CEA Market Structures and Competition 3

Question 1

In a Stackelberg duopoly, the leader firm gains an advantage by:

Accepted Answer

Committing to an output level first, forcing the follower to react via its reaction function

Answer

The Stackelberg leader commits to output first, knowing the follower will best-respond, allowing the leader to produce more and earn higher profit than in Cournot.

Question 2

Which of the following is NOT a barrier to entry in a monopoly market?

Accepted Answer

Inelastic market demand for the product

Answer

Inelastic demand describes consumer sensitivity to price changes but does not itself prevent rivals from entering the market; the other options are classic entry barriers.

Question 3

Third-degree price discrimination requires that the seller:

Accepted Answer

Separate markets with different price elasticities and prevent resale

Answer

Third-degree price discrimination splits customers into groups with different elasticities (e.g., students vs. adults) and prevents arbitrage between groups.

Question 4

The Lerner Index for a profit-maximizing firm equals:

Accepted Answer

(P − MC) / P

Answer

The Lerner Index is (P − MC)/P and measures the percentage markup over marginal cost, ranging from 0 (perfect competition) toward 1 (pure monopoly).

Question 5

In a repeated game, cooperation in a cartel is most sustainable when:

Accepted Answer

Firms interact indefinitely and the discount rate is low

Answer

With an infinite horizon and patient firms (low discount rate), the future punishment for cheating outweighs the short-run gain, supporting cooperative equilibrium.

(CEA) Certified Economic Analyst Practice Test

(CEA) Certified Economic Analyst Practice Test

CEA Market Structures and Competition 3