Answers to Questions CMA Assumed Knowledge, Vol.

Answers to Questions
1 c – Margarine and butter are substitute goods for each other because consumers can buy either one instead
of the other.
2 d – These are substitute goods because when the price of one increases, the revenue for the other
increases. This is because customers switch from buying the good that is now more expensive (the movie
theater) to buying more of the substitute (cheaper) good (a movie rental).
3 c – By definition.
4 c – A rise in the price of a complementary commodity will shift the demand curve of the original item to the
left, thus decreasing total demand for the original commodity.
5 c – By definition if the elasticity is greater than 1, then the demand is considered relatively elastic.
6 b – The % change in P is 15% (.30 / 2). If the elasticity of demand is 1.9 and the change in P is 15%, we
can calculate the change in Q as 1.9 the change in P. The change in Q is therefore 28.5% (1.9 * 15%).
7 d – If the demand were elastic, a decrease in the price would bring a greater increase in the quantity
demanded than was the decrease in the price. Thus the total revenue will increase.
8 c – If the elasticity of demand for a normal good were 2.5, the 10% reduction in the price would bring a
25% increase in the demand (2.5 * 10% = 25%).
9 b – This is the point that is the furthest from the origin, but still on the indifference curve that is tangent to
the budget constraint line.
10 c – These are the three points that are on the same indifference curve and any point on the same
indifference curve will provide the same benefit to the individual as any other point on the same indifference
curve.
11 b – A price ceiling that is below the equilibrium price will result in lower supply in relation to the demand
at this artificially low maximum price. This is because producers will not want to sell as many units as will be
demanded at the artificially low price.
12 d – Economic cost is the sum of all explicit and implicit costs.
13 a – Economic profits will be lower than the income on its income statement because economic profit
includes implicit costs that are not included in net income.
14 d – The accounting profit is revenue minus explicit (cash) costs. The revenue is $100,000 and the costs
are $20,000 for materials and $5,000 in interest. Therefore, the accounting profit is $75,000.
15 a – Economic profit is the accounting profit minus the implicit costs given up. There are two implicit costs,
which are: 1) the interest on the $50,000 of her own money that was invested ($5,000); and 2) the lost
salary from the other job opportunity ($40,000). The economic profit is $30,000 ($75,000 - $5,000 -
$40,000).
16 b – Marginal product is an increase in the total output resulting from one unit increase in an input.
17 c – Marginal product is an increase in the total output resulting from 1 unit increase in an input. In this
case increase by 1 worker from 10 to 11 causes an increase in the total output equal to 5 (25 – 20 = 5 units).
18 a – The marginal revenue of adding 1 more worker to a team of 11 equals to the change in the total
revenue from 25 units * $49 = $1,225 to 28 units * $47.50 = $1,330. Thus, the marginal revenue is $1,330
– $1,225 = $105. The marginal revenue per unit that was added from adding 1 more worker is $35 ($105 /
(28 – 25) = $35).
19 c – Marginal revenue product is the change in total revenue from using 1 more unit of a resource. In this
example, not only the marginal product is declining, but the average selling price is also declining. Therefore,
both factors will affect marginal revenue product. From 11 workers to 12 workers, the average selling price
decreases from $49.00 to $47.50. This is not the incremental selling price but the average selling price. To
calculate the change in total revenue requires multiplying the total number of product units by the average
selling price (for both levels) and then calculating the difference. Therefore, total revenue changes from 25
units * $49 = $1,225 to 28 units * $47.5 = 1330. Thus, the marginal revenue product is $1,330 – $1,225 =
$105.
20 d – Economies of scale lead to a reduction of the average total costs with increased production. This is
due to efficiencies that are gained from larger operations and increases returns.
21 a – Economies of scale lead to reduction of the average total costs with the increased production.
22 c – Economies of scale lead to reduction of the average total costs with the increasing size of the
factory/production.
23 d – The total cost is equal to the product of the number of units produced and the average costs. In this
case it is: 7 units * $36.86 = $258.02

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24 c – The marginal cost is equal to the change in the total costs due to an increase in production of 1 unit.
In this case we need to calculate the total costs to produce 9 units and the total costs to produce 8 units. The
difference is the marginal cost of the 9th unit. Thus, marginal costs are: (9 units * $33.75) – (8 units *
$34.75) = $25.75.
25 d – The kinked demand curve results from competitors matching only price decreases and leaving any
price increase that is made by one of the competitors in the oligopolistic market unmatched.
26 c – These are all characteristics of monopolistic competition.
27 c – A pure monopolist’s marginal revenue curve always lies below its demand curve because the demand
curve has a negative slope due to the price decrease if more units are sold.
28 a – By definition monopolistic competition is the market structure where there are many producers selling
differentiated products.
29 d – Antitrust laws attempt to maintain a free market and prevent an individual company from controlling
the market and limiting total output.
30 d – Setting prices is illegal under the Sherman Act.
31 a – Price fixing is the most serious of the violations under the Sherman Act.
32 a – Vertical integration occurs when two companies within the supply chain merge.
33 a – Tie-in sales are legal only if necessary in order to ensure the quality of the product.
34 a – As with the above question, agreements regarding a particular supplier are legal only if required to
guarantee quality.
35 d – Unfair business practices are not covered by the Clayton Act. They are illegal, but not because of the
Clayton Act.
36 d – Price discrimination is illegal under the Robinson-Patman Act.
37 c – By definition, this is one of the requirements of the Antitrust Improvements Act of 1976.
38 b – These are items covered under the Clayton Act.
39 a – By definition.
40 a – Net Domestic Product equals GDP minus Depreciation: $4,000 − $500 = $3,500. Here, NNP and NDP
are the same because the only difference, Net income earned abroad for the country (Net Foreign Factor
Income), is zero.
41 b – National Income equals Net Domestic Product minus (Indirect Business Taxes − Subsidies) +/− Net
Foreign Factor Income. Thus, it is $3,500 − ($210 − 0) + 0, which equals $3,290.
42 d – Personal Income equals National Income − Corporate Income Tax − Undistributed Corporate Profits +
Transfer Payments − Social Security Contributions, which is $3,290 − $50 − $25 + $500 − $200 = $3,515.
43 d – Disposable Income is Personal Income minus Personal Income Tax: $3,515 − $250 = $3,265.
44 c – An increase in the quantity and/or quality of resources shifts the production possibilities curve to the
right.
45 c – By definition.
46 d – By definition.
47 b – By definition.
48 c – By definition.
49 d – Total deposits will increase by $1,000,000 / 0.1 = $10,000,000.
50 b – Open market operations is the primary monetary control of the Federal Reserve System.
51 d – A sale of securities reduces the money supply and hence will increase the interest rates.
52 b – The purchase of U.S. government securities by the government will reduce interest rates and increase
money supply, thus stimulating the economy.
53 a – As unemployment rises, the actual GDP falls. It leads to the actual GDP being less than the potential
GDP.
54 d – By definition.
55 d – Increasing taxes will reduce the demand due to lower disposable income. Together with the decrease
in government spending, which further reduces the demand, it will curb the demand driven inflation.
56 c – Transfer payments are effectively just reallocation of money in the private sector by the government,
thus the consumption is reallocated as well.
57 c – By definition.

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58 a – By definition.
59 d – Marginal propensity to consume is measured as the ratio between change in the level of consump-
tion and the change in the level of disposable income: ($44,000 - $38,000) / ($48,000 - $40,000) = 0.75.
60 a – Tight monetary policy leads to the increase in interest rates due to a lower supply of money. It
increases the cost of investments by business, thus curbing them and having a negative impact on the
economic activity and growth.

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