CFA Fundamentals - Chapter 2 Q&A Flashcards
Lekross Dairy can produce and package cheese for $1.20 per pound. Lekross can ship this cheese locally for $0.15 per pound, but the cost to ship over distances greater than 50 miles is $0.55 per pound. A local grocer (Localmart) has offered to buy Lekross cheese for $1.30 per pound, while a grocer 80 miles away (Far Stores) has offered $1.80 per pound. Given this situation, you should:
A. accept Localmart’s offer, but decline the offer of Far Stores.
B. accept Far Stores’ offer, but decline the offer of Localmart.
C. accept both offers.
D. accept neither offer.
B. accept Far Stores’ offer, but decline the offer of Localmart.
Lekross’ cost for cheese delivered to Localmart is $1.20 + 0.15 = $1.35 per pound. For Far Stores, the cost delivered is $1.20 + 0.55 = $1.75 per pound. Far Stores’ offer will cover Lekross’ costs, while any cheese sold to Localmart would generate a loss.
Lionel Mandrake has been tracking sales of various products at a local grocery store. He has noticed that when prices of orange juice increase, sales of fruit punch increase. He has also noticed that when prices of cookies increase, sales of milk decrease. Based on this information, Mandrake should conclude that:
A. orange juice and fruit punch are substitutes, and milk and cookies are substitutes.
B. orange juice and fruit punch are substitutes, and milk and cookies are complements.
C. orange juice and fruit punch are complements, and milk and cookies are substitutes.
D. orange juice and fruit punch are complements, and milk and cookies are complements.
B. orange juice and fruit punch are substitutes, and milk and cookies are complements.
Complements are products where demand for one is directly related to demand for the other (i.e., an increase in demand for one leads to an increase in demand for the other), while substitutes are products where demand for one is inversely related to demand for the other.
- In this case, higher orange juice prices (which would lower demand) cause buyers to increase demand for fruit punch (substitute).
- Higher cookie prices (which would lower demand), cause lower milk demand (complement).
Which of the following statements most accurately reflects the law of supply?
A. Businesses will produce only the quantity of goods they believe consumers will buy.
B. Consumers will buy more of a good as the price of that good declines.
C. As the price of a good increases, more of that good will be supplied.
D. As more inputs are devoted to production, output increases at an ever decreasing rate.
C. As the price of a good increases, more of that good will be supplied.
Gasoline is a product for which demand is inelastic relative to supply in the short run. If the government imposes a new tax on gasoline producers:
A. the statutory incidence of the tax will fall more heavily on gasoline consumers than gasoline producers.
B. the tax incidence will fall more heavily on gasoline consumers than gasoline producers.
C. the tax incidence will fall more heavily on gasoline producers than gasoline consumers.
D. the tax incidence will most likely be split evenly between producers and consumers.
B. If demand is inelastic relative to supply, quantity demanded will be less sensitive to price changes than quantity supplied. Consumers are willing to bear more of the price increase (or have less flexibility to alter their demand), so they will pay more of the tax.
The statutory tax incidence refers only to who is responsible for actually paying the tax, and does not address who bears the economic burden of the tax.
If full employment in the United States is 95% and the current rate of unemployment is 6%, which of the following statements is FALSE?
A. The natural rate of unemployment is 5%.
B. Structural unemployment is less than 5%.
C. Frictional unemployment is less than 5%.
D. Cyclical unemployment is greater than 5%.
the natural rate of unemployment would include both frictional and structural unemployment and would be calculated as 1 – 0.95 = 0.05, or 5%. Any excess would be cyclical in nature.
Assume that nominal GDP for 2004 was $11,466 billion. If the GDP deflator for 2000 (base year) was 100, and the deflator for 2004 is 107.24, what is real GDP for 2004?
A. $12,296 billion.
B. $11,668 billion.
C. $11,267 billion.
D. $10,692 billion.
D. $10,692 billion.
Real GDP2004 = Nominal GDP2004 (GDP Deflatorbase year / GDP Deflator 2004)
Real GDP2004 = 11,466 x (100 / 107.24) = $10,692
the President of the United States has recently proposed a broad-based tax cut. This is an example of all of the following EXCEPT:
A. restrictive monetary policy.
B. Keynesian fiscal policy.
C. an attempt to stimulate economic growth.
D. macroeconomic policy.
A. restrictive monetary policy.
Government taxing and spending is fiscal policy, which is macroeconomic policy. Tax cuts are believed to stimulate the economy, although research does not entirely support this belief.
If the Consumer Price Index (CPI) was 184.3 at the end of 2003 and 190.3 at the end of 2004, then inflation in 2004 was closest to:
A. 1.033%.
B. 3.15%.
C. 3.26%.
D. 6.00%.
the formula for calculating inflation from the CPI is:
inflation = (CPI 2004 / CPI 2003) - 1 =
3.26%
Which of the following is an example of how the Federal Reserve (Fed) could implement an expansionary monetary policy?
A. Sell U.S. Treasury securities in the open market.
B. Lower the marginal tax rate for wealthy taxpayers.
C. Lower the discount rate on short-term funds.
D. Raise the marginal tax rate for wealthy taxpayers.
C. Lower the discount rate on short-term funds.
lowering the discount rate would lower the cost of borrowing and hopefully stimulate the economy. This would be expansionary monetary policy. Selling Treasury securities in the open market would be a restrictive policy, as this would remove money from circulation. Adjusting tax rates would be fiscal policy authorized by Congress and carried out by the Treasury, not the Fed.
The law of diminishing returns suggests that:
A. firms producing near their maximum capacity will experience decreasing marginal revenue.
B. variable costs will increase as output increases.
C. average variable costs will increase at high levels of output.
D. average fixed costs will increase at high levels of output.
C. average variable costs will increase at high levels of output.
the law of diminishing returns holds that as more and more resources are devoted to production, the output increases at a decreasing rate. Stated differently, more and more variable inputs will be required to produce another unit of output, which will raise average variable costs.
Alchemy Inc. has just received government patent protection on an expensive process that converts copper into silver. This patent protection:
A. is a high entry barrier.
B. will allow Alchemy to recover its costs of research and development.
C. will grant Alchemy a monopoly position.
D. All of the above.
A. is a high entry barrier
the patent is a barrier to entry, but there are still other ways to produce silver
(i.e., mining). Alchemy’s ability to recover its expenses will depend on how expensive the process is; it may be cheaper to mine silver than to convert copper.
Joe’s Cafe has found that the price elasticity of demand for desserts is –1.5. Based on this fact, Joe’s cafe should expect that:
A. lowering the price of desserts would reduce demand by more than the percentage price reduction.
B. raising the price of desserts would reduce demand, but by less than the percentage change in price.
C. lowering the price of desserts would increase demand by more than the percentage price reduction.
D. raising the price of desserts would increase demand by more than the percentage change in price.
C. lowering the price of desserts would increase demand by more than the percentage price reduction.
the price elasticity of demand for desserts of –1.5 indicates that changing price would lead to a more than commensurate change in demand (in the opposite direction). Therefore, lowering dessert prices would increase demand by more than the change in price.
Generally speaking, demand will decrease when price increases, and demand will increase when price decreases. That means that price elasticity of demand is almost always negative because demand and price have an inverse relationship. Since there is almost always one decreasing variable, the resulting value will be negative.
However, it’s important to note that price elasticity of demand uses absolute value, meaning that it essentially ignores the negative symbol. Since we already know the direction demand will shift, we’re more concerned about the value of the number since it explains whether demand is elastic or inelastic (and how responsive it is to changes in price).
Protext is a liquid sealant used to protect metal surfaces from harsh weather environments. Protext is made from several chemicals, including oil and other petroleum derivatives. All of the following would be likely to cause a shift in the supply curve for Protext EXCEPT:
A. an increase in oil prices.
B. development of a less expensive production process for Protext.
C. an increase in the retail price of Protext.
D. a decrease in oil prices.
C. an increase in the retail price of Protext.
A change in the price of Protext would simply lead to a move along the supply curve. A change in the cost of the production process or a change in the price of raw materials would cause the entire curve to shift. Note that the question does not ask which way the curve is shifting.
A purely competitive firm will maximize profits by setting output at the point where:
A. unit price equals marginal cost.
B. average cost equals marginal revenue.
C. average total revenue equals average fixed cost.
D. marginal revenue equals average variable cost.
A. unit price equals marginal cost.
Remember that for the purely competitive firm, unit price equals marginal revenue—the firm faces a flat demand curve. Therefore profit will be maximized at the level where marginal revenue (or unit price) equals marginal cost.
According to the law of comparative advantage, trading partners should:
A. specialize in the production of goods where they have an absolute advantage.
B. impose tariffs on goods where they have low opportunity costs of production.
C. import goods for which they have high opportunity costs of production.
D. seek to import goods from nations with low wage rates.
C. import goods for which they have high opportunity costs of production.
Comparative advantage holds that nations should produce and export goods where they have low opportunity costs of production and import goods where they have high opportunity costs of production.
Elasticity?
