CFA Level I · CFA Level I Exam · The Firm and Market Structures
In a Cournot model with two identical firms, each choosing quantity while taking the rival's output as given, the equilibrium market price is most likely:
The Cournot equilibrium price lies below the monopoly price but above the perfectly competitive price. Each firm maximizes profit given its rival's output, so total output is greater than under collusion but less than under perfect competition, leaving price above marginal cost.
- Aequal to the monopoly price, because firms cooperate
- Bbelow the monopoly price but above the perfectly competitive priceCorrect
- Cequal to marginal cost, because firms compete on quantity
Explanation
Each Cournot firm maximizes profit given the other's output, so total output exceeds the monopoly (collusive) level but falls short of the competitive level. Price therefore lies between the monopoly and competitive prices, above marginal cost.
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