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)=0 10q₂.In a Cournot equilibrium, A)the firm with the lower marginal cost produces more. B)both firms will produce the same amount. C)the firm with the higher marginal cost produces more to cover the higher costs. D)the reaction function for both firms is the same since both firms have a constant marginal cost. E)More than one of the above is correct.

Quizplus · Accepted Answer

In a Cournot equilibrium, each firm assumes that the other firm's output will remain constant when it determines its own output level. Thus, both firms will choose their output levels based on their own marginal costs. Since Firm 1 has a lower marginal cost than Firm 2, it will produce more output than Firm 2. Therefore, the correct answer is A: the firm with the lower marginal cost produces more.