CFA Level 1 Question of the Week: Market Structures

Jim Marsh, CFA and Katherine Shipley, are discussing the various types of market structures and their characteristics. During their discussion, Jim makes the following statements:

I: “Perfect competition assumes that all the firms in the market produce identical products, there are a large number of independent firms and there are no barriers to entry or exit.”

II: “Perfect competition also assumes that each seller is small relative to the size of the total market.”

Katherine says,

III: “Firms in perfect competition are price searchers, whereas firms in monopolistic competition face downward-sloping demand curves and are price takers.”

Which of the statements made by Jim and Katherine is/are most likely incorrect?

• Only statement I is incorrect
• Both statements I and II are incorrect
• Only statement III is incorrect