CFA Level 1 Complete Exam || With
Questions & Answers (Rated A+)
Monopolistic competition - ANSWER-Many firms that compete with differentiated
products;
Demand curve is downward sloping and is highly elastic;
Quality, Price and Marketing are key differentiators ;
Low barriers to entry;
Firms must advertise and innovate;
In short run maximize economic profits by producing where marginal revenue equals
marginal cost ;
In long run, price equals average total cost and economic profits are 0
Oligopoly - ANSWER-Only a few firms compete and each must consider the actions of
others when setting price and strategy;
High barriers to entry;
Demand is less elastic than monopolistic competition
Monopoly - ANSWER-Only one seller in the market and there are no good substitutes;
High barriers to entry;
Maximize profit, not price;
Profit maximized when marginal revenue equals marginal cost when demand curve is
above ATC
Natural monopoly - ANSWER-When the average cost of production is falling over the
relevant range of demand and having two or more producers would lead to hire
production costs and hurt the consumer
Marginal cost pricing - ANSWER-Forces the monopoly to reduce price to the point
where the firms marginal cost curve intersects the market demand curve
Oligopoly models - ANSWER--Kinked demand curve
-Cournot duopoly
-Nash equilibrium
-Dominant firm model
Kinked demand curve - ANSWER-Based on the assumption that an increase in a firm's
product price will not be followed by its competitors, but a price decrease will;
Firms assume that demand is more elastic above a certain price than below it;
Firms produce the quantity at the kink, assuming if they increase production, their
revenues will be eroded by decreased prices and if they decrease production the price
won't go up much;
Model doesn't account for cause of kinks
,Cournot duopoly - ANSWER-One firm will look at the other's price and production and
adjust accordingly until both firms meet at an equilibrium of the same price and quantity
Private value auctions - ANSWER-Value is subjective and different to each bidder
Ascending price (English) auction - ANSWER-Bidders can bid amounts greater than the
previous bid, and the bidder that first offers the highest bid wins the item and pays the
amount
Sealed bid auction - ANSWER-Each bidder submits one bid, which is unknown to the
other bidders and the bidder with the highest bid wins the item and pays the price;
The reservation price is the highest price that a bidder is willing to pay;
The optimal bid for the bidder with the highest reservation price is just slightly above the
bidder with the second highest reservation price;
Bids are not necessarily equal to reservation price
Second sealed bid auction (Vickrey auction) - ANSWER-The bidder with the highest bid
wins the item but pays the price bid by the second highest bidder;
No reason for a bidder not to bid his reserve price;
Similar to a an ascending price auction, the winning bidder tends to pay one increment
of price more than the bidder who values the time the second most
Descending price (Dutch) auction - ANSWER-Begins with a price greater than what any
bidder will pay and the price is reduced until a bidder agrees to pay it;
If there are multiple units available, each bidder and specify how many they want to buy;
Can be modified so that winning bidders all pay the same price
Price elasticity - ANSWER-How responsive the quantity demanded is to a change in
price
Elasticity of demand - ANSWER-A measure of how consumers respond to price
changes;
Perfectly elastic is when the demand curve is horizontal;
Perfectly inelastic is when the demand curve is perfectly vertical
Unstable equilibrium - ANSWER-When a supply curve intersects a demand curve more
than once, the unstable equilibrium is an equilibrium where supply can increase towards
another equilibrium that results in a lower price;
Caused by a nonlinear supply function
Statutory incidence - ANSWER-Who is legally responsible for paying a tax
Incidence of tax - ANSWER-Who ends up bearing the cost of a tax
Substitution effect - ANSWER-Always acts to increase the consumption of a good that
has fallen in price
,Income effect - ANSWER-Either increase or decrease a good that has fallen in price;
Typical of normal good to have a positive income effect;
Typical of inferior good to have negative substitution effect
Positive substitution, positive income - ANSWER-Consumption increases
Positive substitution, negative income smaller than positive substitution - ANSWER-
Consumption increases
Positive substitution, negative income greater than positive substitution - ANSWER-
Consumption decreases
Causes of demand changes - ANSWER-Income
Increases as prices of substitute goods increase
Decreases as the prices of complement goods increases
Causes of supply changes - ANSWER-Rises if technology increases;
Rises if input prices decrease
Giffen good - ANSWER-An inferior good for which the income effect outweighs the
substitution effect so that the demand curve is positively sloped (higher the price, higher
the demand)
Relationship cost curves - ANSWER-AFC slopes downward
Vertical distance between ATC and AVC equals AFC
MC initially declines, then rises
MC intersects AVC and ATC at their minimums
ATC and AVC are u-shaped
The MC above the AVC is the firm's short-rum supply curve
Average Revenue > AVC - ANSWER-Firm continue production
Average Revenue < AVC - ANSWER-Firm should shut down
Average Revenue > ATC - ANSWER-Firm should stay in business for long-run
Profit maximized - ANSWER-Producing up to but not over MR=MC;
Producing quantity where TR-TC is at a maximum
Perfect competition - ANSWER-Many firms compete with identical products, low
barriers to entry, and the only way to compete is on price;
Perfectly elastic demand curves for each firm;
A firm will continue to expand production until marginal revenue equals marginal cost,
which maximizes profit or where MR = MC;
Economic loss occurs when marginal revenue is less than marginal cost;
, Firm can't make economic profit in long-run;
Long-run equilibrium output is where marginal revenue equals marginal cost equals
average total cost ;
An increase/decrease in market demand will increase/decrease both equilibrium price
and quantity;
Short-run supply curve is the marginal cost curve above the average variable cost
Nash equilibrium - ANSWER-When the choice of all firms are such that there is no other
choice that makes any firm better off;
Each decision maker will unilaterally choose what's best for himself
Dominant firm model - ANSWER-When a firm with the vast majority prices smaller firms
out of the market over time by lowering prices to the point where it falls below the
average total cost of smaller competitors
Concentration measures - ANSWER-Nth firm indicator
Herfindahl-Hirschman Index
Nth firm indicator - ANSWER-How much market share is held by the top N firms in the
market;
Isn't affected by two large companies merging
Herfindahl-Hirschman Index - ANSWER-Adds up the sum of the squares of the largest
firms in the market
Oligopolists and Collusion Agreements - ANSWER-There is an incentive to cheat and
raise your share of the joint profit
Tax Burden - ANSWER-Falls on the party with less elastic curve
Discrete Random Variable - ANSWER-Variable where the number of outcomes can be
counted and each outcome has a measurable and positive probability
Continuous Random Variable - ANSWER-Variable where the number of possible
outcomes is infinite, even if upper and lower bounds exist
Discrete Uniform Random Variable - ANSWER-Variable where all possible outcomes
for a discrete random variable are equal
Binomial Random Variable - ANSWER-Variable may be defined as the number of
successes in a given number of trials where the outcome can be either a success or
failure;
Expected value = (probability of success) * (number of trials);
Variance = (expected value) * (1 - probability of success)
Bernoulli Random Variable - ANSWER-Binomial random variable with only one trial
Questions & Answers (Rated A+)
Monopolistic competition - ANSWER-Many firms that compete with differentiated
products;
Demand curve is downward sloping and is highly elastic;
Quality, Price and Marketing are key differentiators ;
Low barriers to entry;
Firms must advertise and innovate;
In short run maximize economic profits by producing where marginal revenue equals
marginal cost ;
In long run, price equals average total cost and economic profits are 0
Oligopoly - ANSWER-Only a few firms compete and each must consider the actions of
others when setting price and strategy;
High barriers to entry;
Demand is less elastic than monopolistic competition
Monopoly - ANSWER-Only one seller in the market and there are no good substitutes;
High barriers to entry;
Maximize profit, not price;
Profit maximized when marginal revenue equals marginal cost when demand curve is
above ATC
Natural monopoly - ANSWER-When the average cost of production is falling over the
relevant range of demand and having two or more producers would lead to hire
production costs and hurt the consumer
Marginal cost pricing - ANSWER-Forces the monopoly to reduce price to the point
where the firms marginal cost curve intersects the market demand curve
Oligopoly models - ANSWER--Kinked demand curve
-Cournot duopoly
-Nash equilibrium
-Dominant firm model
Kinked demand curve - ANSWER-Based on the assumption that an increase in a firm's
product price will not be followed by its competitors, but a price decrease will;
Firms assume that demand is more elastic above a certain price than below it;
Firms produce the quantity at the kink, assuming if they increase production, their
revenues will be eroded by decreased prices and if they decrease production the price
won't go up much;
Model doesn't account for cause of kinks
,Cournot duopoly - ANSWER-One firm will look at the other's price and production and
adjust accordingly until both firms meet at an equilibrium of the same price and quantity
Private value auctions - ANSWER-Value is subjective and different to each bidder
Ascending price (English) auction - ANSWER-Bidders can bid amounts greater than the
previous bid, and the bidder that first offers the highest bid wins the item and pays the
amount
Sealed bid auction - ANSWER-Each bidder submits one bid, which is unknown to the
other bidders and the bidder with the highest bid wins the item and pays the price;
The reservation price is the highest price that a bidder is willing to pay;
The optimal bid for the bidder with the highest reservation price is just slightly above the
bidder with the second highest reservation price;
Bids are not necessarily equal to reservation price
Second sealed bid auction (Vickrey auction) - ANSWER-The bidder with the highest bid
wins the item but pays the price bid by the second highest bidder;
No reason for a bidder not to bid his reserve price;
Similar to a an ascending price auction, the winning bidder tends to pay one increment
of price more than the bidder who values the time the second most
Descending price (Dutch) auction - ANSWER-Begins with a price greater than what any
bidder will pay and the price is reduced until a bidder agrees to pay it;
If there are multiple units available, each bidder and specify how many they want to buy;
Can be modified so that winning bidders all pay the same price
Price elasticity - ANSWER-How responsive the quantity demanded is to a change in
price
Elasticity of demand - ANSWER-A measure of how consumers respond to price
changes;
Perfectly elastic is when the demand curve is horizontal;
Perfectly inelastic is when the demand curve is perfectly vertical
Unstable equilibrium - ANSWER-When a supply curve intersects a demand curve more
than once, the unstable equilibrium is an equilibrium where supply can increase towards
another equilibrium that results in a lower price;
Caused by a nonlinear supply function
Statutory incidence - ANSWER-Who is legally responsible for paying a tax
Incidence of tax - ANSWER-Who ends up bearing the cost of a tax
Substitution effect - ANSWER-Always acts to increase the consumption of a good that
has fallen in price
,Income effect - ANSWER-Either increase or decrease a good that has fallen in price;
Typical of normal good to have a positive income effect;
Typical of inferior good to have negative substitution effect
Positive substitution, positive income - ANSWER-Consumption increases
Positive substitution, negative income smaller than positive substitution - ANSWER-
Consumption increases
Positive substitution, negative income greater than positive substitution - ANSWER-
Consumption decreases
Causes of demand changes - ANSWER-Income
Increases as prices of substitute goods increase
Decreases as the prices of complement goods increases
Causes of supply changes - ANSWER-Rises if technology increases;
Rises if input prices decrease
Giffen good - ANSWER-An inferior good for which the income effect outweighs the
substitution effect so that the demand curve is positively sloped (higher the price, higher
the demand)
Relationship cost curves - ANSWER-AFC slopes downward
Vertical distance between ATC and AVC equals AFC
MC initially declines, then rises
MC intersects AVC and ATC at their minimums
ATC and AVC are u-shaped
The MC above the AVC is the firm's short-rum supply curve
Average Revenue > AVC - ANSWER-Firm continue production
Average Revenue < AVC - ANSWER-Firm should shut down
Average Revenue > ATC - ANSWER-Firm should stay in business for long-run
Profit maximized - ANSWER-Producing up to but not over MR=MC;
Producing quantity where TR-TC is at a maximum
Perfect competition - ANSWER-Many firms compete with identical products, low
barriers to entry, and the only way to compete is on price;
Perfectly elastic demand curves for each firm;
A firm will continue to expand production until marginal revenue equals marginal cost,
which maximizes profit or where MR = MC;
Economic loss occurs when marginal revenue is less than marginal cost;
, Firm can't make economic profit in long-run;
Long-run equilibrium output is where marginal revenue equals marginal cost equals
average total cost ;
An increase/decrease in market demand will increase/decrease both equilibrium price
and quantity;
Short-run supply curve is the marginal cost curve above the average variable cost
Nash equilibrium - ANSWER-When the choice of all firms are such that there is no other
choice that makes any firm better off;
Each decision maker will unilaterally choose what's best for himself
Dominant firm model - ANSWER-When a firm with the vast majority prices smaller firms
out of the market over time by lowering prices to the point where it falls below the
average total cost of smaller competitors
Concentration measures - ANSWER-Nth firm indicator
Herfindahl-Hirschman Index
Nth firm indicator - ANSWER-How much market share is held by the top N firms in the
market;
Isn't affected by two large companies merging
Herfindahl-Hirschman Index - ANSWER-Adds up the sum of the squares of the largest
firms in the market
Oligopolists and Collusion Agreements - ANSWER-There is an incentive to cheat and
raise your share of the joint profit
Tax Burden - ANSWER-Falls on the party with less elastic curve
Discrete Random Variable - ANSWER-Variable where the number of outcomes can be
counted and each outcome has a measurable and positive probability
Continuous Random Variable - ANSWER-Variable where the number of possible
outcomes is infinite, even if upper and lower bounds exist
Discrete Uniform Random Variable - ANSWER-Variable where all possible outcomes
for a discrete random variable are equal
Binomial Random Variable - ANSWER-Variable may be defined as the number of
successes in a given number of trials where the outcome can be either a success or
failure;
Expected value = (probability of success) * (number of trials);
Variance = (expected value) * (1 - probability of success)
Bernoulli Random Variable - ANSWER-Binomial random variable with only one trial
