CEA Market Structures and Competition 2

Question 1

In a Cournot oligopoly with two identical firms, each firm's equilibrium output equals what fraction of the competitive output?

Accepted Answer

One-third

Answer

In Cournot duopoly each firm produces 1/3 of the competitive quantity, yielding a combined industry output of 2/3 of the competitive level.

Question 2

Which condition best describes the Bertrand paradox in oligopoly theory?

Accepted Answer

Two price-setting firms with identical costs drive price to marginal cost

Answer

The Bertrand paradox shows that just two identical firms competing on price undercut each other until price equals marginal cost, replicating perfect competition.

Question 3

A 'natural monopoly' arises when:

Accepted Answer

Average cost declines over the entire relevant range of market output

Answer

Natural monopoly exists when economies of scale are so extensive that one firm can serve the entire market at lower average cost than multiple firms could.

Question 4

Which market structure is characterized by a kinked demand curve model used to explain price rigidity?

Accepted Answer

Oligopoly

Answer

The kinked demand curve model (Sweezy) applies to oligopoly, arguing rivals match price cuts but not price increases, creating a kink that leads to stable prices.

Question 5

A firm practicing first-degree price discrimination extracts:

Accepted Answer

All consumer surplus, converting it to producer surplus

Answer

Perfect (first-degree) price discrimination charges every consumer their maximum willingness to pay, capturing the entire consumer surplus as producer surplus.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Market Structures and Competition 2