An industry has two firms. Firm 1's cost function is c(y) = 2y + 500 and firm 2's cost function is c(y) = 2y + 400. The demand curve for the output of this industry is a downward-sloping straight line. In a Cournot equilibrium, where both firms produce positive amounts of output,

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In a Cournot equilibrium, each firm produces the quantity that maximizes its profits given the quantity produced by the other firm. Given the cost functions and the demand curve, the industry's equilibrium quantity is the one that equates the total quantity supplied to the market to the quantity demanded by consumers. Since the cost functions are identical except for the fixed costs, the equilibrium quantity is split evenly between the two firms. Therefore, both firms produce the same amount of output. Choices A and B are incorrect because they imply that fixed costs affect the optimal quantity, but in Cournot competition, only marginal costs matter. Choice D is incorrect because Cournot competition leads to a lower level of output than joint profit maximization, which corresponds to the socially optimal level of output. Choice E is incorrect because it is not necessarily true that firm 1 operates in the region where the demand curve is inelastic.

An Industry Has Two Firms