Market Structures Practice Questions — JAMB UTME — Page 6

Question 101Question →

Match each buyer-dominated market structure or economic concept on the left with its corresponding distinguishing characteristic on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Monopsony matches with a factor or product market dominated by a single buyer facing many competing suppliers. Oligopsony matches with a market environment dominated by a small number of major buyers who exercise joint buyer power. Bilateral Monopoly matches with a market structure where a single seller faces a single buyer, resulting in strategic bargaining over price. Monopsonistic Exploitation matches with the condition where a factor of production is paid a wage or price below its marginal revenue product (

MRP

).

Monopsony describes a market with a single buyer facing many competing sellers. Oligopsony occurs when a few buyers dominate the purchasing side of a market. Bilateral monopoly exists when a single seller faces a single buyer. Monopsonistic exploitation measures the gap between the factor's marginal revenue product (

MRP

) and the lower price or wage actually paid by the monopsonist.

Step-by-Step Solution

1

Identify the defining feature of Monopsony

Monopsony is a market with a single buyer facing multiple sellers.

The prefix 'mono-' means single and 'psony' relates to purchasing or buying.

2

Identify the defining feature of Oligopsony

Oligopsony involves a small number of powerful buyers.

The prefix 'oligo-' means few, indicating a concentrated buyer market.

3

Analyze Bilateral Monopoly

Bilateral Monopoly pairs one single buyer with one single seller.

Two-sided monopoly power leads to bargaining over price and quantity rather than price-taking behavior.

4

Analyze Monopsonistic Exploitation

It describes paying an input less than its marginal revenue product (

MRP

).

Because the marginal factor cost (

MFC

) curve lies above the factor supply curve, monopsonists restrict hiring to pay wages or input prices below

MRP

.

Key Concept

Classification and Characteristics of Buyer-Dominated Market Structures

Question 102Question →

Match each factor market phenomenon associated with buyer-dominated market structures on the left with its corresponding economic feature or outcome on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Marginal Factor Cost (

MFC

) exceeding Average Factor Cost (

AFC

) matches the outcome of facing an upward-sloping supply curve, requiring higher prices on all previous units to hire an additional unit. Monopsonistic exploitation matches the condition where the factor price paid is strictly lower than the factor's Marginal Revenue Product (

MRP_L

). Imposition of an effective minimum wage matches the scenario where employment and factor prices can rise simultaneously by making the buyer a price-taker over a specific range. Upward-sloping factor supply curve matches the factor market constraint demonstrating that additional resource units can only be attracted by offering progressively higher prices.

Each factor market phenomenon is correctly matched according to monopsony theory:

MFC > AFC

is caused by price increases across all hired units when expanding inputs; monopsonistic exploitation represents paying factors less than their marginal revenue product (

MRP_L

); minimum wage enforcement eliminates the upward marginal factor cost slope to allow joint wage and employment gains; and the upward-sloping factor supply curve shows higher prices are needed to attract more inputs.

Step-by-Step Solution

1

Analyze the relationship between Marginal Factor Cost (

MFC

) and Average Factor Cost (

AFC

) under monopsony.

Since the firm is the sole buyer, hiring an extra factor unit raises the factor price for all existing units, causing

MFC

to lie above

AFC

.

To establish the pair for

MFC > AFC

.

2

Identify the economic definition of monopsonistic exploitation.

Monopsonistic exploitation occurs when factor owners (e.g., labor) are paid less than their marginal productivity (

W < MRP_L

).

To correctly pair monopsonistic exploitation with its productivity-gap definition.

3

Examine the impact of a price floor or minimum wage in a buyer-dominated market.

A minimum wage creates a horizontal supply section for the monopsonist, eliminating the upward wage pressure on

MFC

and enabling higher employment alongside higher wages.

To match minimum wage imposition with simultaneous increases in employment and factor prices.

4

Evaluate the nature of an upward-sloping factor supply curve.

The upward slope indicates that higher factor prices must be offered to incentivize additional suppliers to enter or expand supply.

To pair the upward-sloping supply curve with the factor attraction constraint.

Key Concept

Monopsony Factor Markets, Marginal Factor Cost, and Market Distortions

Question 103Question →

In a regional economy, a single state-owned postal corporation operates as the sole employer hiring specialized mail logistics sorters. If this monopsonist operates to maximize profit, which of the following describes the wage rate and employment level established in this labor market compared to a perfectly competitive equilibrium?

A lower wage rate and a lower level of employment

A higher wage rate and a higher level of employment

A lower wage rate but a higher level of employment

A higher wage rate but a lower level of employment

Show answer & explanation

Answer: A lower wage rate and a lower level of employment

Answer

A lower wage rate and a lower level of employment

A monopsonist is the sole buyer in a factor market and faces an upward-sloping supply curve. Consequently, hiring additional units of labor increases the wage required for all units, causing the Marginal Factor Cost (

MFC

) curve to lie above the Average Factor Cost (

AFC

/ labor supply) curve. The firm equates

MRP_L

with

MFC_L

to determine employment level

L_m

and pays wage

W_m

from the supply curve. Compared to a competitive labor market (where

MRP_L = S_L

), the monopsonist hires fewer workers and pays a lower wage rate.

Step-by-Step Solution

1

Analyze the monopsonist's cost structure relative to the supply curve

Since the firm is the sole buyer, it faces an upward-sloping factor supply curve (

S_L = AFC

). To hire an extra worker, it must raise wages for all workers, making

MFC > AFC

.

Understanding why the Marginal Factor Cost curve lies above the labor supply curve is necessary for determining the firm's profit-maximizing input usage.

2

Determine the equilibrium employment level

The monopsonist maximizes profit where Marginal Revenue Product of Labor (

MRP_L

) equals Marginal Factor Cost (

MFC_L

), selecting employment quantity

L_m < L_c

.

Equating marginal benefit (

MRP_L

) to marginal cost (

MFC_L

) yields the profit-maximizing hiring quantity.

3

Determine the equilibrium wage rate and compare with perfect competition

The wage rate

W_m

is read off the labor supply curve at quantity

L_m

, giving

W_m < W_c

and

L_m < L_c

.

Compared to perfect competition where

MRP_L = S_L

, monopsony restricts hiring to pay a lower factor price.

Key Concept

Monopsonistic Exploitation and Factor Market Equilibrium

Estimated Time:1m 0s

Question 104Question →

In a perfectly competitive market, an individual firm has the market power to set its selling price above the prevailing market equilibrium price without losing all of its buyers.

True

False

Show answer & explanation

Answer: False

Answer

False. An individual firm operating under perfect competition is a price taker and cannot charge a price above the market price without losing all its sales to competitors.

The statement is false because one of the fundamental assumptions of perfect competition is that individual firms are price takers. Because the product is homogeneous and consumers have perfect knowledge of the market, any firm attempting to charge a price higher than the established market equilibrium will immediately lose all its customers to other producers selling at the market price.

Step-by-Step Solution

1

Identify the firm's market status and demand curve characteristic under perfect competition.

The firm is a price taker facing a perfectly elastic (horizontal) demand curve set by market supply and demand.

Large numbers of buyers and sellers alongside product homogeneity prevent any single participant from altering market price.

2

Evaluate the buyer reaction to a price increase by an individual producer.

All buyers switch to rival sellers offering identical substitute goods at the market price.

Buyers have complete knowledge of market conditions and identical alternative sellers.

Key Concept

Price-Taker Assumption in Perfect Competition

Question 105Question →

When a firm in a perfectly competitive market faces a market price equal to the minimum point of its short-run average variable cost ( $AVC$ ) curve, its total economic loss from producing the profit-maximizing output is identical to its total fixed cost ( $TFC$ ), making its short-run operational loss equal to the loss incurred by shutting down immediately.

True

False

Show answer & explanation

Answer: True

Answer

The statement is True.

The statement is true because at the short-run shutdown price (

P = \text{min } AVC

), total revenue (

TR

) exactly matches total variable cost (

TVC

). Subtracting total cost (

TC = TFC + TVC

) from total revenue leaves an economic loss equal to

-TFC

. Because shutting down entirely also yields an economic loss of

-TFC

, the financial loss is identical whether the firm operates or halts production.

Step-by-Step Solution

1

Formulate total revenue (

TR

) and total variable cost (

TVC

) at output

Q^*

where

P = \text{min } AVC

.

TR = P \times Q^*

and

TVC = AVC \times Q^*

. Since

P = AVC

,

TR = TVC

.

To evaluate whether revenue covers variable operating expenses at the short-run shutdown threshold.

2

Calculate total economic loss when the firm produces

Q^*

.

\text{Loss} = TC - TR = (TFC + TVC) - TVC = TFC.

Because

TR

offsets

TVC

completely, the net loss equals unrecovered fixed costs.

3

Calculate total economic loss when the firm shuts down (

Q = 0

).

\text{Loss} = TC - TR = (TFC + 0) - 0 = TFC.

At zero output, variable costs and revenues are zero, leaving fixed costs as the total loss.

4

Compare the economic losses under both choices.

\text{Loss when producing } (TFC) = \text{Loss when shut down } (TFC).

Demonstrates that operating at

P = \text{min } AVC

yields the exact same monetary loss as shutting down immediately.

Key Concept

Short-run shutdown decision and fixed cost loss equivalence in perfect competition

Question 106Question →

On the AFEX Commodities Exchange in Nigeria, grain dealers contract to trade bulk maize where the price is agreed upon today, but physical delivery and payment take place three months in the future. Based on the timing of delivery, which type of market does this transaction represent?

Futures market

Spot market

Money market

Capital market

Show answer & explanation

Answer: Futures market

Answer

The transaction represents a futures market because contracts are executed for delivery and settlement at a specified future date.

Markets classified by the nature and timing of delivery fall into spot markets (immediate exchange) and futures markets (contracted for a future date). Because the contract specifies price today with settlement three months later, it is a classic futures market transaction.

Step-by-Step Solution

1

Analyze the timing of transaction and delivery in the stem scenario.

The price is negotiated immediately, but physical delivery and final settlement take place three months later.

Market classification by time or delivery tenure distinguishes immediate exchanges from deferred exchanges.

2

Match the transaction characteristics to standard market classifications.

Transactions involving price agreement today for future delivery represent futures (or forward) markets, whereas immediate cash and delivery represent spot markets.

This structural definition separates spot transactions from derivative/futures transactions.

Key Concept

Classification of Markets by Time of Delivery (Spot vs Futures Markets)

Question 107Question →

Match each market classification based on geographical scope and regulatory status on the left with its corresponding economic characteristic or example on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Local market matches transactions limited to a specific village or immediate neighborhood; National market matches trading of standardized commodities across all geopolitical zones; Open market matches an unrestricted trading environment without price controls; Black market matches illegal trading of restricted goods outside official price ceilings.

The pairings correctly match each market concept to its defining economic scope: local markets serve immediate small areas due to product perishability, national markets distribute goods nationwide across all zones, open markets rely on unrestricted supply and demand, and black markets operate illegally outside official price regulations.

Step-by-Step Solution

1

Analyze geographical scope classifications.

Local markets involve immediate community trading, whereas national markets span across the entire country.

Geographical classification depends on the area over which buyers and sellers interact.

2

Analyze legal and regulatory status classifications.

Open markets permit free pricing without statutory barriers, while black markets operate illicitly to bypass official price controls.

Legal classification distinguishes legitimate free-market activities from clandestine trading violating government mandates.

Key Concept

Classification of markets by geographical extent and legal status

Question 108Question →

A price-taking firm operating in a competitive market has a short-run total cost function given by $TC = Q^3 - 6Q^2 + 25Q + 100$ , where $Q$ represents the quantity of output produced. If the prevailing market price is $\$25$ per unit, what is the firm's profit-maximizing output and its corresponding economic profit or loss?

4

units with an economic loss of

\$68

4

units with an economic profit of

\$32

2

units with an economic loss of

\$84

6

units with an economic loss of

\$100

Show answer & explanation

Answer: $4$ units with an economic loss of $\$68$

Answer

The firm maximizes profit at an output of

4

units, resulting in an economic loss of

\$68

.

Under perfect competition, a price-taking firm maximizes short-run profit or minimizes loss where

P = MC

on the upward-sloping segment of

MC

. Taking the first derivative of

TC = Q^3 - 6Q^2 + 25Q + 100

gives

MC = 3Q^2 - 12Q + 25

. Equating

MC

to market price

P = 25

yields

3Q^2 - 12Q = 0

, giving

Q = 4

units. Substituting

Q = 4

into the cost and revenue equations yields

TR = 100

and

TC = 168

, resulting in an economic loss of

\$68

. Since price (

P = 25

) exceeds average variable cost (

AVC(4) = 4^2 - 6(4) + 25 = 17

), the firm minimizes losses by continuing production in the short run.

Step-by-Step Solution

1

Derive the Marginal Cost (

MC

) function from Total Cost (

TC

).

MC = \frac{dTC}{dQ} = 3Q^2 - 12Q + 25

Profit maximization under perfect competition requires setting market price equal to marginal cost (

P = MC

).

2

Set market price

P = 25

equal to

MC

and solve for output

Q

.

25 = 3Q^2 - 12Q + 25 \implies 3Q^2 - 12Q = 0 \implies 3Q(Q - 4) = 0

. Since

Q > 0

,

Q = 4

units.

Equating

P

and

MC

identifies the output level where profit is maximized or loss is minimized.

3

Calculate Total Revenue (

TR

) and Total Cost (

TC

) at

Q = 4

.

TR = P \times Q = 25 \times 4 = 100

.

TC = 4^3 - 6(4)^2 + 25(4) + 100 = 64 - 96 + 100 + 100 = 168

.

Evaluating

TR

and

TC

at the optimal output level allows determination of overall economic profit or loss.

4

Compute economic profit or loss.

\text{Profit} = TR - TC = 100 - 168 = -68

(an economic loss of

\$68

).

Subtracting total cost from total revenue yields the firm's financial outcome.

Key Concept

Profit Maximization and Loss Minimization in Perfect Competition

Question 109Question →

In a market for standardized grain featuring numerous small buyers and sellers, a single producer decides to set their selling price $5\%$ above the prevailing market equilibrium price. Which of the following best describes the immediate economic outcome for this producer?

The producer will experience a complete loss of sales as buyers switch entirely to identical alternatives offered at the market price.

The producer's total revenue will rise slightly because agricultural commodities generally exhibit price-inelastic demand.

The producer will gain supernormal profit in the short run until competitor entry forces prices back down.

The prevailing equilibrium market price will adjust upward across the entire industry to match the producer's new price.

Show answer & explanation

Answer: The producer will experience a complete loss of sales as buyers switch entirely to identical alternatives offered at the market price.

Answer

The producer will experience a complete loss of sales as buyers switch entirely to identical alternatives offered at the market price.

Under perfect competition, products are homogeneous (identical) and market participants possess perfect information. As a result, the demand curve facing an individual firm is horizontal (perfectly elastic). If an individual firm attempts to charge any price above the prevailing market price, consumers will immediately shift all their purchases to rival sellers, causing the firm's sales to drop to zero.

Step-by-Step Solution

1

Identify the market structure and its key assumptions

The scenario describes a perfectly competitive market due to standardized products (homogeneous goods) and numerous buyers and sellers.

Recognizing the underlying market structure establishes the firm's pricing power and demand curve features.

2

Determine the elasticity of demand facing the individual firm

The demand curve facing an individual perfectly competitive firm is perfectly (infinitely) elastic (

E_d = \infty

).

Because goods are identical and participants have perfect knowledge, consumers can instantly purchase from other sellers at the equilibrium price.

3

Analyze the impact of charging a price above equilibrium

Setting price

P > P_{equilibrium}

leads to quantity demanded falling immediately to zero (

Q = 0

).

Price-taking firms must take the market price as given; charging even slightly higher eliminates all sales.

Key Concept

Price-Taker Status and Infinitely Elastic Demand in Perfect Competition

Estimated Time:1m 15s

Question 110Question →

In a perfectly competitive market, a profit-maximizing firm determines its short-run equilibrium output level by setting its marginal cost equal to which of the following?

Marginal revenue

Total revenue

Average fixed cost

Average total cost

Show answer & explanation

Answer: Marginal revenue

Answer

Marginal revenue

Under perfect competition, the firm faces a horizontal demand curve where market price equals marginal revenue (

P = MR

). The general profit-maximization rule for any firm is to produce where marginal cost equals marginal revenue (

MC = MR

). Therefore, the firm sets marginal cost equal to marginal revenue to determine its equilibrium output.

Step-by-Step Solution

1

Identify the market structure and firm behavior

The firm operates under perfect competition and aims to maximize profit in the short run.

Perfectly competitive firms are price takers, meaning market price (

P

) is constant for any level of output sold, making

P = MR = AR

.

2

Apply the profit-maximization rule

The necessary equilibrium condition is

MR = MC

.

If

MR > MC

, producing an additional unit adds more to revenue than to cost, increasing profit. If

MR < MC

, the extra unit costs more to produce than it brings in revenue. Thus, profit is maximized where marginal revenue equals marginal cost.

Key Concept

Short-run Profit-Maximizing Condition under Perfect Competition

Question 111Question →

A poultry farm operates in a perfectly competitive market where the market price per crate of eggs is $\text{N}70$ . The farm's short-run total cost function is $TC = 2Q^2 + 10Q + 200$ , where $Q$ is the quantity of crates produced and $TC$ is the total cost in Naira. What is the maximum economic profit, in Naira, realized by the farm?

Show answer & explanation

Answer: 250

Answer

The maximum economic profit realized by the farm is 250 Naira.

In a perfectly competitive market, the firm is a price taker so marginal revenue equals market price (

MR = P = 70

). Equating marginal revenue to marginal cost (

MC = 4Q + 10

) gives an equilibrium output of

Q = 15

units. Substituting

Q = 15

into Total Revenue (

TR = 70 \times 15 = 1050

) and Total Cost (

TC = 2(15)^2 + 10(15) + 200 = 800

) yields an economic profit of

1050 - 800 = \text{N}250

.

Step-by-Step Solution

1

Derive the Marginal Cost equation from Total Cost

MC = 4Q + 10

Marginal Cost represents the rate of change of Total Cost with respect to output.

2

Equate Marginal Revenue (which equals price in perfect competition) to Marginal Cost

70 = 4Q + 10 \implies Q = 15

units

A price-taking firm maximizes profit where price equals marginal cost (

P = MC

).

3

Calculate Total Revenue at optimal output level

TR = 70 \times 15 = \text{N}1050

Total revenue is the product of price per unit and total output sold.

4

Calculate Total Cost at optimal output level

TC = 2(15)^2 + 10(15) + 200 = \text{N}800

Substitute optimal output into the total cost function.

5

Subtract Total Cost from Total Revenue to find economic profit

\text{Profit} = 1050 - 800 = \text{N}250

Economic profit is the surplus remaining after deducting total explicit and fixed cost from total revenue.

Key Concept

Profit Maximization in Perfect Competition

Estimated Time:1m 30s

Question 112Question →

In the long-run equilibrium of a perfectly competitive market, individual firms earn only normal profits. Which of the following conditions correctly describes this long-run equilibrium position for a price-taking firm?

Price = Marginal Revenue = Marginal Cost = Average Total Cost

Price = Marginal Revenue = Total Revenue

Price = Average Variable Cost with Marginal Cost at its minimum point

Price exceeds Marginal Cost while Marginal Cost equals Total Cost

Show answer & explanation

Answer: Price = Marginal Revenue = Marginal Cost = Average Total Cost

Answer

The long-run equilibrium condition for a perfectly competitive firm is Price = Marginal Revenue = Marginal Cost = Average Total Cost.

In the long run under perfect competition, market entry and exit drive price to equality with the minimum average total cost. Because competitive firms face a perfectly elastic demand curve where price equals marginal revenue, profit maximization occurs where Price = Marginal Revenue = Marginal Cost = Average Total Cost, yielding zero economic (normal) profit.

Step-by-Step Solution

1

Identify the short-run profit maximization condition for a competitive firm.

The firm operates where Price (

P

) = Marginal Revenue (

MR

) = Marginal Cost (

MC

).

As a price taker,

P = MR

, and profit maximization occurs where

MR = MC

.

2

Determine the long-run adjustment mechanism in perfect competition.

Free entry of new firms eliminates short-run economic profits, while exit eliminates economic losses.

Market supply shifts until price equals minimum Average Total Cost (

ATC

).

3

Combine the conditions to state the full long-run equilibrium equality.

P = MR = MC = \text{minimum } ATC

.

At this point, firms earn zero economic profit (normal profit) and have no incentive to enter or leave the industry.

Key Concept

Long-run equilibrium in perfect competition requires firms to produce at minimum average total cost where price equals marginal cost, earning only normal profit.

Estimated Time:45s

Question 113Question →

In a perfectly competitive market, the short-run supply curve of an individual firm is given by the segment of its marginal cost ( $MC$ ) curve that lies above its minimum average variable cost ( $AVC$ ) curve.

True

False

Show answer & explanation

Answer: True

Answer

True. The short-run supply curve of a competitive firm is the rising portion of its marginal cost curve lying at or above the minimum point of its average variable cost curve.

The statement is correct because a price-taking firm's supply decisions in the short run are dictated by comparing price to marginal cost (

P = MC

) above the shut-down price level (

P = AVC_{\text{min}}

). Thus, the short-run supply curve is identical to the section of the

MC

curve above the minimum

AVC

.

Step-by-Step Solution

1

Identify the firm's short-run output rule under perfect competition.

The firm maximizes profit or minimizes loss where

P = MR = MC

.

Since the firm is a price taker, price equals marginal revenue (

P = MR

).

2

Determine the short-run operating threshold (shut-down condition).

The firm operates if

P \geq AVC_{\text{min}}

and shuts down (supplying

Q = 0

) if

P < AVC_{\text{min}}

.

Fixed costs are sunk in the short run, so the firm only needs to cover its variable costs to stay operational.

3

Correlate price levels to output quantity to identify the supply curve.

For any market price

P \geq AVC_{\text{min}}

, quantity supplied is determined directly by the

MC

curve.

This functional relationship defines the short-run supply curve as the segment of

MC

above minimum

AVC

.

Key Concept

Short-Run Supply Curve of a Competitive Firm

Question 114Question →

In the long run, the presence of supernormal (economic) profits in a perfectly competitive industry attracts new firms to enter the market, which increases total market supply and depresses the market price until all firms earn only normal profits.

True

False

Show answer & explanation

Answer: True

Answer

The statement is True.

The statement accurately reflects the long-run equilibrium mechanism in a perfectly competitive market. Free entry of profit-seeking firms increases total market supply, lowering market price until price equals minimum average total cost and economic profits are reduced to normal profit.

Step-by-Step Solution

1

Identify the long-run structural characteristics of perfect competition.

Perfect competition is characterized by free entry and exit of firms and perfect information.

Free entry ensures that firms can respond without cost or legal restriction to economic profit signals.

2

Trace the market response to short-run supernormal profits (

P > ATC

).

Supernormal profit attracts new competitors, causing the industry supply curve to shift to the right.

An increase in the number of active producers expands total output supplied at every price level.

3

Determine the impact of the supply shift on price and long-run equilibrium.

The rightward shift in aggregate supply lowers the market equilibrium price to the minimum point of

ATC

, where

P = MR = MC = ATC

.

At this point, economic profits are driven to zero (normal profit only), ending the incentive for further entry.

Key Concept

Long-run dynamic adjustment and free entry mechanism under perfect competition

Estimated Time:1m 0s

Market Structures

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