CEA - Certified Economic Analyst Market Structures and Competition Questions and Answers

Question 1

Which of the following best describes the long-run equilibrium for a typical firm in a monopolistically competitive market?

Accepted Answer

The firm earns zero economic profit, but its price is greater than its marginal cost.

Answer

The firm earns positive economic profits and operates at the minimum point of its average total cost curve.

Answer

The firm earns zero economic profit, and its price is equal to its marginal cost.

Answer

The firm earns positive economic profits because of significant barriers to entry.

Question 2

An industry is characterized by very high fixed costs and continuously declining average costs as output increases, such that one firm can supply the entire market at a lower cost than multiple firms. This situation is known as a:

Accepted Answer

Natural monopoly

Answer

Cartel

Answer

Government-granted monopoly

Answer

Perfectly competitive market

Question 3

The kinked demand curve model of oligopoly is used to explain which market phenomenon?

Accepted Answer

Price rigidity, where firms are hesitant to change prices.

Answer

Frequent price wars among firms.

Answer

The process of forming a successful cartel.

Answer

Achieving long-run productive efficiency.

Question 4

Which of the following market structures is characterized by achieving both allocative efficiency (P=MC) and productive efficiency (P=minimum ATC) in the long run?

Accepted Answer

Perfect Competition

Answer

Monopoly

Answer

Oligopoly

Answer

Monopolistic Competition

Question 5

Firms in a monopolistically competitive industry, such as local restaurants or coffee shops, primarily compete with each other through which of the following strategies?

Accepted Answer

Differentiating their products through branding, quality, service, and location.

Answer

Forming collusive agreements to set a single market price.

Answer

Producing a standardized, homogeneous product at the lowest possible cost.

Answer

Lobbying the government for exclusive production patents.

Question 6

Consider the following payoff matrix for two firms, Firm A and Firm B, which must decide simultaneously whether to set a High Price or a Low Price. The payoffs represent profits (in millions). What is the Nash Equilibrium for this game?

| | Firm B: High Price | Firm B: Low Price |
| :--- | :--- | :--- |
| **Firm A: High Price** | A: $100, B: $100 | A: $20, B: $120 |
| **Firm A: Low Price** | A: $120, B: $20 | A: $50, B: $50 |

Accepted Answer

Both firms choosing a Low Price.

Answer

Both firms choosing a High Price.

Answer

Firm A chooses High Price, Firm B chooses Low Price.

Answer

Firm A chooses Low Price, Firm B chooses High Price.