A duopoly faces the inverse demand curve p = 160

Question

A duopoly faces the inverse demand curve p = 160 - 2q. Firm 1's total cost function is given by C₁(q₁) = 8q₁ and firm 2's total cost function is given by C₂(q₂) = 10q₂. In a Cournot equilibrium,

Quizplus · Accepted Answer

In a Cournot equilibrium, each firm assumes the other firm's output level and maximizes profit given that assumption. Firm 1's profit-maximizing output level is q1 = (88 - q2)/4, where q2 is firm 2's output level. Firm 2's profit-maximizing output level is q2 = (80 - q1)/5, where q1 is firm 1's output level. Thus, the output levels of both firms depend on each other's output level. 
To find out which firm produces more, we compare their marginal costs. Firm 1's marginal cost is MC1 = 8, and firm 2's marginal cost is MC2 = 10. Since firm 1 has a lower marginal cost, it can produce more than firm 2 and still earn a profit. Therefore, the correct choice is A.