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# Cfa Level I Ss5 2005 Ll - tài liệu luyện ôn thi chứng chỉ CFA

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### Cfa Level I Ss5 2005 Ll - tài liệu luyện ôn thi chứng chỉ CFA

1. 1. Bản Tin Sớm www.bantinsom.com CFA Level I - Study Session 5 1. A. “Demand and Consumer Choice”, including addendum “Consumer Choice and Indifference Curves” The candidate should be able to: a. explain consumer choice in an economic framework; Principles behind Consumer Choice i) Limited income versus unlimited desires necessitates choices. ii)Consumers make rational choices to achieve their goals. iii)Consumers can substitute between “like” goods. iv)Consumers make decisions based on less than perfect information. v)Law of Diminishing Marginal Utility: As consumption of a good increases, the additional utility derived eventually declines. Consumer Behavior in making Choices • Consumer will adjust consumption of a good until the marginal utility of consuming the good just equals the price of the good. Consumer Demand Curve: • Diminishing Marginal Utility implies that as the price of a good rises, the amount demanded by the consumer should fall. • Income & a substitution effect associated with change in price. b. calculate and interpret price and income elasticity of demand; c. discuss the determinants of price and income elasticity of demand; Price Elasticity of Demand = %∆Qd ÷ %∆P where %∆Qd = (Qd1 – Qd0)/[(Qd1 + Qd0)/2], etc. • Is always NEGATIVE: o Increase in price %∆P > will always reduce quantity demanded %∆Qd < 0. • Shows degree of consumer responsive to variations in good’s price. • Elasticity affected by: i) Availability of Substitutes, ii)Share of Total Budget spent on Good, and iii)Length of Time period. Income Elasticity of Demand = %∆Qd ÷ %∆Income • Shows degree of consumer responsive to variations in income. i) Normal Goods: positive income elasticity, demand rises with income. ii)Luxuries: high positive elasticity, demand rises strongly with income. iii)Inferior Goods: negative income elasticity, demand falls with income. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 1 of 23
2. 2. Bản Tin Sớm www.bantinsom.com d. describe the relationships among total revenue, total expenditures, and price elasticity of demand; %∆expenditures ≅ %∆price + %∆quantity Inelastic Demand: when elasticity of demand is less than one in absolute value, a 10% fall in price increases quantity demanded by less than 10%. Thus total expenditure by consumers, and total revenue received by firms, falls. Elastic Demand: when elasticity of demand is greater than one in absolute value, a 10% fall in price increases quantity demanded by more than 10%. Thus total expenditure by consumers, and total revenue received by firms, rises. e. explain why price elasticity of demand tends to increase in the long run. Second Law of Demand: buyers’ response will be greater after they have had time to adjust more fully to a price change. Why? • Better able to rearrange consumption patterns to take advantage of substitutes f. discuss the characteristics of consumer indifference curves. i) More goods are preferable to fewer goods, thus points to upper right preferred to points in lower left of utility curve diagram. ii) Goods are substitutable, hence utility curves slope downward to the right. iii) Diminishing marginal rate of substitution between goods implies utility curves always convex to origin. iv) Indifference curves are everywhere dense, i.e. one through every point. v) Indifference curves cannot cross because if they did then individual would not be following a rational ordering. g. discuss the role of the consumption opportunity constraint and the budget constraint in indifference analysis. Consumption opportunity constraint: separates consumption bundles that are attainable from those that are unattainable. • In money-income economy, usually same as budget constraint. Budget constraint: separates consumption bundles that consumer can purchase from those that cannot be purchased, given the consumer’s limited income and the market prices of the products involved. • Consumer’s choice determined by the point at which their highest indifference curve touches the budget (or consumption opportunity) constraint. • This point yields highest level of utility for given level of income and market prices. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 2 of 23
3. 3. Bản Tin Sớm www.bantinsom.com h. distinguish between the income effect and the substitution effect. Income & Substitution Effects 1. At original prices, Consumer chooses point A. 2. Price of Good X falls, Budget line rotates out. Good Y 3. Consumer moves to Point C. Can break move into two parts. 4. Income effect is move from A to B. Prices same, but reach higher utility assoc. with C. 5. Substitution effect is move from B to C. Prices B change, but stay on same utility curve. A C U1 U0 Good X 1. B. “Costs and the Supply of Goods” The candidate should be able to: a. describe the principal–agent problem of the firm; Principal-Agent Problem • Incentives of principal (purchaser of service) and agent (seller of service) can diverge if principal cannot observe agent’s performance. • Agent will pursue own goals, which may only partially overlap with the goals of the principal who has purchased the agent’s services. b. distinguish among the types of business firms; Proprietorship: Business owned by an individual who possesses the ownership rights to the firm’s profits and is personally liable for the firm’s debts. Partnership: Business owned by two or more individuals who possesses the ownership rights to the firm’s profits and is personally liable for the firm’s debts. Corporation: Business owned by shareholders who have the ownership rights to the firm’s profits but whose liability is limited to the amount of their initial investment in the firm. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 3 of 23
4. 4. Bản Tin Sớm www.bantinsom.com c. distinguish between (1) explicit costs and implicit costs, (2) economic profit and accounting profit, and (3) the short run and the long run in production; Explicit Costs: Payments by a firm to purchase productive resources. Implicit Costs: Opportunity costs of a firm’s use of resources that it owns. These costs do not involve direct payments. Economic Profit: Difference between firms’ total revenue & total cost. Accounting Profit: Firm revenue minus expenses over given time period. Does not take implicit costs into account. Short-Run in Production: Time period short enough so not all factors of production can be adjusted. Typically plant size fixed. Long-Run In Production: Time period long enough so all factors of production can be adjusted. d. differentiate between economic costs and accounting costs; Accounting Costs: Payments by a firm to purchase productive resources. Economic Costs: Opportunity costs of a firm’s use of resources that it owns. These costs do not always involve direct payments. e. define various types of costs, including opportunity costs, sunk costs, fixed costs, variable costs, marginal costs, & average costs; Total Fixed Costs, TFC: Sum of costs that do not vary with level of output. Total Variable Costs, TVC: Sum of costs that change with the level of output. Marginal Cost, MC: MC = ∆TC/∆q where TC = TFC + TVC Change in total cost required to produce an additional unit of output. Average Costs Average Fixed Cost: AFC = TFC/quantity produced Average Variable Cost: AVC = TVC/quantity produced Average Total Cost: ATC = AFC + AVC = TC/quantity produced Sunk Costs: Costs that have already been incurred as the result of past decisions. f. state the law of diminishing returns & explain its impact on a firm’s costs; Law of Diminishing Returns to a Factor of Production As more and more units of a variable input are combined with a fixed amount of another input, the additional units of the variable input will yield increased output at a decreasing rate. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 4 of 23
5. 5. Bản Tin Sớm www.bantinsom.com g. describe the shapes of the short-run marginal cost, average variable cost, average fixed cost, and average total cost curves; Once a firm reaches a level of output at which diminishing returns occur, larger and larger 1. additions of the variable factor are necessary to increase output by one more unit. 2. The result is that the MC of the additional output increases. So long as MC is below ATC, producing additional units of output will bring down the ATC curve. 3. At some point, however, MC will rise by enough to exceed ATC. After the point where MC = ATC, additional units of output will raise ATC causing the ATC curve to be U-shaped. Thus the MC curve will cut the ATC curve at its minimum point. Cost Curve Relationships Costs MC = ∆ TC ÷ ∆q ATC = AFC + AVC AVC = TVC ÷ q MC always cuts ATC and AVC at their minimum points! AFC = TFC ÷ q Quantity, q h. define economies and diseconomies of scale, explain how they each is possible, and relate each to the shape of a firm’s long-run average total cost curve; Economies of Scale: Reductions in firm’s per unit costs as all factors of production are increased in an optimal way. • Possible reasons: 1) Mass production, 2) specialization of factors of production, and 3) “learning by doing” scale economies. Diseconomies of Scale: Increases in firm’s per unit costs as all factors of production are increased in an optimal way. • Possible reasons: 1) coordination inefficiencies, 2) increasing difficulties in conveying information, and 3) increased principal-agent problems. Constant Returns to Scale: No change in firm’s per unit costs as all factors of production are increased in an optimal way. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 5 of 23
6. 6. Bản Tin Sớm www.bantinsom.com Economies and Diseconomies of Scale Costs Diseconomies of Scale Constant Returns to Scale Economies of Scale Quantity, q i. describe the factors that cause cost curves to shift. Factors that Cause Cost Curves to Shift i) Prices of Resources: Increase in price of resources used (inputs to production) will cause a firm’s cost curves to shift upwards. ii) Taxes: Increased taxes shift up a firm’s cost curves. Tax on variable input shifts MC, AVC, & ATC. Fixed tax shifts AFC & ATC. iii) Technology: Cost-reducing technological improvements will lower a firm’s cost curves. Which curves depend on whether technology affects fixed or variable costs. 1. C. “Price Takers and the Competitive Process” The candidate should be able to: a. distinguish between price takers and price searchers; Price-Takers: • Firms that take market price as given when selling their product. Each is small relative to market, cannot affect price. Price-Searchers: • Firms that face a downward-sloping demand curve for their product. Price charged by firm affects amount it sells. b. discuss the conditions that characterize a purely competitive (price taker) market; Purely Competitive Markets • Markets characterized by large number of small firms producing identical products in industry with complete freedom or entry/exit. • Also termed price-taker markets. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 6 of 23
7. 7. Bản Tin Sớm www.bantinsom.com c. explain how and why price takers maximize profits at the quantity for which marginal cost, price, and revenue are equal; Marginal Revenue of each unit of output sold = Market Price. • Price-taking firm sets output so Marginal Cost of last unit of output produced equals market price = marginal revenue. • If MR > MC then selling an additional unit adds to profit, should produce more. • If MR < MC then selling additional unit lowers profit, should produce less. Maximum profit when MR = P = MC of last unit produced and sold. d. calculate and interpret the total revenue and the marginal revenue for a price taker; For a price taker, total revenue is simply equal to the price in the market times the number of units of output sold. Marginal revenue, the change in total revenue/change in output, is constant for a price taker and equal to the market price of the product. e. explain the decision by price takers with economic losses to either continue to operate, shut down, or go out of business; A firm that is making losses, i.e. AC > P, will choose to continue to operate in the short-run so long as: 1. it can cover all its variable costs, and 2. it expects price to be high enough to cover its average cost in the future. In the short run, the firm must pay its fixed costs even if it shuts down. So long as price exceeds average cost, the firm will be able to pay part of its fixed costs. This strategy makes sense so long as the firm expects that at some point price will rise sufficiently to cover both its variable and fixed costs. If either of the conditions above do not hold, i.e. price is too low for the firm to cover its variable costs OR the firm does not expect price to be sufficient to cover average total cost in the future, then the firm should go out of business. f. describe the short-run supply curve for a firm and for a competitive market; SR Supply for Individual Firm • = Marginal Cost curve above AVC. SR Supply for Market • = horizontal sum of all the marginal cost curves of firms in the industry. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 7 of 23
8. 8. Bản Tin Sớm www.bantinsom.com g. contrast the role of constant cost, increasing-cost, and decreasing-cost industries in determining the shape of a long-run market supply curve. Long Run Supply Curve: • shows minimum price that firms will supply any level of market output, given sufficient time to adjust all factors of production & allow for any entry/exit from the industry. Economies of Scale determine Shape of LR Supply • Constant Returns to Scale (i.e. Constant cost) industry will have horizontal LR Supply Curve. • Increasing Returns to Scale (i.e. Declining cost) industry will have downward- sloping LR Supply Curve. • Decreasing Returns to Scale (i.e. Increasing cost) industry will have upward-sloping LR Supply Curve. h. explain the impact of time on the elasticity of supply. Elasticity of supply usually increases in long run as more time is allowed to firms to adjust production in response to changes in prices. Over time, firms can adjust the levels of all factors of production in optimal ways to meet changes in price. 1. D. “Price-Searcher Markets with Low Entry Barriers” The candidate should be able to: a. describe the conditions that characterize competitive price-searcher markets; Competitive Price-Searcher Markets • Each firm faces a downward-sloping demand curve for their output. • Firms produce differentiated products. Output of other firms close substitutes, so individual firm’s demand curve is highly elastic. • Low entry barriers allow entry or exit of firms if existing firms earn non-zero economic profits. Each firm faces competition from existing firms in industry & potential new entrants. b. explain how price searchers choose price and output combinations; Profit-maximizing Behavior for a Price Searcher • Sets output level so that Marginal Cost equal to Marginal Revenue. • For Price Searcher, Marginal Revenue is related to shape of the Demand Curve. • Intuition for two factors at work to sell additional unit of output. o Lower price, sell extra unit and receive additional revenue but o Receive lower price on all existing units also so lose some revenue o Marginal revenue no longer equals price. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 8 of 23
9. 9. Bản Tin Sớm www.bantinsom.com c. summarize the debate about the efficiency of price-searcher markets with low barriers to entry, including the concepts of contestable markets, entrepreneurship, allocative efficiency, and price discrimination; (PRO) In the long run, competition along with free entry and exit will drive prices down to level of average costs. • Contestable markets: market where costs of entry or exit are low, so firms risk little by entry. • Efficient production and zero economic profits should prevail. • Market can be contestable even if capital requirements for entry are high. (CON) LR equilibrium is not allocatively efficient, however, because firms produce less than the minimum ATC level of output. • Advertising in differentiated product markets may be wasteful & self-defeating. • Benefits of dynamic competition improves customer choices of quality and convenience versus trade-off of higher prices. d. explain how price discrimination increases output and reduces allocative inefficiency; Price discrimination occurs when a producer charges different consumers different prices for the same product. • Requires supplier able to identify and separate at least two groups with different price elasticities, and • Prevent those buying at low price from reselling to higher priced customers. • Segmentation of groups with different price elasticities allows suppliers to charge different prices to each, possibly resulting in higher profits than with single price. On balance, output in industry higher with price discrimination than without. Moves industry output closer to competitive output level associated with allocative efficiency. 1. E. “Price-Searcher Markets with High Entry Barriers” The candidate should be able to: a. discuss entry barriers that protect some firms against competition from potential market entrants; • Economies of Scale: Large fixed costs mean decreasing per unit costs. • Government Licensing: Legal barriers to entry established by gov’t. • Patents: Property rights given to newly invented products or processes. • Control over an Essential Resource: Single firm has control over an essential resource or technology. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 9 of 23
10. 10. Bản Tin Sớm www.bantinsom.com b. differentiate between a monopoly and an oligopoly; Monopoly is a market characterized by: • Single seller of a well-defined product with no good substitutes. • High barriers to entry of any other firms into market for the product. Oligopoly is a market characterized by: • Small number of rival firms in industry. • Interdependence among sellers as each is large relative to market. • Substantial economies of scale in production of the good. • High barriers to entry firms into market. c. describe how a profit-maximizing monopolist sets prices and determines output; Profit-maximizing Behavior for a Monopolist • Sets output level so that Marginal Cost equal to Marginal Revenue. • Marginal Revenue is related to shape of the Demand Curve. Intuition for two factors at work to sell additional unit of output. Profit-Maximizing Monopolist Cost, C and Price, p MC = Supply pMonop MR Curve pComp Demand Quantity, q qMonop qComp d. discuss price and output under oligopoly, with and without collusion; Collusion: Under collusion, i.e. acting as a cartel, oligopolists can coordinate supply decisions to maximize the joint profits of all the firms. The cartel essentially acts like a monopolist in market, setting higher price and lower output in order to generate positive economic profits. Without Collusion: Once the collusion by the cartel has established the monopoly price in the market, each member of the cartel has an incentive to cheat by increasing their own supply at the high price to increase its share of profits in the market. Thus without collusion, the oligopolists end up SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 10 of 23
11. 11. Bản Tin Sớm www.bantinsom.com competing with one another on prices, driving the market outcome to that associated with perfect competition, where price is lower, output is higher, and all firms earn zero economic profits. e. discuss why oligopolists have a strong incentive to collude and to cheat on collusive agreements; By colluding, i.e. acting as a cartel, oligopolists can coordinate supply decisions to maximize the joint profits of all the firms. Cartel seeks to create a monopoly in market that results in higher prices and positive economic profits. Once the collusion by the cartel has established the monopoly price in the market, however, each member of the cartel has an incentive to cheat by increasing their own supply at the high price to increase its share of profits in the market. f. discuss the obstacles to collusion among oligopolistic firms; Incentive for any firm to cheat on cartel agreement to increase its profits. Obstacles to success of collusion: • Increase in number of firms making up oligolpoly. • If price cuts by individual firms difficult to detect & prevent. • Low barriers to entry. Successful collusion induces new entrants. • Unstable demand conditions lower likelihood collusion successful. • Vigorous antitrust actions increase cost of collusion. g. describe government policy alternatives that are intended to reduce the problems stemming from high barriers to entry. i) Restructure existing firm or firms to stimulate competition. • May not be possible if economies of scale form barrier. Natural monopoly occurs if declining per unit costs of large range of output. ii)Reduce Artificial Barriers to Trade • If few firms dominate domestic market, may get increased competition by encouraging foreign firms to supply market. iii)Regulate the Dominant Producer(s) • Government may regulate price charged by monopolist or oligopolists in the market to achieve more efficient outcomes. o Average Cost Pricing: set output so ATC = Demand Curve o Marginal Cost Pricing: set output so MC = Demand Curve iv)Supply Market with Government Production • Particularly appropriate for public goods. Concerns about efficiency. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 11 of 23
12. 12. Bản Tin Sớm www.bantinsom.com F. “The Supply of and Demand for Productive Resources” *** All New for 2003 The candidate should be able to a. explain the relationship between the price of a resource and the quantity demanded of that resource; The demand for a resource is a “derived” demand, in that the demand for the resource arises indirectly from the demand for goods that that resource helps to produce. As the price of a resource rises, producers using that resource respond in two ways: i) they substitute towards other resources that are less expensive; and ii) they pass on the higher price of the resource as higher prices and reduced quantities of the goods being produced using the resource. Both of these responses produce an inverse relationship between the price of the resources and the quantity of the resource demanded, i.e. its demand curve is downward-sloping. b. identify and describe the influence of three factors that cause shifts in the demand curve for a resource; The three factors that cause shifts in the demand curve for a resource are: i) A change in the demand for a product will cause a similar change in the demand for the resource used in the production of that product: ii) Changes in the productivity of the resource will alter the demand for that resource. An increase in the productivity of a resource will increase its demand because this makes the resource cheaper per unit of output it produces. iii) Changes in the price of a related resource will alter the demand for the original resource. A rise in the price of a related resource that is complementary in production to the original resource will cause the demand for the original resource to fall. A rise in the price of a related resource that is a substitute in production to the original resource will cause the demand for the original resource to rise. c. define the marginal revenue product of a resource and explain how it influences the demand for that resource; Marginal Revenue Product (MRP) of a resource is equal to its marginal product times the selling price of the product that it helps to produce. The marginal product of a resource is equal to the additional units of the good produced by using one additional unit of the resource as an input in production. A profit-maximizing firm will increase their use of the resource as long as the marginal cost (MC) of the additional unit of the resource is less than the resource’s marginal revenue product. Profit is maximized when the level of the resource is such that its marginal cost is equal to its marginal revenue product. i.e. MRP = MC SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 12 of 23
13. 13. Bản Tin Sớm www.bantinsom.com d. explain the necessary conditions to achieve the cost-minimizing employment levels for two or more variable resources; A profit-maximizing firm with two or more variable resources will set the level of utilization of each resource so that the MRP of that resource is just equal to its Marginal Cost. MRPj = MCj = Price of Resource j per unit for each resource j = 1, 2, 3, … For each resource, its MRP is the price of the final good (P) times the Marginal Product of that resource for the output of the final good (MPj). MPj =P MRP = P x MPj = MCj = Price of Resource j per unit or Price of Resource j This is true for each resource used in producing the final good so the cost-minimizing condition can be summarized as: MP3 MP MP2 = = =K = P 1 Price of Resource 1 Price of Resource 2 Price of Resource 3 e. discuss the factors that influence the supply and demand of resources in the short run and long run; In the short-run: Supply: Many resources tend to be fixed in amount or relatively immobile across markets. This leads to a short-run supply curve that is inelastic, i.e. steeply sloping upwards, as owners of resources demand higher prices in the face of increased short-run demand. Demand: Adjusting the production process to changes in resource prices is difficult in the short-run, thus the short-run demand for resources is also likely to be inelastic, i.e. steeply sloping downwards. In the long-run: Supply: Investment, exploration and depreciation allows for greater changes in the amount of resources available. Thus the long-run supply curve tends to be more elastic, i.e. less steeply sloped upwards, than the short-run supply curve for the resource. Demand: Adjusting the production process to changes in resource prices is easier in the long- run, thus the long-run demand for resources is also likely to be more elastic, i.e. less steeply sloped downwards than short run demand. f. explain how prices for resources are determined in a market economy; In a market economy the equilibrium price of a resource is the level that equilibrates demand and supply. If there is an excess supply of the resource at a given market price, then the unemployed resources will place downward pressure on the market price, bringing demand and supply back into equilibrium. SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 13 of 23
14. 14. Bản Tin Sớm www.bantinsom.com g. explain the process through which changing resource prices influence resource utilization and the performance of the economic system. Changes in the price of a resource influence the behavior of both its users and its suppliers. When the price of a resource rises, users will search for ways to economize on the use of the resource and they may also switch to resources that are substitutes in the production process. Higher prices will lead suppliers of the resource to look for ways to increase the supply of the resource through additional investment and exploration. It is likely new supply will take some period of time to reach the market. 2. “The Financial Environment: Markets, Institutions, and Interest Rates” *** All New for 2004 The candidate should be able to a. identify and explain the factors that influence the supply and demand for capital; Supply of Capital from savers in the economy is influenced by the following factors: - Time Preferences for consumption: high rate of time preference indicate that current consumption is highly valued relative to future consumption. This leads to a lower supply of capital from savers. - Risk: Higher levels of risk in lending mean less capital will be supplied for any given rate of return. - Inflation: Higher expected inflation leads savers to require higher rates of return to offset the effects of inflation on the purchasing power of money. Demand for Capital is influenced by the following factors: - Production Opportunities: The more productive the projects financed by the borrowed savings, the higher the rate of return borrowers will be willing to pay to secure the financing. b. describe the role of interest rates in allocating capital; Firms with the more profitable projects to finance will bid away capital from firms with less profitable projects. Thus interest rates in capital markets ensure that scarce capital made available by savers finances the most profitable projects in the economy. c. explain how the supply of and demand for funds determine interest rates; Interest rates are the rental price of capital determined by demand and supply in the capital markets. The interest rate for each type of security is determined by the intersection of demand and supply in each market. At this point the supply of capital from savers in each market is just equal to the demand for capital from firms in each market. d. discuss the factors that cause the supply and demand curves for funds to shift; Supply and demand curves in a capital market shift if with changes in any of the fundamental factors in LOS 2.1.a. Thus an increase in time preference will reduce the supply of saving (and capital) to the market. Similarly, and increase in the profitability of projects in the economy as a whole will increase the demand for capital, shifting the demand curve outwards. Capital markets are also interdependent, thus a change in demand or supply in one market is likely to spill over into affecting demand or supply in related capital markets. A rise in demand in the market for one type of security raises the interest rate in that market. The higher return will lead some savers SASF CFA® Review 2005 Level I – SS 5 – Macroeconomics Page 14 of 23