Cfa level 1 complete question with
complete solution rated A+ 2023
Private value auctions - correct answer Value is subjective and different to each bidder
Ascending price (English) auction - correct 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 - correct 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) - correct 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 - correct 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 - correct answer How responsive the quantity demanded is to a change in price
Elasticity of demand - correct 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 - correct 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 - correct answer Who is legally responsible for paying a tax
Incidence of tax - correct answer Who ends up bearing the cost of a tax
Substitution effect - correct answer Always acts to increase the consumption of a good that has fallen in
price
Income effect - correct 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 - correct answer Consumption increases
Positive substitution, negative income smaller than positive substitution - correct answer Consumption
increases
Positive substitution, negative income greater than positive substitution - correct answer Consumption
decreases
Causes of demand changes - correct answer Income
Increases as prices of substitute goods increase
Decreases as the prices of complement goods increases
,Causes of supply changes - correct answer Rises if technology increases;
Rises if input prices decrease
Giffen good - correct 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 - correct 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 - correct answer Firm continue production
Average Revenue < AVC - correct answer Firm should shut down
Average Revenue > ATC - correct answer Firm should stay in business for long-run
Profit maximized - correct answer Producing up to but not over MR=MC;
Producing quantity where TR-TC is at a maximum
Perfect competition - correct 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
Monopolistic competition - correct 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 - correct 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 - correct 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 - correct 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 - correct answer Forces the monopoly to reduce price to the point where the firms
marginal cost curve intersects the market demand curve
Oligopoly models - correct answer -Kinked demand curve
complete solution rated A+ 2023
Private value auctions - correct answer Value is subjective and different to each bidder
Ascending price (English) auction - correct 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 - correct 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) - correct 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 - correct 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 - correct answer How responsive the quantity demanded is to a change in price
Elasticity of demand - correct 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 - correct 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 - correct answer Who is legally responsible for paying a tax
Incidence of tax - correct answer Who ends up bearing the cost of a tax
Substitution effect - correct answer Always acts to increase the consumption of a good that has fallen in
price
Income effect - correct 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 - correct answer Consumption increases
Positive substitution, negative income smaller than positive substitution - correct answer Consumption
increases
Positive substitution, negative income greater than positive substitution - correct answer Consumption
decreases
Causes of demand changes - correct answer Income
Increases as prices of substitute goods increase
Decreases as the prices of complement goods increases
,Causes of supply changes - correct answer Rises if technology increases;
Rises if input prices decrease
Giffen good - correct 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 - correct 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 - correct answer Firm continue production
Average Revenue < AVC - correct answer Firm should shut down
Average Revenue > ATC - correct answer Firm should stay in business for long-run
Profit maximized - correct answer Producing up to but not over MR=MC;
Producing quantity where TR-TC is at a maximum
Perfect competition - correct 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
Monopolistic competition - correct 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 - correct 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 - correct 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 - correct 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 - correct answer Forces the monopoly to reduce price to the point where the firms
marginal cost curve intersects the market demand curve
Oligopoly models - correct answer -Kinked demand curve
