An Industry Has Two Firms

question 20

Multiple Choice

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.

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