Question

The inverse demand in a Cournot duopoly is P = a - b (Q1 + Q2), and costs are C1(Q1) = c1Q1 and C2(Q2) = c2Q2. The government has imposed a per unit tax of $t on each unit sold by each firm. The equilibrium price of each firm is the same as a situation where: a. each firm’s demand increases by t. b. each firm’s demand decreases by t. c. each firm’s marginal cost increases by t. d. each firm’s marginal cost decreases by t.

Answer 1

c. each firm’s marginal cost increases by t.

(Tax of $t will increase the marginal cost of each firm by $t. So, equilibrium price of each firm is same as a situation where MC of each firm increases by $t.)