CFA Level 1 Exam – Economics Test ||
With 100% Correct Solutions
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
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)
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
HHI greater than 1,800 - ANSWER-NOT Competitive
HHI between 1,000-1,800 - ANSWER-Moderately Competitive
HHI less than 1,000 - ANSWER-Competitive
Four-Firm Concentration Ratio 100% - ANSWER-Monopoly
Four-Firm Concentration Ratio less than 40% - ANSWER-Competitve
Four-Firm Concentration Ratio greater than 60% - ANSWER-Oligopoly
Three limitations to the HHI and Four-Firm Concentration Ratio - ANSWER-1) Problems
with defining the geographical scope of the market; 2) Barriers to entry and firm turnover
are NOT considered; 3) Weak link between market and an industry
Accounting Profits - ANSWER-Includes explicit costs
Economic Profit - ANSWER-Considers explicit and implicit costs
Economic Profit Formula - ANSWER-Economic Profit= Total Revenue - Opportunity
Costs = Total Revenue - (Explicit + Implicit Costs)
Implicit Costs - ANSWER-Implied Rental Rate + Normal Profit
Implied Rental Rate - ANSWER-Term used to describe the opportunity cost to a firm for
using its own capital. Sum of Economic Depreciation and Foregone Interest
Normal Profit - ANSWER-Opportunity cost of Owners' entrepreneurship expertise. It
represents what owners could have earned if they used their organizational decision-
making and other entreprenurial skills is another activity such as running another
business.
With 100% Correct Solutions
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
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)
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
HHI greater than 1,800 - ANSWER-NOT Competitive
HHI between 1,000-1,800 - ANSWER-Moderately Competitive
HHI less than 1,000 - ANSWER-Competitive
Four-Firm Concentration Ratio 100% - ANSWER-Monopoly
Four-Firm Concentration Ratio less than 40% - ANSWER-Competitve
Four-Firm Concentration Ratio greater than 60% - ANSWER-Oligopoly
Three limitations to the HHI and Four-Firm Concentration Ratio - ANSWER-1) Problems
with defining the geographical scope of the market; 2) Barriers to entry and firm turnover
are NOT considered; 3) Weak link between market and an industry
Accounting Profits - ANSWER-Includes explicit costs
Economic Profit - ANSWER-Considers explicit and implicit costs
Economic Profit Formula - ANSWER-Economic Profit= Total Revenue - Opportunity
Costs = Total Revenue - (Explicit + Implicit Costs)
Implicit Costs - ANSWER-Implied Rental Rate + Normal Profit
Implied Rental Rate - ANSWER-Term used to describe the opportunity cost to a firm for
using its own capital. Sum of Economic Depreciation and Foregone Interest
Normal Profit - ANSWER-Opportunity cost of Owners' entrepreneurship expertise. It
represents what owners could have earned if they used their organizational decision-
making and other entreprenurial skills is another activity such as running another
business.
