cfa level 1 Economics 1 Questions and Answer

Schweser Printable Answers
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Econ 1

Test ID#: 7

Question 1 -
#96669

Antonio Conti consumes 2 pounds of beef per week when beef is $4.50 per pound and 3 pounds of chicken when
chicken sells for $3.50 per pound. If the price of chicken increases to $4.00 per pound, Conti’s consumption of
beef increases to 2.5 pounds per week. Which of the following most accurately describes Conti’s cross elasticity
of demand for beef versus chicken? The cross elasticity of demand for:
Your answer: A was incorrect. The correct answer was C) beef relative to chicken is +1.67 and beef and chicken
are substitutes.

The average quantity of beef demanded is (2.0 + 2.5) / 2 = 2.25 pounds, so the percentage change in the quantity
of beef demanded is (2.5 – 2.0) / 2.25 = +22.22%. The average price of chicken is ($3.50 + $4.00) / 2 = $3.75 per
pound, so the percentage change in the price of chicken ($4.00 – $3.50) / $3.75 = +13.33%. The cross elasticity
of demand for beef relative to the price of chicken is 22.2 / 13.3 = 1.67. Since the cross elasticity is positive,
chicken and beef are substitutes for Conti.
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 2 -
#96658

Suppose the price of computers increases from $1,000 to $1,200. Assuming the original quantity demanded for
computers was 50 million units, and the new quantity demanded is 45 million computers, what is the price
elasticity of demand, and is the demand for computers elastic or inelastic?
Your answer: A was correct!
Price elasticity of demand is calculated by dividing the percent change in quantity demanded by the percent

change in price, using the average value of the variable in the computations. The percent change in quantity
demanded is (45 − 50) / [(50 + 45) / 2] = −5 / 47.5 = -0.105 or -10.5%. The percent change in price is = (1,200 −
1,000) / [(1,000 + 1,200) / 2] = 200 / 1,100 = 0.1818 or 18.2% . The price elasticity of demand is -10.5 / 18.2 = -
0.58.
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 3 -
#96650


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A) beef relative to chicken is +1.67 and beef and chicken are complimentary goods.
B) chicken relative to beef is +1.75 and beef and chicken are substitutes.
C) beef relative to chicken is +1.67 and beef and chicken are substitutes.
A) -0.58, inelastic.

B) 0.58, inelastic.
C) -1.73, elastic.
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Which of the following statements least accurately describes why firms can coordinate economic activity more
efficiently than markets? Firms can achieve:
Your answer: A was incorrect. The correct answer was B) diversification benefits.
Firms can often coordinate economic activity more efficiently than markets because firms can reduce the costs of

market transactions, and they can achieve economies of scale, scope, and team production.
This question tested from Session 4, Reading 16, LOS g.
Question 4 -
#96706

When household incomes go down and the quantity of a product demanded goes up, the product is:
Your answer: A was incorrect. The correct answer was C) an inferior good.
When household incomes go down and the quantity demanded of a product goes up, the product is an inferior
good. Inferior goods include things like bus travel and margarine.
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 5 -
#96893

Suppose that the demand curve for honey shifts such that the equilibrium price for a pound of honey increases
from $7 to $9 per pound. At the new equilibrium, the quantity supplied increases from 500 pounds per month to
600 pounds per month, although the supply curve has not shifted. The elasticity of supply for honey is closest to:
Your answer: A was incorrect. The correct answer was B) +0.73.

The average quantity of honey supplied is (500 + 600) / 2 = 550 pounds, and the average price of honey ($7 +
$9) / 2 = $8 per pound. So, the percentage change in quantity is (600 – 500) / 550 = 18.18% and the percentage
change in price is (9 - 7) / 8 = 25.00%. Thus, the elasticity of supply is 18.18 / 25.00 = +0.73.
This question tested from Session 4, Reading 13, LOS a, (Part 2).
A) economies of team production.
B) diversification benefits.
C) economies of scope.
A) a necessity.
B) a normal good.
C) an inferior good.
A) +0.91.
B) +0.73.

C) +1.12.
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Question 6 -
#96656

Which of the following statements about a tax imposed on buyers or suppliers is most accurate?
Your answer: A was incorrect. The correct answer was B) If demand is less elastic than supply, consumers will
bear a higher proportion of the tax than suppliers.
If demand is less elastic than supply, consumers will bear a higher proportion of the tax than suppliers. If supply is
less elastic than demand, suppliers will bear a higher proportion of the tax than consumers.
This question tested from Session 4, Reading 15, LOS c.
Question 7 -
#96901

Which of the following constraints to profit maximization most appropriately
considers the prices and availability of
the resources that a firm uses and the willingness of people to invest in the firm?
Your answer: A was correct!
Markets present constraints on the firm’s growth. Market constraints include the prices and availability of the
resources that a firm uses and the willingness of people to invest in the firm.
This question tested from Session 4, Reading 16, LOS b.
Question 8 -
#96896

Which of the following types of business firms exposes its owners to the greatest legal liability in the U.S. and
which type of firm is
most likely to face a principal-agent conflict, respectively?
Your answer: A was incorrect. The correct answer was C) Proprietorship; corporation.
The owner of a proprietorship is subject to unlimited liability. Shareholders of corporations have limited liability,
only up to the amount invested.
In many corporations, the agent (management) may be working for different objectives than those of the principal
(shareholders).
This question tested from Session 4, Reading 16, LOS e, (Part 2).

A) If demand is less elastic than supply, consumers will bear a lower proportion of the tax than suppliers.
B) If demand is less elastic than supply, consumers will bear a higher proportion of the tax than suppliers.
C)
The proportion of the tax is borne equally by consumers and suppliers, regardless of supply and
demand elasticity.
A) Markets.
B) Information.
C) Technology.
A) Proprietorship; partnership.
B) Corporation; corporation.
C) Proprietorship; corporation.
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Question 9 -
#96682

Assume that for the average consumer, the quantity demanded for jeans increases from 5 to 7 pairs per year in
response to a price decrease from $29 to $24 per pair. The respective price elasticity and relative elasticity of
demand for jeans is best described by which of the following?
Your answer: A was correct!
The percentage change in quantity demanded is (7 − 5) / [(7 + 5) / 2] = 33.33% and the percentage change in
price is (24 − 29) / [(24 + 29) / 2] = -18.87%. Thus, price elasticity = 33.33% / -18.87% = -1.77.
A good is considered to be elastic if the absolute value of price elasticity is greater than 1. In this case, the
absolute value of the price elasticity of demand for jeans is 1.77, so the price elasticity for jeans is relatively
elastic.

This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 10 -
#96760

Which of the following most accurately describes the shape of the average fixed cost (AFC) curve? The AFC
curve:
Your answer: A was incorrect. The correct answer was B) becomes flatter as output increases.
The AFC curve declines initially, but as output increases it flattens because a fixed cost is being averaged over
more and more units of output.
This question tested from Session 4, Reading 17, LOS c.
Question 11 -
#96795

Which of the following most accurately describes the relationship between the slope of a firm’s long-run average
total cost (LRATC) curve and scale economies?
A) −1.77; relatively elastic.
B) −1.77; relatively inelastic.
C) −2.32; relatively elastic.
A) is always below the average variable cost curve.

B) becomes flatter as output increases.
C) intersects the marginal cost curve at the marginal cost curve’s minimum.
Downward sloping
segment of LRATC
Upward sloping
segment of LRATC
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Your answer: A was incorrect. The correct answer was C)
The downward sloping segment of the LRATC cost curve covers the output range where economies of scale exist
because per unit costs decrease as output increases. The upward sloping segment of the LRATC curve is where
diseconomies of scale are present because costs rise as output increases.
This question tested from Session 4, Reading 17, LOS d.
Question 12 -
#96641

Which of the following is the most likely effect of a quota on wheat?
Your answer: A was incorrect. The correct answer was B) Nothing if the quota is set above the equilibrium
quantity.
A quota does not cause the supply curve to shift. The equilibrium quantity will decrease to the quota amount.
Marginal cost will be less than marginal benefit, leading to a deadweight loss from underproduction.
This question tested from Session 4, Reading 15, LOS d.
Question 13 -
#96634

Arthur Hampton is reviewing the transcript of a lawmaking session during which a legislator made the following
two statements:
Statement 1: The impact of a tax on the equilibrium price and quantity of a good or service will be
the same whether the tax is legally imposed on the buyers or sellers.
Statement 2: The impact on the equilibrium price and quantity of a good or service of making trade
in it illegal will be the same whether the penalty is imposed on the buyers or sellers.
With respect to these statements:
Your answer: A was correct!
Hampton should agree with Statement 1 but disagree with Statement 2. In the trade of illegal goods, the effects of
the prohibition depend on whether the penalties are imposed on the buyers or sellers. A penalty imposed on the
buyers will shift the demand curve down by the value of the penalty buyers expect to bear. A penalty imposed on
A) Diseconomies of scale Economies of scale
B) Economies of scale Economies of scale
C) Economies of scale Diseconomies of scale
Economies of scale
Diseconomies of scale
A) The supply curve will shift downward.
B) Nothing if the quota is set above the equilibrium quantity.
C) Marginal costs will be greater than marginal benefit.
A) only statement 1 is correct.
B) both are correct.
C) only statement 2 is correct.
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the sellers will shift the supply curve up by the value of the penalty sellers expect to bear. Other things equal, a

penalty on buyers will result in a lower equilibrium price and a penalty on sellers will result in a higher equilibrium
price. In either case the equilibrium quantity decreases.
This question tested from Session 4, Reading 15, LOS c.
Question 14 -
#96863

New legislation setting a price ceiling will most likely cause:
Your answer: A was incorrect. The correct answer was B)
a market shortage.
Price ceilings restrict the producer from increasing the selling price. The lower price will stimulate demand by
consumers at this lower price. However, since producers will not be able to increase price there is little incentive
for them to increase supply. Hence, production and supply will be limited at the price ceiling leading to a market
shortage.
This question tested from Session 4, Reading 15, LOS a.
Question 15 -
#96862

Consider two companies, Company A and Company B. Company A is primarily a manufacturing firm with a large
number of employees who are paid an hourly wage. Company B is primarily a sales and service organization with
most of its employees performing their duties independently of any direct supervision. Which of the following
systems for organization production are most likely to be used for Company A and Company B, respectively?
Your answer: A was incorrect. The correct answer was C) Command system; incentive system.
Command systems are used when it is easy to monitor the performance of employees, as is usually the situation
with hourly production workers. Incentive systems are usually most effective for organizing the production of
employees whose activities are difficult to supervise, like those of independent sales people.
This question tested from Session 4, Reading 16, LOS d.
Question 16 -
#96721

Under a price ceiling, bribery is a mechanism to:

A) a market surplus.
B) a market shortage.
C) a decrease in demand.

A) Incentive system; incentive system.
B) Command system; command system.
C) Command system; incentive system.
A) bring the total price of a good (including the bribe) lower and closer to the equilibrium price.
B) allocate a good to the richest individuals in the market.
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Your answer: A was incorrect. The correct answer was C) bring the total price of a good (including the bribe)
higher and closer to the equilibrium price.
A price ceiling is an upper limit on the price a supplier can charge. If the ceiling is below the equilibrium price, it
can result in bribes as a rationing mechanism, whereas the total price of a good (including the bribe) is brought
closer to the equilibrium price.
This question tested from Session 4, Reading 15, LOS a.
Question 17 -
#96788

A firm realizes that it is producing more than the profit maximizing level of output and makes a short-run decision
to decrease its output. Which of the firm’s cost measures is least likely to decrease as a result?
Your answer: A was incorrect. The correct answer was B) Average fixed cost.
A short-run decrease in output will cause a firm’s average fixed costs to increase because its fixed costs are
spread over a smaller number of units. In terms of cost curves, average fixed cost never slopes upward, so a

decrease in output never reduces average fixed costs. The average variable cost, average total cost, and
marginal cost curves all have upward sloping components along which a lower level of output would result in a
lower cost.
This question tested from Session 4, Reading 17, LOS a.
Question 18 -
#96739

Consider two markets; one has a Herfindahl-Hirschman Index (HHI) of 50, while the other has a four-firm
concentration ratio equal to 2%. Which of the following statements most accurately describes these two markets?

Your answer: A was incorrect. The correct answer was B) Both markets are highly competitive.
An HHI concentration measure of 50 is very low, indicating a high degree of competition. A four firm concentration
ratio of 2% indicates a high level of competition. For both the four-firm ratio and the HHI, the higher (lower) the
concentration measure, the lower (greater) the degree of competition.
This question tested from Session 4, Reading 16, LOS f.
Question 19 -
#96807

Which of the following two factors are
most likely
to be considered variable during the short run?
C) bring the total price of a good (including the bribe) higher and closer to the equilibrium price.
A) Average variable cost.
B) Average fixed cost.
C) Marginal cost.
A) The market with the HHI equal to 50 has low competition, while the other market is highly competitive.
B) Both markets are highly competitive.
C) Both of these markets are monopolies.
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Your answer: A was incorrect. The correct answer was B) Labor and raw materials.
Of the sets of factors listed, the two that are typically considered variable in the short run are labor and raw
materials.
This question tested from Session 4, Reading 17, LOS a.
Question 20 -
#96867

If the price elasticity of demand is -1.5 and you increase the price of the product 2%, the quantity demanded will
(closest to):
Your answer: A was incorrect. The correct answer was C) decrease 3%.
If the price elasticity of demand is -1.5, and you increase the price of the product 2%, the quantity demanded will
decrease approximately 3%. When the price elasticity is negative, it means that price and demand move in
opposite directions. Given a price decrease, demand will increase and vice versa. The absolute value, 1.5,
indicates that demand will move one-and-a-half times as much as price.
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 21 -
#96733

Marginal benefit is most accurately described as the:
Your answer: A was correct!
Marginal benefit is the benefit a consumer receives from consuming an additional unit of a good or service. It is
quantified as the maximum price that a consumer is willing to pay for one additional unit of a good or service.
This question tested from Session 4, Reading 14, LOS a.
Question 22 -
#96637

When a tax is imposed on the consumption of a good, which of the following terms refers to who bears the burden
of the tax?
A) Labor and technology.
B) Labor and raw materials.
C) Raw materials and technology.
A) decrease 1.5%.
B) decrease 0.75%.
C) decrease 3%.
A) benefit an individual gets from consuming an additional unit of a good or service.
B) benefit from producing one more unit of a good or service.
C) benefit that must be forgone in order to consume an additional unit of a good or service.
A) The incidence of a tax.
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Your answer: A was correct!
The incidence of a tax refers to how the burden of a tax is actually shared between buyers and sellers. The
deadweight loss is the loss of the gains from trade from the lower equilibrium quantity that results from the tax.
Consumer surplus is the gains from trade that consumers accrue from the existence of the market.
This question tested from Session 4, Reading 15, LOS c.
Question 23 -
#96754

A firm is trying to determine the optimal amount of labor to employ in its production process. Each unit of labor for
this process costs the firm $35. A partial table of the firm’s short-run output estimates appears below:

Which of the following is least likely to be accurate? This firm:
Your answer: A was correct!
A profit maximizing firm will employ additional units of labor as long as the MRP of labor is greater than the cost of
an additional unit of labor. At 7 units of labor input, MRP = $32, which is less than the $35 cost of one unit of
labor. Therefore the firm will not employ the 7th unit of labor and will produce 35 units of output. Marginal product
is decreasing as labor input increases, so the firm is experiencing diminishing marginal returns from labor.
This question tested from Session 4, Reading 17, LOS d.
Question 24 -
#96731

If the marginal benefit of the last unit of a good or service consumed was $25, the marginal benefit of the next unit
consumed is most likely to be:
Your answer: A was correct!
B) The deadweight loss.
C) Consumer surplus.
Labor input,
units
Marginal
product
Total product
Marginal
revenue
Marginal revenue
product
4 8 22 $10 $80
5 7 29 $9 $63
6 6 35 $9 $54
7 4 39 $8 $32
8 2 41 $8 $16
9+ 0 41

A) will employ the 7th unit of labor.
B) experiences diminishing marginal returns from labor over the entire range shown.
C) will produce 35 units of the product.
A) $24.
B) $25.
C) $26.
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In most cases, the marginal benefit of a good or service decreases as the quantity consumed increases. So, $24
is the most likely answer. This principle is called decreasing marginal benefit.
This question tested from Session 4, Reading 14, LOS a.
Question 25 -
#96881

The price of product Z decreased from $2.50 per unit to $2.00 per unit. Since the price decreased, demand has
gone up from 3 million units to 4 million units. Calculate the respective price elasticity of demand and determine
the elasticity of demand.
Your answer: A was correct!
percentage change in quantity = [(4 − 3)] / [(4 + 3) / 2] = 1 / 3.5 = 0.286 = 28.6%
percentage change in price = [(2 − 2.5)] / [(2 + 2.5) / 2] = -0.5 / 2.25 = -0.222 = -22.2%
28.6 % / -22.2% = -1.29
Since the price elasticity of demand is greater than 1 (ignore the sign), product Z is elastic
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 26 -
#96729

Consumer surplus is most accurately defined as the difference between the:
Your answer: A was incorrect. The correct answer was C) total value consumers place on the quantity of a good
purchased, and the total amount they must pay for that quantity.
For an individual, consumer surplus is defined as the sum of the differences between what that individual is willing
to pay for each individual unit of a good or service that he or she purchases (marginal benefit) and the amount
that he or she actually pays for each of these individual units.
This question tested from Session 4, Reading 14, LOS b.
Question 27 -
#96750

Which of the following most accurately describes the relationship between the average total cost (ATC) curve and
the average variable cost (AVC) curve? The vertical distance between the ATC and AVC curves:

A) −1.29; elastic.
B) −1.29; inelastic.
C) −2.00; elastic.
A)
value consumers are willing to pay for an additional unit of good or service and the cost of producing
the additional unit of the good or service.
B)
price that a consumer must pay for an additional unit of a good or service and the cost of producing the
additional unit of the good or service.
C)
total value consumers place on the quantity of a good purchased, and the total amount they must pay
for that quantity.
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Your answer: A was correct!
The vertical distance between the ATC curve and AVC cost curve is average fixed cost, which decreases as
output increases because more output is averaged over the same cost.
This question tested from Session 4, Reading 17, LOS c.
Question 28 -
#96719

Which of the following describes a market for goods or services that operates outside the legal system, trading at
prices that exceed legally imposed price ceilings?
Your answer: A was correct!
A black market is a market where trading takes place for legally prohibited goods or at prices that exceed legally
imposed ceiling prices.
This question tested from Session 4, Reading 15, LOS a.
Question 29 -
#96675

Consider the following two final consumer goods:
Good W requires the inputs of raw material R and intermediate goods S and T.
Good X requires the inputs of raw material R and intermediate goods U and V.
If demand for Good W increases and demand for Good X decreases, which of the following outcomes is least
likely?
Your answer: A was incorrect. The correct answer was B) More resources will be devoted to producing Good W
and less to producing Good T.
If demand for Good W increases and demand for Good X decreases, the market will allocate more resources to
producing Good W and the goods that go into producing Good W (that is, Good S and Good T), and less to
producing Good X and the goods that go into producing Good X (that is, Good U and Good V). Changes in the
relative prices of all these goods are the signal that tells their producers where to direct resources. Prices will

increase for goods W, S and T while prices decrease for Goods X, U and V.
This question tested from Session 4, Reading 14, LOS e.

A) decreases as output increases.
B) increases as output increases.
C) increases and then decreases as output increases.
A) A black market.
B) An asymmetrical market.
C) An incidental market.
A) Some of raw material R will be diverted away from the producers of Good X.
B)
More resources will be devoted to producing Good W and less to producing Good T.
C) The price of Good U will decrease and the price of Good S will increase.
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Question 30 -
#96707

Equilibrium in a perfectly competitive market results in a quantity for which the:
Your answer: A was incorrect. The correct answer was B) sum of consumer and producer surpluses is
maximized.
In a competitive market, the equilibrium quantity is the one for which the sum of the consumer and producer
surpluses is maximized.
This question tested from Session 4, Reading 14, LOS d.
Question 31 -

#96692

Which of the following is least likely to be considered an obstacle to the efficient allocation of an economy’s
resources?
Your answer: A was correct!
Price controls and taxes are obstacles to allocative efficiency. Rent controls and minimum wages are examples of
price controls. As opposed to being obstacles to the efficient allocation of resources, changes in consumer tastes
lead to the reallocation of society’s resources, producing a different mix of goods or services that provide
increased benefits.
This question tested from Session 4, Reading 14, LOS e.
Question 32 -
#96691

Marko Tskitishvili, an economist, has been studying the drop in the price of the average household computer in
the U.S. and wonders if computers should still be considered a luxury good or if it has now become a normal
good. He conducts a survey of 500 people and finds the following:
*Assume that 1998 is the base rate.
Based on the above data, Tskitishvili would conclude that a computer is a:
A) producer surplus equals zero.
B) sum of consumer and producer surpluses is maximized.
C) consumer and producer surpluses are equal.
A) Changes in consumer tastes.
B) Rent controls.
C) Taxes.
1998 2005
Avg. Household Income $41,000 $53,000
Avg. Computers Purchased per
Household

0.42 0.57
A) luxury good with income elasticity of 1.01.
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Your answer: A was incorrect. The correct answer was B) luxury good with income elasticity of 1.18.
% change in computers demanded = ( 0.57- 0.42) / 0.495 = 30.30%
% change in income = ($53,000 - $41,000) / $47,000 = 25.53%
30.30% / 25.53% = 1.18
1.18 > 1 so Tskitishvili would conclude that computers are a luxury good.
This question tested from Session 4, Reading 13, LOS a, (Part 1).
Question 33 -
#96799

The upward sloping segment of a long-run average total cost curve represents the existence of:
Your answer: A was incorrect. The correct answer was B) diseconomies of scale.
Diseconomies of scale occur along the upward sloping segment of the long-run average total cost curve where
costs rise as output increases. The flat portion at the bottom of the long-run average total costs curve represents
constant returns to scale.
This question tested from Session 4, Reading 17, LOS d.
Question 34 -
#96651

Which of the following statements about price floors and the labor market is least accurate?
Your answer: A was correct!
If a price floor is set below the equilibrium price, it will have no effect on the quantity demanded or supplied.

However, a price floor (minimum wage in the labor market) above the equilibrium price (wage rate in the labor
market) will cause a surplus at the floor price. Inefficiencies result from a price floor because producers will divert
resources to supply a larger quantity of the good, but consumers will demand a smaller quantity at the floor price.

This question tested from Session 4, Reading 15, LOS b.
Question 35 -
#96894

Which of the following organizational structures is (are) subject to double taxation?

B) luxury good with income elasticity of 1.18.
C) normal good with income elasticity of 0.84.
A) economies of scale.
B) diseconomies of scale.
C) efficiencies of scale.
A)
If a price floor is set below the equilibrium price, the quantity demanded will exceed the quantity
supplied.
B) In the long run, effective price floors lead to inefficiencies in production.
C) Setting a minimum wage above the equilibrium wage rate will lead to an excess supply of labor.
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Your answer: A was correct!
Corporations must pay taxes on the firm’s profits and the shareholders must pay on profits distributed as
dividends.

This question tested from Session 4, Reading 16, LOS e, (Part 2).
Question 36 -
#96879

Which of the following most accurately describes elasticity of supply? Elasticity of supply is the percentage
change in the quantity supplied divided by the percentage change in:
Your answer: A was incorrect. The correct answer was B) price and it equals zero when supply is perfectly
inelastic.

Elasticity of supply equals zero when the supply curve is vertical, indicating perfectly inelastic supply.
This question tested from Session 4, Reading 13, LOS a, (Part 2).
Question 37 -
#96629

If quantity demanded increases 15% when the price drops 1%, demand for this good:
Your answer: A was incorrect. The correct answer was C) elastic, but not perfectly elastic.
Whenever quantity demanded for a good changes by a greater percentage than price, the price elasticity of
demand will be greater than 1.0 and demand for the product is considered to be elastic.
This question tested from Session 4, Reading 13, LOS b.
Question 38 -
#96887

Ken Brobeck and Alice Magnuson are discussing the use of technology in production. They state the following:
A) Corporations.
B) Proprietorships.
C) Partnerships and proprietorships.
A) price and it equals zero when supply is perfectly elastic.
B) price and it equals zero when supply is perfectly inelastic.
C) quantity demanded and it equals infinity when supply is perfectly inelastic.
A) perfectly elastic.

B) inelastic, but not perfectly inelastic.
C) elastic, but not perfectly elastic.
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Brobeck: If a firm has an opportunity to increase both its output and revenue by adopting new
technology, it should do so.
Magnuson: If a production process is economically efficient, it must also be technologically efficient.
With respect to these statements:
Your answer: A was incorrect. The correct answer was B) only Brobeck is incorrect.
Brobeck is incorrect. A firm must incur costs to employ new technology. The firm should do so only if the
additional revenue from adopting the technology is greater than the increase in costs.
Magnuson is correct. A production process is technologically efficient if there is no process that uses less of one
input without using more of another input to produce a particular level of output. A process is economically
efficient if it produces a given output at the lowest possible cost. A process cannot be economically efficient
unless it is technologically efficient.
This question tested from Session 4, Reading 16, LOS c.
Question 39 -
#96670

Which of the following best describes the relationship between the indicated type of market and the Herfindahl-
Hirschman Index, respectively?
Your answer: A was correct!
The Herfindahl-Hirschman Index (HHI) has a theoretical range of near zero to 10,000. The HHI is very low in a
highly competitive and increases to 10,000 (=100%
2

) for an industry with only one firm, e.g., a monopoly. An HHI
between 1,000 and 1,800 is considered moderately competitive (monopolistic competition), while an HHI greater
than 1,800 indicates a market that is not competitive (oligopoly).
This question tested from Session 4, Reading 16, LOS f.
Question 40 -
#96804

Two ways in which economic activity may be coordinated include:
Your answer: A was correct!
A) both are incorrect.
B) only Brobeck is incorrect.
C) only Magnuson is incorrect.
A) Monopoly; 10,000.
B) Monopolistic competition; 100.
C) Perfect competition; 1,800.
A) market coordination and firm coordination.
B) market coordination and systemic coordination.
C) market coordination and structural coordination.
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Firm coordination occurs when a firm produces its product using resources within the firm. Market coordination
occurs when resources outside the firm are used for example a firm may have other companies produce the
components of their product (outsourcing) and the firm then assembles these outsourced components in-house.
This question tested from Session 4, Reading 16, LOS g.
Question 41 -

#96941

Which of the following is a characteristic of perfect competition?
Your answer: A was incorrect. The correct answer was B) There are no barriers to entry into the market.
The only true statement listed in the question is that, under perfect competition there are no barriers to entry into
the market. Each of the other possible answers is not a characteristic of perfect competition. While the
competitors can earn positive economic profits in the short-run, they cannot earn long term economic profits due
to ease of entry and exit.
This question tested from Session 5, Reading 18, LOS a.
Question 42 -
#97143

Which of the following most accurately describes a market structure that has one seller of a specific, well-defined
product that has no good substitutes?
Your answer: A was correct!
A monopoly is characterized by one seller, a specific and well-defined product for which there is no good
substitutes, and high barriers to entry.
This question tested from Session 5, Reading 19, LOS a.
Question 43 -
#96998

When smaller amounts of additional labor are supplied in response to increases in the wages offered, this is
known as the:
Your answer: A was correct!
A) The products of different firms are sold at different prices.
B) There are no barriers to entry into the market.
C) There are a few sellers.
A) Monopoly.
B)
Perfect competition.

C) Oligopoly.
A) income effect.
B) substitution effect.
C) marginal rate of substitution.
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The income effect results in smaller additions to the labor supply as wages increase. Like any good, income
received in the form of wages has a decreasing marginal utility. When the point is reached at which the utility
received is equal to the marginal cost of leisure foregone, the maximum amount of labor that will be offered is
reached.
This question tested from Session 5, Reading 21, LOS c.
Question 44 -
#97175

Monetarists believe that:
Your answer: A was correct!
Monetarists believe that monetary policy has a significant impact on aggregate demand. Because of timing
problems, most monetarists believe that discretionary monetary policy should not be used to stabilize the
economy. Keynesian economists believe shifts in aggregate demand arise primarily from changes in
expectations. Classical economists believe money wages tend to adjust quickly; both monetarists and Keynesians
believe wages are “downward sticky.”
This question tested from Session 5, Reading 23, LOS d.
Question 45 -
#96953

Which of the following factors is least likely to affect the supply of labor?
Your answer: A was correct!
Wages, the size of the adult population (i.e., the available labor force), and the accumulation of capital are all
factors that affect the supply of labor. The aggregate requirement for labor is a demand issue that will ultimately
help to determine the equilibrium level of wages and quantities offered.
This question tested from Session 5, Reading 21, LOS c.
Question 46 -
#97194

David Landau, CFA, was discussing the biases associated with the Consumer Price Index (CPI). He was also
discussing the effect of these biases on determining the inflation rate of an economy. Which of the following is
least likely a source of bias in CPI data and does the CPI generally understate or overstate the true rate of
inflation?
A) monetary policy has a significant impact on aggregate demand.
B) shifts in aggregate demand arise from changes in expectations.
C)
discretionary monetary policy should be used to stabilize the economy.
A) The aggregate requirement for labor.
B) The accumulation of capital.
C) Wages offered.
Not a source of bias CPI bias direction
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Your answer: A was incorrect. The correct answer was C)
The four sources of bias associated with CPI data are: new goods, quality changes, commodity substitution, and

outlet substitution. As a result, in 1996 a Congressional Advisory Commission concluded that the CPI tends to
overstate the true rate of inflation by 1.1% per year.
This question tested from Session 5, Reading 22, LOS d, (Part 2).
Question 47 -
#97355

Assume that a firm in an oligopoly market believes the demand curve for its product is more elastic above a
specific price than below this price. This belief is most closely associated with which of the following models?
Your answer: A was correct!
The kinked demand model assumes that each firm in a market believes that at some price, demand is more
elastic in respect to price increases than it is to price decreases.
This question tested from Session 5, Reading 20, LOS a.
Question 48 -
#97237

In the dominant firm model of oligopoly, it is least likely that one firm:
Your answer: A was incorrect. The correct answer was B) is the innovation leader in product development.
The dominant firm model of oligopoly is based on the assumption that one firm has a significant cost advantage
which allows it to set the price in the market and control a relatively large share of the industry
’s production and
sales. It does not assume that the firm will be the innovation leader in product development. In fact, being more
innovative is one of the factors that allow smaller competitors that work at a cost disadvantage to survive.
This question tested from Session 5, Reading 20, LOS d.
Question 49 -
#96929

A labor market analyst makes the following assertions about trends in labor income:
A) Quality changes Understate
B) Outlet substitution Overstate
C) Consumer preferences Overstate

Consumer preferences Overstate
A) Kinked demand model.
B) Dominant firm model.
C) Variable elasticity model.
A) effectively sets the price in the market.
B) is the innovation leader in product development.
C) has a significant cost advantage over its competitors.
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Statement 1: The net effect of technological improvements has been to increase the demand for
labor. This can be seen in the long-run increase in real wage rates.
Statement 2: The broadest measure of labor income is total wages, salaries, and tips received.
With respect to these statements:
Your answer: A was incorrect. The correct answer was C) only statement 2 is incorrect.
Statement 1 is correct. Technological improvements increase demand for some types of labor and decrease
demand for other types, but the net long-run effect has been to increase demand for labor as a whole. The long-
run increase in real wage rates is evidence that supports this assertion. Statement 2 is incorrect. A more complete
measure of labor income is total labor compensation, which includes employer-provided benefits as well as wage
and salary income.
This question tested from Session 5, Reading 21, LOS b.
Question 50 -
#96963

Bradley works a 14-hour-per-week job as a bartender at McQuigley’s Pub. Maddeline left her position at a
commercial bank to raise her two-year old daughter. How would these individuals be classified from the viewpoint

of employment statistics?
Your answer: A was incorrect. The correct answer was B)
The labor force includes all people who are either employed or actively seeking employment. As such, Bradley is
considered employed from the viewpoint of employment statistics whereas Maddeline is not counted in the labor
force.
This question tested from Session 5, Reading 22, LOS a.
Question 51 -
#97019

The natural rate of unemployment exists when:
A) both are incorrect.
B) only statement 1 is incorrect.
C) only statement 2 is incorrect.
Bradley Maddeline
A) Employed Employed
B) Employed Not in labor force
C) Not in labor force Not in labor force
Employed Not in labor force
A) the economy operates below full employment.
B) structural unemployment is zero.
C) the economy operates at full employment.
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Your answer: A was incorrect. The correct answer was C) the economy operates at full employment.
The natural rate of unemployment exists when the economy operates at full employment. At full employment,

cyclical unemployment is zero.
This question tested from Session 5, Reading 22, LOS c.
Question 52 -
#96997

When workers agree to forego leisure to undertake labor and receive wages, the term that is applied in labor
supply economics is the:
Your answer: A was incorrect. The correct answer was B) substitution effect.
In labor supply economics, the term applied to the decision by workers to forego leisure and undertake labor for
wages is the substitution effect.

This question tested from Session 5, Reading 21, LOS c.
Question 53 -
#97052

Which of the following is least likely a barrier to entry?
Your answer: A was incorrect. The correct answer was C)
Price controls.
Often barriers to entry are government licensing and legal barriers.
This question tested from Session 5, Reading 19, LOS a.
Question 54 -
#97125

Which of the following is least likely
to be considered a necessary condition for a monopolist to realize profits from
price discrimination?
Your answer: A was correct!
A) income effect.
B) substitution effect.
C) marginal rate of substitution.

A) Resource controls.
B) Economies of scale.

C) Price controls.
A) Two different costs of production.
B)
The ability to prevent trading between customers in different price groups.
C) A product for which the demand curve is downward sloping.
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Price discrimination works when the seller (discriminator) faces a downward-sloping demand curve and has at
least two customer groups each having different price elasticities for the product. It is also necessary that trading
does not occur between customer groups so that the customers paying a lower price cannot resell the product to
the customers paying a higher price.
This question tested from Session 5, Reading 19, LOS c.
Question 55 -
#96759

Suppose a price-taker firm produces baseball bats that sell at a price of $100 each. This firm’s average total cost
at the current level of production is $150 per bat, and the average fixed cost is $40 per bat. Which of the following
statements is most accurate regarding this firm? They should:
Your answer: A was incorrect. The correct answer was C)
shut down in the short run because their average variable cost is greater than their price.
Variable costs = $150 (ATC)
− $40 (AFC) = $110 (AVC). At a selling price of $100 the firm is not covering its

variable costs and will have losses greater than its fixed costs if it stays in business.
This question tested from Session 5, Reading 18, LOS b.
Question 56 -
#97051

Which of the following is least likely to be considered a reason for the existence of a natural monopoly? Firms:
Your answer: A was incorrect. The correct answer was C) that can maximize profit when price equals marginal
cost.
Profit maximization occurs when price equals marginal cost in a perfectly competitive industry, not a monopoly. A
natural monopoly exists when economies of scale or scope are so significant that total industry production should
be produced by only one firm. In this case, average total cost declines over the entire range of demand.
This question tested from Session 5, Reading 19, LOS e.
Question 57 -
#97010

Unemployment due to the time it takes for qualified workers to be matched with existing job openings describes:
A) continue producing baseball bats because they are covering their fixed costs.
B) shut down in the short run because their average total cost is greater than their price.
C) shut down in the short run because their average variable cost is greater than their price.

A) that have significant economies of scope.
B)
for which average total cost decreases over the entire range of industry demand.
C) that can maximize profit when price equals marginal cost.
A) structural unemployment.

B) frictional unemployment.
C) cyclical unemployment.
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Your answer: A was incorrect. The correct answer was B)
frictional unemployment.
Structural unemployment is due to structural changes in the economy that eliminate some jobs while generating
job openings for which unemployed workers are not qualified. Cyclical unemployment results from short
-term
deviations from "full employment."
This question tested from Session 5, Reading 22, LOS c.
Question 58 -
#97348

Statement 1: “The kinked demand curve model of oligopoly assumes that a decrease in price will not be followed
by other firms in the industry, but a price increase will.”
Statement 2: “Firms in monopolistic competition have high advertising expenses because they want to create the
perception that their product is different from their competitors’
products when the competing products are actually
quite similar.”
With respect to these statements:
Your answer: A was incorrect. The correct answer was C) only one is correct.
Statement 1 is incorrect because the kinked demand curve model contends that each firm in oligopoly competition
believes that an increase (not decrease) in its price will not be followed by the competition, but a decrease (not
increase) in price will. Each firm believes that it faces a demand curve that is more elastic (flatter) above a given
price, i.e., the kink, than it is below the given price.
This question tested from Session 5, Reading 20, LOS a.
Question 59 -
#96819

A perfect competition has all of the following characteristics EXCEPT:
Your answer: A was incorrect. The correct answer was C)
a differentiated product.
In a perfectly competitive market all the firms produce a homogeneous product.
This question tested from Session 5, Reading 18, LOS a.
Question 60 -
#96967

A) both are correct.
B) both are incorrect.
C) only one is correct.
A) barriers to entry don't exist.
B) a large number of independent firms.

C) a differentiated product.
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Given the following information for a country, what is the labor force participation rate?
Your answer: A was incorrect. The correct answer was C) 76%.
Labor force participation rate = (# of persons 16 or older who are employed or seeking employment) / (civilian
population 16 or older)
Labor force participation rate = (8 + 152) / 210 = 76%.
This question tested from Session 5, Reading 22, LOS a.
Question 61 -

#97211

When real GDP falls below potential GDP:
Your answer: A was incorrect. The correct answer was C) cyclical unemployment increases.
When real GDP falls below potential GDP, cyclical unemployment increases. When real GDP increases, cyclical
unemployment decreases. Structural unemployment arises from a mismatch of employer needs and workers’
skills and is not directly related to cyclical changes in GDP growth.
This question tested from Session 5, Reading 22, LOS c.
Question 62 -
#97155

Compared to a competitive market, a monopoly situation will produce:
Your answer: A was correct!
A monopolist, faced with the same demand curve that would exist under perfect competition, will decrease output
to the point that marginal revenue equals marginal cost. This will have the effect of reducing the sum of the
consumer surplus and the producer surplus, relative to what they would have been under perfect competition.
However, the size of the producer surplus increases on an absolute basis at the expense of the consumer
Total civilian population 16 and over 210

Those not in the labor force 50

Unemployed 8

Employed 152

A) 72%.
B) 95%.
C) 76%.
A) structural unemployment increases.
B) cyclical unemployment decreases.

C) cyclical unemployment increases.
A) less output, and the sum of the consumer surplus and the producer surplus will be reduced.
B) less output, and the sum of the consumer surplus and the producer surplus will be increased.
C) more output, and the sum of the consumer surplus and the producer surplus will be reduced.
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surplus.
This question tested from Session 5, Reading 19, LOS d.
Question 63 -
#97434

The demand curves faced by monopolistic competitors is:
Your answer: A was incorrect. The correct answer was C) elastic due to the availability of many close substitutes.
The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes.
If a firm increases its product price, it will lose customers to firms selling substitute products.
This question tested from Session 5, Reading 20, LOS a.
Question 64 -
#97267

An oligopoly is charcterized by all of the following EXCEPT:
Your answer: A was incorrect. The correct answer was C)
a large number of sellers.
Oligopolies consist of a small number of sellers. Their products may be either similar or differentiated.
This question tested from Session 5, Reading 20, LOS a.
Question 65 -

#97182

Which of the following choices best describes the effects on consumption, investment, and net exports that would
result from an increase in the price level, other factors held constant?

Your answer: A was incorrect. The correct answer was C)
A) not sensitive to price due to absence of close substitutes.
B) inelastic due to the availability of many complementary goods.
C) elastic due to the availability of many close substitutes.
A) large economies of scale.
B) significant barriers to entry.

C) a large number of sellers.
Consumption Investment Net exports
A) Decrease Increase Increase
B) Increase Increase Increase
C) Decrease Decrease Decrease
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At higher price levels, consumption, investment, and net exports all decrease. A rising price level decreases
consumers’ real wealth, so they consume less. The higher price level will increase interest rates, which causes
business investment to decrease. Rising domestic prices will also reduce foreign purchases of the country’s
goods, decreasing net exports.
This question tested from Session 5, Reading 23, LOS b, (Part 2).
Question 66 -

#96790

An economic market characterized by a large number of independent firms all producing identical products is best

described as:
Your answer: A was incorrect. The correct answer was B) perfect competition.
In a perfectly competitive economic market, there are many independent firms, each seller is small relative to the
total market, and there are no barriers to entry or exit.
This question tested from Session 5, Reading 18, LOS a.
Question 67 -
#96912

The short-run supply curve to a firm operating under perfect competition is most accurately described as the
segment of the:
Your answer: A was incorrect. The correct answer was B) marginal cost (MC) curve above the average variable
cost (AVC) curve.
The short-run supply curve for a firm under perfect competition is the segment of its MC curve above the AVC
curve.
This question tested from Session 5, Reading 18, LOS c.
Question 68 -
#96934

When a firm operates under conditions of perfect competition, marginal revenue always equals:
Decrease Decrease Decrease
A) monopolistic competition.
B) perfect competition.
C) monopoly.
A) marginal cost (MC) curve below the average total cost (ATC) curve.
B) marginal cost (MC) curve above the average variable cost (AVC) curve.
C) average total cost (ATC) curve above the average variable cost (AVC) curve.

A) total cost.
B) price.
C) average variable cost.
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