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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 391
To estimate elasticity properly, economists need:
Select an option first.
Correct answer: B — A two-equation model for supply and demand
Explanation: Because price and quantity are jointly determined, both the demand and the supply relationship have to be specified and identified before the elasticity of demand can be recovered.
Question 392
A drawback of time-series elasticity estimation is:
Select an option first.
Correct answer: B — Market structure may change over time
Explanation: A long time series may span changes in technology, entrants and regulation, so the relationship being estimated is not stable across the sample.
Question 393
A drawback of cross-sectional regression is:
Select an option first.
Correct answer: B — It requires extensive data collection
Explanation: Cross sectional estimation needs price and quantity observations across many separate markets or firms at one point in time, which is expensive and often simply unavailable.
Question 394
Different specifications of explanatory variables in regression:
Select an option first.
Correct answer: B — Can dramatically change elasticity estimates
Explanation: Elasticity estimates are sensitive to which explanatory variables are included and how they are measured, so different but equally defensible specifications can produce materially different numbers.
Question 395
The concentration ratio measures:
Select an option first.
Correct answer: B — Sum of market shares of the largest N firms
Explanation: The concentration ratio adds up the market shares of the largest N firms, most often the largest four, as a simple summary of how concentrated an industry is.
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Question 396
A concentration ratio of 100% indicates:
Select an option first.
Correct answer: B — A monopoly
Explanation: If the largest firms account for all sales, no one else is supplying the market. At N equal to one that is monopoly, and for larger N it is a very tightly held oligopoly.
Question 397
A key advantage of the concentration ratio is:
Select an option first.
Correct answer: B — It is simple to compute
Explanation: Its appeal is practicality. It needs only market share data and produces a single comparable number, which is why regulators use it as a first screen.
Question 398
A major limitation of the concentration ratio is that:
Select an option first.
Correct answer: B — It does not directly quantify market power
Explanation: A high ratio says only that sales are concentrated. It says nothing about entry barriers or substitutes, so it does not by itself establish that firms can raise price profitably.
Question 399
A firm with 100% market share may still behave competitively if:
Select an option first.
Correct answer: A — Barriers to entry are low
Explanation: In a contestable market even a sole incumbent has to price near cost, because any attempt to raise price would invite immediate entry.
Question 400
A sugar wholesaler with no competitors may still price competitively because:
Select an option first.
Correct answer: B — Potential entrants can easily enter
Explanation: Sugar is a commodity that others can supply readily, so an incumbent that raised price would simply attract new sellers. Having no current competitors is not the same as having market power.
Question 401
A concentration ratio may fail to reflect increased pricing power when:
Select an option first.
Correct answer: B — The largest firms merge
Explanation: The ratio only counts the largest N firms, so a merger between two firms already inside that group leaves the ratio unchanged even though the market has in fact become more concentrated.
Question 402
Competition law is also known as:
Select an option first.
Correct answer: B — Antitrust law
Explanation: Competition law is the term used in the European Union and much of the Commonwealth, while antitrust law is the equivalent term in the United States.
Question 403
Regulators may block mergers when:
Select an option first.
Correct answer: B — The merger may create excessive market power
Explanation: Authorities intervene when a merger would give the combined firm enough market power to raise prices or shut rivals out, which is the basis on which large deals are blocked or made conditional.
Question 404
Elasticity estimation requires:
Select an option first.
Correct answer: C — Both supply and demand equations
Explanation: Because price and quantity are determined simultaneously, both relationships must be modelled to identify the demand elasticity separately from the supply response.
Question 405
Time-series elasticity estimation may be unreliable because:
Select an option first.
Correct answer: B — Market structure may change over time
Explanation: The structure of the market can shift across the sample period, so the estimated relationship blends several different regimes and may not describe any one of them.
Question 406
Cross-sectional elasticity estimation:
Select an option first.
Correct answer: B — Requires extensive data collection
Explanation: It requires assembling comparable price and quantity data across many markets or firms at the same date, which is a substantial data collection exercise.
Question 407
Using GDP instead of household income in a regression is an example of:
Select an option first.
Correct answer: B — Variable specification choice
Explanation: Swapping one measure of income for another is a choice about how to specify the explanatory variable, and such choices can move the estimated elasticity noticeably.
Question 408
A concentration ratio close to 0 indicates:
Select an option first.
Correct answer: B — Perfect competition
Explanation: A ratio near zero means the largest firms account for almost none of the market, implying a very large number of small sellers, which is the structure of perfect competition.
Question 409
A concentration ratio close to 100 indicates:
Select an option first.
Correct answer: B — Monopoly
Explanation: A ratio near 100 means the largest firms account for essentially all sales, and at the extreme of a single firm this is monopoly.
Question 410
A high concentration ratio does NOT always imply market power because:
Select an option first.
Correct answer: B — Entry barriers may be low
Explanation: If entry is cheap and quick, even the largest firms cannot hold price above cost, so concentration on its own does not establish market power.
Question 411
A merger between the top two firms may not change the concentration ratio much because:
Select an option first.
Correct answer: B — The ratio sums their shares anyway
Explanation: The ratio is the sum of the shares of the largest N firms. Merging two firms that are already inside that group simply combines shares that were being counted anyway, so the total barely moves.
Question 412
The concentration ratio’s main disadvantage is:
Select an option first.
Correct answer: B — It does not measure market power directly
Explanation: The measure is easy to compute but does not tell you whether the concentrated firms can actually raise price, which is what market power means.
Question 413
A monopolist restricting output causes:
Select an option first.
Correct answer: B — Higher prices and lower consumption
Explanation: Restricting output moves the market up the demand curve, so price rises and the quantity consumed falls relative to the competitive outcome.
Question 414
Regulators broke up AT&T to:
Select an option first.
Correct answer: B — Introduce competition and lower prices
Explanation: The purpose of the breakup was to open long distance and equipment markets to competitors, with the expectation of lower prices and more innovation.
Question 415
The vitamin price-fixing case involved:
Select an option first.
Correct answer: B — Roche, Rhone-Poulenc, and BASF
Explanation: Roche, Rhone-Poulenc and BASF were fined for a long running international conspiracy to fix the price of bulk vitamins.
Question 416
A merger may be blocked if:
Select an option first.
Correct answer: B — It creates excessive market concentration
Explanation: Authorities block a deal when the combined firm would hold enough share to raise price or exclude rivals, which is the concentration test at the heart of merger control.
Question 417
Endogeneity means:
Select an option first.
Correct answer: B — Variables are jointly determined
Explanation: Endogeneity means the variables are determined jointly within the system rather than from outside it. In a demand study, price and quantity are set together by supply and demand, so price is correlated with the error term. Exogenous is the opposite of endogenous, so that option states the reverse.
Question 418
Time-series data may mislead elasticity estimates because:
Select an option first.
Correct answer: B — Market conditions evolve over time
Explanation: Over a long sample the market itself changes, through entry, technology and regulation, so a single estimated elasticity may not describe conditions at any one time.
Question 419
Cross-sectional data may be difficult to use because:
Select an option first.
Correct answer: B — It requires extensive data collection
Explanation: It requires comparable observations across many firms or markets at a single date, and assembling that data is costly and often infeasible.
Question 420
Business cycles are defined as recurrent expansions and contractions in:
Select an option first.
Correct answer: B — Aggregate economic activity
Explanation: ✔ Why correct: Business cycles affect broad aggregate activity, not individual sectors.
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