CFA Level 1 Complete -Complete Exam
Study Guide with Verified Answers |
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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 ;
Study Guide with Verified Answers |
Guaranteed A+
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 ;
