Market Structures and Competition — High School Economics practice questions

An economy is said to be in a recession when:

1. GDP grows faster than 5%
2. Real GDP declines for two consecutive quarters (a common rule of thumb)
3. Unemployment falls below 3%
4. Inflation exceeds 10%

Answer: B — Real GDP declines for two consecutive quarters (a common rule of thumb)

The two-consecutive-quarters-of-negative-real-GDP rule is a common shorthand; the NBER also considers other factors in officially dating recessions.

A tariff is:

1. A tax on imported goods
2. A subsidy for domestic producers
3. A maximum quantity of imports
4. An exchange rate adjustment

Answer: A — A tax on imported goods

Tariffs are import taxes, raising the price of foreign goods to protect domestic industries or generate revenue.

The four factors of production are:

1. Land, labor, capital, entrepreneurship
2. Money, goods, services, profit
3. Demand, supply, equilibrium, surplus
4. Production, distribution, exchange, consumption

Answer: A — Land, labor, capital, entrepreneurship

Economists identify land (natural resources), labor (human effort), capital (tools/equipment), and entrepreneurship (organizing/risk-taking) as factors of production.

In long-run equilibrium under monopolistic competition, the typical firm:

1. Earns large economic profits
2. Sets price equal to marginal cost
3. Earns zero economic profit because free entry erodes profits, while still producing a differentiated product at P > MC
4. Faces a perfectly elastic demand curve

Answer: C — Earns zero economic profit because free entry erodes profits, while still producing a differentiated product at P > MC

C) Free entry pushes economic profits to zero in the long run, but price still exceeds marginal cost due to product differentiation. A) Profits competed away. B) That would be perfect competition. D) Differentiated firms face downward-sloping demand.

Comparative advantage, central to international trade theory, refers to:

1. A country producing more total output than its trading partners
2. A country producing a good at lower opportunity cost than its trading partners
3. A country having the cheapest labor
4. Tariffs that protect domestic industry

Answer: B — A country producing a good at lower opportunity cost than its trading partners

Per Ricardo, mutually beneficial trade is based on comparative (not absolute) advantage — producing at lower opportunity cost.

A profit-maximizing firm produces where:

1. Total revenue equals total cost
2. Marginal revenue equals MARGINAL COST (MR = MC)
3. Average cost is at its minimum
4. Marginal revenue equals price

Answer: B — Marginal revenue equals MARGINAL COST (MR = MC)

B) The universal profit-maximization rule: produce until the last unit's added revenue just equals its added cost. A) That's the break-even point (zero profit), not the profit max. C) Applies only under specific conditions. D) True in perfect competition only; not in general.

A NATURAL monopoly arises when:

1. The government blocks competitors by law
2. The firm colludes with foreign firms
3. The firm invents a totally new product
4. A single firm can supply the entire market at LOWER average cost than multiple firms could — typically due to large economies of scale (e.g., water utilities)

Answer: D — A single firm can supply the entire market at LOWER average cost than multiple firms could — typically due to large economies of scale (e.g., water utilities)

D) Textbook natural monopoly — high fixed costs relative to variable costs, so unit cost keeps falling with scale. A) Legal monopoly, distinct from natural. B) Cartels, different concept. C) That's a first-mover advantage.

A defining structural feature of oligopoly is:

1. A single seller of a unique good
2. Many firms each producing identical, undifferentiated products
3. Government ownership of all firms
4. A few large firms whose strategic decisions are interdependent — each firm anticipates rivals' reactions

Answer: D — A few large firms whose strategic decisions are interdependent — each firm anticipates rivals' reactions

D) Strategic interdependence — captured by game-theory tools — is the hallmark of oligopoly. A) Monopoly. B) Perfect competition. C) Not a structural feature; describes ownership.

A monopoly arises when:

1. Many firms compete
2. A single firm is the sole supplier of a good with no close substitutes
3. Government bans market entry by law in every market
4. Two firms quietly collude on price

Answer: B — A single firm is the sole supplier of a good with no close substitutes

B) Defining feature of monopoly. A) Competition. C) Overstates. D) Collusion is oligopoly behavior.

The business cycle's typical phases, in order, are:

1. Peak, trough, expansion, contraction
2. Recession, expansion, peak, trough
3. Expansion, peak, contraction (recession), trough, recovery
4. Inflation, deflation, stagflation, recovery

Answer: C — Expansion, peak, contraction (recession), trough, recovery

The business cycle moves through expansion → peak → contraction (or recession) → trough → recovery/expansion again.

What is an oligopoly?

A market dominated by a few large firms (e.g., airlines, smartphones). Strategic interaction; can be competitive or collusive.

What is a monopoly?

A market with a single seller and high barriers to entry. The firm sets price; deadweight loss results.

What are barriers to entry?

Obstacles preventing new firms from entering a market (high fixed costs, patents, government licenses, brand loyalty).

What is marginal cost (MC)?

The additional cost of producing one more unit.