Suppose that firms in a two-firm industry choose quantities every month, and each month the firms sell at the market-clearing price determined by the quantities they choose. Each firm has a constant marginal cost, and the market demand curve is linear of the form P = a - bQ, where Q is total industry quantity and P is the market price. Suppose that initially each firm has the same constant marginal cost. Further suppose that each month the firms attain the Cournot equilibrium in quantities.
a) Suppose that it is observed that from one month to the next Firm 1's quantity goes down, Firm 2's quantity goes up, and the market price goes up. A change in the demand and/or cost conditions consistent with what we observe is:
i) The market demand curve shifted leftward in a parallel fashion.
ii) The market demand curve shifted rightward in a parallel fashion.
iii) Firm 1's marginal cost went up, while Firm 2's marginal cost stayed the same.
iv) Firm 2's marginal cost went up, while Firm 1's marginal cost stayed the same.
v) All of the above are possible.
b) Suppose that it is observed that from one month to the next, Firm 1's quantity goes down, Firm 2's quantity goes down, and the market price goes down. A change in the demand and/or cost conditions consistent with what we observe is:
i) The market demand curve shifted leftward in a parallel fashion.
ii) The market demand curve shifted rightward in a parallel fashion.
iii) Firm 1's marginal cost went up, while Firm 2's marginal cost stayed the same.
iv) Firm 2's marginal cost went down, while Firm 1's marginal cost stayed the same.
v) All of the above are possible.
c) Suppose that it is observed that from one month to the next, Firm 1's quantity goes up, Firm 2's quantity goes up, and the market price goes up. A change in the demand and/or cost conditions consistent with what we observe is:
i) The market demand curve shifted leftward in a parallel fashion.
ii) The market demand curve shifted rightward in a parallel fashion.
iii) Both firms' marginal costs went up by the same amount.
iv) Both firms' marginal costs went down by the same amount.
v) All of the above are possible.
d) Suppose that it is observed that from one month to the next, Firm 1's quantity goes up, Firm 2's quantity goes up, and the market price goes down. A change in the demand and/or cost conditions consistent with what we observe is:
i) The market demand curve shifted leftward in a parallel fashion.
ii) The market demand curve shifted rightward in a parallel fashion.
iii) Both firms' marginal costs went up by the same amount.
iv) Both firms' marginal costs went down by the same amount.
v) All of the above are possible.