Economics — Free Practice Questions
2 free questions · 6–9% of the Level I exam · answers & explanations
These two questions are a free sample of the same original Economics questions shipped in the app — exactly what a non-premium user previews. Tap an answer to check yourself and read the LOS-anchored explanation. Economics carries 6–9% of the CFA® Level I exam; the full app has 65 Economics practice questions plus the topic’s share of the 540-question mock bank, with cross-audited answer keys.
A firm in a perfectly competitive market has total fixed costs of $36,000 per month. It sells its output at the market price of $30 per unit and incurs variable costs of $18 per unit. The number of units the firm must sell each month to break even is closest to:
Why: The breakeven point is the output level at which total revenue equals total cost. With constant per-unit price and variable cost, the formula is: Breakeven quantity = Total fixed costs ÷ (Price per unit − Variable cost per unit). Substituting the stem's numbers: Breakeven quantity = 36,000 ÷ (30 − 18) = 36,000 ÷ 12 = 3,000 units. Check: at 3,000 units, total revenue = 3,000 × $30 = $90,000 and total cost = $36,000 + 3,000 × $18 = $90,000, so revenue exactly covers all costs. Dividing fixed costs by the $30 selling price (36,000 ÷ 30 = 1,200) ignores variable costs entirely, while dividing fixed costs by the $18 variable cost per unit (36,000 ÷ 18 = 2,000) divides by a cost figure instead of the per-unit contribution margin of $12.
A price-taking producer sells 4,000 units per month at the market price of $25 per unit. Its monthly total variable costs are $88,000 and its total fixed costs are $40,000, and management expects the current price to persist. The firm's most appropriate course of action is to:
Why: The shutdown decision compares price with average variable cost (AVC) in the short run and with average total cost (ATC) in the long run. AVC = Total variable costs ÷ Quantity and ATC = (Total variable costs + Total fixed costs) ÷ Quantity. Substituting: AVC = 88,000 ÷ 4,000 = $22 and ATC = (88,000 + 40,000) ÷ 4,000 = 128,000 ÷ 4,000 = $32. The $25 price lies between AVC and ATC. Because price exceeds AVC, each unit contributes (25 − 22) × 4,000 = $12,000 per month toward fixed costs: the operating loss of 128,000 − 100,000 = $28,000 is smaller than the $40,000 loss (full fixed costs) from shutting down, so the firm should keep producing in the short run. Because price is below ATC, economic losses persist, so the firm should exit in the long run if the price does not recover. Halting production immediately applies the average total cost benchmark to the short-run decision, when the correct short-run shutdown threshold is average variable cost. Continuing indefinitely treats coverage of variable costs as sufficient for long-run viability, but staying in the market in the long run requires price to cover average total cost.
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