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Which of the following is true? a
Which of the following is true?
a. In Bertrand oligopoly, each firm believes that its rivals will hold their output constant if it changes its output.
b. In Cournot oligopoly, firms produce an identical product at a constant marginal cost and engage in price competition.
c. In oligopoly, a change in marginal cost never has an effect on output or price.
d. None of the answers is correct.
Expert Solution
The answer is d).
In Bertrand competition, firm competes in terms of price, not quantity. Thus, in equilibrium, a firm sets its price assuming that the other firm will not deviate from the chosen price. Hence a) is incorrect.
In Cournot competition, firms engage in quantity competition. Hence b) is incorrect.
In Oligopoly competition, firms behave like a monopolist when making production decisions. That is, firms produce when marginal revenue is equal to marginal cost. Thus, changes to marginal cost will affect production decisions. c) is incorrect.
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