Economics (MB141): October 2005

 Economics (MB141): October 2005

• Answer all questions.
• Marks are indicated against each question.
1.
The proportionate change in quantity demanded due to the change in price can be expressed as
(a) Elasticity of demand
(b) Law of demand
(c) Law of supply
(d) Elasticity of supply
(e) Marginal rate of substitution.
(1 mark)
2.
In India, the demand for life saving drugs is assumed to be perfectly inelastic. If the governmentimposes a tax, the tax burden is borne by
(a) Only seller
(b) Only buyers
(c) More by the buyers and less by the suppliers
(d) Equally by both buyers and suppliers
(e) Less by the buyers and more by the suppliers.
(1 mark)
3.
The demand and supply functions of a good are
Qs = 400 + 15P
Qd = 600 – 10P
If the government fixes a price ceiling of Rs.12 for the product, there would be
(a) No supply of the good
(b) Shortage of the good
(c) Excess supply of the good
(d) Excess demand for the good
(e) No effect on demand and supply.
(2 marks)
4.
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)
5.
The average cost of producing 500 units of a good is Rs.5. The firm incurs a fixed cost of Rs.500 in theform of rent paid for the building. If the current price of the good is Rs.10 and the firm increases its sales to 750 units, the profit earned by the business unit, assuming the marginal cost is constant, is
(a) Rs.3,500 (b) Rs.7,000 (c) Rs.4,500 (d) Rs.4,000 (e) Rs.7,500.
(2 marks)
6.
Diseconomies of scale refer to
(a) The forces which reduce the average cost of producing a good as the firm expands the size of its plant
(b) The forces which reduce the marginal cost of producing a good as the firm expands the size of its plant
(c) The forces which increase the average cost of producing a good as the firm expands the size of its plant
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(d) The forces which increase the marginal cost of producing a good as the firm expands the size of itsplant
(e) The forces which keep the average cost of producing a good constant as the firm expands the size of its plant.
(1 mark)
7.
A combination of Capital (K) and Labor (L) lies to the right of the firm’s cost line; it means that thecombination is
(a) Undesirable
(b) Efficient, given the budget
(c) Inefficient, given the budget
(d) Unattainable, given the budget
(e) Inferior to the points within the constraint in terms of production.
(1 mark)
8.
Long run cost function of a firm is TC = Q3 – 40Q2+ 450Q. What is the minimum possible average cost?
(a) Rs.30 (b) Rs.40 (c) Rs.50 (d) Rs.60 (e) Rs.70.
(2 marks)
9.
The quantity of foodgrains demanded by a wholesale merchant is Qd = 100-5P, where Qd is the quantity demanded. The value of the slope of the demand curve will be
(a) 5.0 (b) 0.2 (c) –0.2 (d) –5 (e) 0.01.
(1 mark)
10.
Which of the following is true of a perfectly competitive firm in long run equilibrium?
(a) P = MR = MC = AR (b) P = MR, but MR > MC
(c) P = MC, but MR < MC (d) MR = MC and P < MR
(e) MR = MC and P > MR.
(1 mark)
11.
If the marginal revenue for a product is Rs.15 and the elasticity of demand for the product is 2, the average revenue for the product will be
(a) Rs.7.50 (b) Rs.15.0 (c) Rs.30.0 (d) Rs.22.5 (e) Rs.20.0.
(2 marks)
12.
A consumer is willing to buy 100 units of a product at a price of Rs.10 per unit. If the current price ofthe product is Rs.9, the consumer surplus is
(a) Re.1 (b) Rs.50 (c) Rs.100 (d) Rs.900 (e) Rs.1,000.
(1 mark)
13.
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)
14.
The total fixed cost of a firm producing ballpoint pen is Rs.20,000. If each pen sells at Rs.20 and has anaverage variable cost of Rs.15 per pen, what should be the output of the firm if it wants to earn a profitof Rs.30,000?
(a) 5,000 units (b) 10,000 units (c) 15,000 units (d) 20,000 units (e) 6,000 units.
(2 marks)
15.
A firm operating in a perfectly competitive industry has the following cost function.
TC = 500 + 8Q + 0.035Q2
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Supply and demand functions for the industry are given as follows:
QS = 8,500 + 100P
QD= 14,500 –
300P
The profit maximizing output for the firm will be
(a) 100 units (b) 200 units (c) 10 units (d) 50 units (e) 250 units.
(2 marks)
16.
The demand function for a firm is Q = 2,000 –50P. If the firm wants to maximize total revenue, its output should be
(a) 1,200 units (b) 800 units (c) 750 units (d) 1,000 units (e) 500 units.
(2 marks)
17.
The data pertaining to price and quantity demanded of a good are as follows:
Price (Rs)
Quantity demanded (units)
10
20
15
15
The value of arc elasticity of demand for the good is
(a) 0.510 (b) 1.00 (c) 2.00 (d) 0.402 (e) 0.714.
(2 marks)
18.
An automobile manufacturer estimates the price elasticity of demand for bikes to be unitary. The price of the bike is currently Rs.10,000 and the manufacturer wants to increase the quantity demanded ofbikes from 30 to 60 units. If the manufacturer wants to sell 60 bikes, at what price should he sell these bikes?
(a) Rs.10,000 (b) Rs.50,000 (c) Rs.5,000 (d) Rs.15,000 (e) Rs.20,000.
(2 marks)
19.
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)
20.
Law of diminishing returns is not relevant when
(a) Factors are not perfect substitutes of each other
(b) The time period is short
(c) All factor inputs are increased by the same proportion
(d) Technology remains constant
(e) Capital is held constant with varying amounts of labour.
(1 mark)
21.
Break even point of a firm is achieved where
(a) Total costs equal total revenue
(b) Marginal costs equal marginal revenue
(c) Average revenue equals marginal revenue
(d) Marginal product equals average product
(e) Marginal revenue equals average cost.
(1 mark)
22.
The total cost function for Lignite Corporation is estimated as TC = 200 + 4Q + 2Q2. The firm is a perfectly competitive firm and is selling the goods at Rs. 24. If the output produced and sold by Lignite
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Corporation is 5 units, the profit/loss earned by Lignite Corporation is
(a) Rs. 150 (profit) (b) Rs. 125 (loss) (c) Rs. 150 (loss)
(d) Rs. 125 (profit) (e) Rs. 250 (loss).
(2 marks)
23.
If the production function is Q = 20K 0.3 L 0.3, what is the marginal rate of technical substitution of labor for capital?
(a) 0.3 LK (b) 0.3 KL (c) LK (d) KL (e) K –L.
(2 marks)
24.
Which of the following statements is false?
(a) Different points on an indifference curve stand for different combinations of two goods
(b) Different points on an indifference curve stand for the same level of satisfaction
(c) The slope of an indifference curve is the marginal rate of substitution
(d) Indifference curves always slope upwards
(e) Two indifference curves can never intersect each other.
(1 mark)
25.
The highly elastic demand curve of the firm in a monopolistically competitive market indicates that theproducts are
(a) Homogeneous
(b) Differentiated and close substitutes
(c) Differentiated but not close substitutes of each other
(d) Differentiated and perfect substitutes
(e) Heterogeneous and perfect substitutes.
(1 mark)
26.
Which of the following indicates the same level of total output for any combination of inputs?
(a) Indifference curve (b) Isoquant
(c) Production possibility frontier (d) Isocost line
(e) Marginal product curve.
(1 mark)
27.
Which of the following costs remain constant as the output increases?
(a) Marginal cost (b) Average variable cost
(c) Average fixed cost (d) Total variable cost
(e) None of the above.
(1 mark)
28.
A wheat producer finds that the price elasticity of demand for wheat is infinity. If the manufacturer decides to increase the price of the wheat by 10 %, the demand for wheat will
(a) Increase by 10%
(b) Remain the same
(c) Decline to zero
(d) Decrease by 10%
(e) Inadequate information.
(1 mark)
29.
If the total variable cost of a bottling plant increased from Rs. 100 to Rs. 130 with the increase in outputfrom 50 units to 51 units, the marginal cost of the firm will be
(a) Rs.25 (b) Rs.26 (c) Rs.30 (d) Rs.150 (e) Rs.130.
(1 mark)
30.
The demand schedule of a certain brand of tea is given below:
Price (Rs)
100
80
50
30
20
Quantity demanded (units)
10
30
40
60
80
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The total revenue for the company producing this brand of tea is maximum when quantity demanded isequal to
(a) 10 units (b) 30 units (c) 40 units (d) 60 units (e) 80 units.
(1 mark)
31.
A person will continue to pursue an activity up to the point where
(a) Total benefit from that activity is equal to total cost of that activity
(b) Average benefit from that activity is equal to average cost of that activity
(c) Marginal benefit from that activity is equal to zero
(d) Marginal benefit from that activity is equal to marginal cost of that activity
(e) Average benefit from that activity is equal to marginal cost of that activity.
(1 mark)
32.
Production function of a firm is Q = 10L2 – 0.5L3. If the labor input is 10 units, average product of labor is
(a) 10.0 units (b) 50.0 units (c) 1.0 units (d) 0.5 units (e) 150.0 units.
(2 marks)
33.
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)
34.
For a firm in a perfectly competitive market, the average and marginal revenue curves coincide because
(a) The firm is a price taker
(b) There are constant returns to scale
(c) There are constant returns to the variable factors
(d) It is a condition of profit maximization
(e) It is a condition of perfectly inelastic demand.
(1 mark)
35.
For a firm, the average cost function is estimated as
AC= 100Q + 20 + 4Q
What is total variable cost for the firm at an output of 15 units?
(a) Rs.100 (b) Rs.750 (c) Rs.1,200 (d) Rs.1,340 (e) Rs.2,100.
(2 marks)
36.
A profit maximizing firm will stop production in the short run if price is
(a) Less than average cost
(b) Less than marginal cost
(c) Less than the average variable cost
(d) Equal to average cost
(e) Less than total cost.
(1 mark)
37.
The value of all the goods and services produced in an economy during a period of time and adjustedfor inflation is called
(a) Real GDP (b) Nominal GDP
(c) Real National income (d) Nominal national income
(e) Per capita income.
(1 mark)
38.
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
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(d) Real GNP to nominal GDP
(e) Nominal wage to real wage.
(1 mark)
39.
The following information is extracted from National Income Accounts of a country for the year 2005:
Particulars
MUC
NNP at factor cost
8,400
Indirect taxes
1,900
Subsidies
200
NDP at market prices
10,000
The net factor income from abroad of the economy for the year 2005 would be
(a) 500 MUC (b) 1,000 MUC (c) 100 MUC (d) 200 MUC (e) 300 MUC.
(2 marks)
40.
Which of the following statements is true?
(a) There is a surplus output to the right of the Keynesian equilibrium output
(b) At the Keynesian equilibrium, consumption is greater than disposable income
(c) The Keynesian equilibrium output is necessarily at the full employment output
(d) At the Keynesian equilibrium output, consumption is less than disposable income
(e) At the Keynesian equilibrium, there will be unintended inventories.
(1 mark)
41.
The following information is given for an economy:
Consumption
(C)
100+0.75Yd
Investment
(I)
80 MUC
Taxes
(T)
0.20Y
Government Expenditure
(G)
150 MUC
The equilibrium income for the economy is
(a) 900 MUC (b) 825 MUC (c) 950 MUC (d) 930 MUC (e) 910 MUC.
(2 marks)
42.
When a central bank wants to pursue an expansionary monetary policy, it will
(a) Increase the bank rate and decrease the reserve requirements
(b) Decrease bank rate and increase reserve requirements
(c) Increase both the bank rate and the reserve requirements
(d) Decrease both the bank rate and reserve requirements
(e) Induce no changes in the bank rate and the reserve requirements.
(1 mark)
43.
GDP of a country is 8,000 MUC. Value of output produced in domestic country by foreign factors ofproduction is 200 MUC and value of the output produced by domestic factors of production in foreigncountries is 100 MUC. GNP of the country is
(a) 7,700 MUC (b) 7,800 MUC (c) 7,900 MUC (d) 8,100 MUC (e) 8,200 MUC.
(2 marks)
44.
Consider the following data for an economy:
Particulars
MUC
Earnings on loans and investments from abroad
500
Earnings on loans and investments to abroad
2,500
Import of services
4,000
Private remittances to abroad (transfers)
500
Private remittances from abroad (transfers)
500
Exports of services
2,000
Merchandize exports
15,000
Merchandize imports
12,000
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Merchandize imports
12,000
The current account balance for the economy is
(a) 1,000 MUC (Surplus) (b) 1,000 MUC (Deficit)
(c) 500 MUC (Deficit) (d) 500 MUC (Surplus) (e) Zero.
(2 marks)
45.
Automatic stabilizers refer to
(a) Inherent mechanisms in the stock market that automatically cause stock market gains to becancelled 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 ineconomic activity
(d) Discretionary monetary policy maneuvers designed to keep inflation under control automatically
(e) Monetary policy that aims at stabilizing interest rates in the economy.
(1 mark)
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46.
Which of the following statements is false?
(a) The difference between gross and net investment is depreciation
(b) GDP is represented as the sum of consumption, investment, government expenditure and transfer payments
(c) Depreciation is that part of the GDP that does not flow to households
(d) Households’ earn income by contributing factor inputs to the reduction of consumer goods and capital goods
(e) The difference between national income and domestic income is the net factor income from abroad.
(1 mark)
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47.
The following data is taken from National Income Accounts of a country:
Particulars
Rs. Cr.
GNP at market prices
1,700
Transfer payments
242
Indirect taxes
173
Personal taxes
203
Consumption of capital
190
Undistributed corporate profits
28
Corporate tax
75
Subsidies
20
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)
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48.
Which of the following schools of thought believes in an active government role in the macroeconomy?
(a) Keynesian economics (b) Monetarism
(c) New classical economics (d) Classical economics
(e) Rational expectations.
(1 mark)
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49.
According to the classical theory, at a level of output corresponding to the full employment level ofoutput
(a) The aggregate supply curve will be horizontal
(b) The aggregate supply curve will be vertical
(c) The aggregate supply curve will be upward sloping
(d) The aggregate supply curve will be downward sloping
(e) The aggregate supply curve is absent.
(1 mark)
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50.
In a deflationary period, the appropriate policy for the RBI would be to
(a) Buy government securities in the open market
(b) Discourage commercial banks to increase their loans
(c) Increase Cash Reserve Ratio
(d) Increase bank rate
(e) Reduce the credit to government.
(1 mark)
51.
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 corporateinvestment (I) is
(a) Rs.125 billion (b) Rs.200 billion (c) Rs.240 billion (d) Rs.300 billion (e) Rs.360 billion.
(2 marks)
52.
The overall balance of payment of an economy for the year 2005 is given below:
Rs. (million)
Items
Credit
Debit
Merchandise
53000
65474
Services
24986
18780
Transfers
15225
367
Income
2826
7708
Foreign Direct Investment
4790
1179
Portfolio Investment
7535
6591
External Assistance
2773
5233
Commercial Borrowings (MT & LT)
2737
4435
Commercial Borrowings (Short Term)
8189
7210
Commercial Banks
16926
8973
Others
536
246
Rupee Debt Service
—
474
Other Capital
6402
2909
Errors & Omissions
634
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During the year 2005, trade deficit for the economy is
(a) Rs.12,474 million (b) Rs.12,574 million
(c) Rs.12,974 million (d) Rs.13,821 million (e) Rs.13,980 million.
(2 marks)
53.
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)
54.
The business cycle is defined as
(a) The annual cycle of output
(b) The change in nominal wage rate in an year for a country
(c) The variation in the economic activity with a regular pattern
(d) The change in the foreign exchange reserves of a country
(e) The change in inflation in a year for a country.
(1 mark)
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55.
In national income analysis, when the consumption and investment schedules are added, we obtain an
(a) Aggregate supply schedule
(b) Aggregate demand schedule
(c) Aggregate gross investment schedule
(d) Aggregate net investment schedule
(e) Aggregate saving schedule.
(1 mark)
56.
If marginal propensity to consume is 0.75 the multiplier is
(a) 0.75 (b) 1.33 (c) 4.00 (d) 7.50 (e) 0.25.
(1 mark)
57.
In a two-sector economy, the consumption function is estimated to be C = 20 + 0.70Yd. If the equilibrium output is 600 MUC, the level of investment in the economy is
(a) 140 MUC (b) 150 MUC (c) 160 MUC (d) 130 MUC (e) 170 MUC.
(2 marks)
58.
If a scheduled bank meets its cash reserve requirement of 3% by depositing Rs.7.5 crore with the RBI,then the total deposit liabilities of the bank are
(a) Rs.22.50 crore
(b) Rs.225.00 crore
(c) Rs.250.00 crore
(d) Rs.150.00 crore
(e) Rs.175.00 crore.
(1 mark)
59.
The real rate of interest
(a) Equals the nominal rate of interest plus the rate of inflation
(b) Equals the rate of inflation minus the nominal rate of interest
(c) Equals the nominal rate of interest minus the rate of inflation
(d) Tends to increase when inflation increases
(e) Is more relevant to investors than consumers.
(1 mark)
60.
The monetary liabilities of a Central Bank are estimated as 1,275 MUC and the government money is25MUC. The currency deposit ratio for the economy is 0.20. Reserve ratio imposed by the CentralBank is 5%. The money supply in the economy will be
(a) 6,200 MUC (b) 6,240 MUC (c) 7,000 MUC (d) 7,240 MUC (e) 5,500 MJUC.
(2 marks)
61.
In an economy, the high-powered money and money supply are 4,300 MUC and 17,200 MUCrespectively. If the reserve ratio is 10%, currency deposit ratio for the economy is
(a) 0.17 (b) 0.20 (c) 0.24 (d) 0.27 (e) 0.29.
(2 marks)
62.
Which of the following variables will be at low levels during boom phase of a business cycle?
(a) Bank reserves (b) Wage rates
(c) Bank credit (d) Inventory
(e) Cost of production.
(1 mark)
63.
Which of the following is a consequence of a reduction in the required reserve ratio?
(a) Decrease in the credit creation and decrease in the money supply
(b) An increase in the credit creation and decrease in the money supply
(c) Increase in the credit creation and increase in the money supply
(d) Decrease in credit creation and increase in the money supply
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(e) The money supply remains unaffected.
(1 mark)
64.
In a two sector economy the savings function is S = –60 + 0.25Yd. If the investment in the economy is 100 MUC, equilibrium income will be
(a) 1,020 MUC (b) 640 MUC
(c) 660 MUC (d) 1,040 MUC (e) 1,240 MUC.
(1 mark)
65.
Which of the following best describes bank rate?
(a) The rate at which the central bank discounts foreign bills
(b) The rate at which the central bank discounts the government’s bills
(c) The rate at which the central bank discounts the commercial bank bills
(d) The rates at which loans are given to costumers by commercial banks
(e) The rate at which deposits are mobilized by commercial banks.
(1 mark)
66.
The consumption function shows the relationship between Consumption and
(a) disposable income
(b) expectations
(c) price level
(d) money supply
(e) rate of interest.
(1 mark)
67.
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)
68.
The following balances are taken from the balance sheet of the Central Bank of a country.
Particulars
MUC
Financial Assets
24,000
Other Assets
100
Net worth
1,000
Other non-monetary liabilities
525
The amount of Government money is 25 MUC. The high-powered money in the economy would be
(a) 22,600 MUC (b) 22,575 MUC
(c) 20,000 MUC (d) 21,500 MUC (e) 19,500 MUC.
(2 marks)
69.
If the marginal propensity to consume is 0.8 and the autonomous investment increases 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.
(2 marks)
70.
Which of the following happens when the central bank increases open market purchases?
(a) Aggregate supply decreases
(b) Rate of inflation increases
(c) Interest rates will increase
(d) Aggregate demand decreases
(e) Total output decreases.
(1 mark)
71.
Current account deficit for an economy is 5,000 MUC. If foreign exchange reserves increase by 1,000 MUC for the same period, capital account balance is
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(a) 1,000 MUC (b) 4,000 MUC
(c) 5,000 MUC (d) 6,000 MUC (e) 10,000 MUC.
(1 mark)
72.
Which of the following statements correctly illustrates the multiplier?
(a) Any increase in aggregate spending that causes the aggregate demand curve to shift will result in a larger increase in national income
(b) Any increase in autonomous investment will create a multiplier effect which will decrease the marginal propensity to consume
(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 proportionate increase in consumer spending
(e) For any given increase in income, there is no increase in consumer spending.
(1 mark)
73.
Which of the following is a stock variable?
(a) Gross Domestic Product (b) Inventory of a firm
(c) Inflation (d) Exports
(e) Investment.
(1 mark)
74.
The following information is extracted from National Income Accounts of a country:
Particulars
Million units of currency (MUC)
NDP at market prices
10,000
Indirect taxes
700
Subsidies
200
Gross domestic investment
1,600
Net domestic investment
1,300
The GDP at factor cost would be
(a) 8,000 MUC (b) 8,800 MUC (c) 9,800 MUC (d) 11,800 MUC (e) 12,000 MUC.
(2 marks)
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Suggested Answers Economics (MB141): October 2005
1.
Answer : (a)
Reason : The proportionate change in quantity demanded due to the change in price can be expressed as elasticity of demand.
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2.
Answer : (b)
Reason : When the demand for life saving drugs is perfectly inelastic, the burden of a tax is borne entirely by the buyers.
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3.
Answer : (e)
Reason : At equilibrium, Qs = Qd
400 + 15P = 600 – 10P
25P = 200
Or, P = 8
Since, price ceiling is above the equilibrium price of Rs.8, there would not have any affect on demand and supply of the good.
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4.
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.
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5.
Answer : (d)
Reason : Total cost for producing 500 units = 500 x 5 = 2500
Total Variable Cost (TVC) = 2500 – Total Fixed Cost = 2500 - 500 = Rs.2,000
Average variable cost = 2000/500 = Rs.4
Total cost for producing 750 units = 750 x 4 + 500 = Rs.3,500
Total revenue (TR) = 750 x 10 = 7,500
Thus, total profit = 7500 – 3500 = Rs.4,000.
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6.
Answer : (c)
Reason : Diseconomies of scale refer to the forces causing the average cost of production to increase as the output increases. Therefore the answer is (c).
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7.
Answer : (d)
Reason : A combination of inputs to the right of the cost line indicates that it is a point above the cost function which cannot be reached with the given budget. Hence, the correct answer is (d).
(a) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost line is not undesirable.
(b) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost line is not concerned whether the combination is efficient or not, given the budget.
(c) Is not the answer because the combination of capital and labor lies to the right of the firm’s cost line is not concerned whether the combination is inefficient or not, given the budget
(d) Is the answer because the combination of capital and labor lies to the right of the
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12
firm’s cost line is unattainable, given the budget. The firm’s cannot hire the combination of capital and labor, given the budget.
(e) Is not the answer because the combination of capital and labor are not inferior to the points within the constraint in terms of production, but it is not attainable.
8.
Answer : (c)
Reason : TC = Q3 – 40Q2 + 450Q
AC = Q2 – 40Q + 450
∂AC / ∂Q = 0 gives
2Q – 40 = 0
Q = 20
When Q = 20, AC = 202 – 40 × 20 + 450
= 400 – 800 + 450
= 50.
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9.
Answer : (c)
Reason : Differentiating the equation we get;∂Q/∂P = -5
But slope =∂P/∂Q = -1/5
Hence the correct answer is (c)
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10.
Answer : (a)
Reason : A perfectly competitive firm is in equilibrium only when P = MR =MC because in perfect competition, MR = P.
(a) Is the answer because a perfectly competitive firm is in equilibrium only when P = MR =MC.
(b) Is not the answer because a perfectly competitive firm is not in equilibrium when P = MR, but MR > MC.
(c) Is not the answer because a perfectly competitive firm is not in equilibrium when P = MC, but MR < MC.
(d) Is not the answer because a perfectly competitive firm is not in equilibrium when MR = MC, but P < MR.
(e) Is not the answer because a perfectly competitive firm is not in equilibrium when MR= MC, but P > MR.
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11.
Answer : (c)
Reason : MR = AR(1-1/e)
15 = AR ( 1-1/2)or AR = 30
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12.
Answer : (c)
Reason : Consumer surplus is the amount of money actually paid by the consumer and the amount of money he is willing to pay rather than go without it.
Consumer surplus = (100×10) – (100 × 9)
Or Rs.100
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13.
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.
When MP=0, total product is maximum and AP will be decreasing. Hence option (a) is not the answer.
When MP is maximum, AP is less than MP and AP will be increasing. Hence option (b) is not the answer.
When MP is minimum, AP will be decreasing. Hence option (c) is not the answer.
When MP is negative, AP will be decreasing. Hence option (d) is not the answer.
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14.
Answer : (b)
Reason : Profit = TR –TC
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13
TR = 20Q
TC = total fixed cost + total variable cost
Or 20,000 + 15Q
Total revenue = 20Q
Profit = TR – TC or 20Q – (20,000 + 15Q)
= 20Q –20000-15Q
Given profit = 30,000
20Q- 20,000 – 15Q = 30000
or Q = 10,000
15.
Answer : (a)
Reason : QS = 8,500 + 100P
QD = 14,500 – 300P
At equilibrium QS = QD
8,500 + 100P = 14,500 – 300P
400P = 6,000
P = 15
Since the firm is operating in a perfectly competitive industry, the firm is a price taker and the price is constant at 15.
TC = 500 + 8Q + 0.035Q2
To maximize profits MC = MR
MC = QTC∂∂ = 8 + 0.07 Q
MR = P = 15
8 + 0.07Q = 15
Q = 07.07 = 100.
Profit maximizing output for the firm is 100 units.
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16.
Answer : (d)
Reason : From the equation we have P = 40 – 0.02 Q
Revenue is amximum when MR = 0
TR= 40Q – 0.02Q2
MR = 40 – 0.04Q
Revenue is maximum when MR =0 or
40 – 0.04Q = 0
or Q = 1000 units.
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17.
Answer : (e)
Reason : By the point elasticity formula the price elasticity in this case is given by
Change in price/change in quantity ×original price/original quantity
Which means (0.5/0.5)(10/20) which gives the value 0.5
However, since in the question, there is a perceptible difference in price and quantity, the arc elasticity formula need to be used.
Which gives ∂q (P1 +P2)/∂P (Q1 + Q2) = 5 × 25 / 5 × 35 = 0.714.
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18.
Answer : (c)
Reason : When the demand is unit elastic and the quantity sold of the cars increase from 30 to 60 units, he has to sell the additional cars at Rs.5,000 each. When the elasticity is unity, the total revenue must be the same.
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19.
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
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substituted for Y. Only a convex indifference curve can mean a diminishing marginal rate of substitution of X for Y.
20.
Answer : (c)
Reason : The law of diminishing returns states that by employing more units of some factors of production to work with one or more fixed factors, the total product will increase at an increasing rate, then at a constant rate and finally at a diminishing rate.
(a) Is not the answer because the law of diminishing returns holds good when factors are not perfect substitutes of each other. When factors are perfect substitutes one factor can be substituted for other factor and there will not be a problem of diminishing returns
(b) Is not the answer because the law of diminishing returns is relevant only when the time period is short because in long run all factors are variable.
(c) Is the answer because the law of diminishing returns is not applicable when the two inputs are used in same proportion. When all factor inputs are increased by the same proportion, this law is not relevant.
(d) Is not the answer because the law of diminishing returns assumes that the state of technology is given and remains constant.
(e) Is not the answer because according to the law of diminishing returns, one factor of production must always be kept constant at a given level. So if capital is held constant, with varying labor, this law of diminishing returns holds good.
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21.
Answer : (a)
Reason : Break even point by definition is the point where the total revenue equals total cost.
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22.
Answer : (c)
Reason : The total revenue = Price × quantity. The it becomes 24Q.Profits = total revenue – total costs
At the output level of 5 units, the firm incurs a loss of Rs. 150.
Profits = 24Q – 200 – 4Q – 2Q2
= 20Q – 2Q2 – 200
profit at the output of 5 units =
20 (5) – 2 (5)2 – 200
= 100 – 50 – 200
= 50 – 200 = -150 or a loss of Rs.150
Hence the correct answer is (c)
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23.
Answer : (d)
Reason : The MRTS is equal to the ratio of the marginal productivities of the two products – MPL/MPK
6K0.3L-0.7/6K-0.7L0.3
K0.3L-0.7/K-0.7L0.3
K/L
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24.
Answer : (d)
Reason : When two goods are perfect complements, the indifference curves are L –shaped showing both of them are jointly required for consumption. Two indifference curves cannot intersect each other and when the indifference curves are downward sloping, it is a case of perfect substitutes. Also different points n an indifference curve shows different combinations of goods yielding the same level of satisfaction.
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25.
Answer : (b)
Reason : In a monopolistic market, the products are differentiated, but they are close substitutes of each other.
It is not the answer as the products are differentiated and are not homogeneous.
It is the answer as the products re close substitutes and is differentiated.
It is not the answer. Only if close substitutes are available, there is need to take decisions regarding advertising outlays and selling costs.
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15
It is not the answer as the products are differentiated but are not perfect substitutes.
It is not the answer as the products are neither homogeneous nor are they perfect substitutes.
26.
Answer : (b)
Reason : Isoquant represents all the alternative combinations of two factors that can produce a given level of output.
(a) Is not the answer because an indifference curve shows all the various combinations of two goods that give equal amount of satisfaction or utility to a consumer.
(b) Is the answer because isoquant shows all combination of inputs that can produce a given output.
(c) Is not the answer because production possibility frontier represents all possible combinations of total output that can be produced with a fixed amount of productive resources.
(d) Is not the answer because isocost line shows all the combinations of the two factors (e.g. labor and capital) that the firm can buy with a given set of prices of the two factors.
(e) Is not the answer because marginal product curve is the curve, which represents the marginal product of a factor i.e. the addition to the total production by the employment of an extra unit of a variable factor.
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27.
Answer : (e)
Reason : (a) Normally, marginal cost falls initially, reaches a minimum and then gradually increases after some point with the increase of output.
(b) Average variable cost falls initially, reaches a minimum and then gradually increases after some point with the increase of output.
(c) As TFC remains constant, AFC falls continuously with the increase in output.
(d) Total variable costs increases with increase of output.
(e) The correct answer (e) because none of the above remains constant with the increase of quantity of output.
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28.
Answer : (c)
Reason : Here the price elasticity of the good implies a perfectly elastic situation. In the case of perfect price elasticity, if a firm increases the price of the good, the quantity demanded of the good may fall to zero. Hence (c) is the answer.
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29.
Answer : (c)
Reason : Marginal costs are independent of the fixed costs and depend only on the variable cost. Hence the marginal cost equals the change in total variable cost i e is Rs. 30 (130 – 100)
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30.
Answer : (b)
Reason : Solution
Tr = Price X quantity
100 x 10 = 1000
80 x 30 = 2,400
50 x 40 = 2,000
30 x 60 = 1,800
20 x 80 = 1,600
TR is maximum when 30 units of tea is produced
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31.
Answer : (d)
Reason : A person pursuing any activity would like to maximize the net benefit from that activity. Net benefit is equal to the benefit less the cost.
(a) Is not the answer because net benefit is zero when total benefit is equal to total cost of that activity.
(b) Is not the answer because net benefit is zero when average benefit is equal to average cost of that activity.
(c) Is not the answer because net benefit cannot be maximized if the cost of that activity is positive
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16
(d) Is the answer. As long as the marginal benefit is greater than the marginal cost, total net benefit can be increased by pursuing that activity. If marginal benefit is less than the marginal cost, total net benefit can be increased by decreasing that activity. And net benefit is maximized when marginal benefit is equal to the marginal cost.
(e) Is not the answer because net benefit cannot be maximized.
32.
Answer : (b)
Reason : Production function = Q = 10L2 – 0.5L3
APL = 10 L -0.5 L2
= 10 x 10 -0.5 x 102
= 50.
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33.
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
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34.
Answer : (a)
Reason : For a firm in a perfectly competitive market, the average and marginal revenue curves coincide because the firm is a price taker.
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35.
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
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36.
Answer : (c)
Reason : In the short run, a profit maximizing firm will stop production when price is less than average variable cost
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37.
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.
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38.
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.
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39.
Answer : (c)
Reason : NFIA = NNPMP – NDPMP
NNPMP =NNPFC + Indirect Taxes – Subsidies
= 8,400 + 1,900 – 200
= 10,100.
∴ NFIA = 10,100 – 10,000
= 100.
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40.
Answer : (a)
Reason : When the economy is producing to the right of the equilibrium output determined by the Keynesian cross, there will be unsold inventories. or there will be over production. At the equilibrium point, consumption is equal to disposable income
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17
41.
Answer : (b)
Reason : Y = C + I + G
Or, Y = 100 + 0.75 (Y – 0.20Y ) + 80 + 150 (∴ Yd = Y – T)
Or, Y = 0.75Y – 0.15Y + 330
Or, Y = 0.60Y + 300
Or, 0.40 Y = 330
Or, Y = 825 MUC
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42.
Answer : (d)
Reason : When a central bank reduces the reserve requirements and the bank rate, the money supply in the system increases. This is called an expansionary monetary policy.
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43.
Answer : (c)
Reason : GNP = GDP + NFIA
NFIA = Factor income received from abroad – Factor income paid abroad.
= 100 – 200
= – 100
∴ GNP = 8000 – 100
= 7900.
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44.
Answer : (b)
Reason : Current account balance = Credit (Current account )– debit (Current account)
= [Earnings on loans and investments from abroad + Private remittances from abroad (transfers) + Exports of services + Merchandize exports] – [Earnings on loans and investments to abroad + Private remittances to abroad (transfers) + Import of services + Merchandize imports] = [500 + 500 + 2,000 + 15,000 – [2,500 + 500 + 4,000 + 12,000]
= 18,000 – 19,000 = –1,000 i.e. 1,000 MUC (Deficit)
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45.
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.
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46.
Answer : (b)
Reason : The I in the equation represent gross investment and not net investment, The value of replacement investment is included in the GDP.
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47.
Answer : (e)
Reason : Personal Income = National Income – Undistributed corporate profit – corporate tax + Transfer payments
National Income = GNP at market price – Depreciation – Indirect taxes + Subsidies
= 1,700 – 190 – 173 + 20
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= 1,357
∴Personal Income = 1,357 – 28 – 75 + 242
= Rs.1,496 cr
48.
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.
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49.
Answer : (b)
Reason : According to the classical theory, at the full employment level of output, all the labor has been fully employed and hence, the aggregate supply curve will be perfectly inelastic or vertical
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50.
Answer : (a)
Reason : It would be appropriate for the RBI to pursue a expansionary monetary policy during a period of deflation. Through expansionary monetary policy RBI would like to increase the aggregate demand in the economy thereby causing the prices to increase. Of all the options, only open market purchase of government securities is an expansionary monetary policy. All other options are contractionary monetary policies.
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51.
Answer : (b)
Reason : MPC = 0.6
Multiplier (m) = 5.24.016.011MPC1==−=−1
ΔY = m . ΔI
∴ ΔI = 5.2500mY=Δ = 200
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52.
Answer : (a)
Reason : Trade deficit for the year 2002-03 = Merchandise (credit) – Merchandise (debit)
= 53,000 – 65,474
= $12,474 million
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53.
Answer : (e)
Reason : Consumption demand Investment demand and net exports are included in the aggregate demand for goods and services.
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54.
Answer : (c)
Reason : The business cycle is defined as the variation in the economic activity with a regular pattern
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55.
Answer : (b)
Reason : When the consumption and the investment schedules are added, we get the aggregate demand schedule. This is given by Y = c+I
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56.
Answer: (c)
MPC = 0.75
Multiplier = 11MPC−= 110.75−= 4.
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57.
Answer : (c)
Reason : Here, consumption = 20 + 0.70Yd
When income equals 600 consumption = 20 + 0.7(600) = 440
Savings = income – consumption
600 – 440 = 160
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58.
Answer : (c)
Reason : 7.5Rs.250Cr.0.03=
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59.
Answer : (c)
Reason : Nominal rate of interest = real rate of interest + inflation. Therefore the answer is (c).
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60.
Answer : (b)
Reason : High powered money = Monetary Liabilities of RBI + Government Money
= 1275 + 25 = 1300
Money Supply = H × m
Money multiplier (m) = rCC1uu++ = 1.200.25 = 4.8
∴ Money Supply = 1300 × 4.8 = 6,240 MUC.
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61.
Answer : (b)
Reason : Money supply = High Powered money × Money multiplier
∴ 17,200 = 4,300. m
or, m = 17,20044,300= 1CumCur+=+
∴ 1Cu4Cu0.10+=+
or, 1+ Cu = 4Cu + 0.40
or, – 3Cu = –.06
or, Cu = 0.20
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62.
Answer : (d)
Reason : (a) During a boom bank reserves will be high as the bank credit is high to support the increased economic activity
(b) Wage rate will be high as demand for labor increase during the boom phase
(c) As the economic activity increase during the boom bank credit also increases
(d) During a boom demand increased at a faster rate and inventories tend to be low. All other variables tend to increase during a boom.
(e) Cost of production will be high as demand for factors of production will be relatively high during the boom phase.
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63.
Answer : (c)
Reason : When the reserve ratio is reduced, the money supply increases by the money multiplier given by M = 1 + Cu / Cu + r
A reduction in the reserve ratio will thus tend to increase the money supply, which will enable the banks to increase the loans
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64.
Answer : (b)
Reason : S = – 60 + 0.25Yd
At equilibrium level of income, S = I
: – 60 + 0.25 Yd = 100
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20
or, 0.25Yd = 160
Yd = 160/0.25 = 640
65.
Answer : (c)
Reason : The bank rate is the rate at which the central banks discount the commercial bank bills.
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66.
Answer : (a)
Reason : Consumption function shows the relationship between consumption and disposable income.
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67.
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.
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68.
Answer : (a)
Reason : High powered money = Monetary Liabilities of RBI + Government Money
Monetary liabilities of RBI = Financial Assets + Other Assets – Non-monetary liabilities
Non-monetary liabilities = Other non-monetary liabilities + Net worth
= 525 + 1,000 = 1,525 MUC
∴ Monetary liabilities = 24,000 + 100 – 1525 = 22,575 MUC
Government money = 25 MUC
∴ High powered money (H) = 22,575 + 25 = 22,600 MUC
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69.
Answer : (e)
Reason : Multiplier = 1/1-MPC = YIΔΔ ⇒ ΔY = 100× (1/0.2) = Rs 500 crores
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70.
Answer : (b)
Reason : Open market operations refer to purchase and sale of securities by the central bank. When the central bank purchases securities it increases the reserve base of the commercial banks and hence leads to multiple expansions of credit and deposits.
a. The increase in the monetary base leads to more credit creation and hence leads to increase in output that is aggregate supply.
b. As the money supply increases due to open market purchases, in short run production cannot adjust to the increased demand which is a result of higher money supply. The prices tend to increase which results in inflation. Hence b is the correct option.
c. The increase in money supply leads to a downward pressure on interest rate and the interest rates will in fact decrease.
d. Aggregate demand will increase as the increased money supply will lead to decrease in interest rates which will increase the investment demand and consumption demand.
e. Output increases as explained in option (a).
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71.
Answer : (d)
Reason : Change in forex reserves = Current a/c balance + Capital a/c balance
∴ Capital a/c balance = Δ Forex reserves + Current a/c deficit
= 1000 + 5000
= 6000.
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72.
Answer : (a)
Reason : The multiplier states that if there is an increase in autonomous government spending, the increase in aggregate demand caused by that spending would cause a larger increase in national income.
(a) Is the answer
(b) Is not the answer because when the multiplier increases the MPC is high and not low
(c) Is not the answer since this is not the expression for multiplier
(d) Is not the answer since it is just a observed fact and not an explanation for the multiplier
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21
(e) It is not the answer since multiplier is given by the ratio of an increment in income to increment in autonomous investment
73.
Answer : (b)
Reason : Stock is a variable which is measured at a point of time.
a. GDP is the money value of goods and services produced within the domestic territory of a country (which includes depreciation) in a year and hence not a stock because it is measured over a period of time, usually a year.
b. Inventories refer to the unsold stock or the raw materials maintained by a firm to be use in the production process. Hence it is measured at a point of time, i.e., number of unsold goods as on 31 March, 2003 are 100. Hence, it is a stock variable
c. Inflation refers to persistent increase in prices over a period of time. It is measured over a period of time hence it is a flow and not a stock variable.
d. Exports is an example of flow variables.
e. Investment is an example of flow variables.
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74.
Answer : (c)
Reason : GDPFC = NDPMP + Depreciation – Indirect Taxes + Subsidies
Depreciation = Gross domestic investment – Net domestic investment
= 1,600 – 1,300
= 300.
∴ GDPFC = 10,000 + 300 – 700 + 200
= 9800.
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