Market Structures and Competition Flashcards
7 cards from real CEA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Market Structures and Competition flashcards as text
In a Stackelberg duopoly, the leader firm gains an advantage by:
Answer: Committing to an output level first, forcing the follower to react via its reaction function
The Stackelberg leader commits to output first, knowing the follower will best-respond, allowing the leader to produce more and earn higher profit than in Cournot.
Which of the following is NOT a barrier to entry in a monopoly market?
Answer: Inelastic market demand for the product
Inelastic demand describes consumer sensitivity to price changes but does not itself prevent rivals from entering the market; the other options are classic entry barriers.
Third-degree price discrimination requires that the seller:
Answer: Separate markets with different price elasticities and prevent resale
Third-degree price discrimination splits customers into groups with different elasticities (e.g., students vs. adults) and prevents arbitrage between groups.
The Lerner Index for a profit-maximizing firm equals:
Answer: (P − MC) / P
The Lerner Index is (P − MC)/P and measures the percentage markup over marginal cost, ranging from 0 (perfect competition) toward 1 (pure monopoly).
In a repeated game, cooperation in a cartel is most sustainable when:
Answer: Firms interact indefinitely and the discount rate is low
With an infinite horizon and patient firms (low discount rate), the future punishment for cheating outweighs the short-run gain, supporting cooperative equilibrium.
A monopsony buyer in a labor market sets the wage:
Answer: Below the competitive wage, hiring fewer workers than the competitive outcome
A monopsony faces an upward-sloping labor supply and sets the wage below MRP, resulting in both a lower wage and lower employment than under competition.
What distinguishes an oligopoly from monopolistic competition primarily?
Answer: Strategic interdependence among a small number of firms
Oligopoly is defined by strategic interdependence—each firm must consider rivals' reactions—while monopolistic competition involves many small firms with no such interdependence.