CFA Level 1 – Economics Exam
Questions and Answers (Definite Pass)
Price Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%t
Change in Price)
Cross Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%
Change in Price of Substitute or Complement)
Income Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%
Change in Income)
Price Elasticity of Supply Formula - Answer-(% Change in Quantity Supplied) / (%
Change in Price)
Elasticity of Demand Factors - Answer-1) Availability of Substitute; 2) Relative amount
of income spent on the good; 3) Time SINCE price change
Elasticity of Supply Factors - Answer-1) Available substitutes for resources (inputs)
used to produce the goods; (2) the time that has elapsed since the price change
Income elasticity of an Inferior Good- Positive or Negative - Answer-Negative
Total Cost Formula - Answer-= Total Fixed Cost + Total Variable Cost
Average Fixed Cost Formula - Answer-Average Fixed Cost = TFC/Q
Average Variable Cost Formula - Answer-Average Variable Cost= TVC/Q
Average Total Cost Formula - Answer-= AFC + AVC
Unemployment Rate Formula - Answer-(Number of Unemployed) / (Labor Force) x 100
Labor Force Participation Rate Formula - Answer-(Labor Force) / (Working-Age
Population(16 or older) ) x 100
Employment to Population Ratio Formula - Answer-(Number of Employed) / (Working-
Age Population) x 100
CPI Formula - Answer-(Cost of Basket of Current Prices) / (Cost of Basket at Base
Period Prices) x 100
Inflation Rate Formula - Answer-% change in CPI
(Current CPI- Year Ago CPI)/ (Year Ago CPI) X 100
,Potential Deposit Expansion Multiplier Formula - Answer-= 1 / (required reserve ratio)
Potential Increase In Money Supply Formula - Answer-= (Potential Deposit Expansion
Multiplier) x (Increase in Excess Reserves)
Money Multiplier for a change in monetary base Formula - Answer-(1+c) / (d+c)
c = currency as a % of deposits
d = desired reserve ratio
Change in Quantity of Money Formula - Answer-(Change in Quantity of Money) =
(Change in Monetary Base) x (Money Multiplier)
Equation of Exchange Formula - Answer-= (Money supply) x (Velocity) = GDP = (Price)
x (Real Output)
Quantity Theory of Money Formula - Answer-Price = M (V/Y)
What does it mean if Cross elasticity is positive - Answer-Two goods are reasonable
substitutes for each other
What does it mean if Price Elasticity of Demand is less than one in absolute value? -
Answer-Inelastic
What does it mean if Price Elasticity of Demand is greater than one in absolute value? -
Answer-Elastic
Normal Goods Elasticity - Answer-Positive Income Elasticity (greater than 1)
Total Revenue Test - Answer-Estimate elasticity of demand:
P Up-> R Up (Inelastic);
P Up -> D Down (Elastic)
Cross Elasticity of Substitutes- Positive or Negative - Answer-Positive
Income Elasticity for normal goods- Positive or Negative - Answer-Positive
Income Elasticity for inferior goods- Positive or Negative - Answer-Negative
Command System - Answer-A central authority determines resource allocation, is used
in centrally planned economies and is also used within firms and in the military
Majority Rule - Answer-Government policies such as taxation and transfer payments are
an example of this type of resource allocation
, Efficient allocation of resources - Answer-Marginal Benefit to society (Demand) =
Marginal Cost for the "last" unit of each good and service to be produced (Supply). (MC
= MB)
Marginal Cost Formula - Answer-(Change in Total Cost) / (Change in Output)
Two Concepts of Robert Nozick's Anarchy, State, and Utopia (Symmetry) - Answer-1)
Governments must recognize and protect private property; 2) Private property must be
given from one party to another only when it is voluntarily done
When demand is less elastic than supply- consumers bear higher or lower burden -
Answer-HIGHER
When supply is less elastic than demand- consumers bear higher or lower burden -
Answer-LOWER, suppliers will bear a higher burden
Inelastic means more or less DWL - Answer-Less
Three Constraints to Profit Maximization - Answer-TMI 1) Technological, 2)
Informational, 3) Market Constraints
Technological Efficiency - Answer-Output from least inputs
Economic Efficiency - Answer-Output from least cost
Two ways that firms can organize production - Answer-CI 1) Command System, 2)
Incentive System
Command Systems - Answer-Organization according to a managerial chain of
command, eg US Military [Told what to do]
Incentive System - Answer-Senior mangement creates a system of rewards intended to
motivate workers to perform in such a way as to maximize profits [Motivated to do]
Principal- Agent Problem - Answer-Problems that arise when incentives and motivations
or managers and workers (Agents) are not the same as the incentives and motivations
of their firms.
Three Methods used to reduce Principal-Agent Problem - Answer-OIL 1) Ownership, 2)
Incentive Pay, 3) Long-term contracts
Three Types of Business Organizations - Answer-PPC 1) Proprietorships, 2)
Partnerships, 3) Corporations
Four Types of Economic Markets - Answer-PMOM 1) Perfect Competition, 2)
Monopolitic Competition, 3) Oligopoly, 4) Monopoly
Questions and Answers (Definite Pass)
Price Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%t
Change in Price)
Cross Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%
Change in Price of Substitute or Complement)
Income Elasticity of Demand Formula - Answer-(% Change in Quantity Demanded) / (%
Change in Income)
Price Elasticity of Supply Formula - Answer-(% Change in Quantity Supplied) / (%
Change in Price)
Elasticity of Demand Factors - Answer-1) Availability of Substitute; 2) Relative amount
of income spent on the good; 3) Time SINCE price change
Elasticity of Supply Factors - Answer-1) Available substitutes for resources (inputs)
used to produce the goods; (2) the time that has elapsed since the price change
Income elasticity of an Inferior Good- Positive or Negative - Answer-Negative
Total Cost Formula - Answer-= Total Fixed Cost + Total Variable Cost
Average Fixed Cost Formula - Answer-Average Fixed Cost = TFC/Q
Average Variable Cost Formula - Answer-Average Variable Cost= TVC/Q
Average Total Cost Formula - Answer-= AFC + AVC
Unemployment Rate Formula - Answer-(Number of Unemployed) / (Labor Force) x 100
Labor Force Participation Rate Formula - Answer-(Labor Force) / (Working-Age
Population(16 or older) ) x 100
Employment to Population Ratio Formula - Answer-(Number of Employed) / (Working-
Age Population) x 100
CPI Formula - Answer-(Cost of Basket of Current Prices) / (Cost of Basket at Base
Period Prices) x 100
Inflation Rate Formula - Answer-% change in CPI
(Current CPI- Year Ago CPI)/ (Year Ago CPI) X 100
,Potential Deposit Expansion Multiplier Formula - Answer-= 1 / (required reserve ratio)
Potential Increase In Money Supply Formula - Answer-= (Potential Deposit Expansion
Multiplier) x (Increase in Excess Reserves)
Money Multiplier for a change in monetary base Formula - Answer-(1+c) / (d+c)
c = currency as a % of deposits
d = desired reserve ratio
Change in Quantity of Money Formula - Answer-(Change in Quantity of Money) =
(Change in Monetary Base) x (Money Multiplier)
Equation of Exchange Formula - Answer-= (Money supply) x (Velocity) = GDP = (Price)
x (Real Output)
Quantity Theory of Money Formula - Answer-Price = M (V/Y)
What does it mean if Cross elasticity is positive - Answer-Two goods are reasonable
substitutes for each other
What does it mean if Price Elasticity of Demand is less than one in absolute value? -
Answer-Inelastic
What does it mean if Price Elasticity of Demand is greater than one in absolute value? -
Answer-Elastic
Normal Goods Elasticity - Answer-Positive Income Elasticity (greater than 1)
Total Revenue Test - Answer-Estimate elasticity of demand:
P Up-> R Up (Inelastic);
P Up -> D Down (Elastic)
Cross Elasticity of Substitutes- Positive or Negative - Answer-Positive
Income Elasticity for normal goods- Positive or Negative - Answer-Positive
Income Elasticity for inferior goods- Positive or Negative - Answer-Negative
Command System - Answer-A central authority determines resource allocation, is used
in centrally planned economies and is also used within firms and in the military
Majority Rule - Answer-Government policies such as taxation and transfer payments are
an example of this type of resource allocation
, Efficient allocation of resources - Answer-Marginal Benefit to society (Demand) =
Marginal Cost for the "last" unit of each good and service to be produced (Supply). (MC
= MB)
Marginal Cost Formula - Answer-(Change in Total Cost) / (Change in Output)
Two Concepts of Robert Nozick's Anarchy, State, and Utopia (Symmetry) - Answer-1)
Governments must recognize and protect private property; 2) Private property must be
given from one party to another only when it is voluntarily done
When demand is less elastic than supply- consumers bear higher or lower burden -
Answer-HIGHER
When supply is less elastic than demand- consumers bear higher or lower burden -
Answer-LOWER, suppliers will bear a higher burden
Inelastic means more or less DWL - Answer-Less
Three Constraints to Profit Maximization - Answer-TMI 1) Technological, 2)
Informational, 3) Market Constraints
Technological Efficiency - Answer-Output from least inputs
Economic Efficiency - Answer-Output from least cost
Two ways that firms can organize production - Answer-CI 1) Command System, 2)
Incentive System
Command Systems - Answer-Organization according to a managerial chain of
command, eg US Military [Told what to do]
Incentive System - Answer-Senior mangement creates a system of rewards intended to
motivate workers to perform in such a way as to maximize profits [Motivated to do]
Principal- Agent Problem - Answer-Problems that arise when incentives and motivations
or managers and workers (Agents) are not the same as the incentives and motivations
of their firms.
Three Methods used to reduce Principal-Agent Problem - Answer-OIL 1) Ownership, 2)
Incentive Pay, 3) Long-term contracts
Three Types of Business Organizations - Answer-PPC 1) Proprietorships, 2)
Partnerships, 3) Corporations
Four Types of Economic Markets - Answer-PMOM 1) Perfect Competition, 2)
Monopolitic Competition, 3) Oligopoly, 4) Monopoly
