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Free CFA Economics Practice Questions & Answers
2,050 exam-style Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 301
In oligopoly markets, products:
Select an option first.
Correct answer: C — May be homogeneous or differentiated
Explanation: Oligopoly is defined by the small number of sellers, not by the nature of the product. Steel and crude oil are near homogeneous oligopolies, while cars and smartphones are differentiated ones.
Question 302
A defining feature of oligopoly is:
Select an option first.
Correct answer: B — High barriers to entry
Explanation: High barriers to entry are what keep the number of firms small and allow economic profit to persist. With zero barriers, entry would compete profits away and the market would not stay an oligopoly.
Question 303
Oligopoly firms often have substantial pricing power because:
Select an option first.
Correct answer: B — There are few competitors
Explanation: With only a handful of sellers, each firm faces a downward sloping demand curve and can raise price without losing every customer. It is the small number of rivals, not uniqueness of the product, that creates the pricing power.
Question 304
Price collusion is attractive in oligopoly because:
Select an option first.
Correct answer: B — Firms want to maximize joint profits
Explanation: Colluding firms can jointly restrict output and push price toward the monopoly level, raising profit for the group above what non cooperative competition delivers.
Question 305
A well-known example of an oligopoly cartel is:
Select an option first.
Correct answer: B — OPEC
Explanation: OPEC is the standard example of a producer cartel, coordinating output quotas among member states to influence the world oil price. The Federal Reserve, World Bank and IMF are policy institutions, not producer cartels.
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Question 306
In non-colluding oligopoly markets, demand curves depend on:
Select an option first.
Correct answer: B — Pricing strategies adopted by firms
Explanation: Without a collusive agreement, the demand curve each firm faces depends on how rivals respond to its price moves, so the pricing strategy assumed for rivals determines the shape of that demand curve.
Question 307
The three basic pricing strategies in oligopoly include all EXCEPT:
Select an option first.
Correct answer: D — Perfect competition pricing rule
Explanation: The three strategies covered are pricing interdependence, the Cournot assumption and Nash equilibrium. Setting price equal to marginal cost is the perfect competition result, not an oligopoly pricing strategy.
Question 308
Pricing interdependence implies:
Select an option first.
Correct answer: B — Firms expect retaliation to price changes
Explanation: Pricing interdependence means each firm assumes rivals will respond to its price move, so it must weigh the likely retaliation before acting rather than treating its demand curve as fixed.
Question 309
In airline price wars, the typical assumption is that competitors:
Select an option first.
Correct answer: B — Match price decreases but ignore price increases
Explanation: The standard asymmetric assumption is that rivals match a price cut, to avoid losing share, but ignore a price increase, letting the firm that raised price lose customers. This asymmetry is what produces the kink.
Question 310
If a firm raises its price in a non-colluding oligopoly, demand becomes:
Select an option first.
Correct answer: A — More elastic
Explanation: Above the prevailing price rivals do not follow, so a firm that raises price loses a large block of customers to them. A large quantity response to a small price change is elastic demand.
Question 311
If a firm lowers its price in a non-colluding oligopoly, demand becomes:
Select an option first.
Correct answer: B — Less elastic
Explanation: Below the prevailing price rivals match the cut, so the firm gains few extra customers. A small quantity response to a price change is inelastic demand.
Question 312
The kinked demand curve arises because:
Select an option first.
Correct answer: B — Rivals react differently to price increases vs decreases
Explanation: The kink exists precisely because the assumed reaction differs on the two sides: rivals match cuts but ignore increases, making demand more elastic above the prevailing price and less elastic below it.
Question 313
A kinked demand curve implies:
Select an option first.
Correct answer: B — A discontinuous marginal revenue curve
Explanation: Because the demand curve has two different slopes meeting at the kink, the marginal revenue curve derived from it has a vertical gap at that output.
Question 314
Under the Cournot assumption, each firm assumes:
Select an option first.
Correct answer: B — Rivals will keep output constant
Explanation: Cournot competition is a quantity game in which each firm picks its output taking the output of the rival as fixed, and the market price then clears at the combined quantity.
Question 315
Cournot equilibrium occurs when:
Select an option first.
Correct answer: B — No firm has incentive to change output
Explanation: Cournot equilibrium is reached when the output of each firm is a best response to the output of the other, so no firm can raise profit by changing its own output alone.
Question 316
A duopoly is:
Select an option first.
Correct answer: B — A market with two firms
Explanation: A duopoly is simply an oligopoly with exactly two sellers, and it is the usual setting for working through the Cournot and Stackelberg models.
Question 317
In Cournot duopoly, each firm:
Select an option first.
Correct answer: B — Assumes rivals keep output unchanged
Explanation: Each Cournot duopolist chooses its own quantity on the assumption that the rival will hold output at the current level.
Question 318
Nash equilibrium occurs when:
Select an option first.
Correct answer: B — No firm can improve profit by unilaterally changing strategy
Explanation: Nash equilibrium is a set of strategies where each firm is doing the best it can given what the others are doing, so no firm can gain by deviating on its own.
Question 319
In Nash equilibrium, firms:
Select an option first.
Correct answer: B — Act non-cooperatively but rationally
Explanation: Nash equilibrium is a non cooperative concept. Firms do not coordinate, but each still chooses rationally in the light of what rivals are expected to do.
Question 320
In oligopoly Nash equilibrium, firms:
Select an option first.
Correct answer: B — Cannot increase profit by unilateral price changes
Explanation: That is the defining property of the equilibrium. If a firm could raise its own profit by changing price on its own, the situation would not be a Nash equilibrium.
Question 321
Nash equilibrium assumes firms:
Select an option first.
Correct answer: B — Anticipate rivals’ rational responses
Explanation: Nash equilibrium assumes each firm forms a correct expectation of the rational response of its rivals, which is what distinguishes it from the simpler Cournot assumption of fixed rival output.
Question 322
In oligopoly, firms’ actions are:
Select an option first.
Correct answer: B — Interdependent
Explanation: Interdependence is the defining feature of oligopoly. Because sellers are few, the profit of each depends on the choices of the others.
Question 323
Oligopoly firms in Nash equilibrium:
Select an option first.
Correct answer: C — Maximize individual profits given rivals’ actions
Explanation: Each firm maximises its own profit taking the strategies of rivals as given. Maximising joint profit would require collusion, which is not what a Nash equilibrium describes.
Question 324
The kinked demand curve predicts that prices in oligopoly:
Select an option first.
Correct answer: B — Tend to be rigid
Explanation: Because rivals match cuts but ignore increases, a firm loses either way from moving price, so the prevailing price tends to stay put even as costs shift.
Question 325
Price rigidity in oligopoly occurs because:
Select an option first.
Correct answer: B — Firms fear losing customers if they raise prices
Explanation: A firm that raises price alone is not followed by rivals, so it loses a large block of customers. That expected loss deters price increases and helps hold the price rigid.
Question 326
Under pricing interdependence, a price decrease by one firm:
Select an option first.
Correct answer: B — Is matched by rivals
Explanation: A price cut threatens the volume of rivals, so they match it to protect their own share, which is why the firm cutting price gains far less than it might expect.
Question 327
Under pricing interdependence, a price increase by one firm:
Select an option first.
Correct answer: B — Is ignored by rivals
Explanation: Rivals are content to let a firm price itself out of the market, so they leave their own prices unchanged and absorb the customers who switch away.
Question 328
The kink in the demand curve occurs at:
Select an option first.
Correct answer: B — The prevailing market price
Explanation: The kink sits at the current market price, because that is the reference point from which rivals judge whether a move is an increase or a cut.
Question 329
The MR curve associated with a kinked demand curve:
Select an option first.
Correct answer: B — Has a discontinuity
Explanation: The two different demand slopes on either side of the kink produce a vertical break in marginal revenue at the kink output.
Question 330
The Cournot model assumes firms compete by choosing:
Select an option first.
Correct answer: B — Output levels
Explanation: Cournot is a quantity setting model. Firms choose how much to produce, and the market price is then determined by the total quantity supplied.
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