CFAI Practice: M01 — Firm and Market Structures
Source: CFAI Official Practice Problems 2026
Questions
1. The short-term shutdown point of production for a firm under perfect competition will most likely occur when:
- A. price = ATC
- B. MR = MC
- C. MR = AVC ✓
Firm shuts down when MR (= price) ≤ AVC.
2. Under perfect competition, a company breaks even when market price = minimum of:
- A. ATC ✓
- B. AVC
- C. short-run MC
3. Shutdown in short run if TR < total:
- A. fixed costs
- B. variable costs ✓
- C. opportunity costs
4. TVC = 3M. Stay in long term if TR ≥:
- A. $3.0M
- B. $4.5M
- C. $7.0M ✓
Long term: TR ≥ TC = TVC + TFC = $7M
5. TR > TVC but TR < TC, firm will:
- A. exit
- B. stay in market ✓ (short run)
- C. shutdown
6. Perfect competition, long run:
- A. normal profits ✓
- B. positive economic profits
- C. negative economic profits
7. Increase quantity, no change in per-unit cost:
- A. economies of scale
- B. diseconomies
- C. constant returns to scale ✓
8. Economies of scale when:
- A. cost per unit increases
- B. LRAC slope is negative ✓
- C. operating beyond minimum on LRAC
9. Diseconomies of scale result from:
- A. specialization
- B. overlap of business functions ✓
- C. discounted prices
10. Operating beyond minimum efficient scale, should:
- A. operate at current level
- B. increase production
- C. decrease to minimum point on LRAC ✓
11. Well-defined supply function:
- A. oligopoly
- B. perfect competition ✓
- C. monopolistic competition
12. Aquarius (dominant, price leader) — competitor undercuts. Aquarius market share will:
- A. increase ✓
- B. decrease
- C. stay same
Smaller firms cannot sustain lower prices and will exit.
13. Dominant company market share in oligopoly over time:
- A. increase
- B. decrease ✓
- C. remain same
Profits attract entry by other companies.