CFA Level 1 – Microeconomics



CFA® Level I Program

CFA Level 1 – Study Session 4 – CFA Level 1 Microeconomic Analysis – Finance Grid – DOWNLOAD PDF BELOW!!!

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CFA® Level I Program: 100 Hour Revision Guide. Available only through Finance Grid. See sample question bank for CFA Level 1 Study Session 4 below:

Finance Grid – CFA Level 1
SS 4 Question Database: CIRCLE THE CORRECT RESPONSE: (Please note, in the responses below, 1,2,3 correspond to A, B, C respectively. So if correct answer is indicated as B, then the correct answer you will take should be the one numbered 2.)

  1. ‘Command Systems’ represent a method of organising production of goods and services,
    through a formalised hierarchy, in which;

    1. Commands flow downwards in a
      hierarchy and information flows laterally through the organisation, in order to
      carry out the demands.
    2. Commands flow downwards whereas
      information flows upwards, downwards, and laterally, in an organised teamwork
      structure to achieve maximum efficiency.
    3. Commands flow downwards whereas
      information flows upwards, as in the case of a military hierarchy.

 (CFA Level 1 – Correct Answer is C.)

  1. A ‘Subsidy’on agricultural output will have the following effects;
    1. The subsidy functions like a negative
      tax on suppliers, hence the supply curve will shift downwards and to the right,
      just as if the costs to the suppliers had been reduced. The price paid by
      consumers will reduce by an amount equal to the subsidy.
    2. The subsidy functions like a negative tax on suppliers, hence the supply curve will shift downwards and to the right, just as if the costs to the suppliers had been reduced. The price paid by consumers will reduce by an amount less than the subsidy.
    3. The subsidy functions like a negative
      tax on consumers, hence the demand curve will shift towards the right, and the
      price paid by consumers will be lowered by the amount of the subsidy.

 (CFA Level 1 – Correct Answer is B.)

  1. ‘Price Elasticity of Demand’ can be used to measure the demand response of consumers to
    price changes across various products because;

    1. Elasticity consistently measures the
      slope of the various demand curves of different products, thus allowing for a
      direct comparability.
    2. Products have similar price
      elasticity of demand when they are ‘complementary products’, such as milk and
      tea.
    3. Elasticity is a ‘unit-free’ measure.

 (CFA Level 1 – Correct Answer is C.)

  1. ‘Allocative Efficiency’ is calibrated by evaluating marginal cost and marginal
    benefit.

    1. If MC < MB, the output level is
      less than the optimal quantity and output should be increased, since production
      cost is lower than the value to customer.
    2. If MB = MC, Allocative efficiency
      cannot be achieved, since no calibration is possible at the point where MB and
      MC are equal.
    3. If MC > MB, the output level
      exceeds the optimal quantity and output should be decreased, since value to
      consumer exceeds production costs.

 (CFA Level 1 – Correct Answer is A.)

  1. MSB is the aggregate of the MB curves
    of all consumers and the MSC is the aggregate of the MC curve of all producers.
    In determining the optimal level of output through ‘Allocative Efficiency’;

    1. Output and price level will be
      located to the left of the intersection of MSB and MSC, since operating towards
      the right side of this intersection will deliver dead-weight losses to society.
    2. Output and price level will be
      located at the intersection of MSB and MSC, since there are dead-weight losses
      to society at this point.
    3. Output and price level will be
      located towards the right of the intersection of MSB and MSC, since operating
      exactly at the intersection or towards the left side of this intersection, will
      result in under-production relative to capacity.

 (CFA Level 1 – Correct Answer is B)

  1. In the case of agricultural
    production, a bumper crop means that the vertical ‘Momentary Supply Curve’will be to the right of its normal location. A poor harvest on the other hand will shift the momentary supply curve to the left of its normal location. What is the effect on prices of agricultural products and total revenue to the farmer community?

    1. A bumper crop will lower the price
      paid by consumers and the total revenue to the farmer community will be lower
      since the demand curve is inelastic.
    2. A bumper crop will lower the price
      paid by consumers and the total revenue to the farmer community will be higher
      because of the bumper crop.
    3. A poor harvest will increase the
      price paid by consumers and reduce the total revenue to the farmer community
      due to the poor harvest.

 (CFA Level 1 – Correct Answer is A)

  1. Three candidates studying for their
    economics exam are discussing the concept of ‘Price Elasticity of Demand’ and expressing their casual
    observations. Which student has the best understanding of the concept?

    1. George: “A larger number of close
      substitutes will mean that consumers will be fussy about price changes and quickly
      switch to the substitute product if prices are raised even slightly – That is
      if the products really are close substitutes”.
    2. Jonathan: “I feel that it is the
      quality of the product and not the number of close substitutes available in the
      market, which determines the sensitivity of consumers to price changes”.
    3. Samantha: “Fewer number of substitute
      products available in the market, make the consumers more sensitive to price
      changes – You see there is not much they can choose from”.

 (CFA Level 1 – Correct Answer is A)

  1. The concept of a ‘Rent Ceiling’ can be most accurately described by which of the
    following statements?

    1. Rent ceilings lower the price, create
      a shortage, and may result in illegal price hikes due to consumers wishing to
      bypass the shortage.
    2. Rent ceilings raise the ceiling
      price, create a shortage, and may result in illegal price hikes due to
      consumers wishing to bypass the shortage.
    3. Rent ceilings lower the ceiling price,
      create a surplus supply, and do not result in illegal price hikes.

 (CFA Level 1 – Correct Answer is A)

  1.  Implementing a ‘Production Quota’as an intervention in farm markets;
    1. Overall output is decreased and
      consumers pay a lower price. Dead-weight losses are eliminated.
    2. The overall output is unaffected,
      consumers pay a lower price and suppliers incur a lower cost. Dead-weight
      losses are eliminated.
    3. The overall output is decreased and
      consumers pay a higher price. Dead-weight losses are created.

 (CFA Level 1 – Correct Answer is C)

  1. Identify the most accurate statement
    below, relating to the ‘Principal-Agent’
    problem;

    1. The shareholders are the principals,
      whereas the firm and its managers are the agents.
    2. The firm and its senior management
      are the principals, and all other staff members are the agents.
    3. The firm is the principal, whereas
      the managers and other staff members are the agents.

 (CFA Level 1 – Correct Answer is C)

  1. Equilibrium in the ‘Labour Markets’ is determined at the
    intersection of;

    1. The long run labour supply curve and
      the demand curve for labour
    2. The short run labour supply curve and
      the demand curve for labour
    3. The medium term labour supply curve
      and the demand curve for labour

 (CFA Level 1 – Correct Answer is B)

  1. The various outcomes of intervention
    in markets for ‘Illegal Goods’,
    through fines on sellers, fines or buyers, or both, can be most accurately
    described as follows;

    1. A fine on sellers will lower output
      and lower prices
    2. A fine on buyers will lower output
      and lower prices
    3. A fine on both buyers and sellers, of
      an equal amount, will lower output drastically as well as increase prices.

(CFA Level 1 – Correct Answer is B)

  1. A ‘Rent-Ceiling’will be determined at;
    1. A price exactly equal to the
      prevailing equilibrium price level, so that equilibrium price level is not
      disturbed.
    2. A price above the equilibrium price
      level, so that producers can charge a price higher than equilibrium prices for
      efficient allocation of scarce resources.
    3. A price below the equilibrium price
      level, so that consumers are charged a price lower than the equilibrium prices.

(CFA Level 1 – Correct Answer is C)

  1. For a straight line, downward sloping
    demand curve of a particular product, the ‘Price
    Elasticity of Demand’    will be;

    1. Elastic where the demand curve
      touches the x-axis and the y-axis, but inelastic over the remaining portion of
      the demand curve.
    2. Elastic above the mid-point,
      unit-elastic at the mid-point, and inelastic below the mid-point.
    3. Constant at all points since the
      demand curve is a straight line and has a constant slope.

(CFA Level 1 – Correct Answer is B)

  1. ‘Normal Profit’
    is the profit that an entrepreneur can earn through an alternative, best case
    opportunity. Indicate the proper classification of normal profit, among the
    statements below;

    1. Normal Profit is an ‘Implicit
      Opportunity Cost’ and is subtracted from total revenue, along with other
      opportunity costs, to arrive at ‘Economic Profit’.
    2. Normal Profit is part of ‘Economic
      Profit’ and should not be classified as an opportunity cost, since it is a
      profit rather than a cost.
    3. Normal Profit is an ‘Explicit
      Opportunity Cost’ and is subtracted from total revenue in order to arrive at
      ‘Economic Profit’.

(Correct Answer is A)

  1. Which of the following statements
    about the ‘Measures of Market
    Concentration’    is most accurate?

    1. The ‘Herfindahl-Hirschman’ Index is
      the ratio of; the ‘sum of the squares’ of the % market shares of all firms
      operating in the market to the total size of the market in terms of ‘money
      value of sales’.
    2. The ‘N-Firm Concentration Ratio’ is
      ratio of; the ‘money value of sales’ of the ‘N’ largest firms operating in the
      market to the ‘money value of sales’ of all firms operating in the market.
    3. The ‘N-Firm Concentration Ratio’ is
      ‘sum of the squares’ of the % market shares of the ‘N’ largest firms operating
      in the market.

 (CFA Level 1 – Correct Answer is B)

  1. The effects of a ‘Minimum Wage’ can be best described by which of the following
    statement.

    1. Implementing a minimum wage creates
      economic inefficiency, creating dead-weight losses, reducing the surplus to
      both labour as well as hiring firms. The firms cannot accommodate all the
      workers willing to work at the minimum wage.
    2. Implementing a minimum wage creates
      economic inefficiency, but improves social efficiency and boosts the morale of
      the workers. ‘Dead-weight’ losses and ‘Search’ costs are thus negligible in the
      context of benefit to society.
    3. Implementing a minimum wage reduces
      the hiring firms’ surplus but increases the surplus to the labour because of a
      higher minimum wage compared to the equilibrium wage level. The total surplus
      lost and surplus gained means that total economic efficiency does not change.

 (CFA Level 1 – Correct Answer is A)

  1.  Three analysts are discussing the ‘Constraints faced by a Firm’. Identify
    the analyst making the most correct statement;

    1. Sarosh: In today’s day and age, at
      least there are no constraints in accessing and analysing information in order
      to enhance profitability. Market constraints such as prices, labour access and
      raw material access are the real constraints.
    2. Andreas: Access to information and
      access to technology create profit enhancing opportunities and there are
      virtually no limits to these since information is easily accessible and
      technology keeps ahead of the commercial requirements of businesses. Market
      constraints are irrelevant if the best information and most updated
      technologies are used.
    3. Zain: Market constraints such as
      price levels, labour access and access to other resources, can place constraints
      on a firm’s ability to enhance profits. Also resources that can be spent on
      information access are limited and stage of technology can itself place a
      constraint on profit enhancement.

 (CFA Level 1 – Correct Answer is C)

  1. In considering the perspective of an
    individual consumer, which statement best explains the price paid and the ‘Consumer Surplus’achieved?

    1. The consumer will pay a price at the
      intersection of his or her own MB and the MC curve of the individual producer
      whose product is being purchased. Both individuals struggle to achieve the
      surplus for themselves.
    2. Each individual consumer will always
      pay the prevailing market price for any quantity that the individual wishes to
      consumer. For this reason, there is no consumer’s surplus for the individual.
    3. It is possible that the value derived
      by an individual consumer, exceeds the price paid by the consumer, thus
      generating a consumer’s surplus for the individual.

 (CFA Level 1 – Correct Answer is C)

  1. Which statement below, best describes
    how ‘Market Price is determined’ for
    any product or service?

    1. Market price is determined at the
      intersection of the aggregate MC curve of all producers of the product and the aggregate
      MB curve of all consumers of the product.
    2. Market price is determined at the
      intersection of the MB curve of an individual consumer and the aggregate MC
      curve of all producers, since the individual has unlimited choice.
    3. Market price is determined at the
      intersection of MB curve of the individual consumer and the MC curve of the
      individual producer whose product is being purchased.

 (CFA Level 1 – Correct Answer is A)

  1. Which statement best describes how ‘Quantity produced by an Individual
    Producer’    is determined?

    1. The intersection of the individual
      producer’s MC curve and the aggregate MB curve of his loyal customer base will
      determine the level of output produced by an individual producer.
    2. The individual producer will receive
      the prevailing market price will increase output levels up to the point that
      his own MC becomes equal to the market price. That output level will be the
      quantity produced by an individual producer.
    3. The individual producer will receive
      the prevailing market price and will attempt to maximize his market share,
      producing output equal to the maximum production capacity he possesses.

 (Correct Answer is B)

  1.   Three
    analysts are discussing ‘Agricultural
    Products’    , which statement is most accurate?

    1. Robert: The demand for agricultural
      products is downward sloping but inelastic, whereas the momentary supply curve
      for agricultural products, immediately after a harvest is perfectly inelastic.
    2. James: The demand for agricultural
      products is inelastic immediately after a harvest. The momentary supply curve
      for agricultural products is upward sloping and inelastic as well. This is why
      the government must intervene through subsidies.
    3. Joshua: The demand for agricultural
      products is perfectly elastic. The momentary supply curve is vertical
      immediately after a harvest, but afterwards it may be upward sloping.

 (Correct answer is A)

  1. Complete the sentence through the
    most accurate statement below; “Opportunity
    costs comprise of…”

    1. Explicit costs as well as implicit
      costs, and economic profit is total revenue minus opportunity costs.
    2. Implicit costs such as foregone
      interest and loss due to economic depreciation, however opportunity costs are
      not relevant in the calculation of economic profit. Explicit costs are excluded
      from opportunity costs and are used in the calculation of accounting profit.
    3. Explicit costs and implicit costs
      which have been diverted from other projects, and accounting profit is total
      revenue minus all opportunity costs.

 (Correct Answer is A)

  1. Unlimited liability will be faced by
    owners in the case of which ‘Company
    Incorporation’    status?

    1. In a Corporation and Partnership
      only, in their collective or joint capacities.
    2. In a Sole Proprietorship in
      individual capacity, jointly in the case of a Partnership, and collectively in
      the case of a Corporation.
    3. In a Sole Proprietorship in
      individual capacity and jointly in the case of a Partnership.

 (Correct Answer is C)

  1. ‘Income Elasticity of Demand’is defined as;
    1. The % change in price elasticity of
      quantity demanded, divided by the % change in income levels.
    2. The % change in quantity demanded,
      divided by the % change in income of the consumers.
    3.  The % change in supply elasticity of quantity
      demanded, divided by the % change in income levels of producers.

 (Correct Answer is B)

  1. According to the ‘Fairness Principle in Utilitarianism’….. ;
    1. Progressive taxes are an efficient
      mechanism for taxing the rich to pay for services to the poor, such that
      equality is achieved between them.
    2. Progressive taxes benefit the poor,
      however there is no overall benefit to society since the advantage extended to
      the poor is offset by the taxation disadvantage to the rich.
    3. Progressive taxation is an
      inefficient mechanism and everyone should be taxed at the same rate, in order
      to achieve fairness and maximum utility to society.

 (Correct Answer is A)

  1. The effects of a ‘Rent Ceiling’include;
    1. Economic inefficiency and dead-weight
      losses, improved social efficiency due to lower prices and improvement in at
      least the consumer’s surplus as ‘Search Activity’ decreases.
    2. Economic inefficiency and dead-weight
      losses, shrinkage of the consumer surplus as well as producer surplus, lower
      prices, and potential loss due to increased ‘Search Activity’.
    3. Economic inefficiency and dead-weight
      losses, shrinkage of the consumer surplus as well as producer surplus,
      potential loss due to increased ‘Search Activity’ as a result of higher prices.

 (Correct Answer is B)

  1. ‘Opportunity Costs’represent;
    1. The cost of the foregone alternative,
      which has the lowest value among the alternatives that have been foregone.
    2. The cost of the foregone alternative,
      which has the highest value among the alternatives that have been foregone.
    3. The cost of the foregone alternative,
      which has a value closest to the option that is actually undertaken.

 (Correct Answer is B)

  1.  According to the ‘Fairness Principle of Symmetry’;
    1. The distribution of wealth should be
      equal.
    2. All resources should be under private
      ownership and the distribution of wealth should be fair rather that equal.
    3. All resources should be symmetrically
      distributed; 50% in private ownership and 50% in public ownership.

(Correct answer is B)

  1. Complete the statement in quotes
    using the best statement from the choices provided. “The coordination of economic activities such as hiring and organising
    factors of production, determining output levels to match demand, and the
    distribution and selling of output ….”;

    1. Is best carried out through the
      combined actions of firms as well as the market mechanism, and this ensures the
      viability of the economic system as a whole.
    2. Is best carried out through the
      market mechanism, since the market mechanism ensures the lowest possible cost
      for such coordination.
    3. Is best carried out through the firms
      since the firms can carry out such activities at the lowest possible cost,
      since this ensures the economic viability of the firms themselves.

 (Correct Answer is C)

  1. Regarding ‘Variable and Fixed Resource Inputs’, it can be said most accurately
    that;

    1. In the short run only variable inputs
      can be changed, whereas in the long run all resource inputs can be changed.
    2. In the short run only variable inputs
      can be changed constantly, whereas fixed resource inputs can be changed only at
      fixed intervals.
    3. In the short run none of the resource
      inputs can be changed, whereas variable inputs are changeable in the long run.

 (Correct Answer is A)

  1. The definition of ‘Cross Elasticity of Demand’ is closest
    to which of the following statements?

    1. The % change in quantity demanded of
      product ‘A’ divided by the % change in price of product ‘B’, which may be a
      substitute or complement of product ‘A’.
    2. The product of the % change in
      quantity demanded of product ‘A’ and the % change in quantity demanded of
      product ‘B’, which may be a substitute or complement of product ‘A’.
    3. The ratio of the % change in quantity
      demanded of product ‘A’ and the % change in price of product ‘A’.

 (Correct Answer is A)

  1.  Consider the ‘Distinguishing Features of the Various Market Structures’: A large
    number of firms, differentiated products and a fairly high level of
    competition, is a distinguishing feature of;

    1. ‘Monopolistic Competition’ only.
    2. Both ‘Perfect Competition’ and
      ‘Monopolistic Competition’
    3. Both ‘Monopolistic Competition’ and
      ‘Oligopoly’.

 (Correct Answer is A)

  1. ‘Production
    Efficiency    ’ can be viewed along which of the following dimensions;

    1. ‘Technological Efficiency’ and
      ‘Market Efficiency’; which entails the use of least amount of input resources
      and least amount of marketing resources to get optimal results.
    2. ‘Economic Efficiency’ and
      ‘Technological Efficiency’; which entails the lowest cost of production and use
      of the least amount of input resources.
    3. ‘Technological Efficiency’ and
      ‘Operational Efficiency’; which entails the use of least amount of input
      resources due to technological efficiency.

 (Correct Answer is B)

 

  1. An economist has calculated the ‘Income Elasticity of Demand’ for three
    products; ‘A’ = 1.3, ‘B’ = 0.5, ‘C’ = – 0.3. Which of the statements below,
    about the economic categorisation of the three products is most accurate?

    1. ‘A’ is a ‘Luxury, Normal Good’, ‘B is
      a ‘Necessity, Normal Good’ and ‘C is an ‘Inferior Good’.
    2. ‘A’ is a ‘Necessity, Normal Good’, ‘B
      is a ‘Luxury, Normal Good’ and ‘C is an ‘Inferior Good’.
    3. ‘C’ is an ‘Inferior Good’ since its
      quantity demanded decreases when income increases, hence the negative sign. ‘A’
      and ‘B’ are both ‘Normal Goods’.

 (Correct Answer is A)

  1. Which of the following statements
    best describes the nature of ‘Demand and
    Supply Curves    ’, over different time frames?

    1. The short run supply curve is
      horizontal, the long run supply curve is vertical (perfectly inelastic), and
      the demand curve is downward sloping from left to right.
    2. The short run supply curve is upward
      sloping, the long run supply curve is horizontal (perfectly elastic) and the
      demand curve is downwards sloping from left to right.
    3. The short run supply curve is
      vertically, the long run supply curve is horizontal (perfectly elastic) and the
      demand curve is upward sloping from left to right.

 (Correct Answer is B)

  1.  Which statement best describes the ‘Economic Effects of Taxes’?
    1. The equilibrium quantity does not
      change due to taxes on either party, but consumers will pay less if the tax is
      imposed only on producers.
    2. The equilibrium quantity will
      decrease, price to consumer will be raised and revenue to producers will be
      reduced, regardless of whether the tax is imposed on consumers or producers.
    3. The equilibrium quantity will
      decrease and price to consumer will be raised, however revenue to producers
      will not be reduced if the tax is imposed only on consumers.

 (Correct Answer is B)

  1. ‘Supply
    Elasticity    ’ concepts are best described by which of the following
    statements?

    1. Like ‘Demand’, ‘Supply’ is also more
      elastic in the long run since all variables can be adjusted in the long run.
    2. ‘Supply’ will be more inelastic if
      several substitutes are available as resource inputs to the production process.
    3. ‘Momentary Supply’ is the most
      inelastic since quantity supplied can be varied in a moment.

 (Correct Answer is A)

  1. Consider the implications of ‘Price Elasticity of Demand on Total Revenue’.
    Which statement below for a straight line demand curve is most accurate?

    1. In the inelastic region of the demand
      curve, lowering prices will always increase total revenue since consumers buy
      more units at lower prices.
    2. In the elastic region of the demand
      curve, lowering prices will reduce total revenue since consumers will perceive
      lower prices to mean lower quality, and buy less.
    3. In the elastic region of the demand curve,
      lowering prices will increase total revenue up to the mid-point. Further price
      reductions into the inelastic region will begin to reduce total revenue.

 (Correct Answer is C)

  1. An ‘Oligopoly’entails;
    1.  High entry and exit barriers, few firms,
      undifferentiated products and adherence to the free market mechanism.
    2. Collusion to create low entry and exit
      barriers, a large number of firms, differentiated or undifferentiated products
      and adherence to the free market mechanism.
    3. High entry and exit barriers, few
      firms, differentiated or undifferentiated products and collusion for fixing
      prices and output.

(Correct Answer is C)

  1. ‘Allocative Efficiency’ is based on the allocation of resources to the production of
    various goods and services;

    1. On the basis of personal interests of
      the various producers operating in the economy, achieving a balance between the
      economic interests of producers.
    2. On the basis of social interests,
      such that more units of a particular good cannot be produced without
      sacrificing another good that is more highly valued by consumers. A balance is
      achieved such that a consumer cannot be made better off without making someone
      else worse off.
    3. On the basis of social and economic
      interests of the political forces that can influence the economic decisions of
      businesses.

(Correct
Answer is B)

  1. ‘Short Run Labour Productivity Measures’include;
    1. Only ‘Average Product’ and ‘Total
      Product of Labour’; and ‘Total Product of Labour’ is an indicator of the
      labour’s productivity level.
    2. Only ‘Average Product’ and ‘Marginal
      Product of Labour’; and ‘Marginal Product of Labour’ is an indicator of the
      labour’s productivity level.
    3. ‘Average Product’, ‘Marginal Product’
      and ‘Total Product of Labour’; and ‘Average Product’ of labour is an indicator
      of the labour’s productivity level.

(Correct Answer is B)

  1. Three analysts have slightly
    different views regarding the ‘Statutory
    and Actual Incidence of Tax’    . Circle the most accurate analyst’s statement;

    1. Seemab: The relative elasticity of
      buyers versus suppliers determines the actual incidence of tax. The more
      inelastic party will bear a greater actual tax incidence regardless of whom the
      statutory tax is imposed upon.
    2. Wendy: A Statutory tax on consumers
      rather than producers will mean that consumers will inevitably have to bear a
      greater actual tax incidence.
    3. Raymond: The more elastic party will
      bear the greater actual tax incidence regardless of whom the statutory tax is
      imposed upon. Since usually, demand is more elastic, consumers will bear more
      of the actual tax incidence.

(Correct Answer is A)

  1. For the purpose of identifying if
    products are Substitutes or Complements,
    which of the following statements is most accurate?

    1.  If products A and B are Complements, their
      ‘Cross Price Elasticity’ will be greater than zero and their ‘Price Elasticity
      of Demand’ will be equal.
    2. If products A and B are Complements,
      both will have the same ‘Price Elasticity of Demand’ and if the products are
      Substitutes, their ‘Price Elasticity of Demand’ will be different.
    3. If products A and B are Substitutes,
      their ‘Cross Price Elasticity of Demand’ will be greater than zero.

(Correct Answer is C)

  1.  Consider a graphical depiction of ‘Short Run Labour Productivity Measures’.
    If Average Product and Marginal Product are plotted against an x-axis scale
    which reads ‘quantity of workers per day’ and a y-axis scale which reads
    ‘output per day’, in that case;

    1. Marginal Product and Average Product
      curves would never be touching each other because of the x-axis and y-axis
      scales used.
    2. Marginal Product and Average Product
      curves would be touching each other at the point where the Average Product
      curve is at its highest point against the vertical axis.
    3. Marginal Product and Average Product
      curves would touch each other in the region where the Marginal Product curve is
      still rising and the Average Product curve is not at its peak.

(Correct Answer is B)

  1. Three analysts express their views
    about the ‘Shape of the Demand curve and
    its Elasticity’    . Identify the analyst making the most accurate statement;

    1. Rotimi: If the demand curve is
      vertical, we can say that demand is perfectly inelastic and the quantity demanded
      will not change at any price level. Elasticity will be zero.
    2. Radcliffe: If the demand curve is
      horizontal, then the demand is perfectly elastic. Elasticity will be infinite.
      In fact this is true for a straight line, downward sloping demand curve as well.
    3. Shariq: If the demand is depicted as
      downward sloping, and is a straight line, in that case it will have constant
      elasticity at every point on the line since slope is conceptually similar to
      the formula used for calculating elasticity.

(Correct Answer is A)

  1. Regarding ‘Business Incorporation’options, which statement is most accurate?
    1. An individual may incorporate the
      business as a ‘Sole Proprietorship’, in his individual capacity only.
    2. An individual may incorporate as a
      ‘Sole Proprietorship’ or as a ‘Partnership’ with others. No other incorporation
      status will be allowed to an individual.
    3. An individual may incorporate as a
      ‘Sole Proprietorship’ individually, as a ‘Partnership’ along with others as
      well as incorporate as a ‘Corporation’.

(Correct Answer is C)

  1. In the case of two products, A and B,
    price is changed by 30%. If the percentage change in quantity demanded as a
    result of the price change is observed to be 40% for A and 20% for B. Using
    this information select the best description about their ‘Price Elasticity of Demand’;

    1. The demand for both A and B, has
      similar price elasticity since the price change is set to be equal for both at
      30%. However their elasticity with respect to quantity is obviously different.
    2. The demand for A is inelastic but the
      demand for B is elastic.
    3. The demand for A is elastic but the
      demand for B is inelastic.

(Correct Answer is C)

  1. “As more of a variable input is added
    to a fixed input, the Marginal Product of the variable input eventually
    decreases, which is described in economics as the phenomenon of diminishing
    returns”. Which of the statements below offers the most accurate description of
    labour productivity measures when ‘Diminishing
    Returns’    are observed?

    1. The total product curve will begin to
      flatten out, the marginal product curve will fall and the average product curve
      will also turn downwards, but subsequent to the decline of the marginal product
      curve.
    2. The total product curve will begin to
      flatten out, the average product curve will fall and the marginal product curve
      will also turn downwards, but subsequent to the decline of the average product
      curve.
    3. All three curves will stop rising and
      begin to flatten out simultaneously when diminishing returns set in.

(Correct Answer is A)

  1. In considering the market action, we
    can say that ‘Market Equilibrium’
    will be observed at the intersection of the ;

    1. Market demand curve and the market
      supply curve.
    2. Market demand curve and the short run
      market supply curve.
    3. Market demand curve and the long run
      market supply curve.

(Correct Answer is B)

  1. From the perspective of an ‘Individual Producer’, which statement
    is most accurate?

    1. The individual producer’s MC is
      always equal to the aggregate MB of all consumers; hence there will be no
      producer surplus for an individual producer if he wishes to receive the market
      price.
    2. The individual producer will receive
      the prevailing market price and produce a quantity at which his own MC is less
      than or equal to the market price.
    3. The market price received by the
      individual producer will be based on the intersection of producer’s own MC
      curve and the MB curve of the individual consumer transacting with him. This is
      because individual producers always engage in perfect price discrimination.

(Correct Answer is B)

  1. A ‘Minimum Wage’is;
    1. Like a price ceiling and is placed
      below the equilibrium wage level.
    2. Like a price ceiling or a price floor
      depending on if it is placed above or below the equilibrium wage level.
    3. Like a price floor and is set above
      the equilibrium wage level.

(Correct Answer is B)

  1. The ‘Principal-Agent’problem, arises in the context of;
    1. Command-based systems
    2. Incentive-based systems
    3. Both incentive based systems and
      command-based systems.

(Correct Answer is B)

  1. ‘Incentive Systems’ represent a method of organising the production of goods and services
    through;

    1. Incentives that are designed in order
      to align the activities of the employees with the profit maximising objectives
      of the firm.
    2. A structure that creates incentives
      such as promotions in order to induce employees to follow the commands, as well
      as dis-incentives through accountability systems and job loss if commands are
      not executed properly.
    3. A structure that creates positive
      incentives only. Direct negative incentives are avoided in most cases since
      strict negative outcomes are built into the system if an employee does not
      follow the directives of his seniors.

(Correct Answer is A)

  1. Choose the most accurate of the three
    statements made by a company’s analysts regarding a ‘Production Quota’;

    1. Ayuna: A production quota is only
      relevant when placed to the left of the equilibrium output level. Output is
      reduced through this intervention.
    2. Rania: A production quota is commonly
      placed at the equilibrium output level and it merely serves to allocate the
      quota fairly among various producers. Total output is unaffected by a
      production quota.
    3. Cynthia: A production quota can be
      used to reduce output, keep it constant or increase output, and hence it can be
      placed at the equilibrium output level or to its left or right.

(Correct Answer is A)

  1. The effects of a ‘Subsidy on Agricultural Output’are;
    • To lower the price paid by consumers,
      lower the cost incurred by the producers, increase output and reduce
      dead-weight losses.
    • To lower the costs incurred by the
      producers such that output may increase and consumers end up paying a lower
      price.
    • To lower the price paid by the
      consumer by the exact amount of the subsidy given.

Purchase the latest curriculum for the exam from our CFA Level 1 Products Page. The economics course for 2012 has been vastly modified and the old textbook written by Michael Parking has been replaced by a new textbook.

 


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