CEA Economic Theory & Principles 3

Question 1

When a good has many close substitutes, its price elasticity of demand tends to be:

Accepted Answer

Elastic

Answer

Availability of substitutes makes consumers highly responsive to price changes, resulting in elastic demand.

Question 2

Which market structure is characterized by a few large firms, mutual interdependence, and significant barriers to entry?

Accepted Answer

Oligopoly

Answer

Oligopoly features a small number of dominant firms whose strategic decisions are interdependent.

Question 3

The income effect of a price decrease suggests that consumers will:

Accepted Answer

Feel relatively richer and increase consumption of normal goods

Answer

A price decrease increases real purchasing power, allowing consumers to buy more of normal goods via the income effect.

Question 4

In game theory, a Nash Equilibrium occurs when:

Accepted Answer

Each player's strategy is optimal given the strategies of all other players

Answer

At Nash Equilibrium, no player can unilaterally improve their outcome by changing their own strategy.

Question 5

Which of the following is an example of a positive externality?

Accepted Answer

A beekeeper's bees pollinating neighboring farms

Answer

Bees pollinating neighboring farms creates benefits for third parties not compensated by the market — a positive externality.

(CEA) Certified Economic Analyst Practice Test