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,
A)the firm with lower fixed costs produces more.
B)the firm with higher fixed costs produces more.
C)both firms produce the same amount of output.
D)there is less output than there would be if the firms colluded to maximize joint profits.
E)firm 1 always operates in the region where the demand curve is inelastic.

Question

Quizplus · Accepted Answer

In a Cournot equilibrium, firms choose quantities simultaneously to maximize their own profit given the quantity chosen by the other firm. Since both firms have the same marginal cost (2), they will produce the same amount of output regardless of the difference in fixed costs.

An Industry Has Two Firms