MEcon Master of Economics Microeconomics and Market Structure 2

Question 1

Which market structure is characterized by many firms selling differentiated products with free entry and exit?

Accepted Answer

Monopolistic competition

Answer

Monopolistic competition combines many competing firms (like perfect competition) with product differentiation giving each firm some pricing power (like monopoly).

Question 2

A natural monopoly arises when:

Accepted Answer

A single firm can supply the entire market at lower average cost than multiple firms

Answer

Natural monopoly occurs when economies of scale are so large relative to market demand that one firm's average cost keeps falling throughout the market, making duplication wasteful.

Question 3

The Lerner Index measures a firm's market power as:

Accepted Answer

(P – MC) / P

Answer

The Lerner Index = (P − MC)/P ranges from 0 (perfect competition) to 1 (pure monopoly), measuring the markup over marginal cost as a share of price.

Question 4

In a Cournot duopoly, each firm chooses its output assuming the rival's:

Accepted Answer

Output remains constant

Answer

Cournot competition has each firm selecting quantity as its best response to the other firm's fixed output, with equilibrium at the intersection of reaction functions.

Question 5

The concept of 'adverse selection' in insurance markets occurs because:

Accepted Answer

High-risk individuals are more likely to purchase insurance than low-risk individuals

Answer

Adverse selection arises from asymmetric information — those who know they are higher risk seek insurance more eagerly, skewing the insured pool toward bad risks.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics Microeconomics and Market Structure 2