Consider a Two-Firm Oligopoly Facing a Market Inverse Demand Curve

question 15

Multiple Choice

Consider a two-firm oligopoly facing a market inverse demand curve of P = 100 - 2(q₁ + q₂) , where q₁ is the output of Firm 1 and q₂ is the output of Firm 2. Firm 1's marginal cost is constant at $12, while Firm 2's marginal cost is constant at $20. In Cournot equilibrium, how much output does each firm produce?

• A) q₁ = 20; q₂ = 14
• B) q₁ = 16; q₂ = 12
• C) q₁ = 18; q₂ = 8
• D) q₁ = 14; q₂ = 11

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Definitions:

Deadweight Loss

An economic inefficiency that occurs when there is a difference between the supply and demand equilibrium and the quantity of a good being produced and consumed.

Excise Tax

Excise tax is a specific tax levied on certain goods, services, or activities, typically to discourage their use or to raise revenue for specific government programs.

Tax Incidence

The distribution of the economic burden of a tax between buyers and sellers, depending on the elasticity of demand and supply.

Producers

Entities or individuals that create goods or services for consumption by consumers.