Tài liệu CFA Level I - Study Session 5 pptx

CFA Level I - Study Session 5 1. A. “Demand and Consumer Choice”, including addendum “Consumer Choice and Indifference Curves” The candidate should be able to: a. explain consumer choice in an economic framework; Principles behind Consumer Choice i) Limited income versus unlimited desires necessitates choices. ii) Consumers make rational choices to achieve their goals. iii) Consumers can substitute between “like” goods. iv) Consumers make decisions based on less than perfect information. v) Law of Diminishing Marginal Utility : As consumption of a good increases, the additional utility derived eventually declines. Consumer Behavior in making Choices • Consumer will adjust consumption of a good until the marginal utility of consuming the good just equals the price of the good. Consumer Demand Curve: • Diminishing Marginal Utility implies that as the price of a good rises, the amount demanded by the consumer should fall. • Income & a substitution effect associated with change in price. b. calculate and interpret price and income elasticity of demand; c. discuss the determinants of price and income elasticity of demand; Price Elasticity of Demand = %∆Q d ÷ %∆P where %∆Q d = (Q d 1 – Q d 0 )/[(Q d 1 + Q d 0 )/2], etc. • Is always NEGATIVE: o Increase in price %∆P > will always reduce quantity demanded %∆Q d < 0. • Shows degree of consumer responsive to variations in good’s price. • Elasticity affected by: i) Availability of Substitutes, ii) Share of Total Budget spent on Good, and iii) Length of Time period. Income Elasticity of Demand = %∆Q d ÷ %∆Income • Shows degree of consumer responsive to variations in income. i) Normal Goods : positive income elasticity, demand rises with income. ii) Luxuries : high positive elasticity, demand rises strongly with income. iii) Inferior Goods : negative income elasticity, demand falls with income. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 1 of 23 d. describe the relationships among total revenue, total expenditures, and price elasticity of demand; %∆expenditures ≅ %∆price + %∆quantity Inelastic Demand: when elasticity of demand is less than one in absolute value, a 10% fall in price increases quantity demanded by less than 10%. Thus total expenditure by consumers, and total revenue received by firms, falls. Elastic Demand: when elasticity of demand is greater than one in absolute value, a 10% fall in price increases quantity demanded by more than 10%. Thus total expenditure by consumers, and total revenue received by firms, rises. e. explain why price elasticity of demand tends to increase in the long run. Second Law of Demand: buyers’ response will be greater after they have had time to adjust more fully to a price change. Why? • Better able to rearrange consumption patterns to take advantage of substitutes f. discuss the characteristics of consumer indifference curves. i) More goods are preferable to fewer goods, thus points to upper right preferred to points in lower left of utility curve diagram. ii) Goods are substitutable, hence utility curves slope downward to the right. iii) Diminishing marginal rate of substitution between goods implies utility curves always convex to origin. iv) Indifference curves are everywhere dense, i.e. one through every point. v) Indifference curves cannot cross because if they did then individual would not be following a rational ordering. g. discuss the role of the consumption opportunity constraint and the budget constraint in indifference analysis. Consumption opportunity constraint: separates consumption bundles that are attainable from those that are unattainable. • In money-income economy, usually same as budget constraint. Budget constraint: separates consumption bundles that consumer can purchase from those that cannot be purchased, given the consumer’s limited income and the market prices of the products involved. • Consumer’s choice determined by the point at which their highest indifference curve touches the budget (or consumption opportunity) constraint. • This point yields highest level of utility for given level of income and market prices. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 2 of 23 h. distinguish between the income effect and the substitution effect. 2. Price of Good X falls, Budget line rotates out. C 3. Consumer moves to Point C. Can break move into two parts. U 1 Income & Substitution Effects Good Y Good X A U 0 1. At original prices, Consumer chooses point A. B 4. Income effect is move from A to B. Prices same, but reach higher utility assoc. with C. 5. Substitution effect is move from B to C. Prices change, but stay on same utility curve. 1. B. “Costs and the Supply of Goods” The candidate should be able to: a. describe the principal–agent problem of the firm; Principal-Agent Problem • Incentives of principal (purchaser of service) and agent (seller of service) can diverge if principal cannot observe agent’s performance. • Agent will pursue own goals, which may only partially overlap with the goals of the principal who has purchased the agent’s services. b. distinguish among the types of business firms; Proprietorship: Business owned by an individual who possesses the ownership rights to the firm’s profits and is personally liable for the firm’s debts. Partnership: Business owned by two or more individuals who possesses the ownership rights to the firm’s profits and is personally liable for the firm’s debts. Corporation: Business owned by shareholders who have the ownership rights to the firm’s profits but whose liability is limited to the amount of their initial investment in the firm. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 3 of 23 c. distinguish between (1) explicit costs and implicit costs, (2) economic profit and accounting profit, and (3) the short run and the long run in production; Explicit Costs: Payments by a firm to purchase productive resources. Implicit Costs: Opportunity costs of a firm’s use of resources that it owns. These costs do not involve direct payments. Economic Profit: Difference between firms’ total revenue & total cost. Accounting Profit: Firm revenue minus expenses over given time period. Does not take implicit costs into account. Short-Run in Production: Time period short enough so not all factors of production can be adjusted. Typically plant size fixed. Long-Run In Production: Time period long enough so all factors of production can be adjusted. d. differentiate between economic costs and accounting costs; Accounting Costs: Payments by a firm to purchase productive resources. Economic Costs: Opportunity costs of a firm’s use of resources that it owns. These costs do not always involve direct payments. e. define various types of costs, including opportunity costs, sunk costs, fixed costs, variable costs, marginal costs, & average costs; Total Fixed Costs, TFC: Sum of costs that do not vary with level of output. Total Variable Costs, TVC: Sum of costs that change with the level of output. Marginal Cost, MC: MC = ∆TC/∆q where TC = TFC + TVC Change in total cost required to produce an additional unit of output. Average Costs Average Fixed Cost: AFC = TFC/quantity produced Average Variable Cost: AVC = TVC/quantity produced Average Total Cost: ATC = AFC + AVC = TC/quantity produced Sunk Costs: Costs that have already been incurred as the result of past decisions. f. state the law of diminishing returns & explain its impact on a firm’s costs; Law of Diminishing Returns to a Factor of Production As more and more units of a variable input are combined with a fixed amount of another input, the additional units of the variable input will yield increased output at a decreasing rate. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 4 of 23 g. describe the shapes of the short-run marginal cost, average variable cost, average fixed cost, and average total cost curves; 1. Once a firm reaches a level of output at which diminishing returns occur, larger and larger additions of the variable factor are necessary to increase output by one more unit. 2. The result is that the MC of the additional output increases. So long as MC is below ATC, producing additional units of output will bring down the ATC curve. 3. At some point, however, MC will rise by enough to exceed ATC. After the point where MC = ATC, additional units of output will raise ATC causing the ATC curve to be U-shaped. Thus the MC curve will cut the ATC curve at its minimum point. Cost Curve Relationships MC = ∆ TC ÷ ∆ q AVC = TVC ÷ q ATC = AFC + AVC Quantity, q Costs AFC = TFC ÷ q MC always cuts ATC and AVC at their minimum points! h. define economies and diseconomies of scale, explain how they each is possible, and relate each to the shape of a firm’s long-run average total cost curve; Economies of Scale: Reductions in firm’s per unit costs as all factors of production are increased in an optimal way. • Possible reasons: 1) Mass production, 2) specialization of factors of production, and 3) “learning by doing” scale economies. Diseconomies of Scale: Increases in firm’s per unit costs as all factors of production are increased in an optimal way. • Possible reasons: 1) coordination inefficiencies, 2) increasing difficulties in conveying information, and 3) increased principal-agent problems. Constant Returns to Scale: No change in firm’s per unit costs as all factors of production are increased in an optimal way. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 5 of 23 Economies and Diseconomies of Scale Diseconomies of Scale Quantity, q Costs Economies of Scale Constant Returns to Scale i. describe the factors that cause cost curves to shift. Factors that Cause Cost Curves to Shift i) Prices of Resources : Increase in price of resources used (inputs to production) will cause a firm’s cost curves to shift upwards. ii) Taxes : Increased taxes shift up a firm’s cost curves. Tax on variable input shifts MC, AVC, & ATC. Fixed tax shifts AFC & ATC. iii) Technology : Cost-reducing technological improvements will lower a firm’s cost curves. Which curves depend on whether technology affects fixed or variable costs. 1. C. “Price Takers and the Competitive Process” The candidate should be able to: a. distinguish between price takers and price searchers; Price-Takers: • Firms that take market price as given when selling their product. Each is small relative to market, cannot affect price. Price-Searchers: • Firms that face a downward-sloping demand curve for their product. Price charged by firm affects amount it sells. b. discuss the conditions that characterize a purely competitive (price taker) market; Purely Competitive Markets • Markets characterized by large number of small firms producing identical products in industry with complete freedom or entry/exit. • Also termed price-taker markets. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 6 of 23 c. explain how and why price takers maximize profits at the quantity for which marginal cost, price, and revenue are equal; Marginal Revenue of each unit of output sold = Market Price. • Price-taking firm sets output so Marginal Cost of last unit of output produced equals market price = marginal revenue. • If MR > MC then selling an additional unit adds to profit, should produce more. • If MR < MC then selling additional unit lowers profit, should produce less. Maximum profit when MR = P = MC of last unit produced and sold. d. calculate and interpret the total revenue and the marginal revenue for a price taker; For a price taker, total revenue is simply equal to the price in the market times the number of units of output sold. Marginal revenue, the change in total revenue/change in output, is constant for a price taker and equal to the market price of the product. e. explain the decision by price takers with economic losses to either continue to operate, shut down, or go out of business; A firm that is making losses, i.e. AC > P, will choose to continue to operate in the short-run so long as: 1. it can cover all its variable costs, and 2. it expects price to be high enough to cover its average cost in the future. In the short run, the firm must pay its fixed costs even if it shuts down. So long as price exceeds average cost, the firm will be able to pay part of its fixed costs. This strategy makes sense so long as the firm expects that at some point price will rise sufficiently to cover both its variable and fixed costs. If either of the conditions above do not hold, i.e. price is too low for the firm to cover its variable costs OR the firm does not expect price to be sufficient to cover average total cost in the future, then the firm should go out of business. f. describe the short-run supply curve for a firm and for a competitive market; SR Supply for Individual Firm • = Marginal Cost curve above AVC. SR Supply for Market • = horizontal sum of all the marginal cost curves of firms in the industry. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 7 of 23 g. contrast the role of constant cost, increasing-cost, and decreasing-cost industries in determining the shape of a long-run market supply curve. Long Run Supply Curve: • shows minimum price that firms will supply any level of market output, given sufficient time to adjust all factors of production & allow for any entry/exit from the industry. Economies of Scale determine Shape of LR Supply • Constant Returns to Scale (i.e. Constant cost) industry will have horizontal LR Supply Curve. • Increasing Returns to Scale (i.e. Declining cost) industry will have downward- sloping LR Supply Curve. • Decreasing Returns to Scale (i.e. Increasing cost) industry will have upward- sloping LR Supply Curve. h. explain the impact of time on the elasticity of supply. Elasticity of supply usually increases in long run as more time is allowed to firms to adjust production in response to changes in prices. Over time, firms can adjust the levels of all factors of production in optimal ways to meet changes in price. 1. D. “Price-Searcher Markets with Low Entry Barriers” The candidate should be able to: a. describe the conditions that characterize competitive price-searcher markets; Competitive Price-Searcher Markets • Each firm faces a downward-sloping demand curve for their output. • Firms produce differentiated products. Output of other firms close substitutes, so individual firm’s demand curve is highly elastic. • Low entry barriers allow entry or exit of firms if existing firms earn non-zero economic profits. Each firm faces competition from existing firms in industry & potential new entrants. b. explain how price searchers choose price and output combinations; Profit-maximizing Behavior for a Price Searcher • Sets output level so that Marginal Cost equal to Marginal Revenue. • For Price Searcher, Marginal Revenue is related to shape of the Demand Curve. • Intuition for two factors at work to sell additional unit of output. o Lower price, sell extra unit and receive additional revenue but o Receive lower price on all existing units also so lose some revenue o Marginal revenue no longer equals price. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 8 of 23 c. summarize the debate about the efficiency of price-searcher markets with low barriers to entry, including the concepts of contestable markets, entrepreneurship, allocative efficiency, and price discrimination; (PRO) In the long run, competition along with free entry and exit will drive prices down to level of average costs. • Contestable markets: market where costs of entry or exit are low, so firms risk little by entry. • Efficient production and zero economic profits should prevail. • Market can be contestable even if capital requirements for entry are high. (CON) LR equilibrium is not allocatively efficient, however, because firms produce less than the minimum ATC level of output. • Advertising in differentiated product markets may be wasteful & self-defeating. • Benefits of dynamic competition improves customer choices of quality and convenience versus trade-off of higher prices. d. explain how price discrimination increases output and reduces allocative inefficiency; Price discrimination occurs when a producer charges different consumers different prices for the same product. • Requires supplier able to identify and separate at least two groups with different price elasticities, and • Prevent those buying at low price from reselling to higher priced customers. • Segmentation of groups with different price elasticities allows suppliers to charge different prices to each, possibly resulting in higher profits than with single price. On balance, output in industry higher with price discrimination than without. Moves industry output closer to competitive output level associated with allocative efficiency. 1. E. “Price-Searcher Markets with High Entry Barriers” The candidate should be able to: a. discuss entry barriers that protect some firms against competition from potential market entrants; • Economies of Scale : Large fixed costs mean decreasing per unit costs. • Government Licensing : Legal barriers to entry established by gov’t. • Patents : Property rights given to newly invented products or processes. • Control over an Essential Resource : Single firm has control over an essential resource or technology. SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 9 of 23 b. differentiate between a monopoly and an oligopoly; Monopoly is a market characterized by: • Single seller of a well-defined product with no good substitutes. • High barriers to entry of any other firms into market for the product. Oligopoly is a market characterized by: • Small number of rival firms in industry. • Interdependence among sellers as each is large relative to market. • Substantial economies of scale in production of the good. • High barriers to entry firms into market. c. describe how a profit-maximizing monopolist sets prices and determines output; Profit-maximizing Behavior for a Monopolist • Sets output level so that Marginal Cost equal to Marginal Revenue. • Marginal Revenue is related to shape of the Demand Curve. Intuition for two factors at work to sell additional unit of output. Profit-Maximizing Monopolist Cost, C and Price, p Quantity, q MR Curve Demand MC = Supply q Monop p Monop q Comp p Comp d. discuss price and output under oligopoly, with and without collusion; Collusion: Under collusion, i.e. acting as a cartel, oligopolists can coordinate supply decisions to maximize the joint profits of all the firms. The cartel essentially acts like a monopolist in market, setting higher price and lower output in order to generate positive economic profits. Without Collusion: Once the collusion by the cartel has established the monopoly price in the market, each member of the cartel has an incentive to cheat by increasing their own supply at the high price to increase its share of profits in the market. Thus without collusion, the oligopolists SASF CFA ® Review 2005 Level I – SS 5 – Macroeconomics Page 10 of 23 [...]... A LOS Level I Study Session 5- 1 .A.h LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .B.c 6 B LOS Level I Study Session 5- 1 .B.f 7 B LOS Level I Study Session 5- 1 .C.e 8 B LOS Level I Study Session 5- 1 .D.a and 5- 1 .E.b 9 A LOS Level I Study Session 5- 1 .F.b 10 C LOS Level I Study Session 5- 1 .F.d 2002 Study Session #5 Answers... 4 5 B D D C A LOS Level I Study Session 5- 1 .A.a LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .B.e LOS Level I Study Session 5- 1 .C.c LOS Level I Study Session 5- 1 .D.c 6 C 7 A 8 C 9 C 10 A LOS Level I Study Session 5- 1 .E.b LOS Level I Study Session 5- 1 .E.e LOS Level I Study Session 5- 1 .C.d LOS Level I Study Session 5- 1 .C.e LOS Level I Study Session 5- 1 .D.d Permission to print questions... Session 5- 1 .A.h LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .A.b LOS Level I Study Session 5- 1 .B.c 6 D 7 C 8 C LOS Level I Study Session 5- 1 .B.f LOS Level I Study Session 5- 1 .C.e LOS Level I Study Session 5- 1 .D.a and 5- 1 .E.b 9 C LOS Level I Study Session 5- 1 .F.b 10 B LOS Level I Study Session 5- 1 .F.d 2003 Study Session #5 Answers 1 2 3 4 5 C B D... characterize a monopolist but not a competitive price searcher market? I II III IV A B C D 9 Well-defined product with no good substitutes Downward-sloping demand curve for their good High barriers to entry Zero economic profits in the long run I. , II., III., & IV I & III II & IV II., III., & IV Which of the following factors will not cause a shift in the demand curve for a resource? A Change in the price... 20 05 Level I – SS 5 – Macroeconomics Page 21 of 23 6 The essential characteristics of a monopoly are: V VI VII A B C D Well-defined product with no good substitutes Control over an essential resource High barriers to entry I & II II & III I & III I only 7 Which of the following is not an obstacle to collusion in an oligopolistic market? A B C D High barriers to entry Larger number of firms in the industry... production III Price is currently above the average variable cost of production IV Price is currently below the average variable cost of production In the short run, price-takers earning economic losses will continue to operate so long as: A B C D I and II hold I and III hold I and IV hold II and IV hold SASF CFA Review 20 05 Level I – SS 5 – Macroeconomics Page 19 of 23 8 Which of the following characterize... interactions 4 Firms maximize profits by operating according to which rule? v vi vii viii Price = MC MR = price MR = MC MR = AVC 5 Which of the following does not characterize a price-searcher market with low barriers to entry? A B C D Positive economic profits should prevail Advertising may be wasteful and self-defeating Improved customer choice of quality Price should equal average cost SASF CFA Review... resource’s marginal revenue product Profit is maximized when the level of the resource is such that its marginal cost is equal to its marginal revenue product i. e MRP = MC SASF CFA Review 20 05 Level I – SS 5 – Macroeconomics Page 12 of 23 d explain the necessary conditions to achieve the cost-minimizing employment levels for two or more variable resources; A profit-maximizing firm with two or more variable... upward-sloping 10 Price discrimination is not characterized by one of the following: A B C D Decreases output Requires groups of consumers with different price elasticities Prevention of resale between customer groups Charge differing prices to different consumers SASF CFA Review 20 05 Level I – SS 5 – Macroeconomics Page 22 of 23 2004 Study Session #5 Answers 1 2 3 4 5 C D B D B LOS Level I Study Session. .. collusion g describe government policy alternatives that are intended to reduce the problems stemming from high barriers to entry i) ii) iii) iv) • • • • Restructure existing firm or firms to stimulate competition May not be possible if economies of scale form barrier Natural monopoly occurs if declining per unit costs of large range of output Reduce Artificial Barriers to Trade If few firms dominate . profits in the long run A. I. , II., III., & IV. B. I. & III. C. II. & IV. D. II., III., & IV. 9. Which of the following factors will not. responsive to variations in income. i) Normal Goods : positive income elasticity, demand rises with income. ii) Luxuries : high positive elasticity, demand