- CFA Exams
- CFA Level I Exam
- Topic 2. Economics
- Learning Module 1. The Firm and Market Structures
- Subject 1. Supply Analysis: Cost, Marginal Return, and Productivity
CFA Practice Question
Which of the following factors is not an explanation of the positive relationship between market price and quantity supplied?
II. As all firms in an industry hire more factors of production, the prices paid for them often increase.
III. For most firms, unit costs decrease as output increases in the long run.
IV. As price increases, some less efficient firms will enter the market.
I. The law of diminishing returns makes it more costly for firms to expand output quickly.
II. As all firms in an industry hire more factors of production, the prices paid for them often increase.
III. For most firms, unit costs decrease as output increases in the long run.
IV. As price increases, some less efficient firms will enter the market.
A. III and IV
B. I and II
C. III only
Explanation: If unit costs decreased as output increased, this would imply that firms would allow prices to fall as they expanded output. Under an increasing cost industry, the firm requires a higher price in order to expand output because its costs increase. This explains the positive relationship between price and level of output.
User Contributed Comments 5
| User | Comment |
|---|---|
| Dancho | What about IV? |
| sbajaj | Firms will not be willing to produce more if prices fall with an increase in supply. |
| steved333 | IV is a valid explanation for a positive relationship. If price increases, then others are going to want a piece of it, so other firms (albeit new and less efficient) will enter the market, as well. The question asks which is NOT, so it's III. |
| emongeca7 | good point! |
| YOUCANDOIT | nice explanation steved333! |