Skip to content

IAI Actuarial Core Principles · Business Economics · Profit maximisation under imperfect competition

In a Cournot duopoly with identical firms and homogeneous products, each firm chooses its output taking the rival's output as given. Compared with the joint-profit-maximising (cartel) outcome, the Cournot equilibrium has:

Cournot output is higher and price lower than in a cartel, because each firm ignores the harm its extra output does to the rival's revenue. Still, output stays below the perfectly competitive level and price above it.

  1. ALower total output and higher price
  2. BHigher total output and lower priceCorrect
  3. CThe same total output but lower profit per firm
  4. DHigher total output and higher price
  5. Lower total output and lower price

Explanation

Each Cournot firm ignores the price reduction its extra output imposes on the rival, so it produces more than a cartel would. Total output is therefore higher than the cartel level and price is lower, though still above the competitive outcome. Industry profit is lower than under collusion.

Did you get it right without looking?

One question tells you little. A timed set on Profit maximisation under imperfect competition shows your real accuracy, how long you take and where you lose marks.

Practise Profit maximisation under imperfect competitionFree diagnostic mock

More Profit maximisation under imperfect competition questions