Free CFA Level I Economics Practice Questions

In the Cournot model, duopolists choose their output quantities simultaneously and independently, each taking the rival's quantity as given (the Cournot-Nash assumption). The equilibrium output lies between the competitive output and the monopoly output. Choice B describes the Bertrand model (price competition) mixed with a Stackelberg-like sequential structure. Choice A describes collusion or a cartel arrangement, not the non-cooperative Cournot equilibrium.

A natural monopoly exists when the minimum efficient scale of production is so large relative to market demand that one firm can serve the entire market at a lower average total cost than multiple firms. This typically occurs in industries with very high fixed costs and low marginal costs, such as utilities. Choice B describes a legal or government-granted monopoly (e.g., patent protection), which is a different source of monopoly power. Choice C describes predatory pricing, an anticompetitive practice, not the structural cost conditions that define a natural monopoly.

Under a currency board, every unit of domestic currency must be backed by foreign exchange reserves, severely limiting the central bank's ability to expand the monetary base. This means it cannot act as a lender of last resort during banking crises by injecting liquidity freely, making the financial system more vulnerable to bank runs.
Choice B is incorrect because a currency board maintains a fixed exchange rate, so the rate is stable, not volatile.
Choice A is incorrect because while money supply does expand with reserve inflows, it also contracts with outflows. The rigid link to reserves actually constrains inflation rather than making it uncontrollable — the key limitation is the loss of monetary policy flexibility.