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Series 86.., questions and answers verified 2024
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Series 86.., questions and answers verified 2024
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Series 86Economies of scale - correct answer ✔When the average cost of producing
an item declines as the number of items produced increases.
Economies of scope - correct answer ✔-The average total cost of production
decreases as a result of increasing the number of different goods produced
- Minimizing the product line costs of production, marketing, and/or distribution
- Economies of scope exist if a company can promote multiple products while
reducing the cost of advertising each individual product.
Barriers to entry - correct answer ✔- Pure competition
- Monopolistic competition
- Oligopoly
- Duopoly
- Monopoly
- Monopsony
Pure competition - correct answer ✔Many producers of a commodity
Monopolistic competition - correct answer ✔Many producers with small
market share
Oligopoly - correct answer ✔Several large producers controlling 70-80% of
the market share
Duopoly - correct answer ✔Two producers
,Monopoly - correct answer ✔Single producer
Monopsony - correct answer ✔A single buyer in the market
Cost of equity created by a new issue of stock - correct answer ✔k* = [ D / P
(1-F) ] + g
k* = required rate of return
D = dividend to be paid at the end of the year
P0 = current market price (at time 0)
g = growth rate per year
F = underwriting fees as a percentage of sales prices
Elasticity - correct answer ✔Change in quantity that will occur when the price
of an item changes
The coefficient of elasticity is the percentage change in quantity demanded
divided by the percentage change in price.
* The sign of the change is IGNORED
Demand elasticity - correct answer ✔Degree to which the quantity
demanded would change for a given change in price.
Ed= % Change in quantity demanded / % Change in price
Ed > 1 = demand is elastic; demand will change by a larger % than the price
change; demand tends to be elastic at higher prices; price decrease will
,increase total revenue and price increase will decrease total revenue when
demand is elastic
Ed < 1 = inelastic; demand will change by a smaller % than the price change;
demand tends to be inelastic at lower prices
Ed = coefficient of elasticity
Use absolute value of formula
Midpoint of reference points will be used in calculation
Supply elasticity - correct answer ✔Influenced most by time (how quickly can
a producer change production to increase or decrease the supply of a
product)
% Increase in Sales Required to Maintain the Same Revenue - correct
answer ✔Price decline % / Compliment of price decrease
I.e. if you lowered the price of product by 5%, you'd need to increase sales by
5.26% (.05*.95) to obtain the same revenue.
% Increase in Sales Required to Increase Revenue - correct answer ✔[( 1 +
revenue increase %) - complement of price decrease ] / compliment of price
decrease
Capital - correct answer ✔Man-made resources used to produce other
goods and services
If cost of capital < returns that can be made by acquiring/using capital, then a
business will borrow that capital to obtain prospective profits
, Economic profit - correct answer ✔Revenue earned by a business that
exceeds its costs (incl. wages, interest, cost of raw materials, rent, and normal
profit)
* Takes into account the cost of capital (not only profit from operations), but
also profit above the expected returns on capex
*Economists say economic profit doesn't include normal profit.
Normal profit - correct answer ✔The cost of obtaining and retaining
entrepreneurial ability
The Short Run - correct answer ✔Time period over which plant and
equipment (fixed costs) cannot be changed, although they can be used in
different ways
Law of Diminishing Returns - correct answer ✔As more and more variable
resources are combined with fixed resources, there will be a point beyond
which the extra (marginal) output obtained by adding additional variable
resources will decline.
Average fixed cost (AFC) - correct answer ✔Total fixed costs / output
Average variable cost (AVC) - correct answer ✔Will eventually reach a
minimum point and then begin to rise because of the law of diminishing
returns
Average total cost (ATC) - correct answer ✔ATC = AVC + AFC
Marginal Cost (MC) - correct answer ✔Additional cost of producing one more
unit of output
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