The Firm and Market Structures practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

Economics

The Firm and Market Structures

A price-taking firm produces the output at which price equals marginal cost. At that output, price is 27, average variable cost is 25, and average total cost is 34. Fixed cost is unavoidable in the current period. The firm's most appropriate short-run decision is to:

Economics

The Firm and Market Structures

For a perfectly competitive firm, the profit-maximizing output is best described as the quantity at which:

Economics

The Firm and Market Structures

An industry consists of three producers of a chemically identical cement product. Each firm's pricing decisions depend heavily on the anticipated responses of its rivals, and entering the industry requires very large capital outlays. The market structure is most likely:

Economics

The Firm and Market Structures

A sole proprietor reports revenue of 1,200,000 and explicit costs of 980,000. The owner's best alternative employment pays 120,000, and the normal return on the owner's capital is 130,000. The firm's economic result is best described as:

Economics

The Firm and Market Structures

A firm is most likely at its breakeven point when:

Economics

The Firm and Market Structures

An industry's five largest firms have market shares of 35%, 20%, 15%, 10%, and 8%, with the remainder of the market held by many small firms. The four-firm concentration ratio for this industry is closest to:

Economics

The Firm and Market Structures

A manufacturer observes that doubling all inputs raises output by 2.4 times and reduces long-run average cost. During a one-month period, however, adding workers to a fixed plant causes marginal product of labor to fall. The observations are best described as:

Economics

The Firm and Market Structures

When all fixed costs are sunk, a firm should most likely shut down in the short run if price is below:

Economics

The Firm and Market Structures

Lena Marsh manages a price-taking plant that sells 1,000 units per month at a market price of 20 per unit. Monthly total variable cost is 22,000 and monthly total fixed cost is 6,000; all fixed costs are unavoidable in the short run. Marsh's most appropriate short-run decision and rationale are to:

Economics

The Firm and Market Structures

A small apparel brand faces many competitors, has differentiated products, can enter or exit with limited barriers, and in long-run equilibrium charges a price above marginal cost while earning zero economic profit. The market structure is most likely:

Economics

The Firm and Market Structures

The Herfindahl-Hirschman Index is most appropriately calculated by:

Economics

The Firm and Market Structures

An industry has five firms with market shares of 30%, 25%, 20%, 15%, and 10%. The firms with 20% and 15% shares announce a merger that regulators expect to leave all market shares otherwise unchanged. Using whole-number percentage shares, the increase in the industry's Herfindahl-Hirschman Index caused by the merger is closest to:

Economics

The Firm and Market Structures

A perfectly competitive firm faces a market price of 42. Its marginal cost at output levels 5, 6, 7, and 8 is 35, 39, 42, and 47, respectively. At output 7, average variable cost is 31 and average total cost is 44. The firm's most appropriate short-run decision is to produce:

Economics

The Firm and Market Structures

A firm's product has a price elasticity of demand of -2.0. If the firm raises price by 3%, quantity demanded is most likely to change by:

Economics

The Firm and Market Structures

In a perfectly competitive industry initially in long-run equilibrium, market demand increases permanently. The most likely adjustment path is:

Economics

The Firm and Market Structures

A company sells a differentiated consumer product, has many competitors, spends heavily on advertising, and earns zero economic profit in long-run equilibrium. The company's market structure is most likely:

Economics

The Firm and Market Structures

A monopolistically competitive firm is in long-run equilibrium. Compared with a perfectly competitive firm with the same cost curves, the monopolistically competitive firm most likely has:

Economics

The Firm and Market Structures

A firm faces the following costs at the current output: price = 18, average total cost = 22, average variable cost = 15, and marginal cost = 18. The firm should most likely:

Economics

The Firm and Market Structures

A pure monopolist faces inverse demand P = 120 - 3Q and constant marginal cost of 30. Average total cost at the profit-maximizing output is 55. The monopolist's price, output, and economic profit are closest to:

Economics

The Firm and Market Structures

A market has four firms with market shares of 40%, 30%, 20%, and 10%. The Herfindahl-Hirschman Index is closest to:

Economics

The Firm and Market Structures

For a firm facing a downward-sloping demand curve and charging a single price to all customers, marginal revenue is below price primarily because:

Economics

The Firm and Market Structures

An oligopolist is considering a price cut. The best reason the firm should consider competitor reactions is that oligopoly is characterized by:

Economics

The Firm and Market Structures

Two oligopolists choose either Maintain price or Cut price. If both Maintain, each earns 40. If one Cuts while the other Maintains, the cutter earns 55 and the other earns 20. If both Cut, each earns 25. The most appropriate conclusion is that:

Economics

The Firm and Market Structures

An analyst calculates a high Herfindahl-Hirschman Index for an industry using domestic revenue shares. The most defensible use of this result is to:

Economics

The Firm and Market Structures

An analyst observes two industries. Industry X has an HHI of 2,500 but high import competition and rapid technological change. Industry Y has an HHI of 1,500 but binding patents and high customer switching costs. Which statement is most accurate?

Economics

The Firm and Market Structures

In an oligopoly with a dominant firm and a competitive fringe, the dominant firm's pricing decision is best described as setting output where:

Economics

The Firm and Market Structures

A monopolistically competitive firm lowers price and observes that total revenue falls. The firm's demand over that price range is most likely:

Economics

The Firm and Market Structures

An industry has very large fixed costs and declining long-run average cost across the entire range of market demand. If regulators require price equal to marginal cost, the most likely result is: