IAI CB1 common mistakes
IAI CB1 · Understand the traps and how to avoid them.
In short-answer questions, labels a statement such as 'the government should freeze rents' as positive economics because it names a government policy, while treating 'a binding price ceiling creates excess demand' as normative because it sounds critical.
Candidates classify by topic or tone rather than by whether the claim can be tested against evidence; they treat the word 'should' as the only marker of a value judgement.
What to do instead
Apply a two-step test before writing: can the statement be checked with data and a specified counterfactual? If yes, it is positive; if it rests on a value judgement about desirability, it is normative. Rewrite each statement as either 'if X then Y' or 'X is better than Y' and state which part is being tested.
Treats a change in income, tastes, or the price of a substitute as a movement along the demand curve, or shifts supply when the good's own price changes.
Graphs are recalled as pictures rather than as relationships between named variables; the candidate does not check whether the changed variable appears on an axis.
What to do instead
State the rule explicitly: own price on the vertical axis causes a movement along the curve; any other determinant shifts the curve. For each scenario, name the variable that changed, classify it as own price or other determinant, then redraw with old and new curves and label the initial and final equilibrium.
Computes price elasticity of demand as (new minus old) divided by old without using the midpoint formula when two points are given, drops the negative sign without explanation, and then predicts total revenue in the wrong direction.
The formula is learned as a single simple percentage change; the sign convention and the revenue link are memorised separately and not connected to the elasticity magnitude.
What to do instead
Use the midpoint formula when the question gives two points and no base: change in quantity divided by average quantity, all divided by change in price divided by average price. Interpret the absolute value: greater than 1 is elastic, less than 1 is inelastic. Then link directly: if elastic, a price rise lowers revenue; if inelastic, a price rise raises revenue. Show the sign convention explicitly.
In short-run shutdown questions, compares price with average total cost and exits whenever price is below ATC, or treats fixed costs as avoidable; also mixes short-run and long-run cost curves on the same diagram.
The diagrams look similar and the fixed-versus-variable distinction is memorised as a definition but not converted into a decision rule.
What to do instead
Write the rules separately before calculating: short-run shutdown if price is below average variable cost; long-run exit if price is below average total cost. Fixed costs are sunk in the short run. On the diagram, identify SRATC, LRAC, AVC and MC, mark their minimum points, and state the time horizon before choosing the rule.
For a monopoly, sets output where price equals marginal cost or maximises revenue, then reads price from the marginal cost curve; deadweight loss is omitted or measured from the wrong triangle.
The competitive condition price equals marginal cost is over-generalised, and the monopoly diagram's marginal revenue curve below demand is not used as the starting point.
What to do instead
Always solve marginal revenue equals marginal cost for quantity, then go vertically to the demand curve for price. Mark consumer surplus, producer surplus and deadweight loss between the monopoly quantity and the competitive quantity under demand and marginal cost. Check that price exceeds marginal cost and explain why output is lower than the competitive level.
Asserts that a firm can price-discriminate whenever it has market power, without checking market separation, resale prevention and different elasticities; also confuses first-degree with third-degree discrimination.
The conditions are listed in notes but not applied as a checklist, and the degree labels are memorised loosely without the pricing rule attached.
What to do instead
Use a three-condition checklist: market power, identifiable segments with different elasticities, and no arbitrage or resale. Then classify: first-degree charges each buyer's reservation price; third-degree sets separate prices by segment with marginal revenue equal to marginal cost in each segment. If resale is possible, state that the scheme fails.
In AD/AS questions, treats any inflation as a rightward shift of aggregate demand, or uses short-run aggregate supply when the question asks about long-run equilibrium; confuses a movement along aggregate supply with a shift.
The shock transmission is not traced curve by curve, and the short-run versus long-run distinction is reduced to labels rather than different slopes and adjustment mechanisms.
What to do instead
Classify the shock first: demand-side, supply-side, or expectations and wage-setting. Draw AD/AS with upward-sloping short-run aggregate supply and vertical long-run aggregate supply. For each shock, identify which curve shifts, trace output and price to the short run, then explain the long-run adjustment. Do not shift aggregate demand for a supply shock unless a policy response is specified.
Uses the government-spending multiplier for a tax cut, ignores the negative sign of the tax multiplier, or applies the full multiplier without stating crowding-out and open-economy leakages.
One multiplier formula is memorised, and fiscal policy assumptions are not linked to the model being used.
What to do instead
Write the formulas separately: in the simple closed-economy model the spending multiplier is 1 divided by (1 minus the marginal propensity to consume), while the lump-sum tax multiplier is negative MPC divided by (1 minus MPC). State assumptions such as fixed prices, closed economy and no crowding out. Then explain that imports and interest-rate crowding out reduce the effect. Keep the sign visible in the final answer.
In balance-of-payments questions, records an export shipment as a credit to the financial account, or claims that currency appreciation must improve the current account because imports become cheaper.
Double-entry bookkeeping and the direction of currency price changes are not applied consistently; the current and financial account labels are confused.
What to do instead
Use double entry: an export of goods is a credit in the current account and a corresponding debit in the financial account as foreign assets increase. For exchange rates, appreciation raises the foreign-currency price of exports and lowers the domestic-currency price of imports; the trade balance effect depends on elasticities and the J-curve. State the direction of each price change before drawing a policy conclusion.
Compares nominal interest rates across countries or over time without adjusting for inflation, or treats an inverted yield curve as proof of recession rather than as a signal about expected future rates and term premia.
The Fisher equation and term-structure decomposition are not used, so headline rates are taken as real returns and the yield curve is read as a single predictive indicator.
What to do instead
Convert with the Fisher relation: real rate is approximately nominal rate minus expected inflation, or exactly (1 plus nominal) divided by (1 plus inflation) minus 1. For yield curves, decompose into expected future short rates plus term and risk premia; inversion signals expected rate cuts or premium compression, not a mechanical recession. State which component is changing.