In the context of the Cournot model, which of the following best describes the outcome when each firm correctly anticipates and reacts to its competitor's output decision based on their respective reaction curves?
1
Both firms will continuously increase their outputs to capture more market share until market saturation is reached.
2
Each firm will adjust its output to maximize its own profit, acknowledging the interdependence, leading to a stable equilibrium where no firm can unilaterally increase its profit by changing its output.
3
Firms will minimize production to create artificial scarcity, thereby driving up prices and increasing profits.
4
Each firm will independently set its output without considering the competitor’s strategy, focusing solely on market demand.
5
Question Not Attempted