cfa level 1 Economics 1 Questions and Answer

Schweser Printable Answers - Econ 1 Test ID#: 7 Question 1 - #96669 Antonio Conti consumes 2 pounds of beef per week when beef is $4.50 per pound and 3 pounds of chicken when chicken sells for $3.50 per pound. If the price of chicken increases to $4.00 per pound, Conti’s consumption of beef increases to 2.5 pounds per week. Which of the following most accurately describes Conti’s cross elasticity of demand for beef versus chicken? The cross elasticity of demand for: Your answer: A was incorrect. The correct answer was C) beef relative to chicken is +1.67 and beef and chicken are substitutes. The average quantity of beef demanded is (2.0 + 2.5) / 2 = 2.25 pounds, so the percentage change in the quantity of beef demanded is (2.5 – 2.0) / 2.25 = +22.22%. The average price of chicken is ($3.50 + $4.00) / 2 = $3.75 per pound, so the percentage change in the price of chicken ($4.00 – $3.50) / $3.75 = +13.33%. The cross elasticity of demand for beef relative to the price of chicken is 22.2 / 13.3 = 1.67. Since the cross elasticity is positive, chicken and beef are substitutes for Conti. This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 2 - #96658 Suppose the price of computers increases from $1,000 to $1,200. Assuming the original quantity demanded for computers was 50 million units, and the new quantity demanded is 45 million computers, what is the price elasticity of demand, and is the demand for computers elastic or inelastic? Your answer: A was correct! Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent change in price, using the average value of the variable in the computations. The percent change in quantity demanded is (45 − 50) / [(50 + 45) / 2] = −5 / 47.5 = -0.105 or -10.5%. The percent change in price is = (1,200 − 1,000) / [(1,000 + 1,200) / 2] = 200 / 1,100 = 0.1818 or 18.2% . The price elasticity of demand is -10.5 / 18.2 = - 0.58. This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 3 - #96650 Back to Test Review Hide Questions Print this Page A) beef relative to chicken is +1.67 and beef and chicken are complimentary goods. B) chicken relative to beef is +1.75 and beef and chicken are substitutes. C) beef relative to chicken is +1.67 and beef and chicken are substitutes. A) -0.58, inelastic. B) 0.58, inelastic. C) -1.73, elastic. Page 1 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Which of the following statements least accurately describes why firms can coordinate economic activity more efficiently than markets? Firms can achieve: Your answer: A was incorrect. The correct answer was B) diversification benefits. Firms can often coordinate economic activity more efficiently than markets because firms can reduce the costs of market transactions, and they can achieve economies of scale, scope, and team production. This question tested from Session 4, Reading 16, LOS g. Question 4 - #96706 When household incomes go down and the quantity of a product demanded goes up, the product is: Your answer: A was incorrect. The correct answer was C) an inferior good. When household incomes go down and the quantity demanded of a product goes up, the product is an inferior good. Inferior goods include things like bus travel and margarine. This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 5 - #96893 Suppose that the demand curve for honey shifts such that the equilibrium price for a pound of honey increases from $7 to $9 per pound. At the new equilibrium, the quantity supplied increases from 500 pounds per month to 600 pounds per month, although the supply curve has not shifted. The elasticity of supply for honey is closest to: Your answer: A was incorrect. The correct answer was B) +0.73. The average quantity of honey supplied is (500 + 600) / 2 = 550 pounds, and the average price of honey ($7 + $9) / 2 = $8 per pound. So, the percentage change in quantity is (600 – 500) / 550 = 18.18% and the percentage change in price is (9 - 7) / 8 = 25.00%. Thus, the elasticity of supply is 18.18 / 25.00 = +0.73. This question tested from Session 4, Reading 13, LOS a, (Part 2). A) economies of team production. B) diversification benefits. C) economies of scope. A) a necessity. B) a normal good. C) an inferior good. A) +0.91. B) +0.73. C) +1.12. Page 2 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Question 6 - #96656 Which of the following statements about a tax imposed on buyers or suppliers is most accurate? Your answer: A was incorrect. The correct answer was B) If demand is less elastic than supply, consumers will bear a higher proportion of the tax than suppliers. If demand is less elastic than supply, consumers will bear a higher proportion of the tax than suppliers. If supply is less elastic than demand, suppliers will bear a higher proportion of the tax than consumers. This question tested from Session 4, Reading 15, LOS c. Question 7 - #96901 Which of the following constraints to profit maximization most appropriately considers the prices and availability of the resources that a firm uses and the willingness of people to invest in the firm? Your answer: A was correct! Markets present constraints on the firm’s growth. Market constraints include the prices and availability of the resources that a firm uses and the willingness of people to invest in the firm. This question tested from Session 4, Reading 16, LOS b. Question 8 - #96896 Which of the following types of business firms exposes its owners to the greatest legal liability in the U.S. and which type of firm is most likely to face a principal-agent conflict, respectively? Your answer: A was incorrect. The correct answer was C) Proprietorship; corporation. The owner of a proprietorship is subject to unlimited liability. Shareholders of corporations have limited liability, only up to the amount invested. In many corporations, the agent (management) may be working for different objectives than those of the principal (shareholders). This question tested from Session 4, Reading 16, LOS e, (Part 2). A) If demand is less elastic than supply, consumers will bear a lower proportion of the tax than suppliers. B) If demand is less elastic than supply, consumers will bear a higher proportion of the tax than suppliers. C) The proportion of the tax is borne equally by consumers and suppliers, regardless of supply and demand elasticity. A) Markets. B) Information. C) Technology. A) Proprietorship; partnership. B) Corporation; corporation. C) Proprietorship; corporation. Page 3 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Question 9 - #96682 Assume that for the average consumer, the quantity demanded for jeans increases from 5 to 7 pairs per year in response to a price decrease from $29 to $24 per pair. The respective price elasticity and relative elasticity of demand for jeans is best described by which of the following? Your answer: A was correct! The percentage change in quantity demanded is (7 − 5) / [(7 + 5) / 2] = 33.33% and the percentage change in price is (24 − 29) / [(24 + 29) / 2] = -18.87%. Thus, price elasticity = 33.33% / -18.87% = -1.77. A good is considered to be elastic if the absolute value of price elasticity is greater than 1. In this case, the absolute value of the price elasticity of demand for jeans is 1.77, so the price elasticity for jeans is relatively elastic. This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 10 - #96760 Which of the following most accurately describes the shape of the average fixed cost (AFC) curve? The AFC curve: Your answer: A was incorrect. The correct answer was B) becomes flatter as output increases. The AFC curve declines initially, but as output increases it flattens because a fixed cost is being averaged over more and more units of output. This question tested from Session 4, Reading 17, LOS c. Question 11 - #96795 Which of the following most accurately describes the relationship between the slope of a firm’s long-run average total cost (LRATC) curve and scale economies? A) −1.77; relatively elastic. B) −1.77; relatively inelastic. C) −2.32; relatively elastic. A) is always below the average variable cost curve. B) becomes flatter as output increases. C) intersects the marginal cost curve at the marginal cost curve’s minimum. Downward sloping segment of LRATC Upward sloping segment of LRATC Page 4 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Your answer: A was incorrect. The correct answer was C) The downward sloping segment of the LRATC cost curve covers the output range where economies of scale exist because per unit costs decrease as output increases. The upward sloping segment of the LRATC curve is where diseconomies of scale are present because costs rise as output increases. This question tested from Session 4, Reading 17, LOS d. Question 12 - #96641 Which of the following is the most likely effect of a quota on wheat? Your answer: A was incorrect. The correct answer was B) Nothing if the quota is set above the equilibrium quantity. A quota does not cause the supply curve to shift. The equilibrium quantity will decrease to the quota amount. Marginal cost will be less than marginal benefit, leading to a deadweight loss from underproduction. This question tested from Session 4, Reading 15, LOS d. Question 13 - #96634 Arthur Hampton is reviewing the transcript of a lawmaking session during which a legislator made the following two statements: Statement 1: The impact of a tax on the equilibrium price and quantity of a good or service will be the same whether the tax is legally imposed on the buyers or sellers. Statement 2: The impact on the equilibrium price and quantity of a good or service of making trade in it illegal will be the same whether the penalty is imposed on the buyers or sellers. With respect to these statements: Your answer: A was correct! Hampton should agree with Statement 1 but disagree with Statement 2. In the trade of illegal goods, the effects of the prohibition depend on whether the penalties are imposed on the buyers or sellers. A penalty imposed on the buyers will shift the demand curve down by the value of the penalty buyers expect to bear. A penalty imposed on A) Diseconomies of scale Economies of scale B) Economies of scale Economies of scale C) Economies of scale Diseconomies of scale Economies of scale Diseconomies of scale A) The supply curve will shift downward. B) Nothing if the quota is set above the equilibrium quantity. C) Marginal costs will be greater than marginal benefit. A) only statement 1 is correct. B) both are correct. C) only statement 2 is correct. Page 5 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php the sellers will shift the supply curve up by the value of the penalty sellers expect to bear. Other things equal, a penalty on buyers will result in a lower equilibrium price and a penalty on sellers will result in a higher equilibrium price. In either case the equilibrium quantity decreases. This question tested from Session 4, Reading 15, LOS c. Question 14 - #96863 New legislation setting a price ceiling will most likely cause: Your answer: A was incorrect. The correct answer was B) a market shortage. Price ceilings restrict the producer from increasing the selling price. The lower price will stimulate demand by consumers at this lower price. However, since producers will not be able to increase price there is little incentive for them to increase supply. Hence, production and supply will be limited at the price ceiling leading to a market shortage. This question tested from Session 4, Reading 15, LOS a. Question 15 - #96862 Consider two companies, Company A and Company B. Company A is primarily a manufacturing firm with a large number of employees who are paid an hourly wage. Company B is primarily a sales and service organization with most of its employees performing their duties independently of any direct supervision. Which of the following systems for organization production are most likely to be used for Company A and Company B, respectively? Your answer: A was incorrect. The correct answer was C) Command system; incentive system. Command systems are used when it is easy to monitor the performance of employees, as is usually the situation with hourly production workers. Incentive systems are usually most effective for organizing the production of employees whose activities are difficult to supervise, like those of independent sales people. This question tested from Session 4, Reading 16, LOS d. Question 16 - #96721 Under a price ceiling, bribery is a mechanism to: A) a market surplus. B) a market shortage. C) a decrease in demand. A) Incentive system; incentive system. B) Command system; command system. C) Command system; incentive system. A) bring the total price of a good (including the bribe) lower and closer to the equilibrium price. B) allocate a good to the richest individuals in the market. Page 6 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Your answer: A was incorrect. The correct answer was C) bring the total price of a good (including the bribe) higher and closer to the equilibrium price. A price ceiling is an upper limit on the price a supplier can charge. If the ceiling is below the equilibrium price, it can result in bribes as a rationing mechanism, whereas the total price of a good (including the bribe) is brought closer to the equilibrium price. This question tested from Session 4, Reading 15, LOS a. Question 17 - #96788 A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result? Your answer: A was incorrect. The correct answer was B) Average fixed cost. A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a decrease in output never reduces average fixed costs. The average variable cost, average total cost, and marginal cost curves all have upward sloping components along which a lower level of output would result in a lower cost. This question tested from Session 4, Reading 17, LOS a. Question 18 - #96739 Consider two markets; one has a Herfindahl-Hirschman Index (HHI) of 50, while the other has a four-firm concentration ratio equal to 2%. Which of the following statements most accurately describes these two markets? Your answer: A was incorrect. The correct answer was B) Both markets are highly competitive. An HHI concentration measure of 50 is very low, indicating a high degree of competition. A four firm concentration ratio of 2% indicates a high level of competition. For both the four-firm ratio and the HHI, the higher (lower) the concentration measure, the lower (greater) the degree of competition. This question tested from Session 4, Reading 16, LOS f. Question 19 - #96807 Which of the following two factors are most likely to be considered variable during the short run? C) bring the total price of a good (including the bribe) higher and closer to the equilibrium price. A) Average variable cost. B) Average fixed cost. C) Marginal cost. A) The market with the HHI equal to 50 has low competition, while the other market is highly competitive. B) Both markets are highly competitive. C) Both of these markets are monopolies. Page 7 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Your answer: A was incorrect. The correct answer was B) Labor and raw materials. Of the sets of factors listed, the two that are typically considered variable in the short run are labor and raw materials. This question tested from Session 4, Reading 17, LOS a. Question 20 - #96867 If the price elasticity of demand is -1.5 and you increase the price of the product 2%, the quantity demanded will (closest to): Your answer: A was incorrect. The correct answer was C) decrease 3%. If the price elasticity of demand is -1.5, and you increase the price of the product 2%, the quantity demanded will decrease approximately 3%. When the price elasticity is negative, it means that price and demand move in opposite directions. Given a price decrease, demand will increase and vice versa. The absolute value, 1.5, indicates that demand will move one-and-a-half times as much as price. This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 21 - #96733 Marginal benefit is most accurately described as the: Your answer: A was correct! Marginal benefit is the benefit a consumer receives from consuming an additional unit of a good or service. It is quantified as the maximum price that a consumer is willing to pay for one additional unit of a good or service. This question tested from Session 4, Reading 14, LOS a. Question 22 - #96637 When a tax is imposed on the consumption of a good, which of the following terms refers to who bears the burden of the tax? A) Labor and technology. B) Labor and raw materials. C) Raw materials and technology. A) decrease 1.5%. B) decrease 0.75%. C) decrease 3%. A) benefit an individual gets from consuming an additional unit of a good or service. B) benefit from producing one more unit of a good or service. C) benefit that must be forgone in order to consume an additional unit of a good or service. A) The incidence of a tax. Page 8 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php Your answer: A was correct! The incidence of a tax refers to how the burden of a tax is actually shared between buyers and sellers. The deadweight loss is the loss of the gains from trade from the lower equilibrium quantity that results from the tax. Consumer surplus is the gains from trade that consumers accrue from the existence of the market. This question tested from Session 4, Reading 15, LOS c. Question 23 - #96754 A firm is trying to determine the optimal amount of labor to employ in its production process. Each unit of labor for this process costs the firm $35. A partial table of the firm’s short-run output estimates appears below: Which of the following is least likely to be accurate? This firm: Your answer: A was correct! A profit maximizing firm will employ additional units of labor as long as the MRP of labor is greater than the cost of an additional unit of labor. At 7 units of labor input, MRP = $32, which is less than the $35 cost of one unit of labor. Therefore the firm will not employ the 7th unit of labor and will produce 35 units of output. Marginal product is decreasing as labor input increases, so the firm is experiencing diminishing marginal returns from labor. This question tested from Session 4, Reading 17, LOS d. Question 24 - #96731 If the marginal benefit of the last unit of a good or service consumed was $25, the marginal benefit of the next unit consumed is most likely to be: Your answer: A was correct! B) The deadweight loss. C) Consumer surplus. Labor input, units Marginal product Total product Marginal revenue Marginal revenue product 4 8 22 $10 $80 5 7 29 $9 $63 6 6 35 $9 $54 7 4 39 $8 $32 8 2 41 $8 $16 9+ 0 41 A) will employ the 7th unit of labor. B) experiences diminishing marginal returns from labor over the entire range shown. C) will produce 35 units of the product. A) $24. B) $25. C) $26. Page 9 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php In most cases, the marginal benefit of a good or service decreases as the quantity consumed increases. So, $24 is the most likely answer. This principle is called decreasing marginal benefit. This question tested from Session 4, Reading 14, LOS a. Question 25 - #96881 The price of product Z decreased from $2.50 per unit to $2.00 per unit. Since the price decreased, demand has gone up from 3 million units to 4 million units. Calculate the respective price elasticity of demand and determine the elasticity of demand. Your answer: A was correct! percentage change in quantity = [(4 − 3)] / [(4 + 3) / 2] = 1 / 3.5 = 0.286 = 28.6% percentage change in price = [(2 − 2.5)] / [(2 + 2.5) / 2] = -0.5 / 2.25 = -0.222 = -22.2% 28.6 % / -22.2% = -1.29 Since the price elasticity of demand is greater than 1 (ignore the sign), product Z is elastic This question tested from Session 4, Reading 13, LOS a, (Part 1). Question 26 - #96729 Consumer surplus is most accurately defined as the difference between the: Your answer: A was incorrect. The correct answer was C) total value consumers place on the quantity of a good purchased, and the total amount they must pay for that quantity. For an individual, consumer surplus is defined as the sum of the differences between what that individual is willing to pay for each individual unit of a good or service that he or she purchases (marginal benefit) and the amount that he or she actually pays for each of these individual units. This question tested from Session 4, Reading 14, LOS b. Question 27 - #96750 Which of the following most accurately describes the relationship between the average total cost (ATC) curve and the average variable cost (AVC) curve? The vertical distance between the ATC and AVC curves: A) −1.29; elastic. B) −1.29; inelastic. C) −2.00; elastic. A) value consumers are willing to pay for an additional unit of good or service and the cost of producing the additional unit of the good or service. B) price that a consumer must pay for an additional unit of a good or service and the cost of producing the additional unit of the good or service. C) total value consumers place on the quantity of a good purchased, and the total amount they must pay for that quantity. Page 10 of 44 Printable Exams 24/05/2010 http://localhost:20511/online_program/test_engine/printable_answers.php [...]... *Assume that 19 98 is the base rate Based on the above data, Tskitishvili would conclude that a computer is a: A) luxury good with income elasticity of 1. 01 http://localhost:20 511 /online_program/test_engine/printable_answers.php 24/05/2 010 Printable Exams Page 13 of 44 B) luxury good with income elasticity of 1. 18 C) normal good with income elasticity of 0.84 Your answer: A was incorrect The correct answer. .. correct answer was B) luxury good with income elasticity of 1. 18 % change in computers demanded = ( 0.57- 0.42) / 0.495 = 30.30% % change in income = ($53,000 - $ 41, 000) / $47,000 = 25.53% 30.30% / 25.53% = 1. 18 1. 18 > 1 so Tskitishvili would conclude that computers are a luxury good This question tested from Session 4, Reading 13 , LOS a, (Part 1) Question 33 - #96799 The upward sloping segment of a long-run... Index, respectively? A) Monopoly; 10 ,000 B) Monopolistic competition; 10 0 C) Perfect competition; 1, 800 Your answer: A was correct! The Herfindahl-Hirschman Index (HHI) has a theoretical range of near zero to 10 ,000 The HHI is very low in a highly competitive and increases to 10 ,000 ( =10 0%2) for an industry with only one firm, e.g., a monopoly An HHI between 1, 000 and 1, 800 is considered moderately competitive... #96967 http://localhost:20 511 /online_program/test_engine/printable_answers.php 24/05/2 010 Printable Exams Page 23 of 44 Given the following information for a country, what is the labor force participation rate? Total civilian population 16 and over Those not in the labor force Unemployed Employed 210 50 8 15 2 A) 72% B) 95% C) 76% Your answer: A was incorrect The correct answer was C) 76% Labor force... question tested from Session 5, Reading 19 , LOS d Question 71 - #9 715 6 The natural rate of unemployment is the sum of: A) structural and cyclical unemployment B) frictional and structural unemployment C) frictional and cyclical unemployment Your answer: A was incorrect The correct answer was B) frictional and structural unemployment The sum of the frictional and structural unemployment rates is called... perfectly elastic Your answer: A was incorrect The correct answer was C) elastic, but not perfectly elastic Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of demand will be greater than 1. 0 and demand for the product is considered to be elastic This question tested from Session 4, Reading 13 , LOS b Question 38 - #96887 Ken Brobeck and Alice Magnuson... to producing Good W and less to producing Good T C) The price of Good U will decrease and the price of Good S will increase Your answer: A was incorrect The correct answer was B) More resources will be devoted to producing Good W and less to producing Good T If demand for Good W increases and demand for Good X decreases, the market will allocate more resources to producing Good W and the goods that... customers in different price groups C) A product for which the demand curve is downward sloping Your answer: A was correct! http://localhost:20 511 /online_program/test_engine/printable_answers.php 24/05/2 010 Printable Exams Page 21 of 44 Price discrimination works when the seller (discriminator) faces a downward-sloping demand curve and has at least two customer groups each having different price elasticities... Good S and Good T), and less to producing Good X and the goods that go into producing Good X (that is, Good U and Good V) Changes in the relative prices of all these goods are the signal that tells their producers where to direct resources Prices will increase for goods W, S and T while prices decrease for Goods X, U and V This question tested from Session 4, Reading 14 , LOS e http://localhost:20 511 /online_program/test_engine/printable_answers.php... 4, Reading 15 , LOS b Question 35 - #96894 Which of the following organizational structures is (are) subject to double taxation? http://localhost:20 511 /online_program/test_engine/printable_answers.php 24/05/2 010 Printable Exams Page 14 of 44 A) Corporations B) Proprietorships C) Partnerships and proprietorships Your answer: A was correct! Corporations must pay taxes on the firm’s profits and the shareholders . 47.5 = -0 .10 5 or -10 .5%. The percent change in price is = (1, 200 − 1, 000) / [ (1, 000 + 1, 200) / 2] = 200 / 1, 100 = 0 .18 18 or 18 .2% . The price elasticity of demand is -10 .5 / 18 .2 = - 0.58. This. elasticity of 1. 01. Page 12 of 44 Printable Exams 24/05/2 010 http://localhost:20 511 /online_program/test_engine/printable_answers.php Your answer: A was incorrect. The correct answer was B). elasticity of 1. 18. % change in computers demanded = ( 0.57- 0.42) / 0.495 = 30.30% % change in income = ($53,000 - $ 41, 000) / $47,000 = 25.53% 30.30% / 25.53% = 1. 18 1. 18 > 1 so Tskitishvili