Identify the truthfulness of the following statements.
I. As the number of firms in an industry exhibiting Cournot competition increases, the greater the Cournot equilibrium diverges from the collusive outcome.
II. As the number of firms in an industry exhibiting Cournot competition increases, the market price increases.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Question

Identify the truthfulness of the following statements. 
I. As the number of firms in an industry exhibiting Cournot competition increases, the greater the Cournot equilibrium diverges from the collusive outcome.
II. As the number of firms in an industry exhibiting Cournot competition increases, the market price increases.
A) Both I and II are true.
B) Both I and II are false.
C) I is true; II is false.
D) I is false; II is true.

Quizplus · Accepted Answer

Statement I is true because as the number of firms increases, each firm assumes a smaller share of the market and therefore perceives its own production decisions to have less effect on the market price. This causes each firm to produce more, leading to a greater divergence from the collusive outcome. 
Statement II is false. As the number of firms in the industry increases, each firm's market share decreases, leading to a decrease in market power and lower market price.

Identify the Truthfulness of the Following Statements