Economics (MB141): April, 2005

Economics (MB141): April, 2005

• Answer all questions.
• Marks are indicated against each question.
1. Which of the following circumstances refers to a mixed economy?
(a) Free market economy
(b) Government plays the pivotal role in the functioning of the economy
(c) Prices are determined by the market forces only
(d) Government exercises its power only in the important sectors while in the other sectors, a free
market economy exists
(e) Prices are fixed only by the farmers.
(1 mark)

2. Demand and cost functions of a monopolist are given as
P = 800 – 10Q
TC = 300Q + 2.5Q2
Profit maximizing price for the monopolist is
(a) Rs.300 (b) Rs.20 (c) Rs.600 (d) Rs.800 (e) Rs.400.
(2 marks)

3. A good is said to be a luxury, when the income elasticity of demand is
(a) Greater than one (b) Equal to one (c) Zero
(d) Less than one but more than zero (e) Infinity.
(1 mark)

4. A firm operating under perfect competition has the following cost functions:
MC = 75 – 20Q + 1.5Q2,
AVC = 75 – 10Q + 0.5Q2
The price below which the firm should shut down its operation in the short run is
(a) Rs.20 (b) Rs.25 (c) Rs.40 (d) Rs.50 (e) Rs.75.
(2 marks)

5. When a decrease in price leads to an increase in quantity purchased so as to increase the total revenue,
the price elasticity of demand is
(a) Less than one (b) Equal to one (c) More than one
(d) Zero (e) Infinity.
(1 mark)

6. The demand function for Rollex pens is estimated as
QR = 10,000 – 1,500PR + 2Y + 200PC
Where,
QR = Quantity of Rollex pens demanded
PR = Price of Rollex pen
PC = Price of Competitor’s product
Y = Per capita income of the consumer
If the current price of Rollex pen is Rs.5, the price of the competitor’s product is Rs.8 and per capita
income is Rs.5,000, the income elasticity of demand is
(a) 0.521 (b) 1.222 (c) 0.827 (d) 0.709 (e) 1.410.
(2 marks)

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7. The total cost function is estimated to be TC = 100 – 3Q + 5Q2. If the current output is 5 units, marginal
cost is
(a) Rs.96 (b) Rs.75 (c) Rs.47 (d) Rs.26 (e) Rs.102.
(2 marks)

8. The demand function faced by a firm is estimated to be Q = 100 – 2P. The total cost function of the
firm is given by TC = 50 + 2Q. If the firm produces 12 units, profits made by the firm are
(a) Rs.352 (b) Rs.426 (c) Rs.454 (d) Rs.472 (e) Rs.502.
(2 marks)

9. The demand function for a commodity is estimated as
Qd = 3,00,000 – 30P
The arc price elasticity of demand between the prices Rs.2,500 and Rs.4,000 per unit is
(a) –0.48 (b) 0.48 (c) 4.33 (d) 0.11 (e) –0.11.
(2 marks)

10. Which of the following is an example of variable cost of production?
(a) Cost of buildings (b) Purchasing heavy machines
(c) Salaries of top-level managers (d) Salaries of temporary staff
(e) Acquiring copy-rights of the products.
(1 mark)

11. Which of the following market structures has a predominant feature of price leadership?
(a) Perfectly competitive (b) Monopoly (c) Oligopoly
(d) Monopsony (e) Monopolistic competitive.
(1 mark)
< Answer >
12. The demand function for a commodity is estimated to be
Qd = 3,50,000 – 35P
The theoretical highest price that can prevail in the market is
(a) Rs.9,000 (b) Rs.10,000 (c) Rs.11,000 (d) Rs.12,000 (e) Rs.13,000.
(2 marks)
< Answer >
13. The best possible factor input combination in the production process is indicated by the
(a) Expansion Path (b) Isoquant (c) Iso-cost line (d) Marginal revenue product
(e) Indifference curve.
(1 mark)
< Answer >
14. Which of the following is true with respect to the law of diminishing marginal utility?
(a) The more the consumption, the lesser the marginal utility from every additional unit consumed
(b) The more the consumption, the greater the marginal utility from every additional unit consumed
(c) The lesser the consumption, the lesser the marginal utility from every additional unit consumed
(d) The lesser the consumption, no marginal utility from every additional unit consumed
(e) The law of diminishing marginal utility is valid for an infinite period.
(1 mark)
< Answer >
15. Which of the following is true when the demand curve is perfectly inelastic?
(a) The whole tax burden is borne by the sellers
(b) The whole tax burden is borne by the buyers
(c) The tax burden is borne more by the sellers and less by the buyers
(d) The tax burden is borne less by the sellers and more by the buyers
(e) The tax burden is borne equally by the sellers and buyers.
(1 mark)
< Answer >
16. The production function for Woollen garments is estimated as TP = 30L2 – L3. The maximum possible
average product of labor is
< Answer >
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average product of labor is
(a) 250 units (b) 245 units (c) 225 units (d) 200 units (e) 175 units.
(2 marks)
17. When a proportionate change in input combination causes the same proportionate change in output, the
returns to scale is said to exhibit
(a) Increasing returns (b) Decreasing returns (c) Constant returns
(d) Negative returns (e) Infinity returns.
(1 mark)
< Answer >
18. Which of the following will most likely increase the demand for a particular good?
(a) A fall in the price of substitute goods
(b) An increase in time required to purchase complementary goods
(c) A decrease in the number of consumers purchasing substitute products
(d) A decrease in the price of complementary goods
(e) A decrease in income.
(1 mark)
< Answer >
19. The shape of a short run total product curve reflects the operation of
(a) Law of diminishing marginal utility (b) Law of diminishing returns
(c) Law of returns to scale (d) Law of demand
(e) Law of supply.
(1 mark)
< Answer >
20. The demand curve facing a monopoly firm is a/an
(a) Horizontal straight line (b) Rectangular hyperbola
(c) Downward sloping (d) Upward sloping (e) Indeterminate.
(1 mark)
< Answer >
21. When total utility is maximum, marginal utility is
(a) Greater than one (b) Zero (c) Less than one
(d) One (e) Infinity.
(1 mark)
< Answer >
22. For a firm, the average cost function is estimated as
AC =
100
Q + 20 + 4Q
The total variable cost for the firm at an output of 15 units is
(a) Rs.100 (b) Rs.750 (c) Rs.1,200 (d) Rs.1,340 (e) Rs.2,100.
(2 marks)
< Answer >
23. The break-even point for a perfectly competitive firm is achieved when
(a) Average Revenue = Marginal Cost (b) Average Revenue = Average Cost
(c) Total Revenue = Total Fixed Cost (d) Total Revenue = Marginal Cost
(e) Marginal Revenue = Average Variable Cost.
(1 mark)
< Answer >
24. The marginal utility function of a consumer is estimated to be
MU = 0.50Y
How many units of good Y the consumer would be willing to consume if the price of the good Y is
Rs.10?
(a) 25 units (b) 20 units (c) 30 units (d) 40 units (e) 45 units.
(2 marks)
< Answer >
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25. A firm will shut down its operations in the short run if
(a) It incurs losses
(b) Fixed costs exceed its revenue
(c) Average variable costs exceed its average revenue
(d) Total revenue falls short of total cost
(e) Total fixed cost exceeds its total variable costs.
(1 mark)
< Answer >
26. A profit maximizing firm seeks to maximize the difference between
(a) Marginal revenue and marginal cost (b) Marginal revenue and average cost
(c) Total revenue and marginal revenue (d) Total revenue and average cost
(e) Average revenue and average cost.
(1 mark)
< Answer >
27. Production function for a firm is TPL = 10L – L2. The number of labor after which marginal production
becomes negative is
(a) 4 (b) 6 (c) 5 (d) 10 (e) 8.
(2 marks)
< Answer >
28. Which of the following statements is true?
(a) In a perfectly competitive market, an individual seller can influence the price
(b) In a monopolistically competitive market, no individual seller can influence the price
(c) In a perfectly competitive market, an individual seller is the price taker
(d) In a perfectly competitive market, advertisement plays a significant role
(e) In a perfectly competitive market, price exceeds marginal revenue.
(1 mark)
< Answer >
29. XYZ Ltd., operating in a perfectly competitive market, sells a stationery item at Rs.10 per unit. The
cost function is given as
TC = 4,000 + 4Q + 0.02Q2
The profit maximizing output is
(a) 175 units (b) 150 units (c) 125 units (d) 100 units (e) 75 units.
(2 marks)
< Answer >
30.
The average cost function of a firm is given by AC = Q3 – 6Q2 + 140Q + 750 +
100
Q The fixed cost of
the firm is
(a) Rs.100 (b) Rs.25 (c) Rs.220 (d) Rs.140 (e) Rs.52.
(2 marks)
< Answer >
31. Which of the following is not a feature of a monopolistically competitive market?
(a) Relative freedom of entry and exit of firms
(b) Relatively large number of firms
(c) Homogeneous product
(d) Non-price competition
(e) Product of a firm is not a perfect substitute to that of another firm.
(1 mark)
< Answer >
32. The demand function for a firm is P = 30 – 3Q. If the average cost is Rs.6, what is the output at which
the firm earns normal profits?
(a) 3 units (b) 30 units (c) 10 units (d) 6 units (e) 8 units.
(2 marks)
< Answer >
33. Average revenue is
(a) Total revenue divided by the number of units sold
(b) Revenue earned by the average size of the product
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(c) Revenue earned by all the units of the output
(d) Revenue earned by the average sized firm in the industry
(e) Net addition made to the total revenue by selling one more unit of a commodity.
(1 mark)
34. Total cost function for a firm is TC = 20Q – 0.30Q2 + 0.01Q3. What is the output at which marginal cost
is minimum?
(a) 6 units (b) 7 units (c) 8 units (d) 10 units (e) 20 units.
(2 marks)
< Answer >
35. A curve drawn indicating the slope of the total utility curve closely resembles the
(a) Demand curve (b) Supply curve (c) Average utility curve
(d) Marginal revenue curve (e) Indifference curve.
(1 mark)
< Answer >
36. The supply schedule of a food commodity is given below:
Price
(Rs.)
Quantity Supplied
(Units)
7 15
8 30
What is the arc price elasticity of supply?
(a) 4 (b) 5 (c) – 4 (d) – 5 (e) 6.
(2 marks)
< Answer >
37. Which of the following is a flow variable?
(a) Capital stock (b) Money supply (c) Investment
(d) Price index (e) Unemployment level.
(1 mark)
< Answer >
38. The consumption function in a hypothetical economy is given by C = 50 + 0.60Y. If the investment and
government expenditure are 70 MUC and 20 MUC respectively, the equilibrium output of the economy
is
(a) 100 MUC (b) 150 MUC (c) 350 MUC (d) 225 MUC (e) 125 MUC.
(2 marks)
< Answer >
39. Which of the following ratios best describes the GNP deflator?
(a) Nominal GNP to real GNP (b) Real GNP to nominal GNP
(c) Nominal GNP to real GDP (d) Real GNP to nominal GDP
(e) Nominal NNP to real GNP.
(1 mark)
< Answer >
40. Imperfect information about the labor market leads to
(a) Structural unemployment (b) Cyclical unemployment
(c) Frictional unemployment (d) Disguised unemployment
(e) Natural unemployment.
(1 mark)
< Answer >
41. Consider the following information:
Particulars Rs. (crore)
NDP at market prices 77,000
Net factor income from abroad -700
Depreciation 1,700
Subsidies 6,700
Indirect Taxes 7,700
National income is
(a) Rs.76,000 Crores (b) Rs.75,300 Crores (c) Rs.77,000 Crores
< Answer >
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(d) Rs.77,700 Crores (e) Rs.79,700 Crores
(2 marks)
42. In balance of payments statement, short term inflows and outflows of capital are recorded in
(a) Current account (b) Capital account
(c) Official reserves account (d) Errors and omissions account
(e) Transfer payments account.
(1 mark)
< Answer >
43. The high powered money in an economy is given as 22,000 MUC. The currency-deposit ratio is
estimated to be 0.25. If the Central Bank wants to set the money supply at 50,000 MUC, what should be
the reserve ratio that the Central Bank should impose on banks to achieve the targeted money supply?
(a) 0.250 (b) 0.300 (c) 0.500 (d) 0.425 (e) 0.200.
(2 marks)
< Answer >
44. The following information is extracted from the National Income Accounts of an economy.
Particulars MUC
Exports of goods and services 134
Depreciation 118
Government expenditure 594
Gross domestic investment 639
Imports of goods and services 165
Personal consumption expenditure 2,191
NDP at market prices is
(a) 1,472 MUC (b) 3,275 MUC (c) 2,346 MUC (d) 1,782 MUC (e) 3,393 MUC.
(2 marks)
< Answer >
45. The phrase “business cycle” refers to
(a) The pattern of fluctuations in the general level of prices as measured by the consumer price index
(b) The pattern of fluctuations in interest rate as measured by the prime lending rate
(c) The pattern of fluctuations in economic activity
(d) The pattern of fluctuations in budget surplus or deficit
(e) The pattern of fluctuations in stock market index.
(1 mark)
< Answer >
46. In an economy the GDP at factor cost is Rs.60,000, depreciation is Rs.6,000. GNP at market prices is
Rs.75,000 and indirect taxes are Rs.5,000. There are no subsidies in the economy. The net factor
income from abroad is
(a) Rs.5,000 (b) Rs.15,000 (c) Rs.10,000 (d) Rs.20,000 (e) Rs.25,000.
(2 marks)
< Answer >
47. Which of the following is included in the aggregate demand of an economy?
I. Consumption demand.
II. Investment demand.
III. Net exports.
(a) Only (I) above (b) Only (II) above
(c) Both (I) and (II) above (d) Both (II) and (III) above
(e) (I), (II) and (III) above.
(1 mark)
< Answer >
48. Which of the following is included in GDP of a country?
(a) The sale of a used car (b) The sale of an old house
(c) The sale of stocks and bonds (d) The fee paid to a broker for selling a stock
(e) The sale of a used computer.
(1 mark)
< Answer >
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49. The Phillips curve shows the short run trade-off between
(a) Inflation and unemployment (b) Unemployment and output
(c) Inflation and the nominal interest rate (d) Nominal interest rate and investment
(e) Inflation and output.
(1 mark)
< Answer >
50. If consumption is Rs.10 million when the disposable income is Rs.10.5 million and consumption is
Rs.10.5 million when the disposable income is Rs.11.5 million, the marginal propensity to consume is
(a) 0.25 (b) 0.50 (c) 0.75 (d) 0.80 (e) 0.90.
(1 mark)
< Answer >
51. A contractionary fiscal policy combined with a tight monetary policy results in
I. A lower level of output.
II. A higher level of output.
III. A lower interest rate.
IV. A higher interest rate.
V. A lower or higher interest rate depending on the relative magnitude of fiscal and monetary
policies.
(a) (I) and (III) above (b) (I) and (IV) above (c) (II) and (V) above
(d) (II) and (IV) above (e) (I) and (V) above.
(1 mark)
< Answer >
52. Inflation accompanied by slowing down of economic activity is known as
(a) Deflation (b) Recession (c) Depression (d) Stagflation (e) Galloping inflation.
(1 mark)
< Answer >
53. The following balances are taken from the balance sheet of the Central Bank:
Particulars MUC
Financial assets 3,520
Other assets 60
Non-monetary liabilities 280
If the government money is 100 MUC, high-powered money in the economy is
(a) 3,000 MUC (b) 3,050 MUC (c) 3,100 MUC (d) 3,300 MUC (e) 3,400 MUC.
(2 marks)
< Answer >
54. The principle of the multiplier states that
(a) Any increase in aggregate spending that causes the aggregate demand curve to shift will result in a
larger increase in national income
(b) In the long run, the aggregate demand curve becomes relatively flat as the economy approaches
full employment
(c) Any increase in national income will result in a larger increase in aggregate spending
(d) For any given increase in income, there will be a less than proportional increase in consumer
spending
(e) Any increase in national income will result in a decrease in net exports.
(1 mark)
< Answer >
55. Automatic stabilizers refer to
(a) Inherent mechanisms in the stock market that automatically cause stock market gains to be
cancelled out by losses, which make expected long-run returns equal to zero
(b) The invisible hand mechanisms which automatically bring the economy out of a recession
(c) Government revenue and expenditure items that change automatically in response to changes in
economic activity
(d) Discretionary monetary policy maneuvers designed to keep inflation under control automatically
(e) Discretionary monetary policy maneuvers designed to keep exchange rate under control
automatically.
(1 mark)
< Answer >
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56. Consumption function for an economy is estimated to be
C = 1,000 + 0.80 Yd
Which of the following is true if Yd is zero?
(a) Consumption is zero (b) Savings are 1,000 MUC
(c) Income must be greater than taxes (d) Dissavings are 1,000 MUC
(e) Savings are zero.
(1 mark)
< Answer >
57. Which of the following is not a quantitative instrument of RBI’s monetary policy?
(a) Bank rate (b) Cash reserve requirements
(c) Moral suasion (d) Open market operations
(e) Statutory liquidity ratio.
(1 mark)
< Answer >
58. The following data is taken from National Income Accounts of a country:
Particulars Rs. Cr.
National income 1,357
Transfer payments 242
Undistributed corporate profits 28
Corporate tax 75
Personal income in the country is
(a) Rs.1,363 cr (b) Rs.1,121 cr (c) Rs.1,230 cr (d) Rs.1,296 cr (e) Rs.1,496 cr.
(2 marks)
< Answer >
59. Which of the following is not advocated by supply-side economists?
(a) Promote competition (b) Reduce government controls
(c) Increase corporate tax rate (d) Reduce the role of government
(e) Remove institutional barriers.
(1 mark)
< Answer >
60. Unexpected inflation causes
(a) Loss to debtors (b) Gains to creditors
(c) Gains to pensioners (d) Loss to firms that pay pensions
(e) Loss to fixed income groups.
(1 mark)
< Answer >
61. Which of the following ratios is not an indicator of financial development of a country?
(a) Finance Ratio (b) Financial Interrelations Ratio
(c) New Issue Ratio (d) Intermediation Ratio
(e) Cost Benefit Ratio.
(1 mark)
< Answer >
62. The capital inflows and outflows in an economy during the year 2004-05 are 6,300 MUC and 4,300
MUC respectively. Suppose there is no change in the official foreign reserve assets held by the central
bank, what could be the current account balance for the economy?
(a) 1,500 MUC (Deficit) (b) 1,500 MUC (Surplus)
(c) 2,000 MUC (Deficit) (d) 2,000 MUC (Surplus) (e) Zero.
(2 marks)
< Answer >
63. Which of the following is / are the objectives of fiscal policy?
I. Attaining full employment.
II. Stable prices in the economy.
III. Widening tax base.
IV. Regulating money supply.
(a) Only (I) above (b) Only (II) above
< Answer >
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(c) Both (I) and (II) above (d) Both (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
64. Which of the following is not a component of aggregate expenditure in an economy?
(a) Consumption (b) Investment (c) Government purchases
(d) Net exports (e) Taxes.
(1 mark)
< Answer >
65. Which of the following is true if the central bank does not impose any reserve ratio?
(a) The banking system can no longer affect the supply of money in the economy
(b) The banking sector can create unlimited money supply
(c) The lending capacity of banks would narrow down to zero
(d) A rupee deposited in a bank reduces the money supply in the economy by one rupee
(e) Money supply in the economy will be equivalent to the high-powered money.
(1 mark)
< Answer >
66. Bank rate is the rate at which
(a) RBI rediscounts approved bills of exchange
(b) Commercial banks lend to borrowers
(c) Commercial banks accept deposits
(d) Commercial banks discount foreign bills
(e) Term lending institutions lend to borrowers.
(1 mark)
< Answer >
67. The unemployment in the Keynesian model is caused by
I. Demand deficiency.
II. Supply deficiency.
III. Demand sufficiency.
IV. Supply sufficiency.
(a) Only (I) above (b) Only (II) above
(c) Only (III) above (d) Both (I) and (IV) above
(e) Both (II) and (III) above.
(1 mark)
< Answer >
68. Which of the following is termed as an expansionary monetary policy?
(a) An increase in the cash reserve ratio
(b) An increase in the discount rate
(c) A reduction in the taxes which banks pay on their profits
(d) The central bank buys government securities in the open market
(e) The central bank sells government securities in the open market.
(1 mark)
< Answer >
69. Which of the following refers to the instruments of fiscal policy?
(a) Bank rate (b) Open market operations (c) Cash reserve requirements
(d) Levy of taxes (e) Moral suasion.
(1 mark)
< Answer >
70. The following information is available from the consolidated balance sheet of the banking sector:
Particulars Rs. billion
Net Bank Credit to the Government 2,000
Bank Credit to the Commercial Sector 3,000
Net Foreign Exchange Assets of the Banking Sector 2,200
Net Non-Monetary Liabilities of the Banking Sector 1,200
Money supply in the economy 6,200
Government Currency Liabilities to the Public is
(a) Rs.200 billion (b) Rs.6,000 billion (c) Rs.6,200 billion
< Answer >
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(d) Rs.7,400 billion (e) Rs.7,900 billion.
(1 mark)
71. Which of the following is most likely to happen during a recession?
(a) Decrease in inventory (b) Producers will be cautiously optimistic
(c) Capacity under utilization (d) Expansion in bank credit
(e) Increasing income levels.
(1 mark)
< Answer >
72. If planned consumption equals 70 + 0.80 Yd and planned investment is 90 MUC, the equilibrium level
of income is
(a) 100 MUC (b) 200 MUC (c) 400 MUC (d) 800 MUC (e) 1,000 MUC.
(2 marks)
< Answer >
73. The relationship between aggregate consumption and aggregate income is known as the
(a) Consumption function (b) Saving function (c) Production function
(d) Demand function (e) Aggregate supply function.
(1 mark)
< Answer >
74. If the multiplier is 2.5, the marginal propensity to consume is
(a) 0.20 (b) 0.60 (c) 0.75 (d) 1.00 (e) 4.00.
(2 marks)
< Answer >
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Suggested Answers
Economics (MB141): April, 2005
1. Answer : (d)
Reason : An economy that relies on both markets and command mechanism is called a mixed
economy. Government as well as business firm provides goods and services. In such
economies government supplies roads, defense, pensions, and sometimes-even schooling
directly to the citizens.
< TOP >
2. Answer : (c)
Reason : Demand function of the monopolist are given as P=800 – 10Q
TC=300Q + 2.5Q2
TR=P × Q = 800Q + 10Q2
∴MR = 800 – 20Q.
∴ Profit maximizing output for the monopolist can be determined,
where, MR = MC
MC =
(TC)
Q
∂
∂ = 300 – 5Q
∴ MR = MC
800 – 20Q = 300 + 5Q
– 25Q =– 500
Q =20
∴ P = 800 – 10 (20) = 800 – 200 = 600.
< TOP >
3. Answer : (a)
Reason : When the income elasticity is greater than one, the good is said to be luxury.
< TOP >
4. Answer : (b)
Reason : The minimum price below which the firm is shut down its operation is the minimum
average variable cost.
The average variable cost will be equal to price or marginal revenue at the minimum point
on average variable cost curve.
∴MC = AVC.
75 – 20Q + 1.5Q2 = 75 – 10Q + 0.5Q2
1.5Q2 – 0.5Q2 – 20Q + 10Q = 0.
Q2 –10Q = 0
Q(Q–10) = 0
Q=10.
At Q = 10, AVC = 75 – 10(10) + 0.5 (10)2
= 75 – 100 +50 = Rs.25.
< TOP >
5. Answer : (c)
Reason: When a decrease in price leads to increase in quantity purchased so much as to increase
the total revenue, the price elasticity of demand is more than unity.
< TOP >
6. Answer : (d)
Reason : Q = 10,000 – 1500(5) + 2(5000) + 200(8)
= 21,600 – 7,500
= 14,100
Income elasticity of demand: dQ/dY × Y/Q = 2 × 5000/14100 = 0.709
< TOP >
7. Answer : (c)
Reason : TC=100 – 3Q + 5Q2
MC=–3 + 10Q
< TOP >
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If Q = 5, MC = –3 + (10 × 5) = 47.
8. Answer : (c)
Reason : TR = P × Q
Or, (50 – 0.5Q) Q
Or, 50Q – 0.5Q2
Thus, profit at output 12 units is 50 × 12 – 0.5 × 12 × 12 – 50 – 2 × 12 = 454.
< TOP >
9. Answer : (a)
Reason :
Qd
= 3,00,000 – 30 P
When the price is Rs. 2500 per unit
Qd = 3,00,000 – 30 (2500)
= 3,00,000 – 75000 = 2,25,000 units
When the price is Rs. 4000 per unit
Qd = 3,00,000 – 30 (4000)
= 3,00,000 – 1,20,000 = 1,80,000 units
Arc elasticity =
2 1 1 2
2 1 1 2
Q Q P P /2
P P Q Q /2
− +
×
− +
=
6500
45000 2
1500 405000
2
−
×
= – 0.48.
< TOP >
10. Answer : (d)
Reason : Variable costs are those costs that increase with the level of output. Salaries of temporary
staff are an example of variable cost.
< TOP >
11. Answer : (c)
Reason : Oligopoly market has a predominant feature of price leadership.
< TOP >
12. Answer : (b)
Reason : The theoretical highest price that can prevail in the market is when the quantity demanded
is zero.
3,50,000 – 35 P = 0
3,50,000 = 35 P
P =
3, 50, 000
35 = Rs. 10,000.
< TOP >
13. Answer : (a)
Reason : The locus of points of tangency between set of isoquants and the isocost lines indicates the
best possible input combination. (a) Expansion path is the locus of points of tangency
between set of isoqunats and isocost lines.
< TOP >
14. Answer : (a)
Reason : The law of diminishing marginal utility states that the marginal utility of any good tends
to decline as more of the good is consumed over a definite period of time.
< TOP >
15. Answer : (b)
Reason : If the demand curve is perfectly inelastic, the prices rises by the full amount of the tax and
supply remains unchanged. The entire tax is borne by the customers.
< TOP >
16. Answer : (c)
Reason : AP = TP/L = 30L – L2
Maximum AP: ∂AP/∂L = 0
30 – 2L = 0
Or, L = 15
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13
At L = 15, AP = 30(15) – 15 x 15 = 225 units.
17. Answer : (c)
Reason : When an increase in all inputs leads to proportional increase in output or vice versa, it is
called constant returns to scale. (a) Is not the answer because increasing returns to scale
occurs when an increase in all inputs leads to more than proportional increase in output or
vice versa.
(b) Is not the answer because decreasing returns to scale occurs when an increase in all
inputs leads to less than proportional increase in output.
(c) Is the answer because constant returns to scale occur when an increase in all inputs leads
to proportional increase in output or vice versa.
(d) Is not the answer because in case of negative returns, the quantity of variable factor is
so large compared to the fixed factors that reduce the fixed factor that results in a fall
in the total product instead of rising.
(e) Is not the answer because all of the above cannot be the answer.
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18. Answer : (d)
Reason : A decrease in price of complementary products will make the demand for a particular
product increase. This is because the total cost of the “system” (total cost of ownership)
will not go down. A fall in demand of substitute goods does not necessarily indicate an
increased demand of the product as the entire product category may be falling out of favor.
< TOP >
19. Answer: (b)
Reason: The law of diminishing returns states that, as more and more units of a variable resource
are combined with a fixed amount of other resources, employment of additional units of
the variable resource will eventually increase output only at a decreasing rate. The total
product curve in the short run is affected by the operation of law of diminishing returns.
a. The law of diminishing marginal utility states that the marginal utility of any good
tends to decline as more of the good is consumed over a definite period of time.
b. The law of diminishing returns states that, as more and more units of a variable
resource are combined with a fixed amount of other resources, employment of
additional units of the variable resource will eventually increase output only at a
decreasing rate.
c. Law of returns to scale refers to the changes in the output as all factors change by the
same proportion. Returns to scale may be constant, increasing or decreasing. It is
applicable only in the long run.
d. Law of demand states that there exists an inverse relationship between the quantity
demanded and the price of the commodity. As the price of the commodity increases,
other things remaining constant, consumers will tend to demand less of the
commodity.
e. Law of supply states that there is a direct relationship between the price of a good
and the amount of it offered for sale. As the price of a product increase, other things
remaining constant, producers will increase the amount of the product supplied to the
market. Hence the correct answer is (b).
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20. Answer : (c)
Reason : The demand curve facing a firm under monopoly is a downward sloping curve.
< TOP >
21. Answer : (b)
Reason : Marginal utility starts diminishing as the consumer starts consuming more units of a
product. When marginal utility reaches zero, total utility reaches its maximum and remains
constant.
< TOP >
22. Answer : (c)
Reason : AC = 100/Q + 20 + 4Q
TC = 100 + 20Q + 4Q2
TVC= 20Q + 4Q2
At output 15, TVC = 20(15) + 4(15)2= 300 + 900 =Rs. 1200
< TOP >
23. Answer : (b)
Reason : Break Even Point in perfect competition is at when AR = AC.
< TOP >
14
24. Answer : (b)
Reason : The consumer will consume till MUY = PY
MUY = 0.5Y
0.5Y = 10
Y = 20 units.
< TOP >
25. Answer : (c)
Reason : When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting
down its operations. Even if its fixed costs exceed its revenue, the firm may not shut down
its operations because the firm can reduce its fixed cost loss through sales.
< TOP >
26. Answer : (e)
Reason : The profit of a firm refers to the difference between total revenue and total cost. Hence, to
maximize the profits, the firm should maximize the difference between total revenue and
total cost. The difference between average revenue (AR) and average cost (AC) represents
the average profit of the firm. Hence maximization of difference between average revenue
and average cost also indicates profit maximization. A firm maximizes its profit when it
produces and sells an output at which marginal revenue (MR) is equal to marginal cost
(MC).
< TOP >
27. Answer : (c)
Reason : TPL = 10L – L2
MPL = 10 – 2L
Marginal returns become negative, once MPL equals zero. Thus,
10 – 2L = 0
Or, L = 5.
< TOP >
28. Answer : (c)
Reason : In a perfectly competitive market, an individual seller is the price taker. In a perfectly
competitive market, there are large number of buyers and sellers in the industry/market, so
that no individual buyer can influence the price by changing the purchase or output. This
means that the individual buyer or seller is an insignificant player in the market.
< TOP >
29. Answer : (b)
Reason : In a perfectly competitive market MR = P.
A firm can maximize profits by equating MC and MR.
Here, MR = P = Rs. 10
MC = 4 + 0.04 Q (differentiating in terms of Q)
10 = 4 + 0.04 Q
Q = 6/0.04 = 150.
< TOP >
30. Answer : (a)
Reason : AC = Q3 – 6Q2 + 140Q + 750 +100/Q
TC = AC x Q = (Q3 – 6Q2 + 140Q + 750 +100/Q)Q.
Thus, FC = 100 and VC = Q4 – 6Q3 + 140Q2 + 750Q.
Hence the correct answer is (a)
< TOP >
31. Answer : (c)
Reason : Existence of homogeneous product is not the characteristic of monopolistically
competitive market. Under this market, the firms sell differentiated products.
< TOP >
32. Answer : (e)
Reason : A firm earns normal profits, when TR = TCTR = P × Q = 30Q – 3Q2TC = 6Q30Q – 3Q2 =
6Q24Q = 3Q2Or, Q = 8 units.
< TOP >
33. Answer : (a)
Reason : Average revenue is the revenue earned per unit of output sold. It can be obtained by
dividing the total revenue by the number of units and sold.
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34. Answer : (d) < TOP >
15
Reason : TC = 20Q – 0.30 Q2 + 0.01Q3
MC =
dTC
dQ = 20 – 0.6 Q + 0.03Q2
MC is minimum when
dMC
dQ = 0
dMC
dQ = -0.6 + 0.06 Q = 0
0.06 Q = 0.6
Q = 10.
35. Answer : (a)
Reason : A curve drawn indicating the slope of the total utility curve represents the marginal utility
curve. MU curve closely resembles the demand curve. The only difference between MU
curve and demand curve is that demand curve does not go below 0, while MU can be
negative.
< TOP >
36. Answer : (b)
Reason :
P1
= 7 Q1 = 15
P2 = 8 Q2 = 30
ΔP = 1 ΔQ = 15
Arc EPS =
1 2
1 2
Q P P
P Q Q
Δ + ×
Δ +
=
15 (7 8)
1 (15 30)
× +
+
EPS = 5
< TOP >
37. Answer : (c)
Reason : A variable is a stock if it is measured at a particular point of time. It is a flow variable if it
is measured over a period of time.
a. Capital stock is measured at a particular point of time, hence is a stock variable
b. Money supply are measured at a particular point of time, hence is a stock variable
c. Investment is measured over a period of time hence is a flow variable.
d. Price index is measured at a particular point of time, hence is a stock variable
e. Unemployment level is measured at a particular point of time, hence is a stock
variable.
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38. Answer : (c)
Reason : At equilibrium, Y = C + I + G = 50 + 0.6Y + 70 + 20 = 140 + 0.6Y
0.4Y = 140
Y = 140/0.4 = 350.
< TOP >
39. Answer : (a)
Reason : GNP deflator is a price index, which is used to reveal the cost of purchasing the items
included in GNP during the period relative to the cost of purchasing those items during a
base year. GNP deflator is used to measure real GNP i.e. in rupees of constant purchasing
power. If there is a rise in prices, the nominal GNP is deflated during the latter period to
account for the effects of inflation.
(a) Is the answer because GNP deflator is the ratio of Nominal GNP to Real GNP.
(b) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal
GNP
(c) Is not the answer because GNP deflator is not the ratio of Nominal GNP to Real GDP
(d) Is not the answer because GNP deflator is not the ratio of Real GNP to Nominal
GDP.
< TOP >
40. Answer : (c) < TOP >
16
Reason : Unemployment caused by imperfect information about the available jobs and skills in the
market is called fictional unemployment.
41. Answer : (b)
Reason : N1 = NNP at factor cost
= NDP at factor cost + net income from abroad
= (77,000 – 7,700 + 6,700) + (-700)
= 76000 + (-700)
= Rs.75300 Cr
< TOP >
42. Answer : (b)
Reason : Short term inflows of capital are recorded in the capital account.
< TOP >
43. Answer : (b)
Reason : High-powered money (H) = 22,000 MUC.
Money supply, Ms = H x {(1 + Cu)/(Cu + r)}
Or, 22,000 x {(1.25/0.25 + r)} = 50,000
0.55 = 0.25 + r
r = 0.3.
< TOP >
44. Answer : (b)
Reason : GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 – 165) = 3393
Thus, NDP at market price = GDP at market price – depreciation = 3393 – 118 = 3275.
< TOP >
45. Answer : (c)
Reason : Business cycle is the fluctuation in the level of economic activity which forms a regular
pattern
< TOP >
46. Answer : (c)
Reason : GNPMP = GDPFC + Indirect taxes – Subsidies + NFIA
NFIA = GNPMP – GDPFC – Indirect taxes
= 75,000 – 60,000 – 5,000
= 10,000
< TOP >
47. Answer : (e)
Reason : Consumption demand Investment demand and net exports are included in the aggregate
demand for goods and services.
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48. Answer : (d)
Reason : Payments related to productive activities undertaken by factors of production during the
year are included in the GDP of a country.
(a) Not included since the car is not produced during the current year
(b) Not included since the house is not constructed during the current year
(c) Not included since sale of stocks and bonds are financial transactions only.
(d) Is included in GDP as the fee is earned for rendering brokerage services and is an
income.
(e) Not concluded since the sale of a used computer is not included in GDP of a country.
< TOP >
49. Answer : (a)
Reason : Phillips curve in the short-run shows an inverse relation between inflation and
unemployment. But in the long run there is no trade-off because Phillips curve is vertical
in the long-run.
< TOP >
50. Answer : (b)
Reason : Marginal Propensity to consume =
C
Y
Δ
Δ =
0.5
1.0 = 0.5
< TOP >
51. Answer : (e)
Contractionary (tight) fiscal policy involves increasing tax rate and/or decreasing the
government spending to bring down the aggregate demand and price level in the economy.
Reduced government spending reduces the public borrowings, and thereby interest rate
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17
Reduced government spending reduces the public borrowings, and thereby interest rate
and output in the economy. The tight monetary policy, conversely, reduces the money
supply and thereby increases the interest rate in the economy. Increased interest rate
reduces both consumption and investment and thereby reduces output in the economy.
Thus, we can say that the combined effect of tight fiscal policy and tight monetary policy
lowers the output. But, the direction of change in interest rate is not known unless we
know the magnitude of influence of fiscal and monetary policies on interest rate.
52. Answer : (d)
Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.
< TOP >
53. Answer : (e)
Reason : High – Powered money (H) = monetary liabilities or central bank + Government money.
Monetary liabilities = Financial assets + other assets – Non monetary liabilities
= 3,520 + 60 – 280
= 3,300
∴ M = 3,300 + 100 = 3,400 MUC
< TOP >
54. Answer : (a)
Reason : The principle of the multiplier states that any increase in aggregate spending that causes
the aggregate demand curve to shift will result in a larger increase in national income
< TOP >
55. Answer : (c)
Reason : Every economy goes through cyclical fluctuations in output, employment and prices. This
will have an automatic impact on certain government expenditures and revenues. The
changes in the government spending and revenues that results automatically as the
economy fluctuates are called non-discretionary fiscal policy. Automatic stabilizers are
features of the government budget that automatically adjust net taxes to stabilize aggregate
demand as the economy expands or contracts.
(a) Is not the answer because an automatic stabilizer is not a mechanism in the stock
market that automatically cause stock market gains to be cancelled out by losses.
(b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms,
which automatically bring the economy out of a recession.
(c) Is the answer because automatic stabilizer refers to Government revenues and
expenditures that change automatically in response to changes in economic activity.
When the economy is in a contraction phase, these stabilizers increase transfer
payments and reduce tax collections in order to stimulate aggregate demand. On the
other hand, when the economy begins to expand, the automatic stabilizers increase
tax collections and reduce transfer payments in order to restrain growth in the
aggregate demand.
(d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.
(e) Is not the answer because automatic stabilizer is not a monetary policy for stabilizers
exchange rate.
< TOP >
56. Answer : (d)
Reason : If Yd is zero, consumption is 1,000MUC, which is autonomous consumption. This
consumption is financed by dissavings or borrowing. Hence dissavings are 1,000MUC
< TOP >
57. Answer : (c)
Reason : Bank rate, cash reserve requirements, open market operations and statutory liquidity ratio
are the quantitative instruments of RBI’s monetary policy. Is not a moral suasion
quantitative instrument of RBI’s monetary policy. It is a qualitative instrument of
monetary policy
< TOP >
58. Answer : (e)
Reason : Personal Income = National Income – Undistributed corporate profit – corporate tax +
Transfer payments
= 1,357 – 28 – 75 + 242
= Rs.1,496 cr
< TOP >
59. Answer : (c) < TOP >
18
Reason : Supply side economics advocates to reduce government controls, to promote competition,
to restrict the power of trade unions and to remove institutional barriers. Supply side
economics doesn’t recommend to increase corporate tax rate.
60. Answer : (e)
Reason : Unexpected inflation refers to a situation where the actual rate if inflation is more than
what people are expecting. It would mean that prices have increased at a faster rate.
(a) The debtors have an obligation to repay in future in nominal terms, i.e., in money
terms and not in real terms. Hence with higher inflation today, the debtor’s future
payments will fall with higher inflation. Hence he will gain as he need to repay
lesser in real terms.
(b) On the contrary, with the increasing prices the creditor is bound to suffer loss as with
the repayment of the loan, his purchasing power would be reduced as the price have
increased at a faster rate.
(c) Pensioners earn a fixed amount of money and their wages are not adjusted to the
changes in prices very quickly. Hence with unexpected inflation, their real income is
bound to decline and hence they tend to loose in case there is unexpected inflation.
(d) An unexpected inflation is a gain to the firms as it brings not only greater profits, but
the pension amount it has to pay in real terms is declining with increase in prices.
(e) Fixed income group represent those wage earners whose wages are not adjusted to
changes in prices. With unexpected inflation, their purchasing power would decline
and hence they suffer losses. Hence the option is true.
< TOP >
61. Answer : (e)
Reason : A well-developed financial system is vital for the smooth functioning of an economy. The
financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New
Issues Ratio and Intermediation Ratio are indicators of financial development of a country.
(a) Is not the answer because Finance Ratio is an indicator of financial development of a
country.
(b) Is not the answer because Financial Interrelation Ratio is an indicator of financial
development of a country.
(c) Is not the answer because New Issues Ratio is an indicator of financial development
of a country.
(d) Is not the answer because Intermediation Ratio is an indicator of financial
development of a country.
(e) Is the answer because Cost Benefit Ratio is not an indicator of financial development
of a country.
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62. Answer : (c)
Reason : Capital inflows – capital outflows = 6,300 – 4,300 = 2,000 MUC (Deficit).
< TOP >
63. Answer : (c)
Reason : Attaining full employment and stable prices in the economy is the objectives for the use of
fiscal policies.
< TOP >
64. Answer : (e)
Reason : Aggregate expenditure in an economy consists of Consumption, Investment, Government
purchases and Net exports. Hence the answer is (e).
< TOP >
65. Answer : (b)
Reason : If the central bank doesn’t impose any reserve ratio, the commercial bank need not keep
on deposit with the Reserve bank certain amount of funds equal to a specified percentage
of its own deposit liabilities. Then the banking sector can create unlimited money supply.
(a) Is not the answer because without the imposition of reserve ratio, the banking system
can affect the supply of money through credit creation
(b) Is the answer because if the central bank doesn’t impose any reserve ratio, the
banking sector can create unlimited money supply
(c) Is not the answer because without reserve ratio, the lending capacity of banks
wouldn’t narrow down to zero
(d) Is not the answer because if the central bank doesn’t impose any reserve ratio, a
rupee deposited in a bank doesn’t reduce the money supply in the economy by one
rupee.
< TOP >
19
(e) Is not the answer because if the central bank doesn’t impose any reserve ratio, money
supply in the economy will not be equivalent to high-powered money.
Money supply = H × (1+ Cu/ Cu + r)
Where, H = Monetary Liabilities of Central Bank + Government Money
Cu = Currency-deposit ratio
r = Cash reserve ratio.
66. Answer : (a)
Reason : Bank rate is the rate at which RBI rediscounts approved bills of exchange.
< TOP >
67. Answer : (a)
Reason : In the Keynesian model, unemployment could be reduced if the aggregate demand
increases. Therefore, unemployment is caused by demand deficiency. The Keynesian
theory of unemployment suggests that governments can play an active role in the economy
by adjusting the aggregate demand through its fiscal and monetary instruments.
(a) Is the answer because unemployment in the Keynesian model is caused by demand
deficiency
(b) Is not the answer because unemployment in the Keynesian model is not caused by
supply deficiency
(c) Is not the answer because unemployment in the Keynesian model is not caused by
demand sufficiency
(d) Is not the answer because unemployment in the Keynesian model is not caused by
supply sufficiency
(e) Is not the answer because unemployment in the Keynesian model is not caused by
both demand deficiency and supply deficiency.
< TOP >
68. Answer : (d)
Reason : The central bank buying government securities in the open market is termed as an
expansionary monetary policy.
< TOP >
69. Answer : (d)
Reason : Levy of taxes refers to the instruments of fiscal policy.
< TOP >
70. Answer : (a)
Reason : Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector – Net non-monetary liabilities of the
banking sector + Government money
Rs.6200billion = 2000+3000+2200-1200+ Government money
Government money = Rs.200billion
< TOP >
71. Answer : (c)
Reason : In the business cycles theory, after a business peak or boom, the economy enters
contraction stage. The sales of most businesses fall and real GNP of an economy grows at
a slow pace. There is a large number of unemployment in the labor market. This phase is
otherwise known as recession.
(a) Is not the answer because the inventory stock increases gradually in recession
(b) Is not the answer because business expectation will be pessimistic with cautious
decision-making
(c) Is the answer because there is an underutilization of existing capacity in the economy
(d) Is not the answer because bank credit starts falling in the recession phase of business
cycle
(e) Is not the answer because there is a decline in the income levels of the people.
< TOP >
72. Answer : (d)
Reason : Y = c + 1
Y = 70 + 0.80Y + 90
0.20Y = 160
Y = 800.
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20
73. Answer : (a)
Reason : The relationship between aggregate consumption and aggregate income is known as the
Consumption function.
< TOP >
74. Answer : (b)
Reason : Multiplier =
1
1−MPC
2.5 =
1
1−MPC
2.5 – 2.5 MPC = 1
1.5 = 2.5 MPC
MPC = 0.60
< TOP >
< TOP OF THE DOCUMENT >