Quantitative and Economic CFA Questions
A seller of ice cream cones operates in a monopolistically competitive market. The price in the equilibrium is $3/cone. Which of the following is most likely to be the seller's marginal cost? A) $2.50 B) $3.00 C) $3.20
A) $2.50 The firm should produce at the output where MR=MC. In monopolistic competition, the marginal revenue is smaller than the market price. Therefore, the seller's marginal cost is most likely to be less than $3.00.
Cell Tower Phones is selling the latest generation of its phone for USD 400. Cell Tower's top management estimates that if it drops the price by 20 percent, an additional 30 percent of phones will sell. What is Cell Tower's most likely estimation of the price elasticity of demand for its latest phone? A) -1.5 B) -0.5 C) 1.5
A) -1.5 The price elasticity of demand is calculated as (%change quantity)/(%change price) = 30%/-20% = -1.5
Suppose the consumption function is C = 10 + 0.75(Y − T) and that taxes are T = 2. What is the marginal propensity to save? A) 0.25 B) 0.75 C) 1.75
A) 0.25
Given a demand equation where price is equal to 200 minus half of quantity, if the quantity demanded is 100, the average revenue is closest to: A) 150 B) 200 C) 15,000
A) 150 First, think about equation for AR: AR = TR / Q We know Q = 100 so must find P, P = 200 - 0.5Q P = 150 AR = (100 * 150) / 100 = 150
A firm has the following data on worker productivity: Quantity of labor = total product 0 = 0 1 = 10 2 = 24 3 = 36 4 = 40 The firm experiences increasing returns if the number of workers is closest to: A) 2 B) 3 C) 4
A) 2 Marginal product is the change in output as more units of an input are used, and increasing returns occur when marginal product rises. In this question, marginal product is 10 units for the first worker, 14 units for the second worker, 12 units for the third worker, and 4 units for the fourth worker. The only case in which marginal product rises occurs when the firm hires the second worker, since that worker adds more to output than the previous worker. 0 = 0 ---> 0 1 = 10 ---> 10 2 = 24 ---> 14 3 = 36 ---> 12 4 = 40 ---> 4
A monopoly operating on a remote island sees demand for its product such that the quantity sold is equal to 300 minus half of the product's price. At a quantity of 100, marginal revenue is closest to: A) 200 B) 400 C) 40,000
A) 200 First, think how to get to MR: - Find TR at both 100 and 101 quantities To get TR, isolate P: Q = 300 - 0.5P ----> P = 600 - 2Q TR = Q(600 - 2Q) TR = 100(600 - 2 * 100) ---> 40,000 TR = 101(600 - 2 * 101) ---> 40,198 Find the difference: MR = 40,198 - 40,000 = 198
A company is trying to determine what marginal revenue it will get from expanding production. Its current output is 100, and its demand curve is estimated as quantity being equal to 400 minus the price. The marginal revenue for the company is closest to: A) 200 B) 300 C) 3,000
A) 200 First, think how to get to marginal revenue: - calculate total revenue of output 100 and then at 101 Next find total revenue for both 100 and 101: P = 400 - Q TR = Q(400 - Q) TR = 100(400 - 100) = 30,000 TR = 101(400 - 101) = 30,199 MR = 30,199 - 30,000 = 199
Consumption = 16 Capital Consumption Allowance = 2.5 Government Spending = 3.4 Imports = 1.9 Gross Private Domestic Investment = 5.1 Exports = 2.1 Based only on the data given, the national income is: A) 22.2 B) 24.7 C) 27.2
A) 22.2 National income is gross domestic production minus capital consumption allowance, where GDP is consumption plus gross private domestic investment plus government spending plus export minus import. National Income = 16 + 5.1 + 3.4 + 2.1 − 1.9 − 2.5 = 22.2
The GDP deflator in Country X was 150 in 2017 and it was 188 in 2020. The annual inflation rate over this time period is closest to: A) 7.8% B) 8.4% C) 25.33%
A) 7.8% To find the annual inflation rate, use the formula, where i is the annual inflation rate you are looking for: **IMPORTANT EQUATION ---> X(1+i)^t = X** 150(1+i)^3=188 (188/150)^(1/3) - 1 = 0.078 = 7.8%
Which of the following firm-pricing strategies is associated with the kinked demand curve view of oligopoly? A) A firm may decide that price stability is the best strategy B) A firm may raise its price because it believes that rivals will copy its behavior C) A firm may try to steal market share by cutting price and anticipating that rivals will not copy its actions
A) A firm may decide that price stability is the best strategy If the demand curve a firm faces is kinked, it will be reluctant to either lower or raise prices for fear that rivals will either copy or ignore its decision. **Think gas station where price increases result in rival firms keeping price but price decreases results in rivals matching price**
Following is a demand equation. Q=150−0.5P Which of the following accurately describes the average revenue of a firm facing this demand equation? A) AR = 300 - 2Q B) AR = 300 - 2Q^2 C) AR = 300 - 4Q
A) AR = 300 - 2Q First, solve for P: P = 300 - 2Q Next, calculate total revenue: Total revenue = price * quantity TR = Q(300 - 2Q) TR = 300Q - 2Q^2 Finally, find average revenue: AR = TR/Q AR = (300Q - 2Q^2)/Q AR = 300 - 2Q **Hint, begin with equation for AR and work backwards**
A small firm in a perfectly competitive industry reports that if it produces 7 units of a product, total costs (TC) are AUD 72 and total fixed costs (TFC) are AUD 10. At this output quantity, the average variable cost (AVC) is closest to: A) AUD 8.86 B) AUD 10.29 C) AUD 11.71
A) AUD 8.86 AVC = total variable cost / output = (72-10) / 7 = 8.857
A manufacturing firm can sell 200 units at a price of CAD 36 and an average cost of CAD 22, or 240 units at a price of CAD 32 and an average cost of CAD 20. The marginal revenue and marginal cost per unit, respectively, of reducing the price to CAD 32 are closest to: A) Cad 12 and Cad 10 B) Cad 480 and Cad 400 C) Cad 7,200 and Cad 4,400
A) Cad 12 and Cad 10 Key word, PER UNIT Total Revenue 1 = 200*36 = 7,200 Total Revenue 2 = 240*32 = 7,680 Difference in Total Revenue = 7,680 - 7,200 = 480 MR per unit = 480/(240-200) = 12 Total Cost 1 = 200*22 = 4,400 Total Cost 2 = 240*20 = 4,800 Difference in Total Cost = 4,800-4,400 = 400 MC per unit = 400/(240-200) = 10
Which of the following is least likely to be an effective approach for an oligopoly firm hoping to increase its market share? A) Decreasing price in order to steal sales from competitors B) Relying on non-price competition such as an improved marketing strategy C) Innovating and/or making quality improvements that further differentiate its product from those of rivals
A) Decreasing price in order to steal sales from competitors Firms in oligopoly are reluctant to lower price for fear rivals will follow, perhaps even sparking a price war. So this would indeed be least likely to be an effective approach. **based on Kinked Demand Curve, when firms decrease price, other firms will match low prices**
A Dutch optics firm may sell 60 units at a price of EUR 15, or reduce the price to EUR 10 and sell 100 units. The marginal revenue per unit from reducing the price is closest to: A) EUR 2.5 B) EUR 100 C) EUR 1,000
A) EUR 2.5 Marginal revenue per unit is calculated as the change in total revenue divided by the change in quantity sold. Revenue 1 = 60 * 15 = 900 Revenue 2 = 100 * 10 = 1,000 Change in Revenue = 1,000 - 900 = 100 Change in Quantity Sold = 100 - 60 = 40 MR = 100 / 40 = 2.5
A firm has the following information about its cost structure at various production levels (values in EUR): Quantity ---> Total Fixed Cost ---> Total Variable Cost 0 -----------> 400 -----------------> 0 1 ------------> 400 -----------------> 200 2 ------------> 400 -----------------> 300 3 ------------> 400 -----------------> 400 4 ------------> 400 -----------------> 600 5 ------------> 400 -----------------> 900 When the firm increases production from three units to four units, the marginal cost is: A) EUR 200 B) EUR 800 C) EUR 1,000
A) EUR 200 Marginal cost is equal to the change in total cost divided by the change in quantity produced. In this example, total cost equals EUR 800 when three units are produced and EUR 1,000 when four units are produced, so the marginal cost of increasing production from three units to four units in EUR is (1,000 - 800) / 1 = EUR 200
A company is increasing size and output in order to lower costs. This kind of expansion is best described as utilizing: A) Economies of scale B) Economies of scope C) Competitive advantage
A) Economies of scale Economies of scale are when the firm has cost advantages due to size, output, and scale of operations.
An after school program hires an art teacher for EUR 100 per hour to teach a painting class. The teacher claims that he is comfortable teaching up to 10 kids. Students have to buy their own supplies. Before it reaches 10 students, this class is most likely experiencing: A) Economies to scale B) Diseconomies to scale C) Constant returns to scale
A) Economies to scale The EUR 100 is a fixed cost. Other costs, such as rent, promotion of the new class, and the director's time, are also fixed costs. Students have to buy their own supplies so the program does not have to worry about variable costs. The average total cost will decrease as there are more students, up to 10. It is economies to scale. **ATC goes down in Economies to Scale and ATC goes up with Diseconomies to Scale**
A firm in a perfectly competitive market can either produce 1,000 units and earn GBP 2,000 in revenue, or produce 1,200 units and earn GBP 2,400 in revenue. The marginal revenue per unit from the change in production is closest to: A) GBP 2 B) GBP 400 C) GBP 2,400
A) GBP 2 Remember in perfectly competitive markets the marginal revenue doesn't change based on output 2,000 / 1,000 = 2 as well as, 2,4000 / 1,200 = 2
Information about an aggregate consumption function for an economy is in the following table (in HKD): Consumption function ---- C = 40 + 0.8(Y - T) C --------------------------- aggregate consumption Y ---------------------------- aggregate income T ---------------------------- net taxes (Y - T) ----------------------- disposable income If disposable income decreases by HKD 100 because of an increase in taxes, aggregate saving will decrease by: A) HKD 20 B) HKD 80 C) HKD 100
A) HKD 20 From the aggregate consumption function, the marginal propensity to consumption (MPC) is 0.8. A decrease in disposable income by HKD 100 would decrease consumption by 0.8(100)=HKD 800 Since marginal propensity to save (MPS) is MPS = (1 − MPC) = 0.2 the reduction in disposable income of HKD 100 would cause a decrease in aggregate saving of 0.2(100) = HKD 20
Which of the following goods will experience an income effect that counteracts the substitution effect of a decrease in quantity purchased in response to an increase in its own price? A) Inferior good B) Normal good C) Veblen good
A) Inferior good With an increase in its own price, an inferior good's income effect will cause quantity purchased to increase. This counteracts the substitution effect, which causes quantity purchased to decrease. **Think Giffen good**
The network effect is largely responsible for the creation of a certain monopoly. It is most likely that this monopoly firm has: A) Loyal customers B) Zero marginal costs C) A large fixed cost of production
A) Loyal customers A firm that obtains a natural monopoly through a network effect is able to build a customer base that is likely connected, and so finds it difficult or impractical to move en masse to a new producer or split among multiple producers. This is often the case for social media providers.
The total cost curve (TC) of a firm in a perfectly competitive industry is TC = 10Q^2 + 8Q + 40 and the marginal cost curve (MC) is MC = 20Q + 8 In the long run, this firm is most likely to leave the industry if: A) P = MC = 28 B) P = MC = 48 C) P = MC = 88
A) P = MC = 28 To solve this question, you'll need to focus on the breakeven point. If P = MC = 28, then Q = 1 and TC = 58. The average total cost is TC / Q = ATC = 58. Since P = MC < ATC, the firm's total revenue is 1 × 28 = 28, which is less than its total cost of 1 × 58 = 58, and is earning an economic loss. However, since the average variable cost for this firm is AVC= 10 × 1 + 8 = 18, which is less than its MC = 28, the firm is above its short-run shutdown point. This firm will stay in the industry in the short run, but will leave the industry in the long run unless it can earn a normal profit.
A firm uses both unskilled and skilled labor. Markets for labor and output are perfectly competitive. The following information is provided regarding both types of labor (in HKD): Labor -------> Marginal Revenue ---> Wage Unskilled ---> 150 --------------------> 100 Skilled ------> 300 -------------------> 150 Which type of labor will most likely contribute more to profit when expanding output? A) Skilled labor B) Unskilled labor C) Skilled and Unskilled contribute equally to profit
A) Skilled labor Use marginal revenue divided wage to see skilled has higher ratio Unskilled = MR/wage = 150 / 100 = 1.5 Skilled = MR/wage = 300 / 150 = 2.0
Under imperfect competition, what would most accurately represent the breakeven point for the company? A) Total Revenue = Total Cost B) Average Revenue < Average Cost C) Marginal Revenue = Marginal Cost
A) Total Revenue = Total Cost Even under imperfect competition, the breakeven point is still where total revenue is equal to the total costs for a profit of zero.
A firm's total revenue in a month is USD 100,000. It has to pay USD 80,000 in wages and USD 10,000 for its building and equipment. The CEO had to quit a job that paid him USD 10,000 a month to build this firm. What is most likely to be his economic profit? A) USD 0 B) USD 10,000 C) USD 20,000
A) USD 0 Economic profit is the difference between total revenue and total cost, which includes both explicit cost and implicit cost. The explicit cost is USD 90,000 and the implicit cost is USD 10,000. Therefore, the total revenue and total cost are equal and the economic profit is 0. **Note accounting profit would be USD 10,000**
Consumption spending = 890 billion Wages and salaries = 775 billion Gross investment = 500 billion Corporate profits = 175 billion Government spending = 380 billion Transfer payments = 150 billion Exports = 560 billion Imports = 725 billion Capital consumption allowance = 75 billion Implicit price deflator = 117 Which of these is the closest to the real GDP for this country in base-year dollars? A) 1,371 B) 1,530 C) 1,695
A) USD 1,371 billion GDP = consumption + gross investment + government spending + net exports. 890 + 500 + 380 + (560 −725) = 1,605 *Note transfer payments included in govt. spending* To put this in base-year terms, divide by the deflator. (1,605/117)*100 = 1,371
In the long run, a perfectly competitive firm's economic profit will be: A) Zero B) Positive C) Negative
A) Zero Economic profit takes into account all explicit and implicit opportunity costs. If a firm were to earn zero economic profit, it would be able to cover all of its explicit and opportunity costs and stay in business in the long run without attracting additional competition, which would drive profits down further.
For a firm in an imperfectly competitive market, total revenue is most likely to be at a maximum when marginal revenue is: A) Zero B) Positive C) Negative
A) Zero Total revenue is calculated as price times quantity, and since a firm in an imperfectly competitive market faces a downward-sloping demand curve, the price per unit falls as the quantity rises. Total revenue initially rises as output rises, but at a decreasing rate. This indicates that marginal revenue, the change in total revenue as output rises by one unit, is falling. When marginal revenue is equal to zero, total revenue remains constant when output rises. This occurs where total revenue is at its maximum. **No more revenue when every unit added increases revenue by 0**
In the long run, if a firm in a perfectly competitive industry faces a price below the breakeven point, the firm will most likely choose to: A) exit the market B) stay in the market and incur losses C) raise the price to the breakeven point
A) exit the market The breakeven point of production is the quantity where price, average revenue, and marginal revenue equal average total cost. At this point, profit is zero, and total revenue equals total costs. In the short run, a firm will stay in business as long as it can cover its variable costs, even if it makes a loss, but in the long run, if a firm's revenue cannot cover its total costs, the firm will cease operations and exit the market. **perfectly competitive industry price is also dictated by the market**
The law of diminishing returns is most likely to occur because of: A) fixed resources B) rising marginal product C) specialization and the division of labor
A) fixed resources Marginal product, or marginal return, is the addition to total product from adding another unit of one input, holding all other inputs constant. Initially, a firm can experience rising marginal product, or increasing returns, because of specialization and the division of labor. However, diminishing marginal returns, when marginal product falls as successive workers are added, will eventually occur. This is because the other inputs, including plant size, physical capital, and technology, are held constant, and these fixed inputs prevent the added workers from being as productive as the earlier workers.
A producer decides to raise its price of goods by 10% and immediately loses 80% of sales. It is most accurate to state that this producer: A) has market power B) is not a monopolist C) does not have market power
A) has market power The fact that the producer did not lose all sales following a price increase indicates that the producer indeed has market power. This producer may or may not be a monopolist; it's impossible to state with any confidence.
For a manufacturing firm, the inputs most likely to be held constant in the short run are: A) machinery and factories B) managerial staff and machinery C) factories and production workers
A) machinery and factories Technology, physical capital, and plant size are the inputs most likely to be held constant in defining the short run. Machinery is part of the firm's physical capital, and factories determine the firm's plant size.
The profit maximizing rule for oligopolies is best described as: A) the level of output where MR = MC B) the level of output where all firms have positive profit C) the level of output where the dominant firm has a positive profit
A) the level of output where MR = MC The equilibrium price is determined by the demand curve, while the quantity is determined by the marginal cost/marginal revenue relationship
The breakeven point of production for a perfectly competitive firm is most likely to occur when total revenue equals: A) total cost B) variable cost C) fixed cost
A) total cost The breakeven point of production is the quantity at which profit is zero, so total revenue must equal total cost.
In a given year, only three companies comprised the population of wholesale clubs operating in a given country. Their profits as a percentage of revenues are as follows 1 = 0.9 2 = 1.6 3 = 3.5 The variance of profits as a percentage of revenues is closest to: A) 1.10 B) 1.21 C) 1.81
B) 1.21 **Note it is a population not sample** **Therefore divide by n instead of n-1** **u = population mean** **x-hat = sample mean** u = 2 ((0.9 - 2)^2 + ... + (3.5 - 2)^2) / 3 = 3.62 / 3 = 1.21
If a dataset has a standard deviation of 50.4 and a mean of 34.8, its coefficient of variation is: A) 0.69 B) 1.45 C) 3.23
B) 1.45 The coefficient of variation is the standard deviation divided by the mean, which in this case is CV = s/x-hat = 50.4/34.8 = 1.45
Suppose car sales fall by 1 million units when unemployment increases by 1%, and by 20,000 units when gas prices rise by USD 0.01. These effects of unemployment and gas prices are independent. If unemployment falls from 5% to 4%, gas prices from USD 2.50/gallon to USD 2.00/gallon, and car sales were 10 million units, they will most likely rise to: A) 11 million units B) 12 million units C) 20 million units
B) 12 million units A 1% fall in the unemployment rate will increase the quantity demanded of cars by 1 million. A 50 cent fall in the price of gasoline will increase the quantity demanded of cars by another 1 million. Total quantity demanded will therefore rise from 10 million to 12 million units.
2009 = 18% 2010 = -6% 2011 = 16% 2012 = 2% 2013 = -9% 2014 = 22% The sample standard deviation is closest to: A) 12.1% B) 13.2% C) 175.4%
B) 13.2% Find sample mean (X-hat) = 7.17 Find sample variance = ((18 - 7.17)^2 + .... + (22 - 7.17)^2) / (6 - 1) = 175.37 Find sample std dev = sqrt(175.37) = 13.24%
Each fall, a farmer hires temporary workers to pick apples. The following table shows the amount of apples picked each hour and the numbers of workers hired. # = apples 5 = 200 10 = 600 15 = 960 20 = 1,100 Productivity of labor is most likely maximized when how many workers are hired? A) 5 B) 15 C) 20
B) 15 Productivity of labor is the total output divided by total labor input. Here, it is equal to the amount of apples picked each hour divided by the number of workers. # = apples ----> productivity per/worker 5 = 200 ----> 40 10 = 600 ----> 60 15 = 960 ----> 64 20 = 1,100 ----> 55 When 15 workers are hired, each worker can pick 64 apples on average, which is the most productive.
The following table shows Jian's Jackets' cost functions. Jian has to buy a new sewing machine for every three workers and each worker can make around 10 jackets per day. N____ TVC ___ TFC 10 ___ 400 ___ 600 20___ 600___ 600 30___ 1100___ 600 40___ 1600___ 900 50___ 1800___ 900 60___ 2300___ 900 A diseconomy of scale most likely occurs when he produces how many jackets? A) 30 B) 40 C) 50
B) 40 N____ TVC ___ TFC ---> ATC 10 ___ 400 ___ 600 ---> 100 20___ 600___ 600 ---> 60 30___ 1100___ 600 ---> 56.6 40___ 1600___ 900 ---> 62.5 50___ 1800___ 900 ---> 54 60___ 2300___ 900 ---> 53.3 Note the increase from 30 to 40
Which of the following is most likely to increase an individual's marginal propensity to consume? A) A large, one time cash bonus B) A decrease in income following a job loss C) A decrease in an employer's pension contribution
B) A decrease in income following a job loss The marginal propensity to consume tends to be higher for people with lower income, as they spend a greater proportion of their disposable income. Thus, following a significant reduction of disposable income due to a job loss, a person will not be able to reduce consumption accordingly. Thus, there is likely to be a higher marginal propensity to consume.
So a breakeven point is a level of production which causes profit to be zero. Thinking about the cost curves of a company, what would price have to be equal to in order for profit to be zero? A) AFC B) ATC C) AVC
B) ATC If price is the same as total costs, then profit per unit is zero. The firm is breaking even. **Breakeven point is price at Average Total Cost**
Compared with other firms, a supplier of a good that is considered a natural monopoly is most likely to have: A) Above average start-up costs, and above average marginal costs B) Above average start-up costs, and below average marginal costs C) Below average start-up costs, and above average marginal costs
B) Above average start-up costs, and below average marginal costs The relatively high start-up costs associated with natural monopolies provide a necessary barrier to entry for new firms. Very low marginal costs then allow the producer to expand production quickly, undercutting any rival firms considering the investment of the start-up costs needed to compete.
Information about the aggregate consumption functions of Countries A and B is given in the following table (in EUR): Country A ----- C = 100 + 0.9(Y - T) Country B ----- C = 100 + 0.75(Y-T) C --------------- aggregate consumption Y --------------- aggregate income T --------------- net taxes (Y - T): --------- disposable income If income increases by EUR 10 in Country A with no change in taxes, and taxes decrease by EUR 10 in Country B with no change in income, which of the following can you conclude? A) Both countries A and B will have the same change in consumption B) Country's A consumption increase will be greater than Country's B increase C) Country's B consumption will decrease and Country's A consumption will increase
B) Country's A consumption increase will be greater than Country's B increase The increase in income of EUR 10 and the decrease in net taxes of EUR 10 both result in the same increase of EUR 10 in disposable income. Country A has a larger marginal propensity to consume, and its change in consumption will be 0.9 × 10 = EUR 9 Country B's change in consumption will be 0.75 × 10 = EUR 7.5 The increase in consumption is greater in Country A
A monopolistically competitive firm currently has marginal cost equal to USD 10 per unit and marginal revenue equal to USD 8 per unit. Which of the following describes what the firm should do? A) Increase production B) Decrease production C) Keep the production the same
B) Decrease production Each additional unit would cost more than it would make in revenue
A firm hires five workers so that they can make 10 goods per day. If it hires another worker, and the marginal product of the sixth worker is 1 good, the productivity has: A) Increased B) Decreased C) Remain unchanged
B) Decreased MP = 10/5 = 2 then, decreased: MP = 11/6 = 1.83
A business owner obtained the following accounting data in EUR for the year: Total revenue = 500,000 Supplies = 10,000 Rent and utilities = 100,000 Employee salaries = 200,000 Owner's salary = 80,000 The owner currently has an offer to become the manager of another business for EUR 120,000 per year. The owner's economic profit for the year is closest to: A) EUR -10,000 B) EUR 70,000 C) EUR 110,000
B) EUR 70,000 Economic profit = Revenue = 500,000 Total economic cost = acct. cost + opportunity cost acct. cost = 10,000 + 100,000 + 200,000 = 390,000 opportunity cost = 120,000 - 80,000 = 40,000 Economic profit = total revenue - total economic cost EP = 500,000 - 390,000 - 40,000 = 70,000
The following shows revenue and cost data for a firm that operates under the market structure of imperfect competition. ____P____Q____TR____TC____MR____MC $100____0____$0____$60____$0____$0 $90____1____$90____$85____$90____$25 $80____2____$160____$97____$70____$12 $70____3____$210____$110____$50____$13 $60____4____$240____$138____$30____$28 $50____5____$250____$190____$10____$52 The quantity that most likely maximizes profit is closest to: A) Two units B) Four units C) Five Units
B) Four units Profit maximization occurs at four units, where MR of $30 exceeds MC of $28, which yields a profit contribution of $2—the difference between profit at three units and profit at four units. At three units, profit is TR - TC = $210 - $110 = $100 and at four units profit is $240 - $138 = $102 However, at five units, MR of $10 is less than the MC of $52, resulting in a loss of $42 and a reduction in profit from $102 to $60.
Which of the following is most likely included in the calculation of GDP in the expenditure approach? A) Household Income B) Government Spending C) Government Borrowing
B) Government Spending **expenditure approach combines consumption, investment, govt. expenditure and net exports** **GDP = c+ i + g + (x - m)** **net exports or (x - m) is exports - imports
A Giffen good is: A) Substitution effect is larger than income effect B) Income effect is larger than substitution effect C) Income and substitution effect cancel out
B) Income effect is larger than substitution effect A Giffen good is a low income, non-luxury product for which demand increases as the price increases and vice versa. A Giffen good has an upward-sloping demand curve which is contrary to the fundamental laws of demand which are based on a downward sloping demand curve. **Giffen goods are highly inferior goods for which the income effect is stronger than the substitution effect**
Suppose a company that builds solar panels incurs fixed costs of USD 100,000 per month, opportunity costs of USD 1,000 per unit, and manufacturing costs of USD 2,000 per unit at 500 units per month. If the average total cost (ATC) is USD 3,000 at an output of 600 units, which of the following best describes the situation? A) Constant returns to scale B) Increasing returns to scale C) Decreasing returns to scale
B) Increasing returns to scale ATC at 500 units: 3,200 ATC at 600 units: 3,000 Since the cost per unit decreases to USD 3,000 at a higher level of output (600 units), the company has increasing returns to scale. As average cost goes down, you make more profit. **Increasing returns to scale is when the output increases in a greater proportion than the increase in input** **Decreasing returns to scale is when all production variables are increased by a certain percentage resulting in a less-than-proportional increase in output**
Imagine you are running a factory. You have 10 stations of work, and 5 employees. Each employee tries to cover 2, moving back and forth when there's a backlog of work at one of them. Then you hire 5 more workers. Now each worker has their own station to take care of. Assuming no one moved slower what would happen to output when the staff is doubled? A) It is doubled B) It is more than doubled C) No change in output
B) It is more than doubled This situation is known as increasing marginal returns. Each time you hired one of those last 5 employees, you had more people who could remain at a certain station, saving time, and becoming more specialized and faster at that task. That allows workers to be more productive. Another way of saying this is that marginal product, or the productivity of each additional resource (employee in this case), rises. **Increasing Marginal Returns results in higher efficiency, while diminishing marginal returns results in lower efficiency with addition of more units than needed** **Productivity is the total output divided by the amount of an input being used to produce that output**
Company P used to be the only electricity provider in a metropolitan area. Due to a recent deregulation, households can now buy electricity from several other providers with price match strategies. What will most likely happen to the demand for Company P's product? A) It will have a parallel shift in B) It will become a kinked demand curve C) It will become a horizontal demand curve
B) It will become a kinked demand curve The market used to be a monopoly market and now it is an oligopoly market. There are only a few firms and they have price match strategies. In such a market, the demand for a single firm's product is a kinked demand curve. Consumers are much more sensitive when a firm raises its price than when it lowers its price.
What is the optimal output for monopolistically competitive firms? A) MR > MC B) MR = MC C) MR < MC
B) MR = MC **In fact, all firms, regardless of market structure, find their optimal output by determining where marginal revenue equals marginal cost.**
An imperfect competitor chooses a quantity where: A) MR > MC B) MR = MC C) MR < MC
B) MR = MC in order to maximize profits, an imperfect competitor chooses a quantity where MR=MC, and then goes up to the demand curve to choose price **Under imperfect competition, firms face downward-sloping demand and therefore have some ability to affect price with their output decision. Marginal revenue is below price for imperfect competitors, and profit maximization occurs at the production level where MR = MC.**
A perfectly-competitive firm that is operating at the optimal firm size in the long run is most likely to have achieved: A) Economies of scale B) Minimum efficient scale C) Diseconomies of scale
B) Minimum efficient scale The minimum point on a firm's long-run average cost curve is called the minimum efficient scale. Since this point represents the lowest cost that a perfectly-competitive firm can achieve in the long run, producing at this point indicates that a firm is operating at the optimal firm size.
A firm that differentiates its products through advertising but earns zero profit in the long run is most likely to operate in what type of industry? A) Perfect competition B) Monopolistic competition C) Oligopoly
B) Monopolistic competition Firms in monopolistically competitive industries differentiate their products through advertising. In monopolistic competition, there are low barriers to entry. This allows any short-run profits to be competed away by entry in the long run. **Perfectly competitive firms do earn zero profit in the long run, but products are not differentiated**
A firm competes in a market where there are several competitors, but through marketing it is able to differentiate its product somewhat to gain a relatively small amount of market power. There are few barriers to entry, and competition is significant. Which market structure does this describe? A) Oligopoly B) Monopolistic competition C) Perfect competition
B) Monopolistic competition Several competitors with differentiated products, along with a little market power and significant competition, indicates monopolistic competition.
A firm would like to aggressively upgrade its research and development operations in order to develop new ideas and cut product costs. If successful, the price of its products is most likely to fall in the short run under which market type? A) Perfect competition B) Monopolistic competition C) Oligopoly where there is price independence
B) Monopolistic competition The firm would face an elastic demand curve in monopolistic competition and would gain a disproportionate amount of market share from lower prices. It would likely "pass on" a portion of the cost savings to the consumer in the form of a lower price and increase revenue from the greater market share.
A monopolist operates in a market where the government regulated the price at a level below what the monopolist wanted to charge, but still above what would be the market equilibrium. The regulated price most likely: A) Created a deadweight loss B) Reduced the deadweight loss C) Increased the deadweight loss
B) Reduced the deadweight loss
Which of these is a feature of the mean absolute deviation (MAD)? A) It is a measure of central tendency B) The MAD grows larger as dispersion increases C) The sum of deviations about the mean will equal zero
B) The MAD grows larger as dispersion increases This is true since the absolute value of the dispersions about the mean will be larger for data that is more dispersed and further from the mean.
A firm is operating at the minimum efficient scale point in a perfectly competitive market. Which of the following statements is most likely to be true? A) The firm is earning a positive economic profit B) The firm has the lowest possible average cost C) The firm will experience economies of scale by increasing production
B) The firm has the lowest possible average cost The minimum efficient scale point is the lowest point on the firm's long-run average cost curve, so at this point, the firm has the lowest possible average cost.
Which of the following best describes a monopolist's marginal revenue curve in relation to the market demand? A) It is equal to the demand curve B) The marginal revenue curve is below the demand curve C) The marginal revenue curve is above the demand curve
B) The marginal revenue curve is below the demand curve The monopolist has a marginal revenue curve that is different from its demand curve.
Account | Nominal Amount Consumption spending = 890 Wages and salaries = 775 Proprietors income = 75 Corporate profits = 175 Interest income = 50 Net business transfer payments = 20 Rental income = 100 Imports = 725 Capital consumption allowance = 75 Inventory valuation adjustment = 20 Indirect taxes minus subsidies = 90 Statistical discrepancy = 17 The implicit price deflator is 117.0. The real GDP for this country in base-year dollars is closest to: A) USD 1,100 billion B) USD 1,176 billion C) USD 1,377 billion
B) USD 1,176 billion Using the income approach, GDP equals the sum of wages and salaries, corporate profits, interest income, proprietors' income, rent, inventory adjustment, indirect business taxes, capital consumption allowance, and statistical discrepancy, minus subsidies. 775 + 175 + 50 + 75 + 100 + 20 + 90 + 75 + 17 = 1,377 To put this in base-year terms, divide by the deflator. (1,377/117) * 100 = 1,176
A firm's total revenue in a month is USD 150,000. It has to pay USD 80,000 in employee wages and USD 10,000 for its building and equipment. The manager's salary is an additional USD 20,000. If the owners were to shut down the firm and use the resources devoted here in other markets, they could earn USD 20,000 a month. What is most likely to be the firm's accounting profit? A) USD 20,000 B) USD 40,000 C) USD 60,000
B) USD 40,000 Accounting profit is equal to the total revenue minus explicit costs. The explicit costs are the sum of wages, cost of building and equipment, and the manager's salary. Therefore, total revenue minus explicit cost is USD 40,000. **Note economic profit is 20,000 while accounting profit is explicit cost associated with business**
Which of the following isn't likely to stimulate aggregate consumption? A) a tax cut B) a decline in stock prices C) a surge in customer confidence
B) a decline in stock prices The fall in stock prices would constitute a fall in wealth, which would probably reduce consumption.
A country with a trade deficit is successful in reducing its government deficit. Using the national income identity, most likely there will be: A) an Increase in the capital inflow B) a decrease in the capital inflow C) an Increase in capital account surplus
B) a decrease in the capital inflow From the national income identity, a reduction in the government deficit increases national savings, and this decreases the trade deficit. A decrease in the trade deficit reduces the need to borrow from foreign countries to finance the trade deficit. The reduction in the foreign borrowing decreases capital inflow.
A firm can sell 10 units and earn EUR 1,000 in total revenue, or sell 11 units and earn EUR 1,100 in total revenue. The firm is probably: A) a monopolistic firm B) a perfectly competitive firm C) an imperfectly competitive firm
B) a perfectly competitive firm 1,000/10 = 100 1,100/11 = 100 Any additional unit increase doesn't change marginal revenue despite output produced **Marginal Revenue equals price change for perfectly competitive market**
All else being equal, when the price of a Giffen good decreases, the quantity purchased will most likely: A) increase B) decrease C) remain the same
B) decrease The income effect will decrease the quantity purchased of a Giffen good while the substitution effect will have a positive impact on the quantity purchased. The income effect dominates the substitution effect for a Giffen good, so there would be a net decrease in the quantity purchased. **Think public college example where as price decrease consumers will choose to consume less (inferior good) and instead pay more for private school (normal good)**
All else equal, as income increases, the average propensity to consume most likely: A) increases B) decreases C) stays the same
B) decreases The average propensity to consume (APC) is defined as the ratio of consumption to income. C/Y -----> (aggregate consumption/aggregate income) So as Y increases, the APC decreases. This is an important prediction of traditional consumption theory.
The key determinants of a manufacturing firm's short-run average total cost curve are most likely: A) factories and workers B) factories and machinery C) machinery and raw materials
B) factories and machinery Factories determine the firm's plant size, and machinery is part of the firm's physical capital stock. Both of these are held constant in the short run and are key determinants of the short-run average total cost curve.
The long-run total costs (in CAD) for three firms are given in the following table: N___ A _____ B _____ C 1 ___ 60 ___ 11 _____ 20 2 ___ 70 __ 24 ___ 40 3 ___ 81 __ 39 ____ 60 4 ___ 92 __ 56 ____ 80 5 ___ 100 __ 75 ___ 100 The firm which experiences diseconomies of scale is most likely: A) firm A B) firm B C) firm C
B) firm B The long-run average total costs for this firm, which is the long-run total costs divided by the quantity of output, increase with output. This is shown in the table below. Thus, this firm experiences diseconomies of scale.
A firm producing sweatshirts has the following data on worker productivity. Quantity of labor = Total product 0 = 0 1 = 20 2 = 48 3 = 72 4 = 80 Marginal product exceeds average product for this firm if the number of workers is closest to what number? A) one B) two C) three
B) two Marginal product is the change in total product when one more unit of an input is added, while average product is total product divided by the total number of units of the input that produced the output. For the second worker, marginal product is 28 sweatshirts produced (the difference between 48 sweatshirts with two workers and 20 sweatshirts with one worker), while average product is 24 sweatshirts produced (48 sweatshirts divided by two workers). Marginal product therefore exceeds average product when the number of workers is equal to two. **average product = total product / labor input** 0 = 0 1 = 20 ---> MP = 20 and AP = 20 2 = 48 ---> MP = 28 and AP = 24 (WINNER) 3 = 72 ---> MP = 24 and AP = 24 4 = 80 ---> MP = 4 and AP = 4
An analyst wants to compute the mean absolute deviation for a company and collects a sample of annual returns for the past five years. 1 = 20% 2 = -7% 3 = 29% 4 = -8% 5 = 6% The mean absolute deviation is closest to: A) 0% B) 8% C) 13%
C) 13% Find arithmetic mean = 5.4% (abs(20 - 5.4) + ... + abs(6 - 5.4))/5 = 12.92 = 13%
Consider the following data. Year 1 = 30% Year 2 = -10% Year 3 = 16% The mean absolute deviation of the returns for the three year period is closest to: A) 8% B) 11% C) 15%
C) 15% First, calculate arithmetic mean: AM = (30-10+16)/3 = 12% Then, use the formula for mean absolute deviation or MAD = sum abs(X minus X-hat) / n: (abs(30 - 12) + ... + abs(16 - 12)) / 3 = 44/3 = 14.66% = 15%
Consider the following table: Consumption = 16 Capital Consumption Allowance = 2.5 Government Spending = 3.4 Imports = 1.9 Gross Private Domestic Investment = 5.1 Exports = 2.1 Based only on the data given, the gross domestic product is: A) 27.2 B) 29.1 C) 24.7
C) 24.7 GDP is consumption plus gross private domestic investment plus government spending plus export minus import. Capital Consumption Allowance included in Consumption GDP = 16 + 5.1 + 3.4 + 2.1 − 1.9 = 24.7
While examining historical total returns on a bond market index, an analyst computes the following measures: Mean Return = 0.05 Median Return = 0.045 Variance of Returns = 0.04 The coefficient of variation of historical returns on this bond market index is closest to: A) 0.8 B) 0.9 C) 4.0
C) 4.0 **Remember to square variance to get std dev** X-hat = 0.05 s = sqrt(0.04) = 0.20 CV = s / X-hat = 0.20/0.05 = 4.00
An individual earns a gross income of USD 155,000 and saves USD 20,000. If the average tax rate is 35%, the average propensity to consume is closest to: A) 13% B) 20% C) 52%
C) 52% The individual's disposable income is 155,000 × (1 − 0.35) = 100,750 Savings is USD 20,000. Thus, the consumption is 100,750 − 20,000 = 80,750 **APC = consumption over disposable income** Average propensity to consume is (C/Y) = (80,750/100,750) = 0.52 = 52%
The value of final goods and services for country Y increased from $1.5 trillion to $2.8 trillion over a four-year span. Over that time period, the GDP deflator increased from 100 to 107.3. Over the four-year span, Country Y's real GDP most likely increased by: A) 7% B) 43% C) 73%
C) 73% Real GDP in Year 0 was: 1.5/1.0 = 1.5 And in Year 4, it was: 2.8/1.073 = 2.6 So: (2.6 - 1.5) / 1.5 = 73.3% **GDP deflator is nominal over real so we must solve for real GDP then find %change**
A firm's annual returns for the past seven years are as follows: 1 = 0% 2 = 19% 3 = -11% 4 = 14% 5 = 4% 6 = 7% 7 = 23% The firm's mean absolute deviation is closest to: A) 0% B) 8% C) 9%
C) 9% First, find arithmetic mean = 8% Then, calculate MAD (abs(0 - 8) + ... + abs(23 - 8))/7 = 64/7 = 9.1429 = 9% **Note that mean deviation will always equal 0** **So, mean absolute deviation gives average distance between each data point and the mean**
Which of the following is not a difference between national income and personal income? A) Transfer payments B) Undistributed corporate profits C) Capital consumption allowance
C) Capital consumption allowance The capital consumption allowance is an estimate of the wear and tear on corporate assets that is not a component of either national income or personal income, so it is not a difference between them. It is a difference between GDP and national income.
The market for cellphones and plans was fragmented with many competing carriers offering differentiated products 10 years ago. Today, it is concentrating into one dominated by four large carriers, which have a high degree of interdependence. What impact will this most likely have on consumers? A) Phones will be sold in fewer locations B) There will be more product innovation and a greater variety of phones C) Competitors will match price decreases more readily than price increases
C) Competitors will match price decreases more readily than price increases The market structure is shifting from monopolistic competition to an oligopoly. The interdependent oligopolist is assumed to ignore price increases to pick up market share and match price cuts so as not to lose market share.
The feature most likely instrumental in distinguishing a natural monopoly from other monopolies is: A) A highly differentiated product B) The existence of a single seller C) Extraordinarily high fixed start-up costs
C) Extraordinarily high fixed start-up costs The immense startup costs for some industries makes the existence of a second entrant unreasonable; this combined with a relatively low marginal cost often produces a natural monopoly.
A clothing manufacturer has a choice of four plant sizes over the long run, each with its own individual short-run average total cost curve. What is the curve that defines the lowest per-unit cost for each quantity best referred to as? A) Marginal cost curve B) Long-run supply curve C) Long-run average total cost curve
C) Long-run average total cost curve The long-run average total cost curve is constructed by connecting all the least-cost short-run average total cost curve segments for each possible quantity.
For an imperfect competitor, profit is most likely to be maximized where: A) Total revenue is maximized B) Marginal revenue equals zero C) Marginal revenue equals marginal cost
C) Marginal revenue equals marginal cost For all firms, profit is maximized where the difference between total revenue and total costs is the greatest, or where marginal revenue equals marginal cost **Basically, when one more unit results in the same increase in revenue as cost ---> continued unit increases would lead to MC growing faster than MR**
A market has these characteristics: many sellers, differentiated product, low barriers to entry, and some pricing power. What kind of market structure does it fall under? A) Oligopoly B) Perfect Competition C) Monopolistic Competition
C) Monopolistic Competition
Do you think a firm in a perfectly competitive industry can earn economic profits in the long run? A) Yes, if the price is high enough B) Yes, if a firm has unusually low costs C) No, economic profits will keep attracting new entrants to the industry until the zero-profit condition applies
C) No, economic profits will keep attracting new entrants to the industry until the zero-profit condition applies In the long run, firms in perfectly competitive industries can neither earn economic profits nor suffer economic losses. Another way to put this is that economic profits and losses in competitive industries are not sustainable. When economic profits are occurring, new firms are attracted to the industry. When economic losses are occurring, firms exit the industry. Either way, there is a tendency back to an equilibrium, in which firms earn the normal rate of profit.
Which three pricing strategies are most likely to be used by participating firms in a non-colluding market? A) Pricing dependence, the Cournot assumption, and the Nash Equilibrium B) Pricing independence, collective agreement, and the Nash Equilibrium C) Pricing independence, the Cournot assumption, and the Nash Equilibrium
C) Pricing independence, the Cournot assumption, and the Nash Equilibrium These are the most common pricing strategies used in a non-colluding oligopoly market. **The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each attempts to maximize profits by choosing how much to produce. All firms choose output (quantity) simultaneously.** **The Nash Equilibrium, firms choose based on not knowing what their rival will do, so make the choice that will benefit them irregardless**
Which of the following best describes the average total cost of a monopolistically competitive firm in the long run? A) The average total cost will be lower than the marginal cost B) The average total cost will tend to be rising as new firms enter and compete for resources C) The average total cost in the long-run equilibrium will be higher than the minimum average total cost
C) The average total cost in the long-run equilibrium will be higher than the minimum average total cost In the long run, the price will be at the point where the demand curve is tangent to the average total cost curve, which is at a point to the left and above the minimum average total cost. **Average total cost is higher than minimum to account for advertising and other differentiation expenses**
The following table shows a college graduate's consumption of a good and its prices before and after college graduation: Price --- Q before grad ---- Q after grad ___________________________________________________________ | 4 | --- | 5 | ----- | 5 | | 2 | --- | 8 | ----- | 6 | ___________________________________________________________ If the substitution effect from the fall in the price is a two-unit increase in the quantity demanded before and after graduation, which of the following is most accurate? A) The income effect of the change in the price is the same before and after college graduation B) The good was a normal good before college graduation and a giffen good after college graduation C) The good was a normal good before college graduation and and an inferior good after college graduation
C) The good was a normal good before college graduation and and an inferior good after college graduation Before college graduation, the fall in the price resulted in an increase in the quantity demanded from five to eight, or an increase of three units. The substitution effect accounted for two of the three units increase while the income effect accounted for the remaining one unit increase. In this case, the good is a normal good because the income effect is positive. After college graduation, the same fall in the price resulted in only a one-unit increase in the quantity demanded from five to six. Since the substitution effect increases the quantity demanded by two units, the income effect must be a negative one unit. Thus, the good is an inferior good after college graduation because it has a negative income effect. **Note above mention of negative income effect**
When a firm in a monopolistically competitive market successfully advertises its product, which of the following is least likely to happen? A) The average cost curve goes up B) The profit maximizing output goes up C) The price elasticity of demand goes up
C) The price elasticity of demand goes up The purpose of advertising is to let customers believe that its product is significantly different from, or better than, other products. Customers should be more loyal to the product. The price elasticity of demand should go down.
A manufacturing firm has the following information on its total product of labor: Labor = Total Product 0 = 0 1 = 40 2 = 100 3 = 150 4 = 190 5 = 210 6 = 220 The firm's marginal cost of labor is most likely to begin to rise once the firm hires how many workers? A) One B) Two C) Three
C) Three Marginal cost is the mirror image of marginal product, so the marginal cost of labor rises when marginal product of labor falls. The firm's marginal product is equal to 40 for the first worker, rises to 60 for the second worker, and falls to 50 for the third worker. Since marginal product begins to fall for the third worker, this must be where marginal cost of labor begins to rise. 0 = 0 ---> 0 1 = 40 ---> 40 2 = 100 ---> 60 3 = 150 ---> 50 4 = 190 ---> 40 5 = 210 ---> 20 6 = 220 ---> 10 **Marginal cost of labor rises as difference in total product goes down**
The average propensity to consume (APC) in the United States is about 0.70, while in Italy it is about 0.58, and in Japan about 0.56. In which country would a tax cut of a given amount cause the largest increase in consumption? A) Italy B) Japan C) United States
C) United States The APC is often used in empirical work as a proxy for the marginal propensity to consume (MPC). A tax cut would have the largest effect on the economy with the largest MPC—in this case, the United States.
A firm has the following fixed and variable costs (amounts in USD): Quantity ---> Total fixed cost ---> Total variable cost 0 -----------> 1,000 --------------> 0 1 ------------> 1,000 --------------> 1,500 2 ------------> 1,000 -------------> 2,500 3 ------------> 1,000 -------------> 4,500 4 ------------> 1,000 -------------> 7,000 5 ------------> 1,000 -------------> 10,000 The level of output at which average fixed cost is minimized is: A) one B) two C) five
C) five Average fixed cost is total fixed cost divided by quantity. Since total fixed cost does not change as quantity increases, average fixed cost always decreases with increasing output. Therefore, the highest production level given in this example, five units, must have the lowest average fixed cost.
Store 1 and Store 2 are both located in a local mall. Because of the recent recession, Store 1 decides to close down immediately, while Store 2 stays open until its lease expires in one year and then it closes. This is because Store 1: A) is earning normal profit, and store 2 is earning economic profit B) is operating above its shutdown point but below its breakeven point, while store 2 is operating above its breakeven point C) has total revenue less than its total variable cost, and store 2 has total revenue above its total variable costs but below its total costs
C) has total revenue less than its total variable cost, and store 2 has total revenue above its total variable costs but below its total costs Store 1 shuts down immediately because it cannot earn enough total revenue to pay for its total variable costs. Store 2 is earning enough total revenue to cover its total variable costs but not enough to cover its total costs, which include fixed costs like the cost of its lease. Store 2 stays open because its lease is a sunk cost in the short run, but becomes a variable cost when it expires and has to be renegotiated. Store 2 shuts down and does not renegotiate a new lease because its total revenue cannot be expected to cover its total costs with the new lease.
A Veblen good: A) is a good that has no demand curve B) is a good that supply is controlled C) is a good that demand increases as price increases
C) is a good that demand increases as price increases A Veblen good is a type of luxury good for which the demand for a good increases as the price increases, in apparent contradiction of the law of demand, resulting in an upward-sloping demand curve. **The "snob good" that demand decreases as price drops**
The nature of the demand curve facing firms in oligopoly is: A) highly elastic B) highly inelastic C) largely undefined
C) largely undefined The effect of a change in price on demand will depend on the unknown pricing retaliation of rival firms, so a firm does not know how much it can sell at various prices. **This is due to the high pricing power**
Marginal price is always ________ than the price for imperfect competitors? A) more B) the same C) less
C) less An imperfect competitor (can control price more) faces a downward-sloping demand curve, so must reduce the price to sell more. **Total revenue may rise or fall as output increases, but marginal revenue will always be less than the price for an imperfect competitor** **Conversely, a perfect competitor can sell more without reducing the price, so total revenue always rises as output increases ---> marginal revenue is equal to the price for perfect competitor**
GDP = $14,500 Capital consumption allowance = $1,800 Statistical discrepancy = $100 Retained earnings = $900 Corporate income taxes = $500 Indirect business taxes = $550 Transfer payments = $1,400 Personal taxes = $650 Which of the following is personal disposable income closest to? A) $ 11,400 B) $ 11,950 C) $ 13,850
A) $ 11,400 Personal disposable income = (PI - PT) personal income − personal taxes To calculate personal income, first calculate national income. National income = $14,500 − $1,800 − $100 = $12,600 Next, calculate personal income. Personal income= $12,600 - ($900 + $500 + $550) + $1,400 = $12,050 Finally, Personal disposable income = $12,050 − $650 = $11,400
