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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 361
In Cournot oligopoly, firms assume rivals:
Select an option first.
Correct answer: C — Keep output constant
Explanation: The Cournot assumption is that each firm treats the output of its rivals as fixed when choosing its own quantity.
Question 362
In Nash equilibrium, firms:
Select an option first.
Correct answer: B — Maximize individual profits given rivals’ strategies
Question 363
Long-run economic profits in oligopoly are:
Select an option first.
Correct answer: B — Possible due to barriers to entry
Explanation: Barriers to entry are what allow economic profit to survive in the long run in an oligopoly, unlike perfect competition where entry drives it to zero.
Question 364
Dominant firm market share tends to decline over time because:
Select an option first.
Correct answer: B — New entrants adopt efficient production
Explanation: Over time competitors adopt the technology and scale that gave the leader its cost advantage, so the share of the dominant firm erodes toward the rest of the industry.
Question 365
Price wars in oligopoly:
Select an option first.
Correct answer: B — Reduce total revenue for all firms
Explanation: A price war pushes price toward marginal cost, so although volumes may rise, revenue and profit fall for every firm involved. That is why oligopolists usually avoid starting one.
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Question 366
Innovation in oligopoly:
Select an option first.
Correct answer: B — May help maintain leadership
Explanation: Innovation can renew a cost or product advantage and so help a firm hold its leading position, but it is costly and its payoff is uncertain, so it does not guarantee higher profit.
Question 367
An oligopoly with a credible threat of entry:
Select an option first.
Correct answer: B — Cannot charge high prices
Explanation: When entry is easy and credible, charging a high price simply invites entrants, so the incumbent must price near the competitive level even though few firms are currently present.
Question 368
A credible threat of entry exists when:
Select an option first.
Correct answer: C — Products can be easily replicated
Explanation: If a product can be copied cheaply and quickly, potential entrants can appear as soon as prices rise, which is what makes the entry threat credible. Patents, scale economies and brand loyalty all work the other way.
Question 369
When economies of scale are limited, oligopolists:
Select an option first.
Correct answer: B — Face stronger entry threats
Explanation: Without large economies of scale a new entrant can compete at small volume, so it does not need to build a huge plant to be viable and the entry threat is stronger.
Question 370
Brand recognition reduces threat of entry because:
Select an option first.
Correct answer: B — It creates customer loyalty
Explanation: An established brand gives customers a reason to keep buying from the incumbent, so an entrant must spend heavily on marketing before it can win volume, which raises the cost of entry.
Question 371
Oligopoly appearance may differ from behavior because:
Select an option first.
Correct answer: B — Threat of entry forces competitive pricing
Explanation: A market can look concentrated and still behave competitively, because the mere threat of entry can force incumbents to price as though rivals were already present.
Question 372
A normal oligopoly typically has:
Select an option first.
Correct answer: B — Differentiated goods and pricing power
Explanation: The typical oligopoly sells differentiated products and therefore has some ability to set price above marginal cost, while still facing only a handful of direct competitors.
Question 373
If oligopolists produce easily replicable goods:
Select an option first.
Correct answer: B — They face strong competitive pressure
Explanation: If the product can be copied easily, incumbents cannot hold price much above cost, because doing so invites entry and imitation.
Question 374
High margins in oligopoly:
Select an option first.
Correct answer: A — Attract new entrants
Explanation: High margins signal an attractive market, and that signal draws entrants whose arrival competes the margins back down unless barriers keep them out.
Question 375
In oligopoly, the optimal strategy depends on:
Select an option first.
Correct answer: B — Rivals’ actions
Explanation: Because payoffs are interdependent, the best action for any firm depends on what it expects rivals to do, which is why oligopoly is modelled as a strategic game.
Question 376
In oligopoly, MR and price depend on:
Select an option first.
Correct answer: B — Both the firm’s and rivals’ decisions
Explanation: The demand curve a firm faces, and therefore its marginal revenue and the price it can charge, depends jointly on its own choices and those of its rivals.
Question 377
Oligopolists avoid price wars because:
Select an option first.
Correct answer: B — They reduce total revenue for all firms
Explanation: Price wars drive price toward marginal cost and shrink revenue for every participant, so firms generally prefer to compete on service, quality or brand instead.
Question 378
Long-run equilibrium in oligopoly requires:
Select an option first.
Correct answer: B — Considering rivals’ reactions
Explanation: A long run equilibrium is only stable if no firm wants to deviate, which requires each firm to have taken the reactions of rivals into account when choosing its strategy.
Question 379
Oligopolists may behave competitively when:
Select an option first.
Correct answer: B — Threat of entry is credible
Explanation: When entry is genuinely easy, incumbents must price close to the competitive level despite being few in number, so behaviour looks competitive even though the market is concentrated.
Question 380
Monopoly markets are considered inefficient primarily because:
Select an option first.
Correct answer: B — Producers restrict output to raise prices
Explanation: A monopolist maximises profit by producing less than the competitive quantity and charging more, which leaves mutually beneficial trades unmade and creates deadweight loss.
Question 381
Competition law exists mainly to:
Select an option first.
Correct answer: B — Regulate the degree of competition in industries
Explanation: Competition law exists to police the degree of competition, for example by restraining collusion and blocking mergers that would concentrate a market excessively. It does not target large firms as such.
Question 382
Measuring market power in the real world is difficult because:
Select an option first.
Correct answer: C — Market power is often unclear and context-dependent
Explanation: Market power is not directly observable. Whether a high share confers real power depends on entry barriers, substitutes and buyer strength, so it has to be judged case by case.
Question 383
The Archer Daniels Midland case involved:
Select an option first.
Correct answer: B — A price-fixing conspiracy involving lysine
Explanation: Archer Daniels Midland was prosecuted for conspiring with rivals to fix the price of the animal feed additive lysine, one of the best documented modern cartel cases.
Question 384
The AT&T antitrust case in the 1970s resulted in:
Select an option first.
Correct answer: B — AT&T being broken up into smaller companies
Explanation: The case ended in the 1982 consent decree that split off the regional operating companies, replacing a regulated monopoly with competing carriers.
Question 385
The European Commission denied the GE–Honeywell merger because:
Select an option first.
Correct answer: B — It would create excessive market concentration
Explanation: The European Commission blocked the deal on the ground that combining the two would concentrate the market for aircraft engines and avionics too heavily.
Question 386
A financial analyst evaluating a merger should consider:
Select an option first.
Correct answer: B — Whether competition law may block the merger
Explanation: A merger that looks attractive commercially can still be blocked, or forced to divest assets, by competition authorities, so regulatory risk belongs in the analysis of the deal.
Question 387
The theoretical way to measure market power is to estimate:
Select an option first.
Correct answer: B — Demand and supply elasticity
Explanation: Market power is the ability to raise price above marginal cost, so in principle it is measured by estimating the elasticity of demand the firm faces alongside the supply relationship.
Question 388
If demand is very elastic, the market is likely:
Select an option first.
Correct answer: A — Close to perfect competition
Explanation: Very elastic demand means buyers switch readily to substitutes when price rises, which is the signature of a market with little pricing power, close to perfect competition.
Question 389
The econometric challenge in estimating elasticity is:
Select an option first.
Correct answer: B — Endogeneity of price and quantity
Explanation: Price and quantity are set together by supply and demand, so regressing quantity on price alone gives a biased estimate. This simultaneity is the endogeneity problem.
Question 390
Endogeneity arises because:
Select an option first.
Correct answer: C — Price and quantity are jointly determined
Explanation: Observed price and quantity are the outcome of both curves at once, so price is correlated with the error term in a demand equation and cannot be treated as exogenous.
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