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FACULTAD DE CIENCIAS EMPRESARIALES Y ECONÓMICAS PERÍODO ACADÉMICO: 2020-1 DOCENTE RESPONSABLE: ENRIQUE MANUEL OCHOA GARCÍA, CFA

GESTIÓN DE INVERSIONES I PRIMERA PRÁCTICA CALIFICADA SOLUCIONARIO Question 1 - #97160 Which of the following situations is least likely to lead to high barriers to entry and monopoly supply? A) Natural resources are spread among many firms. B) Economies of scale are present. C) Governmental licensing and regulations are present. Your answer: A was correct! All cases except wide distribution of a natural resource facilitate a monopoly. If natural resource ownership is concentrated in one firm a monopoly would result. This question tested from Session 4, Reading 16, LOS a.

Question 2 - #96795 Which of the following most accurately describes the relationship between the slope of a firm’s long-run average total cost (LRATC) curve and scale economies? Downward sloping segment of LRATC

Upward sloping segment of LRATC

A) Diseconomies of scale

Economies of scale

B) Economies of scale

Economies of scale

C) Economies of scale

Diseconomies of scale

Your answer: A was incorrect. The correct answer was C) Economies of scale Diseconomies of scale The downward sloping segment of the LRATC cost curve covers the output range where economies of scale exist because per unit costs decrease as output increases. The upward sloping segment of the LRATC curve is where diseconomies of scale are present because costs rise as output increases. This question tested from Session 4, Reading 15, LOS i.

Question 3 - #96624 When demand for a good is inelastic, a higher price will: A) fail to reduce the quantity demanded for the good.

B) lead to an increase in total expenditures for the good. C) have no impact on the demand for the good. Your answer: A was incorrect. The correct answer was B) lead to an increase in total expenditures for the good. When demand is relatively inelastic, consumers do not reduce their quantity demanded very much when the price increases. That is, a given percentage increase in price results in a smaller percentage reduction in quantity demanded. Thus, total expenditures on the good increase. "Fail to reduce the quantity demanded for the good" is inaccurate because that would only be true if demand was perfectly inelastic. This question tested from Session 4, Reading 13, LOS l.

Question 4 - #97046 Consider the following statements: Statement 1: “The sum of consumer and producer surpluses is maximized under both monopoly and perfect competition.” Statement 2: “All else being equal, a monopolist that practices price discrimination will be more allocatively efficient than a single-price monopolist.” With respect to these statements: A) both of these statements are accurate. B) neither of these statements is accurate. C) only one of these statements is accurate. Your answer: A was incorrect. The correct answer was C) only one of these statements is accurate. Statement 1 is incorrect because the sum of consumer and producer surpluses is maximized under perfect competition when marginal benefit and marginal cost are equal, or equivalently, where the marginal cost curve intersects the demand curve. Monopolies, however, produce a quantity that is less than the quantity where marginal cost equals marginal benefit, so the sum of producer and consumer surpluses is not maximized. This question tested from Session 4, Reading 16, LOS a.

Question 5 - #97062 A shop foreman determines that an employee would produce two more units of output if he worked one additional hour. The product currently sells for $15.00 per unit and the firm is a price taker. Which of the following choices most accurately describes the relationship between the marginal revenue (MR) and marginal revenue product (MRP) from the additional hour of labor input? A) MR = $15 and MRP < MR. B) MRP > MR. C) MRP = MR. Your answer: A was incorrect. The correct answer was B) MRP > MR.

By definition, the MR is the addition to total revenue from selling one more unit of output. The MRP is the revenue from selling the marginal product, which in this example is two units. Therefore the MRP must be greater than the MR. This question tested from Session 4, Reading 15, LOS k.

Question 6 - #97009 An attempt by that oligopolists to act with another firm in setting a higher price is called: A) prisoner's dilemma. B) high economic profits. C) collusion. Your answer: A was incorrect. The correct answer was C) collusion. Collusion is when firms organize into an association to increase profits by controlling prices and output. Collusion can take place when an industry has a small number of competitors and high barriers to entry. This question tested from Session 4, Reading 16, LOS d.

Question 7 - #96827 A firm has the following characteristics:   

relatively small in size. marginal revenue is equal to the selling price. economic profits will not be earned for any significant period of time.

The firm is best described as existing in a(n): A) purely competitive market. B) price searcher market. C) monopolistic market structure. Your answer: A was correct! The firm being described is a price taker firm in a purely competitive market. These firms must sell their product at the going market price, there are no barriers to entry, and there are a large number of firms that produce a homogeneous product. This question tested from Session 4, Reading 16, LOS h.

Question 8 - #97022 A practice whereby a seller charges different prices to different consumers of the same product or service is called: A) price competition. B) price discrimination. C) discriminatory pricing. Your answer: A was incorrect. The correct answer was B) price discrimination.

Price discrimination is the practice of charging different consumers different prices for the same product or service. This question tested from Session 4, Reading 16, LOS d.

Question 9 - #96763 Which of the following conditions is most likely to exist for a typical production process when average product is at its maximum? A) Marginal product is increasing. B) Average variable cost is at a minimum. C) Marginal cost is at a minimum. Your answer: A was incorrect. The correct answer was B) Average variable cost is at a minimum. When average product is at a maximum, average variable cost is at a minimum. At the corresponding labor and output level, marginal product is decreasing and marginal cost is increasing. This question tested from Session 4, Reading 15, LOS l.

Question 10 - #97434 The demand curves faced by monopolistic competitors is: A) not sensitive to price due to absence of close substitutes. B) inelastic due to the availability of many complementary goods. C) elastic due to the availability of many close substitutes. Your answer: A was incorrect. The correct answer was C) elastic due to the availability of many close substitutes. The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products. This question tested from Session 4, Reading 16, LOS a.

Question 11 - #140361 The market for labor is best described as a: A) factor market. B) goods market. C) services market. Your answer: A was correct! While some part of the labor market is dedicated to providing services, labor is generally viewed as a factor of production. This question tested from Session 4, Reading 13, LOS a.

Question 12 - #96907 A competitive firm will tend to expand its output as long as marginal: A) revenue is greater than the average cost. B) revenue is greater than marginal cost. C) cost is less than average cost. Your answer: A was incorrect. The correct answer was B) revenue is greater than marginal cost. All firms will continue to expand production until marginal revenue = marginal cost. This question tested from Session 4, Reading 16, LOS b.

Question 13 - #96740 For a linear demand curve, at the price where elasticity is -2.0, reducing prices will: A) increase total revenue and we are at the point of maximum total revenue. B) increase total revenue and we are not at the point of maximum total revenue. C) decrease total revenue and we are not at the point of maximum total revenue. Your answer: A was incorrect. The correct answer was B) increase total revenue and we are not at the point of maximum total revenue. If the price elasticity of demand is -2.0, this indicates that the percentage change in quantity demanded is twice the percentage change in price. Thus, a decrease in price will be more than offset by the increase in quantity, and total revenue will increase. We are not at the point of maximum total revenue which is where elasticity is -1.0—the point of unit elastic demand. This question tested from Session 4, Reading 13, LOS l.

Question 14 - #147056 Frequent changes in advertised prices are one of the costs of: A) expected inflation only. B) unexpected inflation only. C) both expected and unexpected inflation. Your answer: A was incorrect. The correct answer was C) both expected and unexpected inflation. Inflation imposes "menu costs" on an economy as businesses must frequently change their advertised prices, regardless of whether inflation is expected or unexpected. This question tested from Session 5, Reading 19, LOS g.

Question 15 - #98213 Which of the following is the most accurate definition of the velocity of money? The velocity of money is the:

A) GDP of a country divided by its money supply. B) GDP of a country divided by its price level. C) money supply of a country divided by its price level. Your answer: A was correct! Velocity is the average number of times per year each dollar is used to buy goods and services (velocity = nominal GDP / money). Therefore, the money supply multiplied by velocity must equal nominal GDP. The equation of exchange must hold with velocity defined in this way. Letting money supply = M, velocity = V, price = P, and real output = Y, the equation of exchange may be symbolically expressed as: MV = PY. This question tested from Session 5, Reading 19, LOS c.

Question 16 - #96501 When comparing a barter economy with an economy that uses money as a medium of exchange we would expect increased efficiencies due to a reduction in which of the following? A) The need to specialize. B) Transaction costs. C) Nominal interest rates. Your answer: A was incorrect. The correct answer was B) Transaction costs. Money functions as a medium of exchange because it is accepted as payment for goods and services. Compare this to a barter economy, where if I have goat and want an ox, I have to find someone willing to trade. Finding someone takes time and time is costly. With money, I can sell the goat and buy the ox. Thus, transaction costs are reduced. Having money as a medium of exchange would not reduce the inflation rate, interest rates, or the need to specialize in the production of those goods in which we have a comparative advantage (low opportunity cost producer). This question tested from Session 5, Reading 19, LOS b.

Question 17 - #96519 Which of the following statements regarding U.S. Federal Reserve open market operations is least accurate? A) If the Fed wants to stimulate the economy, it will sell Treasury securities to banks. When the Fed buys Treasury securities, short-term interest rates will generally B) decrease. C) When the Fed sells Treasury securities, excess reserves decrease. Your answer: A was correct! If the Fed intends to stimulate the economy, they will buy, not sell, Treasury securities. Buying Treasury securities injects reserves into the banking system. This question tested from Session 5, Reading 19, LOS h.

Question 18 - #140404

Because some input prices do not adjust rapidly to changes in the price level, the short-run aggregate supply curve: A) exhibits a negative relationship between quantity supplied and the price level. B) is more elastic than the long-run aggregate supply curve. C) may be interpreted as representing the economy’s potential output. Your answer: A was incorrect. The correct answer was B) is more elastic than the long-run aggregate supply curve. The short-run aggregate supply curve slopes upward (i.e., is not perfectly inelastic) because in the short run some input prices do not adjust fully to changes in the price level. Because firms can increase profit in the short run by increasing output in response to higher prices, there is a positive short-run relationship between the price level and quantity supplied. This question tested from Session 5, Reading 17, LOS g.

Question 19 - #97677 Which of the following statements regarding the monetary policy transmission mechanism is most accurate? Central banks can control long-term interest rates directly because decisions by consumers and businesses are based on these rates. Central banks can control short-term interest rates directly, but long-term interest B) rates are beyond their control. Central banks can control short-term interest rates by increasing the money supply C) to increase interest rates or by decreasing the money supply to decrease interest rates. Your answer: A was incorrect. The correct answer was B) Central banks can control short-term interest rates directly, but long-term interest rates are beyond their control. A)

Central banks can control short-term interest rates directly. However, the decisions of consumers and businesses are based on long-term interest rates, which are beyond the control of central banks. Increasing the money supply will decrease interest rates and decreasing the money supply will increase interest rates. This question tested from Session 5, Reading 19, LOS m.

Question 20 - #97540 If households are holding larger real money balances than they desire, which of the following is least likely? The interest rate is higher than its equilibrium rate in the market for real money balances. B) The opportunity cost of holding money balances will decrease. The central bank must sell securities to absorb the excess money supply and C) establish equilibrium. Your answer: A was incorrect. The correct answer was C) The central bank must sell securities to absorb the excess money supply and establish equilibrium. A)

If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their

undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank. This question tested from Session 5, Reading 19, LOS d.

Question 21 - #97525 When potential real GDP is less than actual real GDP, the economy is most likely experiencing: A) recession. B) inflation. C) underemployment. Your answer: A was incorrect. The correct answer was B) inflation. The economy is in an inflationary phase if actual real GDP is greater than potential real GDP. When actual real GDP equals potential real GDP, the economy is said to be at full employment. The economy is in a recessionary phase if real GDP is less than potential GDP. This question tested from Session 5, Reading 17, LOS j.

Question 22 - #97200 The current annual inflation rate, as measured by using the Consumer Price Index (CPI), is best defined as: A) percentage change in the CPI from its base period. B) percentage change in the CPI from a year ago. C) increase in the CPI from a year ago. Your answer: A was incorrect. The correct answer was B) percentage change in the CPI from a year ago. The inflation rate is the percentage change in the price index from a year earlier. This question tested from Session 5, Reading 18, LOS f.

Question 23 - #96518 Assume the U.S. economy is undergoing a recession. In its efforts to stimulate the economy by trying to influence short-term interest rates the Fed is most likely to take which two actions? A) Buy Treasury securities and decrease bank reserve requirements. B) Sell Treasury securities and increase bank reserve requirements. C) Sell Treasury securities and decrease bank reserve requirements. Your answer: A was correct! If the economy is in a recession, the Fed is likely to attempt to decrease short-term interest rates. Thus, the Fed will buy Treasury securities and decrease bank reserve requirements. This question tested from Session 5, Reading 19, LOS h.

Question 24 - #138321

A firm’s most likely initial response to a cyclical increase in the inventory-to-sales ratio is to adjust their utilization of labor by: A) adding new workers. B) reducing overtime. C) laying off employees. Your answer: A was incorrect. The correct answer was B) reducing overtime. As a cyclical indicator, an increase in the inventory-to-sales ratio is a sign of slowing economic growth. When decreasing their utilization of labor in response to a slowing economy, firms typically first reduce overtime. Firms tend to be slow to lay off workers until it is clear that an economic contraction is underway. This question tested from Session 5, Reading 18, LOS b.

Question 25 - #138377 The government budget deficit of Country M is increasing. At the same time, the government budget surplus of Country N is decreasing. Are the fiscal policies of these countries expansionary or contractionary? A) Both are contractionary. B) One is expansionary and one is contractionary. C) Both are expansionary. Your answer: A was incorrect. The correct answer was C) Both are expansionary. Expansionary fiscal policy increases a budget deficit or decreases a budget surplus. Contractionary fiscal policy decreases a budget deficit or increases a budget surplus. This question tested from Session 5, Reading 19, LOS r.

Question 26 - #97226 Silvano Jimenez, an analyst at Banco del Rey, is reviewing recent actions taken by the U.S. Federal Reserve (the Fed) in setting monetary policy. Recently, the Fed decided to increase the money supply, which has resulted in a decrease in real interest rates. At a staff meeting, Jimenez brings this matter to the attention of his colleagues and makes the following statements: Statement 1: Although the money supply increase has led to a decrease in real interest rates, we should begin to see U.S. investors decrease their investments abroad and the U.S. dollar will appreciate in the foreign exchange market. Statement 2: The Fed’s increase in the money supply will increase the amount of imports into the U.S. Are Statement 1 and Statement 2 as made by Jimenez CORRECT? Statement 1

Statement 2

A) Incorrect

Incorrect

B) Correct

Incorrect

C) Incorrect

Correct

Your answer: A was correct! If the Fed increases the money supply and real interest rates decline, U.S. investors will seek higher real rates of return abroad and the U.S. dollar will depreciate as the dollar will be exchanged for foreign currencies in order to buy the foreign investments. Likewise, the decrease in real interest rates will reduce the inflow of funds from abroad as foreign investors seek higher rates of return outside the U.S. With a dollar that has depreciated, U.S. exports should increase, as U.S. products will become cheaper for foreign buyers. As such, both statements are incorrect. This question tested from Session 5, Reading 19, LOS j.

Question 27 - #138253 Given the following quotes, GBP/USD 2.0000 and MXN/USD 8.0000, calculate the direct MXN/GBP spot cross exchange rate. A) 0.6250. B) 0.2500. C) 4.0000. Your answer: A was incorrect. The correct answer was C) 4.0000. Invert the first quote to read USD/GBP 0.5000. Then, 0.5000 × 8.0000 = 4.0000 MXN/GBP. This question tested from Session 6, Reading 21, LOS d.

Question 28 - #147081 Country G and Country H have currencies that trade freely and have markets for forward currency contracts. If Country G has an interest rate greater than that of Country H, the noarbitrage forward G/H exchange rate is: A) equal to the G/H spot rate. B) greater than the G/H spot rate. C) less than the G/H spot rate. Your answer: A was incorrect. The correct answer was B) greater than the G/H spot rate.

. If the interest rate in Country G is greater than the interest rate in Country H, the numerator is greater than the denominator on the right side of the equation. The left side must have the same relationship, so the forward rate must be greater than the spot rate. This question tested from Session 6, Reading 21, LOS f.

Question 29 - #143185 An exchange rate at which two parties agree to trade a specific amount of one currency for another a year from today is called a:

A) forward exchange rate. B) spot exchange rate. C) real exchange rate. Your answer: A was correct! A forward exchange rate specifies the amount of two currencies that will be exchanged at a specific point of time in the future. A transaction that uses the spot exchange rate is one that would occur immediately. A real exchange rate is one that has been adjusted for the relative inflation rates in two countries, and could be referring to an exchange rate that prevails at any given time. This question tested from Session 6, Reading 21, LOS a.

Question 30 - #89133 The following chart indicates the production possibilities of food and drink per day in Country A and Country B. Units of Output Per Day Country A

Country B

Food

4

8

Drink

6

7

Which of the following statements about the chart is most accurate? Since B workers can produce more of food and drink than A workers, no gains from trade are possible. Mutual gains could be realized from trade if A specialized in drink production and B B) specialized in the food production. Mutual gains could be realized from trade if A specialized in food production and B C) specialized in drink production. Your answer: A was incorrect. The correct answer was B) Mutual gains could be realized from trade if A specialized in drink production and B specialized in the food production. A)

Mutual gains could be realized from trade if A specialized in drink production and B specialized in food production. The reason centers on comparative advantage. Country A must give up 1.5 units of drink to produce one unit of food. Country B must give up 0.875 units of drink to produce one unit of food. Therefore, the opportunity cost of producing food is greater for A than for B. If B produces 8 units of food and A produces 6 units of drink, total production will be greater than it would be if both countries produced both goods. By trading, both countries benefit. This question tested from Session 6, Reading 20, LOS c.

Question 31 - #138379 If the AUD/CAD spot exchange rate is 0.9875 and 60-day forward points are −25, the 60-day AUD/CAD forward rate is closest to: A) 0.9900. B) 0.9850.

C) 0.9870. Your answer: A was incorrect. The correct answer was B) 0.9850. For an exchange rate quoted to four decimal places, forward points are expressed in units of 0.0001. The 60-day forward rate is 0.9850 + 0.0001(−25) = 0.9850. The CAD is trading at a 60day forward discount to the AUD. This question tested from Session 6, Reading 21, LOS e.

Question 32 - #138357 The form of regional trading agreement (RTA) least likely to have the unintended negative effect of reducing a member country’s low-cost imports from a non-member country is a: A) free trade area. B) common market. C) customs union. Your answer: A was correct! A free trade area removes barriers to trade among its members but does not require any of its members to change their trade policies with non-members. A common market and a customs union both impose uniformity on trade rules with non-member nations, which could restrict a member’s low-cost imports from a nation that is not a member. This question tested from Session 6, Reading 20, LOS f.

Question 33 - #89132 The primary benefits derived from tariffs usually accrue to: A) foreign producers of goods protected by tariffs. B) domestic producers of export goods. C) domestic suppliers of goods protected by tariffs. Your answer: A was incorrect. The correct answer was C) domestic suppliers of goods protected by tariffs. Tariffs raise domestic prices, benefiting domestic suppliers. This question tested from Session 6, Reading 20, LOS e.

Question 34 - #138256 If the spot exchange rate between the British pound and the U.S. dollar is GBP/USD 0.7775, and the spot exchange rate between the Canadian dollar and the British pound is CAD/GBP 1.8325, what is the USD/CAD spot cross exchange rate? A) 1.42477. B) 0.42428. C) 0.70186. Your answer: A was incorrect. The correct answer was C) 0.70186.

First, convert GBP/USD 0.7775 to 1/0.7775 = USD/GBP 1.28617. Then, divide USD/GBP 1.28617 by CAD/GBP 1.8325 = USD/CAD 0.70187. This question tested from Session 6, Reading 21, LOS d.

Question 35 - #138358 Sales and purchases of non-produced, non-financial assets are included in which of a country’s trade accounts? A) Capital account. B) Financial account. C) Current account. Your answer: A was correct! The capital account consists of sales and purchases of non-produced, non-financial assets plus capital transfers. This question tested from Session 6, Reading 20, LOS g.

Question 36 - #140423 Which of the following lists of trading blocs is most accurately ordered by degree of economic integration, from least to most integrated? A) Free trade area, common market, customs union. B) Customs union, economic union, monetary union. C) Free trade area, economic union, common market. Your answer: A was incorrect. The correct answer was B) Customs union, economic union, monetary union. The order by degree of economic integration (from least to most integrated) is as follows: free trade areas, customs union, common market, economic union, and monetary union. This question tested from Session 6, Reading 20, LOS f.

Question 37 - #89112 The table below outlines the possible tradeoffs of producing beer and cheese for Germany and Holland. Germany Cheese Beer

Holland Cheese Beer

0

10

0

6

5

0

4

0

Which of the following statements is most accurate? A) Both countries would gain if Germany traded cheese for Holland's beer.

Germany would not gain from trade, because it has an absolute advantage in the production of both goods. C) Both countries would gain if Germany traded beer for Holland's cheese. Your answer: A was incorrect. The correct answer was C) Both countries would gain if Germany traded beer for Holland's cheese. B)

Germany has an absolute advantage in both beer and cheese because it can produce more of both than Holland. The opportunity cost of producing beer is 5/10 = 0.5 in Germany and 4/6 = 0.67 in Holland. The opportunity cost of producing cheese is 10/5 = 2 in Germany and 6/4 = 1.5 in Holland. Holland has a comparative advantage in producing cheese and Germany has a comparative advantage in producing beer. Both countries gain if Germany trades beer for Holland's cheese. This question tested from Session 6, Reading 20, LOS c.

Question 38 - #147076 The sell side of the foreign exchange markets primarily consists of: A) multinational banks. B) retail investors. C) accounting firms. Your answer: A was correct! The sell side of foreign exchange markets is primarily large multinational banks. They are the primary dealers in currencies and originators of forward foreign exchange contracts. This question tested from Session 6, Reading 21, LOS b.

Question 39 - #138356 Which of the following statements about the costs and benefits of international trade is most accurate? A) The costs of trade are greater than the benefits with regard to domestic employment. B) Increased international trade benefits all groups in the trading countries. The costs of trade primarily affect those in domestic industries that compete with C) imports. Your answer: A was incorrect. The correct answer was C) The costs of trade primarily affect those in domestic industries that compete with imports. The benefits of trade are greater than the costs for the overall economy, but those in domestic industries competing with imports may suffer costs in the form of reduced profits or employment. This question tested from Session 6, Reading 20, LOS b.

Question 40 - #147082 If the current spot exchange rate for quotes of JPY/GBP is greater than the no-arbitrage 3month forward exchange rate, the 3-month GBP interest rate is: A) equal to the 3-month JPY interest rate.

B) greater than the 3-month JPY interest rate. C) less than the 3-month JPY interest rate. Your answer: A was incorrect. The correct answer was B) greater than the 3-month JPY interest rate.

. If the no-arbitrage forward JPY/GBP rate is less than the spot rate, the interest rate for JPY must be less than the interest rate for GBP. This question tested from Session 6, Reading 21, LOS f.