Final answer:
The equilibrium output for firms in a Cournot duopoly with asymmetric costs is determined by solving their first-order conditions for profit maximization. The firm with the lower cost will produce more and earn higher profits. In the long run, firms in monopolistically competitive and oligopoly markets tend to earn zero economic profits due to industry entry and exit.
Step-by-step explanation:
The equilibrium output in a Cournot duopoly model with asymmetric costs can be found by solving the first-order conditions for profit maximization for each firm. Given π₁ = q₁ (a−Q)−q₁ c₁ and π₂ = q₂ (a−Q)−q₂ c₂, where π represents profits, q is quantity, a is market price, and c is the cost, and Q is the total market quantity (Q = q₁ + q₂), we solve by differentiating the profit functions with respect to q₁ and q₂, setting them to zero to find the best-response functions, and then solve the system of equations. Because c₁ < c₂, Firm 1 has a cost advantage and thus will produce more and at a lower marginal cost, leading to higher profitability than Firm 2 in equilibrium.
The provided reference material discusses how in monopolistic competition, positive economic profits attract new firms to the industry driving the original firm's demand down, leading to a new equilibrium where the firm earns zero economic profits. This mechanism of industry entry and exit ensures that in the long run, firms in a monopolistically competitive market earn zero economic profits due to entry and exit. A similar process occurs in an oligopoly where cutthroat competition results in firms expanding output and cutting prices until no profits remain, leading to a long-run equilibrium where average cost equals demand and firms earn zero economic profits.