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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 331
In Cournot equilibrium, price is:
Select an option first.
Correct answer: C — Between monopoly and perfect competition
Explanation: Cournot output exceeds the monopoly level but falls short of the perfectly competitive level, so the resulting price sits between the monopoly price and marginal cost.
Question 332
Nash equilibrium in oligopoly is:
Select an option first.
Correct answer: B — Non-cooperative
Explanation: Nash equilibrium describes independent profit maximising behaviour with no agreement between firms, which is what makes it non cooperative.
Question 333
In Nash equilibrium, firms:
Select an option first.
Correct answer: B — Maximize individual profits given rivals’ strategies
Question 334
A key difference between Cournot and Nash equilibrium is that Nash:
Select an option first.
Correct answer: B — Assumes rivals react optimally
Explanation: The Cournot assumption is that rivals hold output fixed. Nash generalises this by assuming each firm anticipates the optimal response of its rivals.
Question 335
In oligopoly, firms do NOT:
Select an option first.
Correct answer: C — Maximize joint profits by default
Explanation: Maximising joint profit is collusion, and it is not the default outcome of oligopoly. Firms do consider rival reactions, do have interdependent decisions and do hold pricing power.
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Question 336
The Nash equilibrium concept comes from:
Select an option first.
Correct answer: B — Game theory
Explanation: Nash equilibrium comes from game theory, developed by John Nash, and applies to oligopoly because firms face a strategic game against a small number of identifiable rivals.
Question 337
In Nash equilibrium, firms earn:
Select an option first.
Correct answer: C — Profit levels determined by market conditions
Explanation: Nash equilibrium says nothing about the level of profit. Depending on demand, costs and barriers to entry, firms in equilibrium may earn positive, zero or negative economic profit.
Question 338
In oligopoly, collusion:
Select an option first.
Correct answer: C — Can increase joint profits
Explanation: By restricting combined output, colluding firms move price toward the monopoly level and raise the profit of the group, which is the whole incentive to collude.
Question 339
The kinked demand curve predicts that marginal cost changes:
Select an option first.
Correct answer: B — May not change price
Explanation: Because marginal revenue has a vertical gap at the kink, marginal cost can shift up or down within that gap and still cut marginal revenue at the same output, leaving the price unchanged.
Question 340
Collusion in oligopolistic industries is encouraged primarily because:
Select an option first.
Correct answer: C — Pricing behavior is interdependent
Explanation: Collusion is attractive precisely because pricing is interdependent. If firms could act without affecting one another there would be little to gain from coordinating.
Question 341
A cartel is best described as:
Select an option first.
Correct answer: B — A formal collusive agreement among firms
Explanation: A cartel is an explicit agreement among producers to coordinate output or price. It differs from tacit price leadership in being formal, and from a monopoly in involving several separate firms.
Question 342
Collusion becomes more difficult when:
Select an option first.
Correct answer: C — Firms have similar market shares
Explanation: When all firms are of similar size, none has the standing to act as price leader and each has a similar incentive to cheat, which makes an agreement harder to reach and harder to police.
Question 343
Collusion is more likely to succeed when:
Select an option first.
Correct answer: B — Products are homogeneous
Explanation: Homogeneous products make an agreement simple to define and easy to monitor, since there is only one price to watch. With differentiated products, quality and feature changes give many hidden ways to cheat.
Question 344
Similar cost structures among firms:
Select an option first.
Correct answer: A — Increase the likelihood of successful collusion
Explanation: When costs are similar, firms want roughly the same price, so it is easier to agree on one and there is less temptation for a low cost member to undercut the others.
Question 345
Frequent, small orders make collusion:
Select an option first.
Correct answer: A — More successful
Explanation: Frequent small orders mean cheating wins only a small one off gain while inviting quick retaliation on all the business still to come, so the incentive to cheat is weak.
Question 346
A strong threat of retaliation in a cartel:
Select an option first.
Correct answer: C — Supports collusion stability
Explanation: If members can respond quickly and painfully to a defection, the expected cost of cheating rises above the gain, which is what holds the agreement together.
Question 347
External competition reduces collusion success because:
Select an option first.
Correct answer: C — It attracts new entrants when profits rise
Explanation: Cartel pricing raises industry profit, and that profit is a signal to firms outside the agreement to enter or expand, which erodes the price the cartel is trying to hold.
Question 348
OPEC’s high crude oil prices encouraged:
Select an option first.
Correct answer: B — Development of US shale and Canadian tar sands
Explanation: Sustained high crude prices made higher cost sources economic, so US shale and Canadian tar sands production expanded and eroded the pricing power of the cartel.
Question 349
Game theory is relevant to oligopoly because:
Select an option first.
Correct answer: C — Firms’ decisions are interdependent
Explanation: Game theory studies choices where the payoff to each player depends on what the others do, which is exactly the position of a small number of interdependent firms.
Question 350
The Stackelberg model differs from Cournot because Stackelberg:
Select an option first.
Correct answer: B — Assumes sequential decisions
Explanation: In Stackelberg the leader moves first and the follower observes that choice before responding, whereas Cournot has both firms choosing output simultaneously.
Question 351
In Stackelberg competition, the leader:
Select an option first.
Correct answer: B — Earns more than in Cournot
Explanation: Moving first lets the leader commit to a larger output and push the follower onto a smaller one, so the leader earns more than it would in the simultaneous Cournot outcome.
Question 352
The Stackelberg leader may overproduce to:
Select an option first.
Correct answer: B — Force the follower to reduce output
Explanation: By committing to a high output first, the leader shifts the residual demand facing the follower, making a smaller output the best response for that follower.
Question 353
The “top dog” strategy refers to:
Select an option first.
Correct answer: B — A leader aggressively overproducing
Explanation: Top dog describes a leader that deliberately produces aggressively to establish and defend a dominant position rather than accommodating rivals.
Question 354
In oligopoly, optimal output is chosen where:
Select an option first.
Correct answer: B — MR = MC
Explanation: Like any profit maximiser, an oligopolist produces where marginal revenue equals marginal cost. What differs from perfect competition is that its marginal revenue depends on rival behaviour.
Question 355
Price in oligopoly is determined by:
Select an option first.
Correct answer: C — The demand curve at the chosen output
Explanation: Output is set where marginal revenue equals marginal cost, and the price is then read off the demand curve at that quantity.
Question 356
A dominant firm in oligopoly typically has:
Select an option first.
Correct answer: B — At least 40% market share
Explanation: A share of roughly 40 percent or more is the usual threshold at which a firm can act as price leader and the rest of the industry follows.
Question 357
Price followers avoid undercutting the dominant firm because:
Select an option first.
Correct answer: B — They fear a price war with a lower-cost producer
Explanation: The leader is typically the low cost producer, so a price war it started would be lost by the higher cost followers. That threat is what keeps followers from undercutting.
Question 358
Price leadership may arise because:
Select an option first.
Correct answer: B — One firm has lower costs or greater capacity
Explanation: Leadership goes to the firm with a genuine advantage, usually lower costs or greater capacity, because only such a firm can make the threat of retaliation credible.
Question 359
In kinked demand curve analysis, the prevailing price:
Select an option first.
Correct answer: B — Is given and unexplained
Explanation: The kinked demand model explains why the prevailing price is sticky, but it takes that price as given and offers no account of how it was arrived at. This is the standard criticism of the model.
Question 360
In dominant firm price leadership, the leader behaves like:
Select an option first.
Correct answer: B — A monopolist in its segment
Explanation: Facing the residual demand left after the smaller firms supply what they wish, the dominant firm sets output where its marginal revenue equals marginal cost, exactly as a monopolist would.
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