CFA Practice Question

CFA Practice Question

Suppose the local contractors for non-resident building construction are planning a strategy to increase long-run profitability. Which of the following would be most essential if this strategy is to succeed in the long run?
A. repeal of the tax on building permits
B. legislation requiring new contractors to pass a stiff licensing exam and pay a $10,000 fee
C. a "gentlemen's agreement" that each contractor would increase his prices by 5 percent
Explanation: The local contractors are likely to earn positive profits in the long run if they can restrict entry into the industry. By imposing still requirements on entrants, they are likely to prevent the entry of too many competitors.

User Contributed Comments 9

User Comment
wollogo How can local contractors control legislation? I would say that C is the better answer only becuase the other choices are outside their control.
wink44 If 'C' happened, more firms would enter the market and drive the price down. 'B' creates increases the barriers to entry.
Hope02 I guess this one explains why CFA institute introduces all kind of fees for the exam including for the material for the upcoming years!!! Looks like a business more than anything else.
mallang so right hope02. I agree.
reganbaha Sure it's a business, but they have a unique product that you are willing to pay for and to study your butt off for. So good business up's for CFA.
At least at the moment it's not watered down like an MBA.
Merke wink44, the reason why C doesn't work, especially in the LONG RUN, is:

Since this "gentlemen's agreement" is a form of Cartel like OPEC, where they agree to keep price or production at some level, but as time goes by, many members are prone to cheat because it's hard to control exactly how the other guy is doing. So, everyone will start dragging prices down or increasing production. As a result, this "gentlemen's agreement" falls apart.
MaresaJaden Agreed with Merke, you have to remember the prisoners dilemma for this one and recognize that this is what C is describing.
birdperson all firms cheat with C -- think OPEC
A brings in more firms and increases competition
B limits the players in the game... best choice
alexchav So that's why the CFA exists...
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