Market Structures and Competition — High School Economics practice questions

Firms in monopolistic competition advertise mainly to:

1. make their products seem different
2. set the market price for everyone
3. create a legal monopoly
4. raise their costs on purpose

Answer: A — make their products seem different

A) Correct — Differentiation gives each firm some pricing power. B) No single firm sets the market price. C) Advertising does not grant a monopoly. D) Higher costs are a side effect.

Antitrust laws such as the Sherman Act aim to:

1. create government-owned firms
2. protect firms from foreign competition
3. set minimum prices
4. promote competition and limit monopolies

Answer: D — promote competition and limit monopolies

D) Correct — They ban price-fixing and some mergers. A) Is not their purpose. B) Is protectionism. C) Is a price floor.

Which is a barrier to entry?

1. Many small competitors
2. Low startup costs
3. A patent
4. Identical products

Answer: C — A patent

C) Correct — It gives one firm the legal right to sell an invention. A) Means entry is easy. B) Make entry easier. D) Do not block entry.

In the long run, firms in perfect competition earn:

1. large economic profits
2. steady economic losses
3. zero economic profit
4. monopoly profits

Answer: C — zero economic profit

C) Correct — Profits attract entry until price equals average total cost. A) Entry competes them away. B) Losses cause firms to exit. D) No firm has market power.

Economic profit differs from accounting profit because economic profit:

1. ignores all costs
2. adds back taxes
3. counts only fixed costs
4. subtracts implicit costs too

Answer: D — subtracts implicit costs too

D) Correct — Implicit costs include the owner's forgone salary. A) Both subtract costs. B) Is not the difference. C) Both count all explicit costs.

A local water utility is often a natural monopoly because:

1. one firm can supply everyone most cheaply
2. the government bans water sales
3. water has many substitutes
4. many competing firms share the same set of pipes

Answer: A — one firm can supply everyone most cheaply

A) Correct — Huge fixed costs make a second set of pipes wasteful. B) Water is sold by the utility. C) It has few substitutes. D) One firm usually owns the network.

OPEC members agree to limit oil output to raise prices. This is an example of:

1. perfect competition
2. a natural monopoly
3. a price ceiling
4. a cartel

Answer: D — a cartel

D) Correct — A cartel is a group of firms that coordinate like a monopoly. A) Firms would act independently. B) OPEC has many members. C) Is a government limit on price.

Restaurants in a city are a good example of:

1. perfect competition
2. monopolistic competition
3. monopoly
4. oligopoly

Answer: B — monopolistic competition

B) Correct — Many firms sell similar but differentiated products. A) Restaurant meals are not identical. C) There are many restaurants. D) There are many firms, not a few.

Which is a fixed cost for a bakery?

1. Flour
2. Hourly wages for extra bakers
3. Monthly rent
4. Electricity for the ovens

Answer: C — Monthly rent

C) Correct — Fixed costs do not change with output. A) Rises with output. B) Rise with output. D) Rises with output.

For a perfectly competitive firm, marginal revenue equals:

1. zero
2. average fixed cost
3. the market price
4. twice the price

Answer: C — the market price

C) Correct — Each extra unit sells at the same price. A) Each unit adds revenue. B) Is a cost, not revenue. D) Each unit adds exactly the price.

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.