CEA Market & Industry Analysis 3 — Questions and Answers
Question 1: Which elasticity concept measures the percentage change in demand for Good A resulting from a percentage change in the price of Good B?
- Income elasticity of demand
- Price elasticity of supply
- Cross-price elasticity of demand (Correct answer)
- Arc elasticity
Correct answer: Cross-price elasticity of demand
Cross-price elasticity of demand measures how the quantity demanded of one good responds to price changes in another related good.
Question 2: A positive cross-price elasticity between two goods indicates they are:
- Complementary goods
- Inferior goods
- Substitute goods (Correct answer)
- Giffen goods
Correct answer: Substitute goods
When goods are substitutes, a rise in one good's price increases demand for the other, producing a positive cross-price elasticity.
Question 3: Market power is most commonly measured by which indicator?
- Market share percentage
- Lerner Index (Correct answer)
- Tobin's Q
- Price-to-earnings ratio
Correct answer: Lerner Index
The Lerner Index measures market power as (P − MC)/P, ranging from 0 (perfect competition) to 1 (pure monopoly).
Question 4: Regulatory capture occurs when:
- Firms merge to eliminate competition
- Government regulators begin serving industry interests rather than the public (Correct answer)
- Foreign competitors enter a protected domestic market
- Consumers organize to influence pricing decisions
Correct answer: Government regulators begin serving industry interests rather than the public
Regulatory capture describes the phenomenon where regulatory agencies advance the commercial interests of the industries they are supposed to regulate.
Question 5: In industry analysis, a 'strategic group' refers to:
- A coalition of firms lobbying for favorable regulation
- Firms within an industry using similar competitive strategies (Correct answer)
- A cluster of vertically integrated suppliers
- Government agencies overseeing an industry
Correct answer: Firms within an industry using similar competitive strategies
Strategic groups are clusters of firms within an industry that follow similar strategies and compete more directly with each other than with firms in other groups.
Question 6: A natural monopoly exists when:
- One firm holds all patents in a market
- A single firm can produce total market output at lower cost than multiple firms (Correct answer)
- The government grants exclusive rights to one producer
- Consumer switching costs prevent market entry
Correct answer: A single firm can produce total market output at lower cost than multiple firms
Natural monopolies arise from economies of scale so extensive that average costs decline over the entire range of market demand, making one firm most efficient.
Question 7: When computing the four-firm concentration ratio (CR4), an analyst uses:
- The sum of the squared market shares of the top four firms
- The combined market share of the four largest firms (Correct answer)
- The average profit margin of the four dominant firms
- The total revenue divided by the number of firms
Correct answer: The combined market share of the four largest firms
CR4 is simply the sum of the market shares of the four largest firms, expressed as a percentage of total industry sales.
CEA Market & Industry Analysis 3
Which elasticity concept measures the percentage change in demand for Good A resulting from a percentage change in the price of Good B?