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Simply put, they test an individual against an established norm, or criterion to see if the individual meets the criterion that is set. For example, a teacher wants to test students in such a way that it will be clear who has adequately learned the material that was taught, and who needs work. On a criterion referenced test, it is not enough just to see who did 'best' on the test, or who did not do well. For whatever reason, even the person performing 'best' might not have adequate mastery of the material. In that case this would probably indicate a problem with the teaching of the material, or a problem with the way the test was made.

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