ECON 528 Final Exam | 156 Questions & Answers
with Complete Solution | Advanced Economics
Guide
Question 1: In a perfectly competitive market, the profit-maximizing condition for a firm in the short
run is:
A) Price = Average Total Cost
B) Price = Marginal Cost
C) Marginal Revenue = Average Variable Cost
D) Total Revenue = Total Cost
Correct Answer: B) Price = Marginal Cost
Explanation: A perfectly competitive firm maximizes profit where Price = Marginal Cost (P = MC).
Because price equals marginal revenue for a price-taker, this is equivalent to MR = MC, the
universal profit-maximizing rule.
Question 2: A natural monopoly occurs when:
A) A single firm controls all raw materials
B) Average total cost falls over the relevant range of output
C) Government grants exclusive operating rights
,D) Product differentiation is impossible
Correct Answer: B) Average total cost falls over the relevant range of output
Explanation: A natural monopoly exists when one firm can produce the entire market output at a
lower average total cost than two or more firms, typically due to large fixed costs and economies of
scale.
Question 3: Under first-degree price discrimination, consumer surplus:
A) Increases
B) Decreases to zero
C) Remains unchanged
D) Becomes negative
Correct Answer: B) Decreases to zero
Explanation: First-degree (perfect) price discrimination charges each consumer their maximum
willingness to pay, converting the entire consumer surplus into producer surplus.
Question 4: In the Cournot model of duopoly, each firm assumes:
A) The rival will keep its price constant
B) The rival will keep its output constant
C) Market demand is perfectly elastic
,D) Collusion is profitable
Correct Answer: B) The rival will keep its output constant
Explanation: Cournot firms choose quantities simultaneously, each assuming the rival’s output is
fixed, leading to a Nash equilibrium in quantities.
Question 5: The Lerner Index measures:
A) Market concentration
B) Price elasticity of demand
C) Monopoly power as (P - MC)/P
D) Consumer surplus
Correct Answer: C) Monopoly power as (P - MC)/P
Explanation: The Lerner Index = (P - MC)/P; it ranges from 0 (perfect competition) to 1 (maximum
monopoly power), inversely related to demand elasticity.
Question 6: A Bertrand duopoly with identical products and marginal cost c yields:
A) Monopoly price
B) Cournot price
C) Competitive price = c
D) Collusive price
Correct Answer: C) Competitive price = c
, Explanation: In the Bertrand model, firms undercut rivals until price equals marginal cost, achieving
the competitive outcome despite only two firms.
Question 7: Which of the following is NOT a source of market failure?
A) Public goods
B) Externalities
C) Perfect information
D) Market power
Correct Answer: C) Perfect information
Explanation: Market failures arise from public goods, externalities, asymmetric information, and
market power. Perfect information is a feature of efficient competitive markets, not a source of
failure.
Question 8: The Nash equilibrium in game theory is defined as:
A) The outcome that maximizes joint payoffs
B) A strategy profile where no player can benefit by unilaterally changing strategy
C) The dominant strategy for all players
D) A cooperative agreement
Correct Answer: B) A strategy profile where no player can benefit by unilaterally changing strategy
Explanation: A Nash equilibrium is a set of strategies where each player’s choice is optimal given
the others’ choices, so no one has an incentive to deviate unilaterally.
Question 9: In second-degree price discrimination, the firm:
A) Charges different prices to different consumer groups
B) Offers a menu of quantity-price bundles
C) Charges each consumer their maximum willingness to pay
D) Sets price equal to marginal cost
with Complete Solution | Advanced Economics
Guide
Question 1: In a perfectly competitive market, the profit-maximizing condition for a firm in the short
run is:
A) Price = Average Total Cost
B) Price = Marginal Cost
C) Marginal Revenue = Average Variable Cost
D) Total Revenue = Total Cost
Correct Answer: B) Price = Marginal Cost
Explanation: A perfectly competitive firm maximizes profit where Price = Marginal Cost (P = MC).
Because price equals marginal revenue for a price-taker, this is equivalent to MR = MC, the
universal profit-maximizing rule.
Question 2: A natural monopoly occurs when:
A) A single firm controls all raw materials
B) Average total cost falls over the relevant range of output
C) Government grants exclusive operating rights
,D) Product differentiation is impossible
Correct Answer: B) Average total cost falls over the relevant range of output
Explanation: A natural monopoly exists when one firm can produce the entire market output at a
lower average total cost than two or more firms, typically due to large fixed costs and economies of
scale.
Question 3: Under first-degree price discrimination, consumer surplus:
A) Increases
B) Decreases to zero
C) Remains unchanged
D) Becomes negative
Correct Answer: B) Decreases to zero
Explanation: First-degree (perfect) price discrimination charges each consumer their maximum
willingness to pay, converting the entire consumer surplus into producer surplus.
Question 4: In the Cournot model of duopoly, each firm assumes:
A) The rival will keep its price constant
B) The rival will keep its output constant
C) Market demand is perfectly elastic
,D) Collusion is profitable
Correct Answer: B) The rival will keep its output constant
Explanation: Cournot firms choose quantities simultaneously, each assuming the rival’s output is
fixed, leading to a Nash equilibrium in quantities.
Question 5: The Lerner Index measures:
A) Market concentration
B) Price elasticity of demand
C) Monopoly power as (P - MC)/P
D) Consumer surplus
Correct Answer: C) Monopoly power as (P - MC)/P
Explanation: The Lerner Index = (P - MC)/P; it ranges from 0 (perfect competition) to 1 (maximum
monopoly power), inversely related to demand elasticity.
Question 6: A Bertrand duopoly with identical products and marginal cost c yields:
A) Monopoly price
B) Cournot price
C) Competitive price = c
D) Collusive price
Correct Answer: C) Competitive price = c
, Explanation: In the Bertrand model, firms undercut rivals until price equals marginal cost, achieving
the competitive outcome despite only two firms.
Question 7: Which of the following is NOT a source of market failure?
A) Public goods
B) Externalities
C) Perfect information
D) Market power
Correct Answer: C) Perfect information
Explanation: Market failures arise from public goods, externalities, asymmetric information, and
market power. Perfect information is a feature of efficient competitive markets, not a source of
failure.
Question 8: The Nash equilibrium in game theory is defined as:
A) The outcome that maximizes joint payoffs
B) A strategy profile where no player can benefit by unilaterally changing strategy
C) The dominant strategy for all players
D) A cooperative agreement
Correct Answer: B) A strategy profile where no player can benefit by unilaterally changing strategy
Explanation: A Nash equilibrium is a set of strategies where each player’s choice is optimal given
the others’ choices, so no one has an incentive to deviate unilaterally.
Question 9: In second-degree price discrimination, the firm:
A) Charges different prices to different consumer groups
B) Offers a menu of quantity-price bundles
C) Charges each consumer their maximum willingness to pay
D) Sets price equal to marginal cost
