Reading 13 Flashcards
(26 cards)
Which of the following markets is most accurately characterized as a goods market? The market for:
coats.
sales clerks.
cotton farmland.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. Coats are finished goods, the result of the output of production.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
The observation “as a price of a good falls, buyers buy more of it” is best known as:
consumer surplus.
the law of demand.
the market mechanism.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Two-dimensional demand and supply curves are drawn under which of the following assumptions?
Own price is held constant.
All variables but quantity are held constant.
All variables but own price and quantity are held constant.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. In order to draw demand and supply curves, own price and own quantity must be allowed to vary. However, all other variables are held constant to focus on the relation of own price with quantity.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
The slope of a supply curve is most often:
zero.
positive.
negative.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. Producers generally will supply a greater quantity of a good at higher prices for the good.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Assume the following equation
Qsx=−4+12Px−2W
where Qsx is the quantity of good X supplied, Px is the price of good X, and W is the wage rate paid to laborers. If the wage rate is 11, the vertical intercept on a graph depicting the supply curve is closest to:
–26.
–4.
52.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. Because the supply curve is the graph of the inverse supply function, solve for the inverse supply function given the wage rate of 11:
Qsx=−4+12/Px−2(11)
=−26+12/Px
Qsx+26=12/Px
Px=52+2Qsx
The vertical intercept is 52.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Movement along the demand curve for good X occurs due to a change in:
income.
the price of good X.
the price of a substitute for good X.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. The demand curve shows quantity demanded as a function of own price only.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A producer’s supply function is given by the equation
Qss=−55+26Ps+1.3Pa
where Qss is the quantity of steel supplied by the market, Ps is the per unit price of steel, and Pa is the per unit price of aluminum.
If the price of aluminum rises, what happens to the steel producer’s supply curve? The supply curve:
shifts to the left.
shifts to the right.
remains unchanged.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. The positive coefficient on the unit price of aluminum implies that aluminum is a substitute for steel. Thus, an increase in the price of aluminum implies that more steel can be sold at given price for steel than before, as steel is substituted for aluminum.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A producer’s supply function is given by the equation
Qss=−55+26Ps+1.3Pa
where Qss is the quantity of steel supplied by the market, Ps is the per unit price of steel, and Pa is the per unit price of aluminum.
If the unit price of aluminum is 10, the slope of the supply curve is closest to:
- 04.
- 30.
- 00.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. The slope coefficient of Qss in the inverse supply function is 0.04.
Startwiththesupplyequation: Qss=−55+26Ps+1.3PaInsertPa=10: =−55+26Ps+1.3(10)=−42+26PsSolveforPs: Ps=1.6+0.04Qss(theinversesupplyfunction)
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A producer’s supply function is given by the equation
Qss=−55+26Ps+1.3Pa
where Qss is the quantity of steel supplied by the market, Ps is the per unit price of steel, and Pa is the per unit price of aluminum.
Assume the supply side of the market consists of exactly five identical sellers. If the unit price of aluminum is 20, which equation is closest to the expression for the market inverse supply function?
Ps=9.6+0.04Qss .
Ps=1.1+0.008Qss .
Qss=−145+130Ps .
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. Start with the equation Qss=−55+26Ps+1.3Pa . To aggregate for five suppliers, multiply the individual producer’s supply function by 5:
Qss=5(−55+26Ps+1.3Pa)Qss=−275+130Ps+6.5Pa
Now insert the unit price of aluminum at 20:
Qss=−275+130Ps+6.5(20)Qss=−145+130Ps
Invert the equation to get the market inverse supply function: Ps=1.1+0.008Qss .
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Which of the following statements about market equilibrium is most accurate?
The difference between quantity demanded and quantity supplied is zero.
The demand curve is negatively sloped and the supply curve is positively sloped.
For any given pair of market demand and supply curves, only one equilibrium point can exist.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. At market equilibrium the quantity demanded just equals quantity supplied, and thus, the difference between the two is zero.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Which of the following statements best characterizes the market mechanism for attaining equilibrium?
Excess supply causes prices to fall.
Excess demand causes prices to fall.
The demand and supply curves shift to reach equilibrium.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. Excess supply at a given price implies that there is not enough demand at that price. So the price must fall until it reaches the point at which the demand and supply curves intersect.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
An auction in which the auctioneer starts at a high price and then lowers the price in increments until there is a willing buyer is best called a:
Dutch auction.
Vickery auction.
private-value auction.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. The basic Dutch auction is a descending-price auction.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Which statement is most likely to be true in a single-price US Treasury bill auction?
Only some non-competitive bids would be filled.
Bidders at the highest winning yield may only get a portion of their order filled.
All bidders at a yield higher than the winning bid would get their entire order filled.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. Non-competitive bids and bidders at lower yields will get their orders filled first. Securities may then not be available to fill demand entirely at the highest winning yield.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
The winner’s curse in common value auctions is best described as the winning bidder paying:
more than the value of the asset.
a price not equal to one’s own bid.
more than intended prior to bidding.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. The winning bidder in such auctions may be overly optimistic about the underlying value of the item won.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A wireless phone manufacturer introduced a next-generation phone that received a high level of positive publicity. Despite running several high-speed production assembly lines, the manufacturer is still falling short in meeting demand for the phone nine months after introduction. Which of the following statements is the most plausible explanation for the demand/supply imbalance?
The phone price is low relative to the equilibrium price.
Competitors introduced next-generation phones at a similar price.
Consumer incomes grew faster than the manufacturer anticipated.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. The situation described is one of excess demand because, in order for markets to clear at the given level of quantity supplied, the company would need to raise prices.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A per-unit tax on items sold that is paid by the seller will most likely result in the:
supply curve shifting vertically upward.
demand curve shifting vertically upward.
demand curve shifting vertically downward.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. The lowest acceptable price to the supplier at any given quantity must now increase because part of the price is paid as a per-unit tax. Thus, the supply curve shifts upward.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Which of the following statements most accurately and completely describes a deadweight loss?
A transfer of surplus from one party to another.
A reduction in either the buyer’s or seller’s surplus.
A reduction in total surplus resulting from market interference.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. A deadweight loss is the surplus lost by both the producer and the consumer and not transferred to anyone.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
If an excise tax is paid by the buyer instead of the seller, which of the following statements is most likely to be true? The price (including tax):
paid will be higher than if the seller had paid the tax.
received will be lower than if the seller had paid the tax.
received will be the same as if the seller had paid the tax.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. The trade price should be the same whether the tax is imposed on the buyer or on the seller.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A quota on an imported good below the market-clearing quantity will most likely lead to which of the following effects?
The supply curve shifts upward.
The demand curve shifts upward.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. A quota will cause excess demand, raising the price of the good and moving it up and to the left along the demand curve. This should shift some of the buyer’s surplus to the seller.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Assume a market demand function is given by the equation
Qd=50−0.75P
where Qd is the quantity demanded and P is the price. If P equals 10, the value of the consumer surplus is closest to:
67.
1,205.
1,667.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. We find consumer surplus as the area of the triangle formed by the y (price) axis, the inverse demand curve, and a line segment from the y axis to the inverse demand function at P = 10.
Putthepriceintothedemandequation: Qd=50−0.75(10)Qd=42.5(thisisthebaseofthetriangle)InvertthedemandfunctionbysolvingforP: −0.75P=Qd−50P=−1.33Qd+66.67
Note the price intercept is 66.67. The height of the triangle is 66.67 – 10 = 56.67. The consumer surplus is the area of the triangle above the price of 10 and below the demand curve, with base equal to the quantity of 42.5: 1/2 Base × Height = (1/2)(42.5)(66.7 – 10) = 1,205.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Which of the following best describes producer surplus?
Revenue minus variable costs.
Revenue minus variable plus fixed costs.
The area above the supply curve and beneath the demand curve and to the left of the equilibrium point.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. Producer surplus is the difference between the total revenue that sellers receive from selling a given amount of a good and the total variable cost of producing that amount.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
Assume a market supply function is given by the equation
Qs=−7+0.6P
where Qs is the quantity supplied and P is the price. If P equals 15, the value of the producer surplus is closest to:
- 3.
- 0.
- 5.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
A is correct. With a linear supply curve, producer surplus is equal to the area of a triangle with base equal to the market clearing price minus the price intercept, height equal to the market clearing quantity, and bounded by the supply curve as the hypotenuse. Given a (market clearing) price of 15, quantity is 2:
Qs=−7+0.6(15)=2
Nextfindtheinversesupplyfunction: P=(1/0.6)7+(1/0.6)QsP=11.67+1.67Qs
Note that the price intercept is 11.7 and the quantity intercept is –7.0. Thus, producer surplus is 1/2 Base × Height = (1/2)(2)(15 – 11.7) = 3.3.
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
The market demand function for four-year private universities is given by the equation
Qdpr=84−3.1Ppr+0.8I+0.9Ppu
where Qdpr is the number of applicants to private universities per year in thousands, Ppr is the average price of private universities (in thousands of USD), I is the household monthly income (in thousands of USD), and Ppu is the average price of public (government-supported) universities (in thousands of USD). Assume that Ppr is equal to 38, I is equal to 100, and Ppu is equal to 18.
The price elasticity of demand for private universities is closest to:
–3.1.
–1.9.
0.6.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
B is correct. From the demand function:
ΔQdpr/ΔPpr=−3.1(thecoeffientinfrontofownprice)SolveforQdpr: Qdpr=84−3.1Ppr+0.8I+0.9Ppu=84−3.1(38)+0.8(100)+0.9(18)=62.4
AtPpr=38,priceelasticityofdemand=(ΔQdpr/ΔPpr)(Ppr/Qdpr)=(−3.1)(38/62.4)=−1.9
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
The market demand function for four-year private universities is given by the equation
Qdpr=84−3.1Ppr+0.8I+0.9Ppu
where Qdpr is the number of applicants to private universities per year in thousands, Ppr is the average price of private universities (in thousands of USD), I is the household monthly income (in thousands of USD), and Ppu is the average price of public (government-supported) universities (in thousands of USD). Assume that Ppr is equal to 38, I is equal to 100, and Ppu is equal to 18.
The income elasticity of demand for private universities is closest to:
- 5.
- 8.
- 3.
(Institute 28)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
C is correct. From the demand function:
ΔQdpr/ΔI=0.8(coefficientinfrontoftheincomevariable)SolveforQdpr: Qdpr=84−3.1Ppr+0.8I+0.9Ppu=84−3.1(38)+0.8(100)+0.9(18)=62.4
AtI=100,theincomeelasticityofdemand=(ΔQdpr/ΔI)(I/Qdpr)=(0.8)(100/62.4)=1.3
(Institute 29)
Institute, CFA. 2015 CFA Level I Volume 2 Economics. Wiley Global Finance, 2014-07-14. VitalBook file.
