CFA Chartered Financial Analyst Level 1 – Economics Questions with Correct Answers

Types of markets Correct Answer Factor markets = markets for factors of production (land, labor, capital), firms purchase services of factors of production (labor) from households and transform those services into intermediate and final goods and services. Goods markets = markets for the output produced by firms (legal and medical services) using the services of factors of production, households and firms act as buyers (intermediate goods and services use inputs to produce other goods while final goods and services are in the final form purchased by households) Capital markets = markets for long-term financial capital (debt and equity), firms can use capital markets to raise funds for investing in business, household savings are the primary source of these funds Interactions between these markets are voluntary. Whenever the perceived value of a good exceeds the cost of producing it, there is potential for a trade that would make the buyer and the seller better off. Demand Correct Answer The willingness and ability of consumers to purchase a given amount of a good or service at a particular price. The quantity demanded depends primarily on price, but also on income levels, tastes, and preferences, and prices/availability of substitutes and complements. Law of demand states that as the price of a product increases (decreases), consumers will be able to purchase less (more) of it. Demand function for gasoline: QDg = 7.5 - 0.5Pg + 0.1I - 0.05Pa -an increase in price of gas results in a decrease in quantity demanded -an increase in income results in an increase in demand -an increase in the price of automobiles results in a decrease in demand (complements) -P&Q are endogenous variables, I and Pa are exogenous Inverse demand function assuming income and automobiles are constant: QDg = 12 - 0.5Pg => Pg = 24 - 2QDg -graph of the inverse demand function is called the demand curve or MARGINAL VALUE CURVE with Price on the y axis and Q on the x axis -shows maximum quantity of gas demanded at every given price/highest price willing to pay -slope of demand curve is the change in price/change in quantity demanded