Economics (MB141) : January 2005

Economics (MB141) : January 2005

• Answer all questions.
• Marks are indicated against each question.
1. The value of all the goods and services produced in an economy during a period of time and adjusted
for inflation is called
(a) Real GDP (b) Nominal GDP
(c) Real National income (d) Nominal national income
(e) Per capita income.
(1 mark)
< Answer >
2. The following information pertains to national income aggregates of a hypothetical economy:
Particulars Rs. crore
Old age pension, scholarships etc. distributed by Government 21
Purchases made by the government sector 246
Value of exports 22
Corporate tax 62
Personal savings 22
Personal income tax 94
Factor incomes received by the household sector 632
The personal disposable income in the economy is
(a) Rs.509 crore (b) Rs.539 crore (c) Rs.529 crore (d) Rs.559 crore (e) Rs.549 crore.
(2 marks)
< Answer >
3. On a day Rajesh, a stockbroker, collected Rs.20,000 towards his commission. Over the day, the value of
his office equipments depreciated by Rs.2,000. Of the remaining Rs.18,000, he paid Rs.1,000 to the
government as service tax; retained Rs.7,000 in his business and took home the remaining amount as
his wages. From his personal income, he paid Rs.3,000 as income tax. What was the contribution made
by Rajesh to national income ?
(a) Rs.18,000 (b) Rs.20,000 (c) Rs.7,000 (d) Rs.21,000 (e) Rs.17,000.
(2 marks)
< Answer >
4. The capital inflows and outflows in an economy during the year 2004-05 are 6,300 MUC and 4,500
MUC respectively. If there is no change in the official foreign reserve assets held by the central bank,
what could be the current account balance of the economy?
(a) 1,500 MUC (deficit) (b) 1,800 MUC (surplus)
(c) 1,800 MUC (deficit) (d) 1,500 MUC (surplus) (e) Zero.
(2 marks)
< Answer >
5. The following information is extracted from the National Income Accounts of an economy:
Particulars
Million
Units of
Currency
(MUC)
Factor income received by domestic residents from business sector 500
Factor income received by domestic residents from foreigners 20
Gross investment 200
Retained earnings 25
Net indirect taxes 60
Corporate profit taxes 15
Personal income taxes 100
Net factor income from abroad –5
Dividends 100
National Income (NI) of the economy is
< Answer >
2
(a) 560 MUC (b) 620 MUC (c) 640 MUC (d) 720 MUC (e) 810 MUC.
(2 marks)
6. Consider the following information:
GDP at factor cost = Rs.5,000 cr.
Net factor income from abroad = Rs.500 cr.
Indirect taxes = Rs.1,355 cr.
GNP at market prices = Rs.5,730 cr.
The subsidies amount to
(a) Rs.950 cr. (b) Rs.1,030 cr. (c) Rs.1,125 cr. (d) Rs.1,290 cr. (e) Rs.1,500 cr.
(2 marks)
< Answer >
7. In a two-sector economy, the marginal propensity to consume (MPC) is estimated to be 0.6. To bring
about a Rs.500 billion change in equilibrium national income (Y), the required increase in corporate
investment (I) is
(a) Rs.125 billion (b) Rs.200 billion (c) Rs.240 billion (d) Rs.300 billion (e) Rs.360
billion.
(2 marks)
< Answer >
8. The following information is given from the national accounts of a country for the year 2004-05.
Particulars MUC
Factor income earned within domestic territory 65,000
Gross domestic fixed capital formation 6,000
Net domestic fixed capital formation 4,000
GNP at market prices 85,000
Indirect taxes 3,000
Subsidies 1,000
The net factor income from abroad for the year 2004-05 is
(a) 15,000 MUC (b) 13,000 MUC (c) 16,000 MUC (d) 17,000 MUC (e) 11,000
MUC.
(2 marks)
< Answer >
9. The following data pertains to the national income aggregates of a hypothetical economy:
Consumption function (C) = 200 + 0.80 Yd, where Yd is disposable income
Investment (I) = 500 MUC
Government spending (G) = 200 MUC
Taxes (T) = 100 MUC
The equilibrium level of savings is
(a) 600 MUC (b) 700 MUC (c) 500 MUC (d) 800 MUC (e) 900 MUC.
(2 marks)
< Answer >
10. The ratio of the change in national product to the change in investment demand is called
(a) Marginal propensity to consume (b) Marginal propensity to save
(c) Average propensity to save (d) Multiplier
(e) Average propensity to consume.
(1 mark)
< Answer >
11. The following balances are taken from the balance sheet of the Central Bank of a country:
Particulars MUC
Net worth 400
Credit to Central Government 1,000
Credit to commercial banks 500
Other non-monetary liabilities 100
Other assets 200
Government deposits 100
Foreign exchange assets 200
< Answer >
3
If the government money in the economy is 100 MUC, the high powered money in the economy is
(a) 1,400 MUC (b) 1,500 MUC (c) 1,650 MUC (d) 1,600 MUC (e) 1,250 MUC.
(2 marks)
12. Which of the following schools of thought believes in an active government role in the macro
economy?
(a) Keynesian economics (b) Monetarism
(c) New classical economics (d) Classical economics
(e) Rational expectations.
(1 mark)
< Answer >
13. Which of the following is not one of the basic Postulates of the Keynesian Model?
(a) Full employment occurs only by coincidence in an economy
(b) Effective demand determines the level of employment and output
(c) Since full employment is not always possible, Government intervention is essential
(d) Budget deficit is a tool to fight recession
(e) Monetary policy is more effective than fiscal policy.
(1 mark)
< Answer >
14. Which of the following policy measures is/are fiscal policy measure(s)?
(a) The government cuts taxes or raises spending to get the economy out of a recession
(b) The central bank changes the money supply to affect the price level, interest rates and exchange
rates
(c) The government restricts imports and stimulates exports
(d) Both (a) and (b) above
(e) Both (a) and (c) above.
(1 mark)
< Answer >
15. Basic consumption function shows the relationship between
(a) Consumption and disposable income
(b) Consumption and expectations
(c) Consumption and price level
(d) Consumption and money supply
(e) Consumption and rate of interest.
(1 mark)
< Answer >
16. If the marginal propensity to consume (MPC) is 0.8 and the autonomous investment rises by Rs.100
crores, then the change in equilibrium output is
(a) Rs.125 crores (b) Rs.200 crores (c) Rs.300 crores
(d) Rs.325 crores (e) Rs.500 crores.
(1 mark)
< Answer >
17. The quantity theory of money implies that a given percentage change in the money supply will cause
(a) A smaller percentage change in nominal GDP
(b) An equal percentage change in nominal GDP
(c) A larger percentage change in nominal GDP
(d) An equal percentage change in real GDP
(e) A larger percentage change in real GDP.
(1 mark)
< Answer >
18. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
(a) Monetary liabilities of the RBI increases
(b) High powered money in the economy decreases
(c) The value of money multiplier decreases
(d) Aggregate demand in the economy increases
(e) Price level in the economy increases.
(1 mark)
< Answer >
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19. An expansionary fiscal policy combined with a liberal 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 (III) above
(d) (II) and (V) above
(e) (I) and (V) above.
(1 mark)
< Answer >
20. 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 >
21. In the previous monetary policy, the RBI Governor reduced the CRR from 4.75 to 4.50%. Which of the
following sequences correctly show the impact of the reduction in CRR?
I. Change in money supply.
II. Change in nominal interest rates.
III. Change in consumption and investment.
IV. Change in aggregate demand.
V. Change in real GDP and price level.
(a) (I), (II), (III), (IV) and (V) above
(b) (I), (II), (III), (V) and (IV) above
(c) (I), (II), (IV), (V) and (III) above
(d) (I), (V), (II), (III) and (IV) above
(e) (I), (III), (II) (V) and (IV) above.
(1 mark)
< Answer >
22. Inflation caused by an increase in wages or other resource prices is termed as
(a) Demand pull inflation (b) Recession (c) Cost push inflation
(d) Deflation (e) Stagflation.
(1 mark)
< Answer >
23. If expected inflation is constant and the nominal interest rate increases, the real interest rate
(a) Increases by more than the change in the nominal interest rate
(b) Increases by the same amount as changes in the nominal interest rate
(c) Decreases by the same amount as changes in the nominal interest rate
(d) Decreases by more than the change in the nominal interest rate
(e) Remains constant.
(1 mark)
< Answer >
24. Which of the following is not an example of an automatic stabilizer?
(a) National defence spending
(b) Social welfare payments
(c) Unemployment compensation
(d) Personal income tax
(e) Corporate income tax.
(1 mark)
< Answer >
5
25. In an inflationary period, the appropriate policy for RBI will be to
(a) Sell government securities in the open market
(b) Encourage commercial banks to increase their loans
(c ) Reduce cash reserve ratio
(d) Reduce bank rate
(e) Extend credit to the government.
(1 mark)
< Answer >
26. The following information is available from the balance of payment statements of an economy:
Item MUC
Trade balance –5,000
Current account balance –2,000
Capital account balance 6,000
The foreign exchange reserves of the country will
(a) Decrease by 7,000 MUC (b) Increase by 7,000 MUC
(c) Decrease by 4,000 MUC (d) Increase by 4,000 MUC
(e) Decrease by 6,000 MUC.
(1 mark)
< Answer >
27. The following information is available from the consolidated balance sheet of the banking sector:
Item 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
Government Currency Liabilities to the Public 200
Money supply in the economy is
(a) Rs.200 billion (b) Rs.6,000 billion (c) Rs.6,200 billion
(d) Rs.7,400 billion (e) Rs.7,600 billion.
(1 mark)
< Answer >
28. The term ‘narrow money’ is
(a) Currency with the public
(b) Currency with the public plus currency with the Government of India
(c) Currency with the public plus Demand deposits of the Banking system plus other deposits with the
RBI
(d) Currency with the public plus Demand deposits of the banking system plus Post office savings
bank deposits
(e) Currency with the public plus Total post office deposits.
(1 mark)
< Answer >
29. If a scheduled bank meets its cash reserve requirement of 3% by depositing Rs 7.5 crore with the RBI,
then
(a) Total deposit liabilities of the bank are Rs.22.50 crore
(b) Total deposit liabilities of the bank are Rs.225.00 crore
(c) Total deposit liabilities of the bank are Rs.250.00 crore
(d) Total deposit liabilities of the bank are Rs.150.00 crore
(e) Total deposit liabilities of the bank are Rs.175.00 crore.
(1 mark)
< Answer >
30. In an economy, the currency with the public is Rs.4,200 crores and the bank reserves amount to
Rs.1,200 crores. The currency deposit ratio is 0.42 and the reserve ratio imposed by the bank is 0.12.
The amount of money supply in the economy is
(a) Rs.2,054 crores (b) Rs.11,045 crores
< Answer >
6
(c) Rs.2,300 crores (d) Rs.14,200 crores (e) Rs.3,400 crores.
(2 marks)
31. Assume that the RBI purchased Rs.500 cr. worth of government bonds from the general public. This
will
(a) Increase the banking system’s reserves, the monetary base and the system’s lending capacity
(b) Decrease the price of bonds in the market
(c) Decrease the bank reserves, the monetary base and the banking system’s lending capacity
(d) Limits the size of the money multiplier
(e) Both (b) and (c) above.
(1 mark)
< Answer >
32. A transaction involving short term capital outflow from UK to US will appear as
(a) A debit on the UK current account
(b) A debit on the UK capital account
(c) A credit on the UK current account
(d) A credit on the UK capital account
(e) Trade deficit on the UK current account.
(1 mark)
< Answer >
33. If the country called ‘Angelland’ enjoys a comparative advantage in the production of coffee over the
country called ‘Babel’, then
(a) The opportunity cost of producing coffee in Angelland is higher than in Babel
(b) The opportunity cost of producing coffee in Angelland is lower than in Babel
(c) Neither Angelland nor Babel should specialize in the production of coffee only
(d) Both the countries enjoy absolute advantage in the production of coffee
(e) The opportunity cost of producing coffee is same in Babel and Angelland.
(1 mark)
< Answer >
34. Phases of business cycles in an economy are designated primarily based on the
(a) Unemployment rate (b) Price level (c) Real GDP
(d) Inventory level (e) Gross investment.
(1 mark)
< Answer >
35. Robert begins his job search soon after his Post-graduation in Computer Science. After two months of
search, he is hired by a software company as a system administrator. The nature of unemployment
encountered by Robert is
(a) Structural (b) Frictional (c) Cyclical (d) Seasonal (e) Disguised.
(1 mark)
< Answer >
36. Suppose a drop in consumer confidence results in an economic contraction. In order to move the
economy out of recession,
I. Government spending could be increased
II. Taxes could be lowered
III. The money supply could be increased
IV. Interest rate could be reduced
(a) (I) above
(b) (I) and (II) above
(c) (II) and (III) above
(d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
37. The difference between M3 and M1 is
(a) Demand deposits (b) Post office savings deposits (c) Savings deposits
(d) Time deposits (e) M2.
(1 mark)
< Answer >
38. Which of the following is not an economic good?
(a) Gas cylinder (b) Mineral water (c) Air
(d) Teakwood (e) Videocassette.
< Answer >
7
(1 mark)
39. A rice miller can sell as much rice he wants at the prevailing market price. He knows that even if he
increases the price by a small proportion, he will lose the entire market. The slope of the demand curve
faced by the miller will be
(a) Infinity (b) Zero (c) One (d) Between zero and infinity
(e) Between one and infinity.
(1 mark)
< Answer >
40. All the major airlines have been experiencing declining sales revenues as fares are increased. From this
it can be inferred that
(a) The demand for air travel is relatively price elastic
(b) The demand for air travel is relatively inelastic
(c) Air travel is an inferior good
(d) The demand for air travel is perfectly inelastic
(e) The demand for air travel is unitary price elastic.
(1 mark)
< Answer >
41. Consumer expenditure data in South India revealed that gold ornaments are a luxury for them. The
income elasticity of demand for gold ornament in South India is
(a) Greater than one (b) Equal to one
(c) Zero (d) Grater than zero but less than one
(e) Less than zero.
(1 mark)
< Answer >
42. The magnitude of a decrease in the supply of oil in India due to supply shocks was found to be greater
than the magnitude of a decrease in the demand. Which among the following is a natural consequence
of this phenomenon?
(a) The equilibrium quantity and the price will decrease
(b) The equilibrium quantity and the price will increase
(c) The equilibrium quantity increases and the equilibrium price decreases
(d) The equilibrium quantity decreases and the equilibrium price increases
(e) The equilibrium price and quantity do not change.
(1 mark)
< Answer >
43. The demand equation Qd=100-20P indicates that there is
(a) 100 units increase in quantity demanded for every 20 units decrease in price
(b) 20 units increase in quantity demanded for every 100 units decrease in price
(c) 100 units decrease in quantity demanded for every 20 units increase in price
(d) 20 units decrease in quantity demanded for each unit increase in price
(e) 100 units increase in quantity demanded for each unit increase in price.
(1 mark)
< Answer >
44. Demand and supply functions of a product are:
Qd = 10,000 – 4P
Qs = 2,000 + 6P
If the government imposes a sales tax of Rs.100 per unit, the price will
(a) Increase by Rs.100 (b) Increase by Rs.50 (c) Increase by Rs.60
(d) Increase by Rs.40 (e) Increase by Rs.80.
(2 marks)
< Answer >
45. Consider two points A and B on a linear demand curve. The price and quantity demanded associated
with the two points are given below:
Point Price (Rs.) Quantity Demanded (units)
A 8.50 2,000
B 10.00 1,500
The point elasticity of demand for the product if price increases from Rs.8.50 to Rs.10.00 is
(a) 1.33 (b) 0.85 (c) 1.13 (d) 1.42 (e) 0.71.
< Answer >
8
(2 marks)
46. The supply and demand functions of a commodity are estimated as
Qd = 1,000 – 200P
Qs = 800P – 2,000
At equilibrium, the elasticity of supply for the commodity is
(a) 2 (b) 4 (c) 6 (d) 8 (e) 10.
(2 marks)
< Answer >
47. When marginal utility is negative, total utility is
(a) Increasing (b) At a minimum (c) Equal to zero
(d) Decreasing (e) At a maximum.
(1 mark)
< Answer >
48. Which of the following does not cause a shift in the demand curve?
(a) Changes in the price of the good
(b) Changes in the income of the buyers
(c) Changes in the personal preferences
(d) Changes in the price of related goods
(e) Changes in the consumer patterns.
(1 mark)
< Answer >
49. Which among the following causes the indifference curves to be convex to the origin?
(a) Diminishing marginal rate of substitution
(b) Increasing marginal rate of substitution
(c) Constant marginal rate of substitution
(d) Increasing marginal rate of technical substitution
(e) Constant marginal rate of technical substitution.
(1 mark)
< Answer >
50. The demand schedule of products A and B are given below:
The value of arc cross elasticity of demand for product A is
(a) 2.98 (b) 26.86 (c) –0.11 (d) 0.03 (e) – 0.33.
(2 marks)
Product A Product B
Price (Rs.) Quantity Demanded (Units) Price (Rs.) Quantity Demanded (Units)
20 100 40 100
20 80 80 80
< Answer >
51. If marginal product is negative, it means that the
(a) Total product is at maximum (b) Average product is at maximum
(c) Average product is falling (d) Total product is increasing
(e) Average product is negative.
(1 mark)
< Answer >
52. If total cost function for a firm is TC = 36Q – 0.60Q2 + 0.020Q3, the minimum possible average cost is
(a) Rs.63.00 (b) Rs.36.50 (c) Rs.31.50 (d) Rs.60.00 (e) Rs.48.50.
(2 marks)
< Answer >
53. A firm has a production function Q=K + 2L, where Q is the output, K is the capital input and L is the
labor input. If both the wage and the cost of capital are equal to Rs.100 per unit, the cost minimizing
output is
(a) Produced at any point along the isoquant
(b) Produced by using labor input only
< Answer >
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(c) Produced by using capital input only
(d) Is impossible to produce
(e) Produced by using both labor and capital in equal amounts.
(2 marks)
54. Maximum point on the average product curve is reached when
(a) Marginal product is zero (b) Marginal product is maximum
(c) Marginal product is minimum (d) Marginal product is negative
(e) Marginal product equals average product.
(1 mark)
< Answer >
55. Marginal product of labor is the
(a) Cost of employing labor for producing one more unit of output
(b) Change in output from using one more unit of labor
(c) Change in revenue from selling one more unit of output
(d) Change in revenue from using one more unit of labor
(e) Change in cost from using two more units of labor.
(1 mark)
< Answer >
56. The production function of firm is
Q = – 3
L3
+ 4L2 + 16L
The point beyond which diminishing returns will begin is
(a) 2 units (b) 3 units (c) 4 units (d) 5 units (e) 6 units.
(2 marks)
< Answer >
57. The vertical distance between the average cost and average variable cost is
(a) Total cost (b) Total fixed cost (c) Marginal cost
(d) Variable cost (e) Average fixed cost.
(1 mark)
< Answer >
58. The production of a tile manufacturing firm is at the minimum point of its average cost curve. The firm
is
(a) Operating under diminishing costs
(b) Making optimum use of its capacity
(c) Operating under excess capacity
(d) Operating under increasing costs
(e) Operating at constant costs.
(1 mark)
< Answer >
59. Average product of a variable input is
(a) The total product divided by the price of the product
(b) The same as marginal product when marginal product is maximum
(c) The total product divided by the amount of variable input used
(d) The same as total product when marginal product is zero
(e) The amount of additional output that can be produced by using one more unit of the variable input.
(1 mark)
< Answer >
60. The supply curve of a monopolist
(a) Is the portion of MC curve that lies above the AVC curve
(b) Is the portion of MC curve that lies above the AC curve
(c) Is vertical
(d) Is horizontal
(e) Is absent.
(1 mark)
< Answer >
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61. The management of a company has finally agreed to increase the salaries of its staff by 10%. Which of
the following will not be affected by the decision?
(a) Economic costs (b) Accounting profits (c) Direct costs
(d) Implicit costs (e) Fixed costs.
(1 mark)
< Answer >
62. The total cost function for a firm is estimated to be TC = 50 – 2Q + 3Q 2 . If the current output is 3
units, the marginal cost is
(a) Rs.36 (b) Rs.46 (c) Rs.26 (d) Rs.16 (e) Rs.6.
(2 marks)
< Answer >
63. A firm operating under perfect competition has the following cost functions:
MC = 100 – 20Q + 1.5Q2, AVC = 100 – 10Q + 0.5Q2
The price below which the firm shuts down its operations in the short run is
(a) Rs.15 (b) Rs.25 (c) Rs.50 (d) Rs.60 (e) Rs.75.
(2 marks)
< Answer >
64. A firm faces the following average variable cost function
AVC = 300 – 10Q + 0.5Q2
Fixed costs are Rs. 150. What is the minimum possible marginal cost?
(a) Rs.243.67 (b) Rs.223.67 (c) Rs.237.33 (d) Rs.233.33 (e) Rs.383.33.
(2 marks)
< Answer >
65. Which of the following assumptions is/are necessary for a market to be perfectly competitive?
I. Products are homogenous.
II. Cost structure of every firm is identical.
III. Buyers have no preferences towards any seller.
IV. Buyers have perfect knowledge about prices in the market.
(a) Only (I) above
(b) Only (II) above
(c) Both (I) and (III) above
(d) (I), (III) and (IV) above
(e) (II), (III) and (IV) above.
(1 mark)
< Answer >
66. ABC Corp, a perfectly competitive firm, is currently producing 20 units. The price is Rs.10 per unit.
Rent cost of the firm is Rs.100 and average variable cost is Rs.4 per unit. The firm is making a/an
(a) Economic profit of Rs.20
(b) Accounting profit of Rs.20
(c) Loss of Rs.3 per unit
(d) Profit of Rs.5 per unit
(e) Profit of Rs.6 per unit.
(1 mark)
< Answer >
67. A perfectly competitive firm can increase its sales revenue by
(a) Reducing the price
(b) Increasing the price
(c) Increasing the production
(d) Increasing the expenditure on advertising
(e) Increasing the sales force.
(1 mark)
< Answer >
68. In the short run, if the market price is less than the average variable cost for a perfectly competitive
firm, then it must
(a) Increase production (b) Decrease production
< Answer >
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(c) Shut down (d) Increase the price of its goods or services
(e) Decrease the price of its goods or services.
(1 mark)
69. An entrepreneur wants to maximize profits without affecting his price. He must produce an output
where
(a) Average cost is minimum (b) Average variable cost is minimum
(c) Average fixed cost is minimum (d) Marginal cost is equal to the average variable cost
(e) Marginal cost is minimum.
(1 mark)
< Answer >
70. The horizontal demand curve of a firm is one of the characteristic features of
(a) Oligopoly (b) Monopoly (c) Monopolistic competition
(d) Perfect competition (e) Duopoly.
(1 mark)
< Answer >
71. A producer of fruits faces a negatively sloped demand curve. He operates at the region where the
elasticity of demand is
(a) Less than one (b) Equal to one (c) Greater than one
(d) Greater than one but less than infinity (e) Zero.
(1 mark)
< Answer >
72. Ampler Ltd. faces a downward sloping demand curve. The profit maximizing condition for the firm in
the short run is
(a) Marginal revenue = Marginal cost
(b) Price = Marginal cost
(c) Marginal revenue = Average cost
(d) Marginal revenue = Total cost
(e) Marginal revenue = Total revenue.
(1 mark)
< Answer >
73. A cloth merchant supplies cotton cloth in Andhra Pradesh and Tamil Nadu and has the demand function
given by
Andhra Pradesh : P = 600 – QA
Tamil Nadu : P = 400 – QT.
The average cost of the merchant is AC =
15,000
100
Q
+
. If price discrimination is illegal, the profit
maximizing price of the merchant is
(a) Rs.180 (b) Rs.250 (c) Rs.275 (d) Rs.300 (e) Rs.400.
(2 marks)
< Answer >
74. The policy of charging different slab rates for power consumption for different purposes by a power
distribution company describes
(a) Product differentiation
(b) Price discrimination
(c) Differential elasticity of supply
(d) Differential cross elasticity of demand
(e) Inelastic demand of consumers.
(1 mark)
< Answer >
75. Demand function of a monopolist is estimated to be Q = 100 – 10P. If the marginal revenue is Rs.4, the
price elasticity of demand for the good is
(a) 6.33 (b) 2.33 (c) 4.44 (d) 5.12 (e) 6.12.
(2 marks)
< Answer >
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76. A kinked demand curve occurs in an oligopoly when a firm
(a) Increases its price and others follow it
(b) Increases its price and others do not follow it
(c) Decreases its price and others follow it
(d) Decreases its price and others do not follow it
(e) Both (b) and (c) above.
(1 mark)
< Answer >
77. In a pure oligopoly, a price war refers to
(a) Continuous price cuts by firms to increase revenues and profits
(b) Unexpected price cut by a firm to improve its sales volumes
(c) A decrease in quantity supplied by the competitive firms to raise prices in order to maximize profits
(d) Entry of a new firm in the industry who charges a lower price
(e) Successive and continued price cuts by competitive firms with an aim to increase market share.
(1 mark)
< Answer >
78. Which of the following factors differentiate perfect competition from monopolistic competition?
I. Number of buyers and sellers.
II. Entry and exit barriers.
III. Product differentiation.
IV. Selling activities.
(a) (I) and (III) above
(b) (I), (II) and (IV) above
(c) (III) and (IV) above
(d) (I) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answer >
13
Suggested Answers
Economics (MB141) : January 2005
1. Answer : (a)
Reason : The value of all the goods and services produced in an economy during a period of time
corrected for inflation is called Real GDP.This is the reflection of the actual GDP.
< TOP >
2. Answer : (d)
Reason : Personal Disposable Income = Personal income – personal taxes
= Factor incomes received by the household sector + Transfer payments – Personal
Taxes
= 632 + 21 – 94 = Rs.559 crore.
Note: Compensation to employees paid by the Government and profit distributed as
dividends by the firms are included in the factor income received by the household sector.
< TOP >
3. Answer : (e)
Reason : Contribution to National income = Contribution to GNP at market prices – depreciation
– indirect taxes = 20000 – 2000 – 1000 = 17000.
< TOP >
4. Answer : (c)
Reason : Capital inflows-capital outflows = 6,300-4,500 = 1,800 MUC (deficit).
< TOP >
5. Answer : (a)
Reason : National income (NI) = Factor income received by domestic residents + Factor income
received by domestic residents from foreigners + corporate profit taxes + retained
earnings = 500 + 20 + 15 + 25 = 560.
< TOP >
6. Answer : (c)
Reason : GNPMP = GDPFC + NFIA + Indirect taxes – Subsidies
5730 = 5000 + 500+ 1355 – X
X = – 5730 +5500 + 1355
= Rs.1125 cr.
< TOP >
7. Answer : (b)
Reason : MPC = 0.6
Multiplier (m) =
2.5
0.4
1
1 0.6
1
1 MPC
1 = =
−
=
−
ΔY = m . ΔI
∴ ΔI = 2.5
500
m
Y =
Δ
= 200
< TOP >
8. Answer : (c)
Reason : NNP at market price = GNP at market prices – Depreciation
= 85,000 – (6,000 – 4,000) = 83,000
NNP at factor cost = NNP at market prices – Indirect taxes + subsidies
= 83,000 – 3,000 + 1,000
= 81,000
Net factor income from abroad = 81,000 – 65,000 = 16,000 MUC.
< TOP >
9. Answer : (a)
Reason : C = 200 + 0.80Yd = 200 + 0.80 (Y– 100) = 200 + 0.80Y – 80 = 0.80Y + 120.
Y = C + I + G
Or, Y = 0.80Y + 120 + 500 + 200
Or, 0.20Y = 820
Y = 4,100.
S = – 200 + 0.20Yd = – 200 + 0.20 (Y – 100) = – 200 + 0.20 (4100– 100)
< TOP >
14
= – 200 + 800
= 600 MUC.
10. Answer : (d)
Reason : The multiplier is used to mean the effect on some endogenous variable of a unit change in
the exogenous variable. The expenditure multiplier relates the change in income to the
change in autonomous spending.
< TOP >
11. Answer : (a)
Reason : High-powered money (H) = Monetary liabilities of Central Bank + Government money =
1300 + 100 = 1400.
Total assets = Total liabilities
(Credit to Central Government + Credit to commercial banks + Foreign exchange
assets + Other assets) = (Net worth + Government deposits + Other non-monetary
liabilities + Monetary liabilities)
(1000 + 500 + 200 + 200) = (400 + 100 + 100 + ML)
1900 = 600 + ML
Or, ML = 1300.
< TOP >
12. Answer : (a)
Reason : Keynes believed the government had a role to play fighting inflation and unemployment,
and using monetary and fiscal policy to manage the macro economy.
(a) Is the answer because Keynesian economist argue activist government role in the
macro economy
(b) Is not the answer because monetarism does not advocate activist government role in
the macro economy
(c) Is not the answer because new classical economist does not advocate activist
government role in the macro economy
(d) Is not the answer because classical economics does not advocate activist government
role in the macro economy
(e) Is not the answer because rational expectations does not advocate activist
government role in the macro economy.
< TOP >
13. Answer: (e)
(a) Is not the answer because Keynes considered the existence of full employment as a
special case. The Keynesian underemployment equilibrium is reflecting real life
situations.
(b) Is not the answer because aggregate demand or effective demand indicates the total
quantity of goods and services that people want to buy. According to Keynes,
effective aggregate demand determines the level of employment and output.
(c) Is not the answer because Keynes argues that State intervention is essential as full
employment is not possible in an economy.
(d) Is not the answer because Keynes argues that an economy facing recession, budget
deficit is an important tool to overcome recession.
(e) Is the answer because in the Keynesian model, monetary policy is not effective as
compared to fiscal policy. Rather it is the fiscal policy, which is very effective and
powerful. Keynes argues that government should maintain an active stance
with a combination of tax and expenditure policies to maintain the desired levels
of output and employment through manipulation of effective demand.
< TOP >
14. Answer : (a)
Reason : Fiscal policy refers to policies dealing with taxes and government expenditure including
transfer payments.
(a) Is the answer because when the government reduces taxes or raises spending to get
the economy out of a recession, is a case of fiscal policy measure.
(b) Is not the answer because when the central bank changes the money supply to affect
the price level, interest rates and exchange rate , it is a monetary policy.
(c) Is not the answer because when the government restricts imports and stimulates
exports; it is a case of EXIM (Export-Import) policy.
< TOP >
15
(d) Is not the answer because both (a) and (b) cannot be the answer.
(e) Is not the answer because both (a) and (c) cannot be the answer.
15. Answer : (a)
Reason : Consumption function shows the relationship between consumption and disposable
income.
< TOP >
16. Answer : (e)
Reason : Multiplier = 1/1-MPC =
Y
I
Δ
Δ ⇒ ΔY = 100× (1/0.2) = Rs 500 crores
< TOP >
17. Answer : (b)
Reason : A equal percentage change in nominal GDP
< TOP >
18. Answer : (c)
Reason : Money supply = H × (1+ Cu / Cu + r)
Where, H = Monetary Liabilities of Central Bank + Government Money.
Cu = Currency-deposit ratio
r = Cash reserve ratio.
(a) Is not the answer because, when the RBI increases cash reserve ratio (CRR),
monetary liabilities of the RBI decreases.
(b) Is not the answer because, when the RBI increases cash reserve ratio (CRR), highpowered
money in the economy increases.
(c) Is the answer because, when the RBI increases cash reserve ratio (CRR), the value
of money multiplier decreases.
(d) Is not the answer because, when the RBI increases cash reserve ratio (CRR),
aggregate demand in the economy decreases.
(e) Is not the answer because, when the RBI increases cash reserve ratio (CRR), price
level in the economy decreases.
< TOP >
19. Answer : (d)
Reason : An expansionary fiscal policy shifts the IS curve to the right. And a liberal monetary
policy shifts the LM curve to the right. It will result in a higher level of output, but the
level of interest rate is dependent on the relative magnitude of fiscal and monetary
policies
(a) Is not the answer, because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a lower interest rate.
(b) Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy does not result in a lower level of output and a higher interest rate.
(c) Is not the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but not a lower interest rate.
(d) Is the answer because an expansionary fiscal policy combined with a liberal
monetary policy results in a higher level of output but we can’t say that it results in a
higher interest rate. It depends on the relative magnitudes and fiscal monetary
policies.
(e) Is the answer because an expansionary fiscal policy combined with a liberal
monetary policy result in higher level of output, but the level of output, but the level
of interest rate is dependent on the relative magnitude of fiscal and monetary
policies.
< TOP >
20. 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
< TOP >
16
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.
(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.
21. Answer : (a)
Reason : When the CRR is reduced to 4.5% from 4.75%, the money supply in the economy
increases with the increase in the value of money multiplier. Higher money supply lowers
the interest rates in the economy. Lower interest rate in turn encourages investment and
consumption in the economy. As consumption and investment are part of aggregate
demand, aggregate demand increases with the reduction of CRR. When aggregate
demand increases, the real GDP and price levels increase in the economy. Therefore,
change in the CRR → change in money supply → change in nominal interest rate →
change in consumption and investment → change in aggregate demand → change in real
GDP and price level.
< TOP >
22. Answer : (c)
Reason : Inflation initiated by increases in wages or other resource prices is termed as cost-push
inflation.
< TOP >
23. Answer: (b)
Reason : If expected inflation is constant, then when the nominal interest rate increases, the real
interest rate increases by the same amount of change as in the nominal interest rate.
< TOP >
24. Answer : (a)
Reason : Automatic stabilizers refer to those government spending and tax revenues that change
automatically as the economy fluctuate. This prevents aggregate demand from falling
excessively during bad times and rising during good times. National defense spending is
not an automatic stabilizer because it is less concerned with the ups and downs in the
economy.
(a) National defense spending changes depending upon the security situation and not on
the business cycles. Thus, national defense spending does not signify an automatic
stabilizer.
(b) Social welfare payments are made during economic downturns that prevent
aggregate demand from falling excessively during economic downturn. But, once
the economy picks up the social welfare payments will decrease which prevent
aggregate demand from rising excessively.
(c) Unemployment compensation payments increase during the economic downturn
because of higher rate of unemployment caused by reduced business activity.
Unemployment compensation payments prevent aggregate demand from falling
excessively during economic downturn. On the contrary, these payments will be low
no sooner than the economy picks up. This prevents aggregate demand from rising
excessively.
(d) & (e) tax revenues automatically change depending upon the profits generated by
the firms. It would be lower during downturn and higher during boom.
< TOP >
25. Answer : (a)
Reason : Sale of government securities in the open market reduces the money supply which in turn
brings down inflation in the economy.
< TOP >
26. Answer : (d)
Reason : Change in foreign exchange reserves = Current account balance + Capital account
balance
= –2000 + 6000 = 4000 MUC
< TOP >
17
27. Answer : (c)
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
= 2000+3000+2200-1200+200
= Rs.6200billion
< TOP >
28. Answer : (c)
Reason : The term ‘narrow money’ is Currency with the public + Demand deposits of the Banking
system + other deposits with the RBI.
< TOP >
29. Answer : (c)
Reason :
7.5 Rs.250Cr.
0.03
=
< TOP >
30. Answer : (d)
Reason : Money supply (M s ) =(1 +cu)/(cu + r) × H; Cu is the currency deposit ratio,r is the
reserve ratio and H is the high powered money.
High powered money = Currency with the public + bank reserves
= 4,200 + 1,200 = Rs.5,400 crores
Substituting the values in the formula, we get Ms = (1 + 0.42)/(0.42 + 0.12)× 5400
= (1.42)/0.54). 5400 = Ms = Rs.14,200 crores
< TOP >
31. Answer : (a)
Reason : Assume that the RBI purchased Rs. 500 cr worth of government bonds from the general
public. This will increase the banking systems reserves, the monetary base and the
system’s lending capacity
< TOP >
32. Answer : (b)
Reason : If there is a short term capital outflow out of U.K. and into US, the outflow will appear as
a debit on the U.K. capital account.
< TOP >
33. Answer : (b)
Reason : If the country called ‘Angelland’ enjoys a comparative advantage in the production of
coffee over the country called ‘Babel’, then the opportunity cost of production in
Angelland is lower than in Babel.
< TOP >
34. Answer : (c)
Reason : The periodic upswings and down swings in the level of economic activity which forms a
regular pattern with an expansion of activity followed by a contraction ,succeded by
further expansion are referred to as business cycles. Each of the phases is characterized
by certain features.
(a) Mere existence of unemployment cannot be taken as an indicator of recession or
depression, as in a country like India, even though the economy is growing these is
unemployment. Hence not true.
(b) Price levels are only an indicator of purchasing power, which in turn is dependent on
income levels of the people also. Hence cannot be taken as primarily indicator of the
different phases of business cycles.
(c) By definition, a business cycle is a swing in total national output, income and
employment market by contraction or expansion in many sectors of the economy
changes in real GNP brings changes in prices, employment. Hence only on the basis
of changes in real GDP different phases are classified. Hence real GDP is the correct
option.
(d) Changes in inventory level do give an indication about the different phases, but the
changes inventory level are as a result of changes in real GDP.
(e) Gross investment is dependent on future growth rate, which again based on
estimation of real GDP in future. Hence gross investment cannot be primarily
indicator.
< TOP >
35. Answer : (b) < TOP >
18
Reason : (a) Structural unemployment arises when the regional or occupational pattern of the job
vacancies does not match the pattern of workers availability and suitability. The
above situation does not represent structural unemployment.
(b) Unemployment that is caused by constant changes in the labor market is called
frictional unemployment. It occurs on account of two reasons: (a) employers not
fully aware of all available workers and their job qualifications; and (b) available
workers are not fully aware of the jobs being offered by employers. Even though the
suitable job is available for Mr.Robert it took him 2 months to find the job. Thus,
the unemployment encountered by Robert is in the nature of frictional (natural)
unemployment.
(c) Unemployment that arises when there is general downturn in business activity is
called cyclical unemployment.
(d) Unemployment that arises because of seasonal variations is called seasonal
unemployment. For example, agricultural labors normally face unemployment during
summer.
(e) When marginal productivity becomes negative because of excess employment we
call it as disguised unemployment. In less developed countries like India there is
widespread disguised unemployment in agricultural sector.
36. Answer : (e)
Reason : If an economy is in recession, expansionary fiscal and monetary policies can help
increase the AD and revive economic activity. Options (a) and (b) are expansionary fiscal
policy tools and options (c) and (d) are expansionary monetary policy tools. Therefore,
any of the options would be appropriate to help an economy in recession.
< TOP >
37. Answer : (d)
Reason : M1 = Currency with the public + Demand deposits with the banking system
+ other deposit with the bank.
M3 = M1+ Time deposits with the banking systems.
(a) Is not the answer because the difference between M3 and M1 is not the demand deposits.
(b) Is not the answer because the difference between M3 and M1 is not the post office
savings deposits.
(c) Is not the answer because the difference between M3 and M1 is not the savings deposits.
(d) Is the answer because the difference between M3 and M1 is the time deposits.
(e) Is not the answer because the difference between M3 and M1 is not M2.
< TOP >
38. Answer : (c)
Reason : Economic goods are those that command a price. Air is free good and not an economic
good.
< TOP >
39. Answer : (b)
Reason : When a producer can sell as much as he wants at the current market pruice, his demand is
perfectly elastic and hence slope is zero.
< TOP >
40. Answer : (a)
Reason : When revenues decline due to price increase, ti means the quantity demanded decreased
greater than proportion to the increase in the price.
< TOP >
41. Answer : (a)
Reason : For luxuries, the income elasticity of demand is greater than one.
< TOP >
42. Answer : (d)
Reason : When the decrease in supply is greater than the decrease in demand, the price rises and
the quantity falls.
< TOP >
43. Answer : (d)
Reason : 1 unit increase (decrease) in price causes 20 units decrease (increase) in quantity
demanded.
< TOP >
44. Answer : (c)
Reason : Qd = 10,000 – 4P
Qs
= 2,000 + 6P
< TOP >
19
Equilibrium price is determined where,
Qs = Qd
3,000 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 3,000
10P = 7000
P = 700.
If the govt. imposes a sales tax of Rs.100 per units
Qs = 3,000 + 6 (P – 100)
= 3,000 + 6P – 600
= 2400 + 6P.
∴Equilibrium price is determined, when Qs = Qd
∴ 2400 + 6P = 10,000 – 4P
6P + 4P = 10,000 – 2400
10P = 7600
P = 760
∴ Change in Price = 760 – 700 = Rs.60 (increase)
45. Answer : (d)
ep= Q
. P
P
Q
Δ
Δ
ΔQ = –500Q = 2000
ΔP = 1.50P = 8.50
∴ep= 2000
8.50
1.50
500 ×
−
= |1.42|
< TOP >
46. Answer : (c)
Reason : At equilibrium, Qs = Qd
1000 – 200P = 800P – 2000
3000 = 1000P
P = 3.
Elasticity of supply = Δ Q/ Δ P x P/Q = 800 x 3/400 = 6.
Hence the correct answer is (c).
< TOP >
47. Answer : (d)
Reason : Marginal Utility is change in Total Utility when additional unit of the good is consumed.
If MU is negative, Total Utility will be decreasing.
< TOP >
48. Answer : (a)
Reason : Movement of the demand curve implies that the change in the price of the good will lead
to change in the demand for the good. For instance, fall in the price leads to extension in
the demand curve. Similarly increase in the price of good leads to contraction in the
demand for the good. A shift in the demand curve is caused by a change in any non-price
determinant of demand. The curve can shift to the right or left. The factors that are
responsible for shift in the demand curve may be listed out as follows:
• Income of the consumers
• prices of other goods (substitutes or complements)
• Tastes and preferences of consumers.
a. It is appropriate in this instance because it is not the factor that is responsible for the
shift in the demand curve but it represents the movement along the demand curve.
b. It is not appropriate in this instance because it is one of the factors that is responsible
for shift in the demand curve.
c. It is not appropriate in this instance because it is one of the factors that is responsible
for shift in the demand curve.
< TOP >
20
d. It is not appropriate in this instance because it is one of the factors that is responsible
for shift in the demand curve.
e. It is not appropriate in this instance because it is one of the factors that is responsible
for shift in the demand curve. The correct answer is (a).
49. Answer : (a)
Reason : The indifference curve are convex to the origin. It follows from the assumption that the
marginal rate of substitution of X for Y (MRSxy) diminishes as more and more of X is
substituted for Y. Only a convex indifference curve can mean a diminishing marginal rate
of substitution of X for Y.
< TOP >
50. Answer : (e)
Reason : Cross elasticity of demand =
%change in demand for Pr oduct A
%change in price of Pr oduct B
(80 100)
100 80
2
80 40
40 80
2
−
+
−
+
=
0.22
0.67
−
= – 0.33
< TOP >
51. Answer : (c)
Reason : Marginal product is the increase in the total product resulting from a unit increase in the
employment of a variable input. When marginal product is negative, TP decreases. When
TP is falling and output is increasing, AP also starts falling.
a. TP will be maximum, when MP = 0
b. AP will be maximum, when MP = AP
c. When marginal product is negative, TP decreases, and AP also decreases.
d. When MP is negative, TP falls.
e. AP cannot be negative.
The correct answer is (c).
< TOP >
52. Answer : (c)
Reason : AC = TC/Q = 36 – 0.60Q + 0.020Q 2
AC is minimum when ∂ AC/ ∂ Q = 0
= – 0.60 + 0.040Q = 0
0.040Q = 0.60
Q = 15
. At Q = 15, AC = 36 – 0.60(15) + 0.020(15) 2 = 36 –9+4.5 = Rs.31.50
< TOP >
53. Answer : (b)
Reason : To operate efficiently, MPK/w = MPL /r.
MPL = ∂TPL / ∂Q = 2 and
MPK = ∂TPK/∂Q =1.Thus MPl /w = 2/100 = 0.02 and
MPK/r = 1/100 = 0.01.
As MPL/w >MPK/r, the firm produces cost minimizing output by using labor input.
< TOP >
54. Answer : (e)
Reason : When marginal product (MP) is greater than average product (AP), AP will be increasing.
When MP < AP, AP will be decreasing. Therefore, AP is maximum when AP is equal to
MP.
(a) When MP=0, total product is maximum and AP will be decreasing. Hence option (a)
is not the answer.
(b) When MP is maximum, AP is less than MP and AP will be increasing. Hence option
(b) is not the answer.
(c) When MP is minimum, AP will be decreasing. Hence option (c) is not the answer.
(d) When MP is negative, AP will be decreasing. Hence option (d) is not the answer.
< TOP >
21
(e) When MP equals A), maximum point on the average product is reached.
55. Answer : (b)
Reason : Marginal product of labor is the addition to the total production by employment of an
extra unit of a variable factor.
(a) Is not the answer because marginal product of labor is not the cost of employing
labor for producing one more unit of output.
(b) Is the answer because marginal product of labor is the change in output from using
one more unit of labor.
(c) Is not the answer because marginal product of labor is not the change in revenue
from selling one more unit of output.
(d) Is not the answer because marginal product of labor is not the change in revenue
from using one more unit of output.
(e) Is not the answer because none of the above is not the answer.
< TOP >
56. Answer : (c)
Reason : Here, MPL = ∂Q/∂L = 8L + 16-3L 2 /3 or –L 2 +8L +16.
MPL is maximum when ∂MPL/∂L =0.
∂MPL/∂L =-2L + 8.
Equating this to zero gives L =4 units. Diminishing returns start to exist when the labor
employed is 4 units.
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57. Answer : (e)
Reason : The vertical distance between the average cost and average variable cost is indicated by
average fixed cost. Hence the correct answer is (e).
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58. Answer : (b)
Reason : The firm at the minimum point of its average cost is working at its optimum capacity.
< TOP >
59. Answer : (c)
Reason : Average productivity = No.of units of the input used
Total productivity
< TOP >
60. Answer : (e)
Reason : For a monopolist, there is no unique relationship between price and quantity supplied.
Therefore, the supply curve of a monopolist is irrelevant.
(a) Is not the answer because the supply curve of a perfectly competitive firm is the
portion of its marginal-cost curve that lies above the average variable costs.
(b) Is not the answer because the supply curve of a monopolist is not the portion of its
marginal-cost curve that lies above the average cost curve.
(c) Is not the answer because the supply curve of a monopolist is not vertical.
(d) Is not the answer because the supply curve of a monopolist is not horizontal.
(e) Is the answer because a monopolist has no supply curve.
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61. Answer : (d)
Reason : Implicit costs are the costs that are inherent for the firm so when the wages are hiked, it is
not affected.
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62. Answer : (d)
Reason : Here, MC = -2+6Q.If Q =3 MC = -2 +18 = Rs.16
< TOP >
63. Answer : (c)
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.
100 – 20Q + 1.5Q2
= 100 – 10Q + 0.5Q2
1.5Q2 – 0.5Q2 – 20Q + 10Q = 0.
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22
Q2 –10Q = 0
Q(Q–10) = 0
Q=10.
At Q = 10, AVC = 100 – 10(10) + 0.5 (10)2
= 100 – 100 +50 = Rs.50.
64. Answer : (d)
AVC = 300 – 10 Q + 0.5 Q2
VC = Q X AVC = 300 Q – 10 Q2 + 0.5Q3
Fixed cost = 150
TC = FC + VC = 150 + 300 Q – 10Q2 + 0.5 Q3
MC =
dTC
dQ = 300 – 20 Q + 1.5 Q2
Minimum possible MC is where
dMC
dQ = 0
dMC
dQ = -20 + 3Q = 0
3Q = 20
Q = 6.67
MC = 300 – 20 (6.67) + 1.5 (6.67)2
= 300 – 133.4 + 66.73
= 233.33.
< TOP >
65. Answer : (d)
Reason: I. In a perfectly competitive market, the products produced by all the firms in the industry
are homogeneous. The technical characteristics of the product as well as the services
associated with its sale and delivery are identical.II. In a perfectly competitive market
cost structure of every firm is not identical. The cost conditions of the industry are
reflected in the change in factor prices, as the industry expands. With the expansion of the
industry in the long run, cost curves of the firms shift on account of external economies
and diseconomies.III. In a perfectly competitive market, there are large number of buyers
and sellers in the industry. No individual seller has any economic or market power to
influence the market price in his favor through his own individual behavior or action.
Buyers have no preferences towards any seller.IV. In a perfectly competitive market,
buyers have perfect knowledge about prices in the market. The information regarding
price is assumed to be available free of costs.
(a) Is not the answer because I above is one of the necessary assumption for a market to
be perfectly competitive.
(b) Is not the answer because II above is one of the necessary assumption for a market
to be perfectly competitive.
(c) Is not the answer because both I and III above are not all necessary assumptions for
a market to be perfectly competitive.
(d) Is the answer because both I, III and IV above are all necessary assumptions for a
market to be perfectly competitive.
(e) Is not the answer because II above is not the assumption of a perfectly competitive
market where as III and IV above are necessary assumptions for a market to be
perfectly competitive.
< TOP >
66. Answer : (b)
Reason : Here TR is Rs.200 (20.10).
FC +VC = 100 + 20 (4) = Rs.80.Hence accounting profits are Rs.20.
< TOP >
67. Answer : (c)
Reason : An individual firm in perfect competition is a price taker. The level of market price is
determined by the market supply and demand. A perfectly competitive firm has control
< TOP >
23
over only on quantity. So sales revenue can be increased by increasing the production
only.
(a) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by reducing the prices.
(b) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the prices.
(c) Is the answer because a perfectly competitive firm can increase its sales revenue by
increasing the production.
(d) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the expenditure on advertising. Because all firms produce a
homogeneous product. The technical characteristics of the product as well as the
services associated with its sale and delivery are same. A buyer can’t differentiate
among products of differentiate firms.
(e) Is not the answer because a perfectly competitive firm cannot increase its sales
revenue by increasing the sale force.
68. Answer : (c)
Reason : When the market price of a firm is such that it cannot cover even its AVC, it must shut
down.
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69. Answer : (a)
Reason : If an entrepreneur wants to maximize profits without affecting his price, he must produce
where his AC is the minimum.
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70. Answer : (d)
Reason : Perfect competition is a form of market structure which represents a market without
rivalry among the individual firms. When the product is similar and identical, given all
other conditions, a perfectly competitive firm can only be a price taker. The price of the
good is determined by the market forces. The demand curve is horizontal to x-axis
implying that the producers can produce as much as quantity of output to the given level
of price.
a. Oligopoly is a form of market structure where there are few sellers. The demand
curve is indeterminable because of the interdependence between the firms and it
depends on the reaction curves of the competitor.
b. Monopoly is a form of market structure where there is only one producer of the
good. The demand curve is downward sloping implying that the producer is a pricemaker.
The distinguishing feature of this form of market structure is that the average
costs of production continually decline with increased output as a result of which
average costs of production will be lowest when a single large firm produces the
entire output demanded.
c. Monopolistic competition is a market structure where there are many firms selling
closely related but non-identical goods. The demand curve is downward sloping
because of product differentiation.
d. The demand curve in the perfect competition is horizontal to x-axis implying that
producer can produce as much as the quantity of output for a given level of price.
e. The demand curve of a duopolist is indeterminate because of high degree of
interdependence between the firms.
Hence, the correct answer is (d).
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71. Answer : (c)
Reason : A monopolist never produces at the point where his elasticity of demand is less than one.
Because by doing so, he incurs losses.
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72. Answer : (a)
Reason : The profit maximizing condition for a firm is where the MC =MR.
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73. Answer : (d)
Reason : When price discrimination is not allowed, the PA=PT and QA +QT =Q (total output).It can
be written as QA=600-PA =600-P.QT = 400-PT .
Since PA =PT we can write 400-PT as 400-P.
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24
Since Q = QA + QT, we have Q = 600-P+400-P = 100-2P or P = 500-0.5Q.
At profit maximization, MR=MC; MC = ∂TC/∂Q and TC = AC.Q = 15,000 +100Q.
Thus MC = 10 and TR = P.Q = (500-0.5Q).Q = 500Q –0.5Q2 .MR = 500-Q.AT
equilibrium, MC =MR. Hence 500 – Q = 100 or Q = 400.Here,P = 500-0.5(400) = Rs.300
74. Answer : (b)
Reason : Price discrimination is the policy by which different prices are changed for the same
product for different purposes and in different markets.
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75. Answer : (b)
Reason : 10P = 100 – Q; P = 10 – 0.1Q; TR = 10Q – 0.1Q2; MR = ∂TR/∂Q ⇒ 10 – 0.2Q = 4;
0.2Q = 6; Q = 30. When Q = 30, P = 10 – 0.1(30) = 7.When P = 7, Elasticity of demand =
∂Q/∂P × P/Q = –10 × 7/30 = (2.33)
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76. Answer : (e)
Reason : The kinked demand curve model is based on the assumption that when a firm increase
price other firms in the industry do not follow and if the firm decrease price other firms
also decrease the price. Therefore, the answer is (e).
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77. Answer : (e)
Reason : In an oligopoly, a price war refers to successive and continued price cuts by the
competitive firms to increase sales and revenues. A price war aims at increasing market
share, but not profits.
(a) Is not the answer because a price war doesn’t mean a continuous price cuts by firms
to increase revenues and profits.
(b) Is not the answer because a price war doesn’t mean an unexpected price cut by a
firm to improve its sales volumes
(c) Is not the answer because a price war doesn’t mean a decrease in quantity supplied
by the competitive firms to raise prices in order to maximize profits.
(d) Is not the answer because a price war doesn’t mean an entry of a new firm in the
industry who charges a lower price
(e) Is the answer because a price war means a successive and continued price cuts by
competitive firms with an aim to increase market share.
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78. Answer : (c)
Reason : In perfect competition and monopolistic competition there are large number of buyers and
sellers and there are no exit and entry barriers. In perfect competition products are
homogeneous and there are no selling activities, whereas in monopolistic competition, the
products are differentiated and selling activities exist.
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