9 Economics Questions

Economics
© EduPristine For [CFA-I – Economics-MM] (Confidential)

Question 1
▪ The demand for home décor doubles when the average family income of Saunderland increases
from $15,000 per annum to $20,000 p.a. The income elasticity for home décor is
A. Greater than 1, and Less than 2
B. Less than 1
C. Greater than 2
© EduPristine For [CFA-I – Economics-MM] (Confidential) 2

Solution 1
▪ C.

Question 2
▪ Production at B leads to a loss due to inefficient production. This loss in efficiency is known as
A. Deadweight loss
B. Utilitarian loss
C. Producer loss

Solution 2
▪ A.
When production occurs at a point other than the equilibrium point the consumer surplus & the producer
surplus is decreased by an amount. This is known as deadweight loss.

Question 3
▪ If the price of the product does not change when the supply of the product increases from zero to
infinity. Then the supply elasticity for the product is most likely
A. Perfectly elastic
B. Unit Elastic
C. Perfectly inelastic

Solution 3
▪ A.

Question 4
▪ John notices that when the price of a Product Z is increased from $15 to $25. The demand declines
from 40 units to 35 units. He also notices that the income elasticity of the product is negative. The
price elasticity of the product is closest to and the product is an
A. 0.27 ; inferior good
B. 0.47; normal good
C. 0.30 ; normal good

Solution 4
▪ A.
Price elasticity = %∆Q = 5/37.5 = 0.27
%∆P 10/20
When demand reduces with an increase in income the good is an inferior good & the income elasticity is
negative.

Question 5
▪ The least likely method of government intervention in farm production is through

A. Production quotas
B. Taxes
C. Subsidies

Solution 5
▪ B.
The two methods of government intervention in farm production are through the use of a) production
quotas and b) subsidies. Taxes are a form of intervention but are generally not used to control farm
production.

Question 6
▪ The HHI for the silicon wafer industry in Saunderland is closest to
Firm Market Share

I. 50%
II. 10%
III. 10%
IV. 5%
V. 5%
ROI* 20%
▪ *ROI Rest of Industry constituting 8 firms each with 2.5% market share
A. 3150
B. 2800
C. 5950

Solution 6
▪ B.
Herfindahl-Hirschman Index is calculated for the industry as follows:
HHI = 502 + 102 + 102 + 52 + 52 + 8 * (2.52) = 2,800

Question 7
▪ A shoemaker Zeebok requires producing 150 units per day. The cost of labor is $20 and the cost of
capital is $550 per unit. Calculate the most likely economical method of production
Quantity of Inputs
Labor Capital
Manual Method 220 50
Automated Method 10 120

A. Automated and requires $56,400 per day
B. Manual and requires $31,900 per day
C. Manual and requires $34,500 per day

Solution 7
▪ B.
Manual Method requires = $ 20*220 + 550*50 = $31,900
Automated Method requires = $ 20*10 + 550*120= $66,200

Question 8
▪ ZenithCorp. a major utility company runs 4 thermo-nuclear generators supplying electricity to the
Greater Manhattan region. The company is planning to set up a 5th generator to meet the ever
increasing demand for electricity. While analyzing the business plan the company CFO notices that
by adding one more units there is a positive but declining increase in marginal cost. This indicates
that the total cost curve and the average total cost curve is most likely
▪ Total Cost Curve Average Total Cost
A. Increasing Decreasing
B. Increasing Increasing
C. Decreasing Increasing

Solution 8
▪ A.
When marginal cost increases in a declining manner the total costs increases however the average total
cost starts decreasing.

Question 9
▪ When an additional unit of labor is added to a company’s work force then the marginal returns
increase initially but decline after a certain point. This is most likely the result of
A. Economies of scale
B. Law of diminishing returns
C. Diseconomies of scale

Solution 9
▪ B.
The law of diminishing returns occurs when the marginal product of an additional worker is less than the
marginal product of the previous worker. As more workers are added there is less for them to do.

Question 10
▪ Which of the following statements best explains how automatic stabilizers work? Even without a
change in fiscal policy, automatic stabilizers tend to promote:
A. A budget deficit during a recession and a budget surplus during an inflationary expansion.
B. A budget surplus during a recession and a budget deficit during an inflationary expansion.
C. A budget deficit during a recession but do not promote a budget surplus during an inflationary
expansion.

Solution 10
▪ A.
A Budget deficit during a recession and a budget surplus during an inflationary expansion.
Automatic stabilizers such as unemployment compensation, corporate profits tax, and the progressive
income tax run a deficit during a business slowdown but run a surplus during an economic expansion.
Therefore, they automatically implement countercyclical fiscal policy without the delays associated with
policy changes that require legislative action.

Question 11
▪ In a perfectly competitive market the lowest possible long run average total cost occurs most likely at
the point where MC (Marginal Cost) SR Firm Supply Curve, ATC ( Average Total Cost)
A. MC > SR Firm Supply Curve = ATC
B. MC = SR Firm Supply Curve = ATC
C. MC < SR Firm Supply Curve < ATC

Solution 11
▪ B.

Question 12
▪ The benefit that a person receives from consuming one or more unit of a good or service is known
as
A. Allocative benefit
B. Increasing benefit
C. Marginal benefit

Solution 12
▪ C.
Marginal benefit (MB) is the benefit that a person receives from consuming one or more unit of a good or
service. The MB is measured as the maximum amount that a person is willing to pay for one or more unit
of the good or service.

Question 13
▪ A public good is a good or service that is consumed by everyone, even if they don’t pay for it, then
which of the following describes an external benefit
A. Benefit that accrues to people other than the buyer of the good or service
B. Benefit that accrues due to external factors like exchange rates, inflation etc.
C. Benefits that accrues to the consumer of a good or service

Solution 13
▪ A.
When an old building is restored or a park is built in a locality the benefit accrues to other people other
than the owner of the building or the owner of the land on which the park was built. An external benefit is
thus the benefit that accrues to other people other than the buyer of a good.

Question 14
▪ Which of the following is least likely an obstacle in achieving the efficient allocation of resources
A. Price Ceiling
B. Monopoly
C. Competition

Solution 14
▪ C.
The five items that are a significant obstacle to an efficient allocation of resources in the market economy
are: a. price ceilings & price floors b. taxes, subsidies & quotas c. monopoly
d. external costs & benefits e. public goods & common resources.

Question 15
▪ Consider a firm in an oligopoly market that believes the demand curve for its product is more elastic
above a certain price than below this price. This belief fits most closely to which of the following
models?
A. Dominant firm model.
B. Kinked demand model.
C. Variable elasticity model.

Solution 15
▪ B.
The correct answer is Kinked demand model.
The kinked demand model assumes that each firm in a market believes that at some price, demand is
more elastic for a price increase than for a price decrease.

Question 16
▪ An insulin user is most likely to pay the entire tax when the demand and supply curves for insulin
injectibles are respectively;
▪ Demand Curve Supply Curve
A. Inelastic Elastic
B. Elastic Perfectly
C. Perfectly inelasticElastic
Inelastic

Solution 16
▪ A.
The buyer pays the tax when the demand curve is perfectly inelastic and the supply curve is perfectly
elastic. The seller will pay it when the demand curve is perfectly elastic and the supply curve is perfectly
inelastic.

Question 17
▪ A high concentration ratio is most likely observed in

A. Perfect competitive market
B. Oligopoly
C. Monopolistic competition

Solution 17
▪ B.
In an oligopoly there is a high concentration ratio and the HHI is more than 1,800.

Question 18
▪ A corporation has all of the following advantages except

A. Owners have limited liability
B. Professional management
C. Ease of set up

Solution 18
▪ C.
Advantages of a corporate setup is that owners of shares in a corporation have a limited liability and they
can take advantage of a professional management. Proprietorships and partnerships are easy to set up.

Question 19
▪ Sally has decided to give up working as an Investment Banker and set up a restaurant in London, all
of the following can be considered as an opportunity cost except
A. Interest on restaurant loan
B. Salary foregone
C. Perks foregone

Solution 19
▪ A.
The opportunity costs include a) explicit cost b) implicit cost. Wages foregone & interest on deposits
foregone are examples of implicit costs.

Question 20
▪ An employee stated that the electricity is being produced at ZenithCorp. at a point above the
Production Possibility Frontier (PPF). This most likely indicates that
A. Production is inefficient
B. The employee is wrong
C. Production is efficient

Solution 20
▪ B.
All the points below the Production Possibilities Frontier (PPF) are possible though production is very
inefficient. Maximum efficiency occurs on the PPF curve. However all points above the curve are not
possible.

Question 21
▪ All of the following are the characteristics of a perfectly competitive market except
A. Many firms sell identical products to many buyers
B. No entry barriers
C. Information asymmetry between buyers & sellers

Solution 21
▪ C.
Characteristics of a perfectly competitive market are a) many firms in the market b) undifferentiated
products c) no entry barriers d) no first mover advantage e) information symmetry

Question 22
Which of the following would be counted as frictional unemployment?

A. Due to the negative growth of GDP, Smith was laid off.
B. Johnson was fired from his job after he got into an argument with his foreman, and has not sought a
new job.
C. Although there were jobs available, Jones was unable to find an employer with an opening.

Solution 22
▪ C.
The correct answer is although there were jobs available, Jones was unable to find an employer with an
opening.
One of the causes of frictional unemployment is that information regarding prospective employees and
employers is costly and sometimes hard to find. The other cause of frictional unemployment is that both
employees and employers may spend some time looking for information that will match them up.

Question 23
▪ Which of these is most likely to be a goods market?

A. Maintenance workers
B. Eating out Services
C. Assembly line workers

Solution 23
▪ B.
Eating out services provide goods or services to its customers.

Question 24
Given a function of quantity demanded vs. price of quantity –

Q = 2−0.4Px + 0.0005Ix + 0.15Py
For the condition of ceteris paribus with variation only along Px, what would happen if the value of Py is
changed?
A. The demand curve’s slope decreases
B. The demand curve’s slope increases
C. The demand curve slope remains the same

Solution 24
▪ C.
The change in value of Py should not affect the value of slope of the demand curve.

Question 25
▪ For a condition to be called an unstable equilibrium, which of these conditions holds true?
A. The supply curve intersects the demand curve from the top
B. The supply curve has a negative slope
C. All of the above

Solution 25
▪ C.
Both these conditions need to be followed in order to be called an unstable equilibrium.

Question 26
▪ For a commodity whose quantity demanded varies with price as – 18Px the price elasticity at
Px = 3 is
A. Elastic
B. Inelastic
C. Positive

Solution 26
▪ B.
The price elasticity is (dQ/dP)*(P/Q) which comes out to be – 0.01 which lies between -1 & 1 and
therefore, inelastic

Question 27
▪ Which of these is a descending price auction?

A. Dutch auction
B. Sealed bid
C. Private value auction

Solution 27
▪ A.
Dutch auction is a descending type auction

Question 28
▪ For a supply function given by

▪ Qs = -100 + 4P
▪ Calculate the producer surplus for a price level of P = 30
A. 100
B. 50
C. 25

Solution 28
▪ B.
▪ Use the formula for producer surplus, Area of triangle = ½ x 20 x (30-25) where Qs = 20 and obtain
the intercept for P as 25.

Question 29
▪ Which of these goods are assumed to be a representation of a person’s social status?

A. Superior goods
B. Veblen goods
C. Giffen goods

Solution 29
▪ B.
The Veblen goods do not vary according to the conventional demand curve but show a positive slope
initially which shows that their demand increases as their price increases which is assumed to reflect a
person’s social status.

Question 30
▪ A company produces chipsets for computers and uses both, manual labour as well as automated
machinery for production. A worker alone can produce 100 chipsets in a day for $2000 while the
automated machinery alone can produce 100 chipsets in a day for $2500. The chipsets are sold for
$50 each. Calculate the marginal revenue product in a day for hiring additional worker.
A. $5000
B. $3000
C. $2000

Solution 30
▪ A.
The marginal revenue product is the additional revenue generated by hiring an additional worker. This
means that $50 x 1000 = $5000

Question 31
▪ Which of the following is least likely to be true about Marginal Revenue Product (MRP) of Labour?
A. Addition to revenue from selling additional output produced by employing one extra unit of Labour
B. Addition to revenue from selling an extra unit of output produced by adding extra units of Labour
C. Product of Marginal Product (MP) of Labour and Marginal Revenue (MR) .

Solution 31
▪ B.
Marginal Revenue Product (MRP) of labour as input is the addition to revenue from selling additional
output produced by employing one extra unit labour.

Question 32
▪ Calculate the Herfindahl Hirschman index for top four blue chip companies with market shares of
20%, 18%, 17% and 16%?
A. 0.1269
B. 0.71
C. 0.8731

Solution 32
▪ A.
Herfindahl Hirschman index is calculated by adding the squares of the market shares of the respective
companies.

Question 33
For the tyre industry in Bhutan, the sales figures (in thousands) are given below:
Firm A: 20
Firm B: 18
Firm C: 17.5
Firm D: 16
Others: 20
The three company concentration ratio for the industry is closest to
A. 60%
B. 55%
C. 78%

Solution 33
▪ A.
The three company concentration ratio will be = (20+18+17.5)/ (20+18+17.5+16+20)

Question 34
▪ Calculate the real GDP for a country whose nominal GDP in the given year is $5 trillion and the GDP
deflator for the given year is 107.
A. 5.35
B. 4.67
C. 5

Solution 34
▪ B.
The real GDP = (Nominal GDP/GDP Deflator)

Question 35
▪ The highest price the consumers are willing to pay for 12 gallons of diesel a week is $3. However,
even if the price is reduced to zero, demand only goes up to 13.2 gallons a week. Given a linear
demand function, what is the drop in demand of diesel if its price rises by $1?
A. Demand reduces by 0.4 gallons
B. Demand reduces by 1 gallon
C. Demand reduces by 0.04 gallons

Solution 35
▪ A.
▪ At P=$3, D= 12 units/week; At P=$0, D=13.2 unit/week. Therefore, slope of the demand curve= (3-
0)/ (12-13.2) = (1/-0.4)
▪ Thus, for every $1 increase in Price, demand reduces by 0.4 units.

Question 36
▪ What is the impact on GDP with increase in aggregate supply and aggregate demand
A. Increases
B. Decreases
C. Indeterminate

Solution 36
▪ A.
GDP increases. When both AD and AS increases, the real GDP increases.

Question 37
▪ What is the impact on aggregate price level with decrease in aggregate supply and aggregate
demand
A. Increases
B. Decreases
C. Indeterminate

Solution 37
▪ C.
Indeterminate. Unless the magnitude of decrease in known, the impact on price level with the decrease
in AD and AS is unknown. If AD decreases more than AS, the prices fall

Question 38
▪ What is the impact on GDP with increase in aggregate supply and decrease in aggregate demand
A. Increases
B. Decreases
C. Indeterminate

Solution 38
▪ C.
Indeterminate. If AD decreases and AS increases, the prices fall but the impact on real GDP in unknown.
If AD decreases more than AS increases, real GDP will fall.

Question 39
▪ Which of the following does a central bank seek to influence directly via the setting of its official
interest rate
A. Inflation expectation
B. Import prices
C. Domestic inflation

Solution 39
▪ A.
Inflation expectations.

Question 40
▪ The common objective of implementing capital controls are

A. Maintain tight exchange rate to support export sector
B. Shield domestic interest rates from external market forces
C. Both of the above

Solution 40
▪ C.
Both of the above

Thank You!
For queries, write to us at: care@edupristine.com
© EduPristine For [CFA-I – Economics-MM] (Confidential)

9 Economics Questions

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

9 Economics Questions

Uploaded by

Copyright:

Available Formats

Economics

© EduPristine For [CFA-I – Economics-MM] (Confidential)

© EduPristine For [CFA-I – Economics-MM] (Confidential) 2

© EduPristine For [CFA-I – Economics-MM] (Confidential) 3

© EduPristine For [CFA-I – Economics-MM] (Confidential) 4

© EduPristine For [CFA-I – Economics-MM] (Confidential) 5

© EduPristine For [CFA-I – Economics-MM] (Confidential) 6

© EduPristine For [CFA-I – Economics-MM] (Confidential) 7

© EduPristine For [CFA-I – Economics-MM] (Confidential) 8

© EduPristine For [CFA-I – Economics-MM] (Confidential) 9

▪ The least likely method of government intervention in farm production is through

© EduPristine For [CFA-I – Economics-MM] (Confidential) 10

© EduPristine For [CFA-I – Economics-MM] (Confidential) 11

▪ The HHI for the silicon wafer industry in Saunderland is closest to

Firm Market Share

© EduPristine For [CFA-I – Economics-MM] (Confidential) 12

© EduPristine For [CFA-I – Economics-MM] (Confidential) 13

Manual Method 220 50

Automated Method 10 120

© EduPristine For [CFA-I – Economics-MM] (Confidential) 14

© EduPristine For [CFA-I – Economics-MM] (Confidential) 15

▪ Total Cost Curve Average Total Cost

© EduPristine For [CFA-I – Economics-MM] (Confidential) 16

© EduPristine For [CFA-I – Economics-MM] (Confidential) 17

© EduPristine For [CFA-I – Economics-MM] (Confidential) 18

© EduPristine For [CFA-I – Economics-MM] (Confidential) 19

© EduPristine For [CFA-I – Economics-MM] (Confidential) 20

© EduPristine For [CFA-I – Economics-MM] (Confidential) 21

© EduPristine For [CFA-I – Economics-MM] (Confidential) 22

© EduPristine For [CFA-I – Economics-MM] (Confidential) 23

© EduPristine For [CFA-I – Economics-MM] (Confidential) 24

© EduPristine For [CFA-I – Economics-MM] (Confidential) 25

© EduPristine For [CFA-I – Economics-MM] (Confidential) 26

© EduPristine For [CFA-I – Economics-MM] (Confidential) 27

© EduPristine For [CFA-I – Economics-MM] (Confidential) 28

© EduPristine For [CFA-I – Economics-MM] (Confidential) 29

© EduPristine For [CFA-I – Economics-MM] (Confidential) 30

© EduPristine For [CFA-I – Economics-MM] (Confidential) 31

▪ Demand Curve Supply Curve

© EduPristine For [CFA-I – Economics-MM] (Confidential) 32

© EduPristine For [CFA-I – Economics-MM] (Confidential) 33

▪ A high concentration ratio is most likely observed in

© EduPristine For [CFA-I – Economics-MM] (Confidential) 34

© EduPristine For [CFA-I – Economics-MM] (Confidential) 35

▪ A corporation has all of the following advantages except

© EduPristine For [CFA-I – Economics-MM] (Confidential) 36

© EduPristine For [CFA-I – Economics-MM] (Confidential) 37

© EduPristine For [CFA-I – Economics-MM] (Confidential) 38

© EduPristine For [CFA-I – Economics-MM] (Confidential) 39

© EduPristine For [CFA-I – Economics-MM] (Confidential) 40

© EduPristine For [CFA-I – Economics-MM] (Confidential) 41

© EduPristine For [CFA-I – Economics-MM] (Confidential) 42

© EduPristine For [CFA-I – Economics-MM] (Confidential) 43

Which of the following would be counted as frictional unemployment?

© EduPristine For [CFA-I – Economics-MM] (Confidential) 44

© EduPristine For [CFA-I – Economics-MM] (Confidential) 45

▪ Which of these is most likely to be a goods market?

© EduPristine For [CFA-I – Economics-MM] (Confidential) 46

© EduPristine For [CFA-I – Economics-MM] (Confidential) 47

Given a function of quantity demanded vs. price of quantity –

© EduPristine For [CFA-I – Economics-MM] (Confidential) 48

© EduPristine For [CFA-I – Economics-MM] (Confidential) 49

© EduPristine For [CFA-I – Economics-MM] (Confidential) 50