Mb141 - 2004 - 04 (april)

Question Paper Economics (MB141) : April 2004 • • 1.

Answer all questions. Marks are indicated against each question. < Answ

Which of the following results in surplus in a market? I.

If a local rent control ordinance establishes a ceiling of Rs.3,500 per room, which is much higher than the equilibrium rent. II. If the government announces a minimum support price of Rs.9 which is more than the equilibrium price of wheat. III. When a minimum wage is enforced which is below the prevailing market equilibrium wage of Rs.100 per day. (a) Only (I) above (c) Both (I) and (II) above (e) Both (II) and (III) above.

(b) Only (II) above (d) Both (I) and (III) above (1 mark)

2.

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Which of the following better resembles the demand curve of a consumer? (a) Indifference curve (c) Budget line (e) Average utility curve.

(b) Marginal utility curve (d) Total utility curve (1 mark)

3.

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Which of the following statements best reflects the consumer surplus? (a) (b) (c) (d) (e)

Padma who is willing to accept a job at Rs.50 per hour is offered Rs.45 per hour Raju pays the sales price of Rs.150 for the same shirt that he refused to buy earlier at Rs.180 Tendulkar gets Pepsi for free when he was ready to pay Rs.8, to quench his thirst Dolly finds that the price of burgers, a food she dislikes, has been reduced by 50 percent Rajesh, carpenter by profession, has a marginal cost of Rs.500 for a unit of output and sells that unit at Rs.600. (1 mark)

4.

Market research conducted by Swati Electronics Ltd. indicated that the prices of consumer electronic goods have dropped, while consumer spending on these electronic goods has increased. It means the demand for consumer electronic goods is (a) Perfectly inelastic (c) Relatively elastic (e) Perfectly elastic.

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(b) Relatively inelastic (d) Unitary elastic (1 mark)

5.

For Ramesh, both Coke and Pepsi are perfect substitutes. The price of each bottle of Coke and Pepsi is Rs.10. Which of the following is true if Pepsi increases the price to Rs.20 per bottle? (a) (b) (c) (d) (e)

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Ramesh will buy twice as much Pepsi as Coke Ramesh will buy twice as much Coke as Pepsi Ramesh will buy equal amounts of Pepsi and Coke Ramesh will buy only Coke No conclusion can be drawn unless utility function of Ramesh is known. (1 mark)

6.

A consumer spends all his daily income of Rs.250 on goods X and Y. Which of the following is true if the quantity of goods X and Y are taken on X-axis and Y-axis respectively and the price of good X doubles? (a) (b) (c)

The budget line will shift towards left The Y-intercept remains the same but the X-intercept falls The Y-intercept remains the same but the X-intercept increases

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(d) (e)

The budget line will shift towards right The budget line will not be affected. (1 mark)

7.

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A consumer can maximize his total utility if he allocates his money income so that (a) (b) (c) (d) (e)

Marginal utility of each product consumed is equal Gain in marginal utility from the last rupee spent on each product purchased is the same Elasticity of demand is the same for all the products purchased Total utility gained from each product consumed is the same Marginal utility of each product consumed is zero. (1 mark)

8.

A combination of Capital (K) and Labor (L) lies to the right of the firm’s cost line; it means that the combination is

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(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) 9.

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Law of diminishing returns is not relevant when (a) All labors are equally efficient (c) All factor inputs are increased by the same proportion (d) Technology remains constant

(b) The time period is short (e) Capital is held constant. (1 mark)

10.

Suppose a firm can produce 1,000 units of a product using either 100 units of labor or 20 machines in 5 hours of time. If labor and machines are perfectly substitutable, shape of the isoquant will be (a) Horizontal straight line (c) Convex to the origin (e) L-shaped.

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(b) Vertical straight line (d) Negatively sloped straight line (1 mark)

11.

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An implicit cost can be defined as the (a) (b)

Payment to the non-owners of the firm for the resources they supply Money payment which the self-employed resources could have earned in their best alternative employment (c) Costs which the firm incurs but does not disclose (d) Costs which do not change over a period of time (e) None of the above. (1 mark) 12.

The intersection of the marginal cost curve and the average cost curve characterizes the point of (a) Maximum profit (c) Minimum marginal cost (e) Minimum profit.

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(b) Minimum average cost (d) Minimum opportunity cost (1 mark)

13.

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Which of the following are not true if fixed cost of a firm is Rs.10,000? I. Average Fixed Cost (AFC) never reaches zero. II. Average Fixed Cost reaches minimum when MC intersects AFC. III. The shape of Average Fixed Cost curve is linear. IV. Average Fixed Cost is maximum when output is zero. (a) Both (I) and (II) above (c) Both (II) and (IV) above (e) (II), (III) and (IV) above.

(b) Both (II) and (III) above (d) (I), (II) and (III) above (1 mark) <

14.

Answer Engineers working at a car manufacturing plant have determined that a 15% increase in all inputs will > increase the output by 15%. Assuming that the prices of inputs remain constant, which of the following costs will change as the output increases? (a) Average variable cost (c) Marginal cost (e) Both (a) and (c) above.

(b) Fixed cost (d) None of the above (1 mark)

15.

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The horizontal demand curve for a firm is one of the characteristic features of (a) Oligopoly (d) Perfect competition

(b) Monopoly (e) Duopoly.

(c) Monopolistic competition (1 mark)

16.

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In the long-run, a perfectly competitive firm earns only normal profits because of (a) (b) (c) (d) (e)

Product homogeneity in the industry Large number of sellers and buyers in the industry Free entry and exit of firms in the industry Both (a) and (b) above Both (b) and (c) above. (1 mark)

17.

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Which of the following is true of a perfectly competitive firm in equilibrium? (a) P = MR = MC (c) P = MC, but MR < MC (e) MR = MC and P > MR.

(b) P = MR, but MR > MC (d) MR = MC and P < MR (1 mark)

18.

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A firm realizes least-cost in production, if it substitutes the factors until their (a) (b) (c) (d) (e)

Prices are equal Marginal physical products are equal Marginal physical products are equal to their factor prices Marginal physical products are equal to zero Marginal physical product to the factor price ratio is equal for all factor inputs. (1 mark)

19.

The frequent formation of cartels by firms in the cement industry in India indicates that the cement industry in the country is (a) A monopoly (c) An oligopoly

(b) Perfectly competitive (d) A monopsony

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(e) An oligopsony. (1 mark)

20.

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In India, which of the following industries best illustrates monopoly? (a) Agriculture (c) Atomic energy

(b) Automobile industry (d) Cola drinks

(e) Television industry. (1 mark)

21.

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Which of the following is a stock variable? (a) Gross Domestic Product (c) Inflation (e) Both (a) and (d) above.

(b) Inventory of a firm (d) National Income (1 mark)

22.

The net factor income earned within the domestic territory of a country must be equal to (a) (b) (c) (d)

Net Domestic Product at factor cost Net Domestic Product at market price Net National product at factor cost Net National Product at market price

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(e)

Personal income. (1 mark)

23.

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Which of the following would not be included in GDP? (a) (b) (c) (d) (e)

Bobby purchases a new suit to wear at work Amok purchases a new Ford car Community Bank purchases new computers for its loan office Margaret grows tomatoes in her home garden Ford India produces but could not sell 100 cars. (1 mark)

24.

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Consumption demand does not depend upon the level of (a) Income (c) Propensity to save (e) Marginal efficiency of investment.

(b) Propensity to consume (d) Wealth (1 mark)

25.

When the addition to capital goods in an economy is less than the capital consumption allowance, the economy experiences (a) Negative net investment (c) Positive net investment (e) Zero gross investment.

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(b) Zero net investment (d) Negative gross investment (1 mark)

26.

If the average propensity to save (APS) is negative, then the average propensity to consume (APC) is (a) Negative (d) One

(b) Zero (e) Greater than one.

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(c) Positive but less than one (1 mark)

27.

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The unemployment in the Keynesian model is caused by (a) Demand deficiency (c) Excess demand

(b) Supply deficiency (d) Excess supply

(e) Both (a) and (b) above. (1 mark)

28.

An important difference between the approaches of the Classical economists and Keynesian economists to achieve a macroeconomic equilibrium is that (a) (b) (c) (d) (e)

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Keynesian economists actively promote the use of fiscal policy while the classical economists do not Keynesian economists actively promote the use of monetary policy to improve aggregate economic performance while classical economists do not Classical economists believe that monetary policy will certainly affect the level of output while Keynesians believe that money growth affects only prices Classical economists believe that fiscal policy is an effective tool for achieving economic stability while Keynesians do not None of the above. (1 mark)

29.

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Which of the following is not true if the central bank imposes a reserve ratio of 100%? (a) (b) (c) (d) (e)

The banking system can no longer affect the supply of money in the economy Change in the foreign exchange reserves will result in an equal change in the money supply The lending capacity of banks would narrow down to zero A rupee deposited in a bank reduces the money supply in the economy by one rupee Money supply in the economy will be equivalent to the high-powered money. (1 mark)

30.

A contractionary fiscal policy combined with a tight monetary policy results in I. II.

A lower level of output. A higher level of output.

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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 (c) (II) and (V) above (e) (I) and (V) above.

(b) (I) and (IV) above (d) (II) and (IV) above (1 mark)

31.

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Stagflation is a period of I. III.

High inflation. High unemployment.

(a) Both (I) and (III) above (c) (I), (II) and (III) above (e) All (I), (II), (III) and (IV) above.

II.

High growth of real GDP. IV. High aggregate demand. (b) Both (III) and (IV) above (d) (II), (III) and (IV) above (1 mark)

32.

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Which of the following statements is/are true about the impact of inflation in the economy? (a) (b) (c)

Unanticipated inflation hurts the fixed income earners most Higher than expected inflation hurts creditors but benefits debtors Inflation creates inefficiency in the economy because it forces people to search for prices when they could be doing something else (d) Inflation can lead to a misallocation of resources because people tend to make mistakes when there is inflation in the economy (e) All of the above. (1 mark) 33.

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Monetized deficit refers to (a) (b) (c) (d) (e)

Fiscal deficit minus interest payments Borrowings and other liabilities of the Central Government Increase in the net RBI credit to the Central Government Fiscal deficit minus Primary deficit RBI’s credit to the commercial banks. (1 mark)

34.

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If a Government is running surplus in its budget, we can expect that public debt will be (a) Rising (b) Falling (c) Constant (d) Falling if there are tax cuts (e) Falling if the government uses the surplus to repay its past debts. (1 mark)

35.

Commercial banks create money through credit creation. Which of the following statements is true with regard to credit creation? (a) (b) (c) (d) (e)

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Credit creation by commercial banks is limited by CRR Commercial banks can create as much credit as they want RBI has no control over the credit created by Commercial banks CRR has no impact on credit creation None of the above. (1 mark)

36.

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Which of the following is a liability for a commercial bank? (a) Reserves with the RBI (c) Credit to the Central Government (e) Discounted commercial bills.

(b) Loans to PSUs (d) Deposits from the public (1 mark) <

37.

Answer >

All entries in the balance of payments statement should collectively sum to (a) GDP of the country (c) Foreign exchange reserves of the country Zero (e) Exports of the country.

(b) GNP of the country (d)

(1 mark) 38.

Which of the following is true if, for a given period, there is no change in the foreign exchange reserves of a country? (a) (b) (c) (d) (e)

< Answ

Balance in the current account is equal to the balance in capital account Surplus (deficit) in the current account is equal to Deficit (surplus) in the capital account Current account balance is zero Trade balance is zero Capital account balance is zero. (1 mark)

39.

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Refer to the figure below:

During which of the following periods of the business cycle is the economy in a recovery stage? (a) The period from A to B (b) The period from C to D (c) The period from C to E (d) The period from A to C (e) The period from B to C. (1 mark) 40.

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Which of the following is most likely to happen during a recession? (a) Decrease in inventory (c) Capacity under utilization (e) Increasing income levels.

(b) Producers will be cautiously optimistic (d) Expansion in bank credit (1 mark)

41.

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Which of the following indicates the same level of total output for any combination of inputs? (a) Indifference curve (c) Production possibility frontier

(b) Isoquant (d) Isocost line

(e) Marginal product curve. (1 mark) < Answ

42.In a monopoly, price is (a) Lesser than the marginal revenue (c) Greater than the marginal revenue (e) Both (b) and (c) above.

(b) Greater than the average revenue (d) Equal to the total revenue (1 mark)

43.

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Which of the following can result in formation of a natural monopoly? (a) Government regulation (c) Economies of large scale production (e) Licenses.

(b) Product differentiation (d) Ownership of critical raw materials (1 mark)

44.

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Which of the following statements is true when marginal utility is negative? (a) Total utility is increasing (c) Total utility is at its maximum (e) None of the above.

(b) Total utility is at its minimum (d) Total utility is decreasing (1 mark)

45.

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Which of the following cost curves is not ‘U’ shaped? (a) Long run average cost curve (c) Short run average cost curve (e) Average fixed cost curve.

(b) Long run marginal cost curve (d) Average variable cost curve (1 mark)

46.

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Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)? (a) (b) (c) (d) (e)

Monetary liabilities of the RBI increases High-powered money in the economy decreases The value of money multiplier decreases Aggregate demand in the economy increases Price level in the economy increases. (1 mark)

47.

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Immediately following a depression, (a) (b) (c) (d) (e)

Unemployment rate increases moderately Aggregate demand decreases further because of recession There will be rapid increase in wages but less than the increase in prices of goods and services The cost of production will gradually increase because of gradual increase in wages Output will decrease rapidly. (1 mark)

48.

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The long run Phillips curve is (a) An upward sloping curve (c) A horizontal straight line (e) Indeterminable.

(b) A downward sloping curve (d) A vertical straight line (1 mark)

49.

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The difference between personal disposable income and personal income is (a) Residential investment (c) Subsidies (e) Personal taxes.

(b) Indirect taxes (d) Transfer payments (1 mark)

50.

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Monetary policy will be more effective when (a) (b) (c) (d) (e)

The economy is facing recession The private investment is more sensitive to interest rate The private investment is less sensitive to interest rate The economy is suffering from liquidity trap The economy is in boom. (1 mark)

51.

The demand function for a product is P = 20 – 2Q. If the current market price is Rs.10, what is the price elasticity of demand? (a) 1 (b) 2 (e) None of the above.

(c) 1.5

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(d) 3 (1 mark)

52.

Supply and demand functions for a product are Qs = 400P – 500 Qd = 1500 – 100P

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Equilibrium output for the product is (a) 1,000 units (b) 1,100 units (e) 1,400 units.

(c) 1,200 units

(d) 1,300 units (2 marks)

53.

A major flood in India wiped out 20% of the entire world's tea production. As a result, if the price of tea rises by 150%, the elasticity of demand for tea is (a) – 1.33 (e) None of the above.

(b) – 13.33

(c) – 3.00

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(d) – 7.50

(1 mark) 54.

When the price is Rs.75 per unit, demand for the good is 10 units and when the price is Rs.70 per unit, demand is 12 units. Assuming that the demand function for the good is linear, what is the theoretical maximum possible quantity of the good that can be demanded? (a) 100 units (e) 76 units.

(b) 25 units

(c) 5 units

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(d) 40 units (2 marks)

55.

A consumer with an income of Rs.100 can buy 10 units of good X and 15 units of good Y. If price of both the goods is same, absolute value of slope of the budget line for the consumer is (a) 0.67 10.00.

(b) 1.00

(c) 1.50

(d) 6.67

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(e) (1 mark)

56.

Marginal utility of good X is 300 utils and its price is Rs.12. If price of good Y is Rs.30, the marginal utility of good Y at equilibrium is (a) 350 utils (e) 600 utils.

(b) 700 utils

(c) 750 utils

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(d) 550 utils (1 mark)

57.

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Refer to the graph below. If price of good Y is Rs.2, income of the consumer is

(a) Rs.10 (b) Rs.20 (e) Insufficient information.

(c) Rs.30

(d) Rs.40. (1 mark)

58.

If the production function is Q = 20K labor for capital?

L (a) 0.3 K

K (b) 0.3 L

0.3

L

0.3,

what is the marginal rate of technical substitution of

L (c) K

K (d) L

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(e)

K –L. (2 marks) 59.

If sales of VCD players increase from 20,000 to 28,000 per month as per capita income increases from Rs.30,000 to Rs.40,000, which of the following is true? (a)

Demand for VCD players is income inelastic

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(b) (c) (d) (e)

VCD player is a Giffen good VCD player is an inferior good, but not a Giffen good VCD player is a luxury VCD player is a necessity. (1 mark)

60.

Production function for a firm is Q = 100L – 0.2L2. If 10 units of labor are used, average productivity of labor is (a) 100 units (e) 80 units.

(b) 96 units

(c) 98 units

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(d) 102 units (1 mark)

61.

Cost function of a firm is TC = 500 + 10Q – 0.25Q3. If the current output is 100 units, average fixed cost is (a) Rs.500 (e) Re.0.25.

(b) Rs.10

(c) Rs.5

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(d) Rs.100 (1 mark)

62.

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Long run cost function of a firm is TC = Q3 – 40Q2 + 450Q. What is the minimum possible average cost? (a) Rs.20 (b) Rs.60 Rs.30.

(c) Rs.10

(d) Rs.50

(e) (2 marks)

63.

If the total cost function is TC = 200 – 4Q + (a) Rs.24 Rs.41.

6Q2

(b) Rs.32

< Answ

and the output is 4 units, the marginal cost is (c) Rs.44

(d) Rs.35

(e) (2 marks)

64.

For a firm operating under a perfectly competitive market, total cost at various levels of output is given below:

< Answ

Quantity (units) Total Cost (Rs.) 100 506 101 508 102 511 103 515 104 520 105 526 If the market going price of the product is Rs.5, equilibrium output for the firm is (a) 101 units (b) 102 units (c) 103 units (d) 104 units (e) 105 units. (2 marks) 65.

A firm in a perfectly competitive industry is producing 100 units, its profit-maximizing quantity. The market price of the good is Rs.2, and total fixed costs and total variable costs are Rs.50 and Rs.40 respectively. The firm's economic profit is (a) Rs.200 Rs.90.

(b) Rs.80

(c) Rs.100

(d) Rs.110

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(e) (2 marks)

66.

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

(c) Rs.600

(d) Rs.800

(e) (2 marks)

67.

The cost function of Amar & Co. is TC = 2,850 + 3.5Q. If the current market price of the good produced by the firm is Rs.5 per unit, what will be the break-even output for the firm? (a) 1,600 units (e) 1,750 units.

(b) 1,200 units

(c) 1,550 units

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(d) 1,900 units (2 marks)

68.

In a two-sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous investment is equal to 22 MUC. The equilibrium level of income in the economy is (a) 21 MUC (b) 30 MUC (e) None of the above.

(c) 43 MUC

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(d) 100 MUC (2 marks)

69.

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From the following information, compute personal savings.

(a) Rs.4,000 (e) Rs.1,000.

Particulars Personal income Personal taxes Dividends Consumption (b) Rs.4,200

Rs. 10,000 3,000 200 6,000 (c) Rs.7,000

(d) Rs.1,200 (1 mark)

70.

GDP of a country is 8,000 MUC. Value of output produced in domestic country by foreign factors of production is 200 MUC and value of the output produced by domestic factors of production in foreign countries is 100 MUC. GNP of the country is (a) 7,700 MUC (e) 8,200 MUC.

(b) 7,800 MUC

(c) 7,900 MUC

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(d) 8,100 MUC (2 marks)

71.

Savings function of an economy is S = – 300 + 0.25 Yd. Break-even disposable income for the economy is (a) 75 MUC (e) 1,500 MUC.

(b) 300 MUC

(c) 900 MUC

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(d) 1,200 MUC (1mark)

72.

Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC, private savings for the year is (a) 500 MUC (e) 2,500 MUC.

(b) 1,000 MUC

(c) 1,500 MUC

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(d) 2,000 MUC (1 mark)

73.

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The consumption schedule for a two sector economy is given below: Disposable Income (Yd) (MUC) 475.0 500 400.0 400 287.5 250 250.0 200 If savings in the economy is 100 MUC, the equilibrium income in the economy is (a) 750 MUC (b) 700 MUC (c) 800 MUC (d) 950 MUC (e) 1,050 MUC.

Consumption (C) (MUC)

(2 marks) 74.

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Given the following data, compute the current account balance for the country. Particulars Earnings on loans and investments from abroad Earnings on loans and investments to abroad

MUC 500 2,500

Import of services Private remittances to abroad (transfers) Private remittances from abroad (transfers) Exports of services Merchandize exports Merchandize imports (a) 1,000 MUC (Surplus) (b) 1,000 MUC (Deficit) (c) 500 MUC (Surplus) (d) 500 MUC (Deficit) (e) Zero.

4,000 500 500 2,000 15,000 12,000

(2 marks) 75.

The following information is extracted from the Union Budget for the year 2003-04: 2003-2004 Budget Estimates (Rs. crore) 1,84,169 69,766 18,023 13,200 1,53,637

Particulars

Tax revenue (net to center) Non-tax revenue Recoveries of loans Other receipts Borrowings and other liabilities Non-plan expenditure On revenue account (of which interest payments is Rs.1,23,223) On capital account Plan Expenditure On revenue account On capital account The Revenue Deficit for the year 2003-04 is (a) Rs.2,53,935 cr. (b) Rs.1,12,292 cr. (c) Rs.1,53,637 cr. (d) Rs.4,38,795 cr.

2,89,384 28,437 76,843 44,131

(e) Rs.1,02,932 cr. (2 marks)

76.

< Answer >

The following information is available with respect to an economy: Particulars Monetary liabilities or central bank Government money

< Answer >

MUC 3,300 100

High-powered money in the economy is (a) 3,000 MUC (e) 3,400 MUC.

(b) 3,100 MUC

(c) 3,200 MUC

(d) 3,300 MUC (1 mark)

77.

Refer to the graph below:

The level of autonomous consumption in the economy is (a) 1,000 MUC (b) 2,000 MUC (c) 4,000 MUC (e) 6,000 MUC.

< Answer >

(d) 4,200 MUC (2 marks)

< Answer

78.

>

In an economy marginal propensity to save (MPS) is 0.25. Multiplier for the economy is (a) 0.20 4.00.

(b) 0.80

(c) 1.00

(d) 1.25

(e) (1 mark)

79.

Monetary liabilities of the central bank are 1,200 MUC and government money is 50 MUC. If the currency deposit ratio is 0.20 and the central bank specifies a reserve ratio of 5%, money supply in the economy will be (a) 5,000 MUC (c) 6,000 MUC (e) 6,600 MUC.

(b) 5,500 MUC (d) 6,550 MUC (2 marks)

80.

For an economy, average propensity to save is – 0.05. Average propensity to consume for the economy is (a) 0.05 (e) Insufficient data.

(b) 0.95

(c) 1.00

The manager of a luxury car company estimated the price elasticity of demand of luxury cars to be 3. Next year, the company intends to increase price of the luxury car by 5%. If the company sold 1,000 units of luxury car this year, how many units of luxury car can it expect to sell in the next year? (a) 80 units (e) 850 units.

(b) 150 units

(c) 1,150 units

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 (a) 1,000 MUC (e) 10,000 MUC.

(b) 4,000 MUC

(c) 5,000 MUC

From the following information, compute GNP at market prices. Particulars GDP at factor cost Net factor income from abroad Indirect taxes Subsidies (a) Rs.1,740 cr. (b) Rs.1,658 cr. (e) Rs.3,002 cr.

Rs.cr. 2,000 200 542 450 (c) Rs.2,292 cr.

(d) Rs.2,342 cr. (1 mark)

END OF QUESTION PAPER

< Answer >

(d) 6,000 MUC (1 mark)

83.

< Answer >

(d) 950 units (2 marks)

82.

< Answer >

(d) 1.05 (1 mark)

81.

< Answer >

< Answer >

Suggested Answers Economics (MB141) : April 2004 Answer : (b) Reason : I.

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Answer : Reason :

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Answer : Reason :

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When a local rent control ordinance establishes a ceiling of Rs.3500 per room, which is much higher than the equilibrium rent, it will not affect the equilibrium rent and quantity of rooms available. II. If the government announces a minimum support price of Rs.9, which is more than the equilibrium price of wheat, the support price reduces quantity demanded and increases quantity supplied. This will result in a surplus in the market. III. When a minimum wage is enforced which is below the prevailing market equilibrium wage of Rs.100 per day, it will have no effect on labor hours. (a) Is not the answer because in I above (b) Is the answer because there is a surplus in the market in II above (c) Is not the answer because there is a surplus in II, but no surplus in I above (d) Is not the answer because there is no surplus in I and III above (e) Is not the answer because there is a surplus in the market II but no surplus in III above. (b) The law of demand is directly derived from the law of diminishing marginal utility. When the price of the good falls, the consumer buys more of the good so as to equate the marginal utility to the lower price. The downward sloping marginal utility curve can be converted into the downward sloping demand curve. (a) Is not the answer because indifference curve doesn’t resemble the demand curve of a consumer. An indifference curve depicts the various alternative combinations of the goods, which provide same level of satisfaction to the consumer. (b) Is the answer because marginal utility curve resembles the demand curve of a consumer. (c) Is not the answer because budget line is not same as the demand curve of a consumer. Budget line represents all the combinations of the two commodities, which the consumer can buy by spending his entire income for the given prices of the two commodities. (d) Is not the answer because total utility curve is not same as the demand curve of a consumer. Total utility curve is a curve representing the sum of all the utilities derived from the total number of units consumed. (e) Is not the answer because average utility curve is not same as the demand curve of a consumer. (c) Consumer surplus is the excess of the price that a consumer is willing to pay for the commodity over and above what he actually pays for it. (a) Is not the answer because Parma is offered a job below the price what she expected. So, this doesn’t reflect the consumer surplus. (b) Is not the answer because Raju refused to buy the same shirt at Rs.180,but he pays for the same shirt a sale price of Rs.150. So, this doesn’t reflect the consumer surplus. (c) Is the answer because Tendulkar is ready to pay Rs.8 for a pepsi, but he gets it free. This is a case of consumer surplus. (d) Is not the answer because the price of the burgers has reduced by 50 percent. This is not a case of consumer surplus. (e) Is not the answer because Rajesh has a marginal cost of Rs. 500 for a unit of output and sells that unit at Rs.600.This is not the excess of the price that a consumer is willing to pay for the commodity over and above, what he actually pays for it. So this is not a case for a consumer surplus. (c) When the prices of consumer electronics have dropped, while consumer spending on these electronic goods has increased, the demand for consumer electronic goods is relatively elastic. In this case the percentage change in quantity demanded is greater than the percentage change in price

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and the value of price elasticity of demand will be greater than one. (a) Is not the answer because in case of a perfectly inelastic demand, if the price of a good decreases, consumer spending on these goods has to be decreased. (b) Is not the answer because in case of a relatively inelastic demand, if the price of a good decreases, consumer spending on these goods has to be decreased. (c) Is the answer because in case of a relatively elastic demand, if the price of a good decreases, consumer spending on these goods has to be increased. (d) Is not the answer because in case of a unitary inelastic demand, if the price of a good decreases, consumer spending on these goods remain constant. (e) Is not the answer because in case of a perfectly elastic demand, if the price of a good decreases, consumer spending on these goods undetermined. Answer : (d) Reason : Since Coke and Pepsi are perfect substitutes, (i.e. gives same amount of satisfaction) Ramesh would consume the one that is available at a cheaper price. With the increase of price of Pepsi, Coke becomes cheaper. Hence, Ramesh would spend his entire income on Coke. Hence the correct answer is (d). Answer : (b) Reason : When the price of good X doubles, the consumer can buy less of the good X with the given income, but can buy same quantity of another good. Hence, the the Y-intercept remains the same but the X-intercept falls. (a) Is not the answer because the budget line will not shift towards left (b) Is the answer because the Y-intercept remains the same but the X-intercept falls (c) Is not the answer because the Y-intercept remains the same but the X-intercept does not increase (d) Is not the answer because the budget line will not shift towards right (e) Is not the answer because the budget line will be affected. Answer : (b) Reason : A consumer can maximize total utility (TU) when

MU y MU x MU n Py = - - - - - = Pn . This equilibrium condition says that to maximize Total Px = Utility, Marginal Utility for the last rupee spent on all the goods should be equal. (a) The consumer may not maximize Total Utility as price of all the goods may not be equal. (b) The consumer maximize Total Utility as Marginal Utility for the last rupee spent on all goods is equal. (c) Though elasticity of demand is same for all the goods this does not ensure maximum Total Utility as the above condition is not satisfied. (d) This may not maximize Total Utility as irrespective of the price paid, Total Utility of every good is same. Further, this does not satisfy the above utility maximizing condition. (e) Budget may not permit the consumer to reach the state of maximum Total Utility for each and every good at which point Marginal Utility is equal to zero. 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 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

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the constraint in terms of production, but it is not attainable. 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 all labors are equally efficient i.e. labor are homogeneous. (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. Answer : (d) Reason : An isoquant is a curve showing all combinations of inputs that can be used to produce a given output. In case of perfect substitutes, the isoquant would be a negatively sloped straight line because inputs can be substituted and only one input can be employed for the production of goods desired. It would be L-shaped, in case of complementary goods as two inputs have to be used together simultaneously for the production of goods. For normal goods, isoquant would be convex to the origin because of decreasing marginal rate of substitutability. Hence (d) is the answer. (a) Is not the answer because the shape of the isoquant will not be horizontal straight line. (b) Is not the answer because the shape of the isoquant will not be vertical straight line (c) Is not the answer because the shape of the isoquant will not be convex to the origin (d) Is the answer because the shape of the isoquant will be negatively sloped straight line (e) Is not the answer because the shape of the isoquant will not be L-shaped. Answer : (b) Reason : Implicit cost is also known as opportunity cost. These costs are not paid out-of-the pockets. It refers to income that could have been earned by factor input in their best alternative use. (a) Payments to the non-owners of the firm for the resources they supply constitute an out-ofthe- pocket cost. Hence (a) is not correct. (b) Implicit cost is also known as opportunity costs. It refers to income that could have earned by factor input in their best alternative use. Money payment, which the self-employed resources could have earned in their best alternative employment, signifies opportunity cost of selfemployed resources. (c) An undisclosed cost does not constitute implicit costs. (d) Fixed cost is the cost that remains same during a period of time. Fixed costs consist of both implicit and explicit costs. (e) Is not the answer because (b) is correct. Answer : (b) Reason : (a) Profit will be maximum when the MC is equal to MR and the slope of MC curve > slope of MR curve (b) As long as MC>AC, AC is increasing and as long as MC
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zero, if there is a certain amount of fixed costs. II. It is not true that AFC reaches minimum when MC interests AFC. AFC does not reach minimum when MC cuts AFC. There is no minimum point of AFC III. It is not true that the shape of AFC curve is linear. The shape of average fixed cost curve is rectangular hyperbola indicating that when the output increases by a certain percentage, the average fixed cost decreases by the same percentage such that their product representing total fixed cost remains constant thoughtout. IV. Average fixed cost is maximum when output is zero. (a) Is not the answer because I above is true and II above is not true if the fixed cost of a firm is Rs.10,000 (b) Is the answer because both II and III are not true if the fixed cost of a firm is Rs.10,000. (c) Is not the answer because II above is not true, while IV above is true if the fixed cost of a firm is Rs.10,000 (d) Is not the answer because I above is true, while II and III above are not true if the fixed cost of a firm is Rs.10,000 (e) Is not the answer because II and III above are not true, while IV above are true if the fixed cost of a firm is Rs.10,000. Answer : (d) Reason : The prices of inputs remain constant; a 15% increase in all inputs will increase the output by 15% results in no change in average variable cost, fixed cost and marginal cost. (a) Is not the answer because average variable cost will not change as the output increases. (b) Is not the answer because fixed cost will not change as the output increases. Fixed cost remains same at different level of output, even if the output is zero. (c) Is not the answer because marginal cost will not change as the output increases. (d) Is the answer because average variable cost, fixed cost and marginal cost will not change as the output increases. 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 price-maker. 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). Answer : (c) Reason : If any firm earns more than normal profits, new firms will enter the industry in the long run, leading to fall in good prices. This decline in the price reduces the volume of profits of the existing firms. This process continues till all existing firms earn only normal profits. On the contrary, when existing firms get losses, some of the firms leave the industry. This increases the price of good. This process continues till the existing firms get normal profits.

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(a) (b) (c)

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Product homogeneity in the industry ensures equal price for the good in the industry, but it does not result in normal profits. Presence of large number of sellers and buyers in the industry does not allow individual buyer or seller, however large, to influence the price by changing the purchase or output. Free entry and exit of firms in an industry ensures normal profits in the long run as higher profits increases the entry of new firms, while losses make existing firms to move out of the industry. As (a) and (b) are not the answers, (d) cannot be the answer. As (b) is not the answer, (e) cannot be the answer.

(d) (e) 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. Answer : (e) Reason : Least-cost production implies that the producer produces a given level of output where the marginal physical product to the factor price ratio is equal to the factor inputs. (a) It is not appropriate in this instance because it is indicating that all factor prices are equal indicates the demand and supply of that factor. (b) It is not appropriate in this instance because it indicates the addition to total output by the employment of an additional unit of a factor of production all else equal. (c) It is not appropriate in this instance because marginal physical product is the slope of the total output curve and therefore will not indicate the least cost production. (d) It is not appropriate in this instance because it is not indicating the least-cost-production. (e) It is appropriate in this instance because, it is the change in the total revenue of the firm that results from the employment of one additional unit of a factor of production. Therefore the marginal physical product to factor price ratio equal to the factor inputs indicates the leastcost production. The correct answer is (e). Answer : (c) Reason : In an oligopoly market there are few sellers so that there is interdependence among the sellers and the sellers are aware of it. This encourages them to form cartels for their mutual benefits. Oligopsony is a complementary form of oligopoly, where there exists a few buyers and a large number of sellers. Cartels imply direct agreement among competing oligopolists with the aim of reducing uncertainty. Hence, (c) is the correct answer. (a) Is not the answer because cement industry is India is not a monopoly. Monopoly indicates a market structure characterized by a single seller. (b) Is not the answer because cement industry is India is not perfectly competitive. In a perfectly competitive market, there are large numbers of buyers and sellers in the market. (c) Is the answer because cement industry is India is an oligopoly (d) Is not the answer because cement industry is India is not a monopsony. (e) Is not the answer because cement industry is India is not an oligopsony. Answer : (c) Reason : Monopoly is a market structure in which there exists a only a single seller. There are no close substitutes for the product and there are barriers to entry in to the industry. In India, the Government of India is the only producer of atomic energy and there are barriers to entry for the

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private entrepreneurs. So, atomic energy best illustrates a monopoly. (a) Is not the answer because agriculture is not a monopoly in India, rather it is a perfectly competitive market. (b) Is not the answer because automobile industry is not a monopoly in India, rather it is an oligopoly. (c) Is the answer because atomic energy is a monopoly in India. (d) Is not the answer because cola drinks is not a monopoly in India. (e) Is not the answer because television industry is not a monopoly in India. 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) National Income is the sum of factor income and labour income earned by the residents of a country earned usually over a period of one year. Hence it is also a flow concept. (e) Since (a) and (d) are not correct options, (e) cannot be the right answer. Answer : (a) Reason : Since the value added within the domestic territory will belong to the domestic factor inputs, NDP at factor cost must be equal to domestic factor income. Hence answer is (a). (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net Domestic Product at market price. (c) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National product at factor cost (d) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Net National Product at market price (e) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Personal income. Answer : (d) Reason : GDP refers to money value of final goods and services produced within the domestic territory of a country including depreciation. There are certain goods which are produced but will not be included in GDP. For example services of house wives (a) Bobby purchase of a new suit is nothing but the consumption expenditure of bobby, which is part of GDP (b) Purchase of new Ford car also refers to consumption expenditure and hence part of GDP (c) New computer purchased by community Bank for its loan office refers to purchase of capital goods. Hence it is part of capital expenditure and hence part of GDP (d) Tomatoes grown in home garden by Market are not taken as part of GDP Even though goods are produced, they are not taken as part of GDP as it refers to production for self consumption. If she sells them in the market then it becomes part of GDP. (e) Fort India could not sell 100 cars, hence they are part of inventories and hence part of capital expenditure. Hence included in GDP as part of capital goods expenditure. Answer : (e) Reason : (a) Consumption depends on the income and as income increase consumption also increase. (b) Propensity to consume refers to the changes in consumption as a result of change in income. Hence propensity to consume effects consumption. (c) Propensity to save refers to changes in savings as a results of changes in income. The level of savings affects the level of consumption. Hence changes in savings does affect consumption

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(d) (e)

Consumption demand does not depend upon the level of wealth Consumption demand does not depend upon the level of marginal efficiency of investment.

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Answer : (a) Reason : When investment < Depreciation, capital stock decreases and net investment will be negative. Note that capital consumption is nothing but depreciation. (a) Is the answer because when the addition to capital goods in an economy is less than the capital consumption allowance, the economy experiences negative net investment (b) Is not the answer because the economy does not experience zero net investment (c) Is not the answer because the economy does not experience positive net investment (d) Is not the answer because the economy does not experience negative gross investment (e) Is not the answer because the economy does not experience zero gross investment.

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Answer : (e) Reason : APS + APC = 1 If APS < 0, APC > 1

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(a) Is not the answer because when the average propensity to save (APS) is negative, then the average propensity to consume (APC) is not negative (b) Is not the answer because when the average propensity to save (APS) is negative, then the average propensity to consume (APC) is not zero (c) Is not the answer because when the average propensity to save (APS) is negative, then the average propensity to consume (APC) is positive but not less than one (d) Is not the answer because when the average propensity to save (APS) is negative, then the average propensity to consume (APC) is not one (e)

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Is the answer because when the average propensity to save (APS) is negative, then the average propensity to consume (APC) is greater than one.

Answer : (a) Reason : In the Keynesian model, unemployment could be reduced if the aggregate demand increases. Therefore, unemployment is caused by demand deficiency. The Keynesian theory of unemployment suggests that governments can play an active role in the economy by adjusting the aggregate demand through its fiscal and monetary instruments. (a) Is the answer because unemployment in the Keynesian model is caused by demand deficiency. (b) Is not the answer because unemployment in the Keynesian model is not caused by supply deficiency. (c) Is not the answer because unemployment in the Keynesian model is not caused by demand sufficiency. (d) Is not the answer because unemployment in the Keynesian model is not caused by supply sufficiency. (e) Is not the answer because unemployment in the Keynesian model is not caused by both demand deficiency and supply deficiency. Answer : (a) Reason : An important difference between the approaches of the classical and Keynesian economists use to achieve a macroeconomic equilibrium is that Keynesian economists actively promote the use of fiscal policy; the classical economists do not. Classical economists believe intervention can be destabilizing and advocate laissez- faire economy. Therefore the answer is (a). (a) Is the answer because Keynesian economists actively promote the use of fiscal policy while the classical economists do not (b) Is not the answer because Keynesian economists actively promote the use of monetary policy to improve aggregate economic performance while classical economists artificially separated the monetary theory from the value theory.

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(c) Is not the answer because classical economists do not believe that monetary policy will certainly affect the level of output. (d) Is not the answer because Classical economists do not believe that fiscal policy is an effective tool for achieving economic stability while Keynesians do. (e) Is not the answer because none of the above cannot be the answer. 29.

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Answer : (d) Reason : Money supply = Currency in the hands of the public + Demand Deposits with banks. A rupee deposited in a bank reduces currency by Rs.1 but raises deposits by Rs.1, and hence does not affect the money supply in the system. As banks are holding entire deposits in reserves, it cannot affect money multiplier and hence supply of money. (a) If banks maintains 100% of their deposits as reserves, there could be no lending and hence no deposit creation. Thus, when the reserve ratio is 100%, the banking system can no longer affect the money stock in the country. (b) Money supply = Money multiplier x High-powered money (H). When the banks maintain 100% reserves, the value of money multiplier will be 1. Hence, change in the foreign exchange reserves leads to an equal change in the money supply. (c) If banks have to maintain 100% of their deposits with RBI, then naturally the lending capacity of banks would be narrowed down to zero. (d) A rupee deposited in a bank reduces the currency with the public, but at the same time increases the deposits of the banks. Hence, there will be no affect on the money supply in the economy. Hence, the statement is not correct. (e) Money supply = Money multiplier x High-powered money (H). When banks maintain 100% reserves, then the value of money multiplier will come down to 1. If the value of money multiplier is 1, then naturally the money supply must be equal to high-powered money. Answer : (e) Reason : Contractionary (tight) fiscal policy involves increasing tax rate and/or decreasing the government spending to bring down the aggregate demand and price level in the economy. Reduced government spending reduces the public borrowings, and thereby interest rate and output in the economy. The tight monetary policy, conversely, reduces the money supply and thereby increases the interest rate in the economy. Increased interest rate reduces both consumption and investment and thereby reduces output in the economy. Thus, we can say that the combined effect of tight fiscal policy and tight monetary policy lowers the output. But, the direction of change in interest rate is not known unless we know the magnitude of influence of fiscal and monetary policies on interest rate. A contractionary fiscal policy combined with a tight monetary policy result in a lower level of I. output. II. A contractionary fiscal policy combined with a tight monetary policy do not result in a higher level of output. A contractionary fiscal policy combined with a tight monetary policy do not result in a lower III. interest rate A contractionary fiscal policy combined with a tight monetary policy result in a higher interest IV. rate A contractionary fiscal policy combined with a tight monetary policy result in a lower or higher V. interest rate depending on the relative magnitude of fiscal and monetary policies. So, the answer is (e).

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Answer : (a) Reason : Stagflation refers to a situation where there is high unemployment and high inflation occurs simultaneously. Statement I is true as stagflation refers to coexistence of stagnant output and high inflation. Statement II is false because during stagflation, there is no increase in output and hence the output is stagnant. Therefore real GDP is not growing. Statement III is true because during stagflation, the output is stagnant, new employment

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opportunities are not created and hence unemployment level is high. Statement IV is false as the price are high and there is unemployment, the aggregate demand tends to be low. So the answer is (a). (e) Inflation is a serious problem on the part of the government worldwide. The effect of inflation is ranging from redistribution of income and wealth of the society to the worsening the balance of payments position of the country. (a) It is true statement that unanticipated inflation hurts the fixed income earners most. Though their monetary income is constant, real income is reduced because of inflation. (b) It is true statement that higher than expected inflation hurts creditors but benefits debtors. Debtors repay the amount, which is fixed in nominal terms. The real values of repayments in the future will decrease with an increase in inflation, leads to an increase in the wealth of the debtors. On the other hand, the wealth of the creditors will decrease with an increase in the rate of inflation. (c) It is a true statement that inflation creates inefficiency in the economy because people spent lot of time to find a reasonable price. (d) It is a true statement that inflation can lead to a misallocation of resources because inflation misleads people to invest logically. (e) Is the answer because all the above statements are correct. (c) Monetized deficit refers to increase in net RBI credit to the Central Government, comprising the net increase in the holdings of T-bills of the RBI and its contribution to the market borrowings of the Government. Fiscal deficit = Borrowings and liabilities of the Central Government and primary deficit = Fiscal deficit – interest payments. (a) Is not the answer because monetized deficit doesn’t refer fiscal deficit minus interest payments (b) Is not the answer because monetized deficit doesn’t refer borrowings and other liabilities of the Central Government (c) Is the answer because monetized deficit refers Increase in the net RBI credit to the Central Government (d) Is not the answer because monetized deficit doesn’t refer fiscal deficit minus Primary deficit (e) Is not the answer because monetized deficit doesn’t refer RBI’s credit to the commercial banks. (e) If a government has a surplus budget, and the government repays its past debts using its surplus budget, public debt will be falling. (a) Is not the answer because if a Government is running surplus in its budget, public debt may not be rising. (b) Is not the answer because if a Government is running surplus in its budget, public debt may not be falling. (c) Is not the answer because if a Government is running surplus in its budget, public debt may not be constant. (d) Is not the answer because if a Government is running surplus in its budget, public debt may not be falling if there are tax cuts. (e) Is the answer because if a Government is running surplus in its budget, public debt will be falling if the Government uses the surplus to repay its past debts. (a) Creation of credit is a major function of a commercial bank. When a bank creates credit or advances loans, there tends to be a multiple expansion of credit in the banking systems. (a) Is the answer because credit creation by the commercial bank is limited by the Cash Reserve Ratio(CRR), i.e. every commercial bank must keep on deposit with the Reserve Bank certain amounts of funds equal to a specified percentage of it’s own deposit liabilities. (b) Is not the answer because commercial banks cannot create as much credit as they want.

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(c) Is not the answer because RBI has control over the credit created by commercial banks. (d) Is not the answer because CRR has an impact on credit creation. Answer : (d) Reason : (a) Reserves with RBI (both surplus reserves and statutory reserves) are assets of a commercial bank. (b) Loans given to public sector undertakings are assets of the banks. (c) Credit given to any individual, firm or government is an asset to the bank lended. (d) Deposits from the public are liabilities to the bank because it has to repay the amount at a later time. (e) Discounted commercial bills from the public are assets to the bank because it purchased (discounted) the bills from the holder of the bill. Answer : (d) Reason : Preparation of BoP statement is based on double-entry system of book keeping. Hence, all debt items should equal credit items, and the balance is zero. (a) Is not the answer because all entries in the balance of payments statement is not collectively sum to GDP of the country (b) Is not the answer because all entries in the balance of payments statement is not collectively sum to GNP of the country (c) Is not the answer because all entries in the balance of payments statement is not collectively sum to foreign exchange reserves of the country

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(d) Is the answer because all entries in the balance of payments statement is collectively sum to zero (e) Is not the answer because all entries in the balance of payments statement is not collectively sum to Exports of the country.

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Answer : (b) Reason : Because of the double entry concept underlying the recording of transactions, BoP account must always be in balance. Thus, ‘Balance in current account + Balance in capital account + Change in reserves = Zero’. When there is no change in the foreign exchange reserves, then ‘balance in current account + balance in capital account = zero’ (or) balance in current account = - (balance in capital account). (a) Balance in current account + Balance in capital account = Change in reserves. When balance in current account ‘plus’ balance in capital account is zero, then balance in the current account = - balance in capital account. Hence, statement (a) is not correct. (b) There will no change in the foreign exchange reserves of a country only when surplus (deficit) in current account is equal to deficit (surplus) in capital account. (c) Current account balance may or may not be zero when the change in foreign exchange reserves of a country is zero. (d) Trade balance (exports – imports) may or may not be zero when the change in foreign exchange reserves of a country is zero. (e) Capital account balance may or may not be zero when the change in foreign exchange reserves of a country is zero. Answer : (a) Reason : A business cycle refers to short-run fluctuations in the business activity in an economy. There are four phases in a business cycle – depression, recession, recovery and boom. Recession signifies reduced business activity in the economy and depression represents the extreme form of recession. Recovery refers to picking up of business activity in the economy after facing depression, while boom refers to greater business activity in the economy. (a) The period from A to B indicates recovery phase. (b) The period from C to D indicates recession phase. (c) The period from C to E indicates both recession and depression phases. (d) The period from A to C indicates both recovery and boom phases. (e) The period from B to C indicates phase of boom.

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40.

Answer : (c) Reason : In the business cycles theory, after a business peak or boom, the economy enters contraction stage. The sales of most businesses fall and real GNP of an economy grows at a slow pace. There is a large number of unemployment in the labor market. This phase is otherwise known as recession. (a) Is not the answer because the inventory stock increases gradually in recession. (b) Is not the answer because business expectation will be pessimistic with cautious decision-making. (c) Is the answer because there is an underutilization of existing capacity in the economy. (d) Is not the answer because bank credit starts falling in the recession phase of business cycle. (e) Is not the answer because there is a decline in the income levels of the people 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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41. 42.

43.

44.

45.

Answer : (c) Reason : Monopoly is a market structure in which there is one seller of the product implying that the producer has complete control over market supply of the commodity. The monopolist must decrease the price he receives for every unit in order to sell an additional unit. Hence, the marginal revenue of the monopolist would be lesser than price. Hence, the correct answer is (c). (a) Is not the answer because in monopoly, price is not lesser than marginal revenue. (b) Is not the answer because in monopoly, price is equal to average revenue. (c) Is the answer because in monopoly, price is greater than marginal revenue. (d) Is not the answer because in monopoly, price is not equal to total revenue. (e) Is not the answer because option (b) above is not true, while option (c) is true. So, the answer is (c). Answer : (c) Reason : A large economy of scale leading to existence of a single firm in an industry is defined as a natural monopoly. Government regulation, ownership of critical raw materials and licenses are sources of monopoly, but not result in natural monopoly. (a) Is not the answer because government regulation cannot result in formation of a natural monopoly. (b) Is not the answer because product differentiation cannot result in formation of a natural monopoly. (c) Is the answer because economies of large-scale production can result in formation of a natural monopoly. (d) Is not the answer because ownership of critical raw materials cannot result in formation of a natural monopoly. (e) Is not the answer because licenses cannot result in formation of a natural monopoly.

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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. (a) As long as marginal utility is positive, total utility will be increasing. (b) Total utility will be at its minimum point when marginal utility is zero and the derivative of marginal utility (second derivative of total utility) is positive. (c) Total utility will be at its maximum point when marginal utility is zero and the derivative of marginal utility (second derivative of total utility) is negative. (d) When marginal utility falls below zero, the total utility starts falling. Hence (d) is the answer. (e) Marginal utility can be negative; which implies that a consumer is deriving negative satisfaction by consuming one additional unit. Answer : (e) Reason : (a) Long run average cost (LAC = LTC/Q) is U-shaped because of economies of scale initially and diseconomies of scale at later stages of production.

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(b)

(c) (e) 46.

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Long run marginal cost (LMC = ∂LTC/∂Q) is U-shaped as cost of producing additional units reduces at the beginning because of economies of scale, but raises later due to diseconomies of scale. & (d) Short run average cost (SAC = STC/Q) and AVC (= TVC/Q) falls and raises due to operation of ‘law of diminishing marginal productivity’. Average fixed cost (AFC = TFC/Q) falls at a decreasing rate with the increase of output because of constant total fixed cost.

Answer : (c) Reason :

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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

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47.

48.

49.

50.

liabilities of the RBI decreases. (b) Is not the answer because When the RBI increases cash reserve ratio (CRR), high powered 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. Answer : (d) Reason : A depression is immediate followed by recovery. (a) During recovery unemployment rate decreases because of picking up of economy activity. (b) Depression is immediately followed by recovery and not recession. (c) Only during boom there will be rapid increase in wages because of high business activity. (d) It is true that during recovery the cost of production will gradually increase because of gradual increase in wages. (e) Production will increase moderately during recovery. Answer : (d) Reason : Phillips curve shows the relationship between the unemployment and inflation. In short-run there exist inverse relationship between inflation rate and unemployment rate because actual rate of inflation is not always the same as the expected rate. But in the long run, the actual rate of inflation equals expected rate and hence the economy automatically reach its natural rate of unemployment. As there is no trade off between inflation and unemployment in the long run, the long run Phillips curve is vertical. (a) Is not the answer because the long run Phillips curve is not an upward sloping curve (b) Is not the answer because the long run Phillips curve is not a downward sloping curve (c) Is not the answer because the long run Phillips curve is not a horizontal straight line (d) Is the answer because the long run Phillips curve is a vertical straight line (e) Is not the answer because the long run Phillips curve is not indeterminable. Answer : (e) Reason : Personal disposable income = Personal income – Personal taxes. (a) Is not the answer because the difference between personal disposable income and personal income is not residential investment. (b) Is not the answer because the difference between personal disposable income and personal income is not indirect taxes. (c) Is not the answer because the difference between personal disposable income and personal income is not subsidies. (d) Is not the answer because the difference between personal disposable income and personal income is not transfer payments. (e) Is the answer because the difference between personal disposable income and personal income is personal taxes Answer : (b) Reason : Monetary policy mainly controls the economy by regulating the interest rates through changes in money supply. If the private investment is more sensitive to interest rate, then monetary policy can more effectively regulate the economy. (a) A recessionary condition cannot make a monetary policy more effective. (b) When private investment is more sensitive to interest rate monetary policy will be more effective as a small change in the interest rate would lead to a greater change in the output. (c) Monetary policy will not be more effective when the private investment is less sensitive to interest rate. (d) During liquidity trap, the effectiveness of monetary policy decreases because during such policy, changes in interest rate cannot have any effect on investments. (e) Effectiveness of the monetary policy is not determined by the phases of business cycle.

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51.

Reason :

52.

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Answer : (a) Price elasticity of demand = ∂Q/∂P × P/Q Given P = 10 Demand function: P = 20 – 2Q Or, 2Q = 20 – P Or, Q = 10 – 0.5P

Thus, ∂Q/∂P × P/Q = -0.5 × 10/5 = -1 Answer : (b) Reason : Qs = 400P – 500 Qd

=

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1500 – 100P

Equilibrium price is determined when Qs = Qd. ∴ 400P – 500 = 1500 – 100P or, 500P = 2000 or, P = 4 When P = 4, Qs = 400(4) – 500 = 1600 – 500 = 1100. 53.

54.

55.

Answer : (e) Reason : Elasticity of demand measures how responsive the demand is to a given change in the price. In the given situation decrease in supply causes an increase in the price. Hence elasticity of demand cannot be computed and the answer is (e). Answer : (d) Reason : When price is Rs.75, demand is 10 units When price is Rs.70, demand is 12 units If the demand is linear, then Q = a + bP Where, b = Change in quantity demanded/Change in price = (12 – 10)/(70 – 75) = 2/(-5) = -0.4. Thus, Q = a – 0.4P At Rs.75, 10 = a – 0.4(75) Or, a = 40 Thus, demand function = Q = 40 – 0.4P The maximum quantity can be demanded when the price is zero. Hence, maximum quantity demanded = 40 – 0.4(0) = 40 units.

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Answer : (b)

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Px Reason : Slope of the budget line = Py

56.

57. 58.

If the prices of both the goods is the same, slope of the budget line will be 1. Answer : (c) Reason : MUx/Px = MUy/Py 300/12 = MUy/30 9000/12 = 750. Answer : (b) Reason : Budget =Px x Qx + Py x Qy = 0 + 2Qy = Rs.20. Answer : (d) Reason : The MRTS is equal to the ratio of the marginal productivities of the two MPL/MPK 6K0.3L-0.7/6K-0.7L0.3 K0.3L-0.7/K-0.7L0.3

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products –

59.

60.

K/L Answer : (d) Reason : When income increases by 33.33%, demand for VCD players increase by 40%. Therefore, income elasticity of demand for VCD players is 1.20. (a) Is not the answer since the demand is elastic as the income elasticity is 1.20. (b) Is not the answer since the VCD player is a normal good as income elasticity is positive. (c) Is not the answer since the VCD player is a normal good as income elasticity is positive. (d) Is the answer since income elasticity is positive and greater than one. (e) Is not the answer since income elasticity is greater than one. For necessities income elasticity of demand is positive but less than one. Answer : (c) Reason : The production function for a firm Q = 100L – APL = = 100 – 0.2L.

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0.2L2

When L = 10, APL = 100 – 0.2 (10) = 100 – 2 = 98. 61.

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Answer : (c) Reason : The cost function of the firm is TC = 500 + 10Q – TFC = 500

0.25Q3

500 ∴ Average Fixed Cost = AFC = Q

500 When Q = 100, AFC = 100 = 5. 62.

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Answer : (d) Reason : LTC =

Q3

–

40Q2

+ 450Q

LTC LAC = Q = Q2 – 40Q + 450 ∂LAC =0 LAC will be minimum, where ∂Q

∂ ( Q 2 − 40Q + 450 ) Or,

∂Q

=0

or, 2Q – 40 = 0 or, 2Q = 40.

40 = 20 or, Q = 2 When Q = 20, LAC

63. 64.

=

(20)2 – 40 (20) + 450 = 400 – 800 + 450 = 50.

Answer : (c) Reason : When Q = 4, MC = 12Q – 4 = 12(4) – 4 = 44. Answer : (d) Reason : Quantity 100 101 102

Marginal Cost (Rs.) -2 3

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103 4 104 5 105 6 A firm would be maximizing profits when MR = MC. Under perfect competition MR is equal to P. Therefore, the firm would maximize profits by producing 104 units where MR = MC. 65.

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Answer : (d) Reason : TR = P × Q = 2 × 100 = 200 TC = TFC + TVC = 50 + 40 = 90 ∴ Economic profit

= = =

66.

TR – TC 200 – 90 Rs.110. < TOP >

Answer : (c) Reason : Demand function of the monopolist are given as P = 800 – 10Q TC

=

300Q + 2.5Q2

TR

=

P × d = 800Q + 10Q2

∴MR = 800 – 20Q. ∴ Profit maximizing output for the monopolist can be determined, where, MR = MC ∂ (TC) MC = ∂Q = 300 +5Q

∴ MR = MC 800 – 20Q = 300 + 5Q – 25Q = – 500 Q = 20 67.

68.

∴ P = 800 – 10 (20) = 800 – 200 = 600. Answer : (d) Reason : At break-even, TR = TC TR = P x Q = 5Q Thus, 5Q = 2850 + 3.5Q Or, 1.5Q = 2850 Or, Q = 2850/1.5 = 1900 units.

Answer : (d) Reason :

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C

=

8 + 0.7Y

S

=

–8 + 0.3Y

At equilibrium, S = I –8 + 0.3Y = 22 0.3Y = 30 Y = 100 69.

Answer : (e) Reason : Personal savings

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= =

70.

Answer (c) Reason :

GNP

=

Personal income – Personal tax – Personal consumption 10,000 – 3,000 – 6,000 = Rs.1,000. :

GDP + NFIA

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NFIA

=

∴ GNP 71.

Factor income received from abroad – Factor income paid abroad.

=

100 – 200

=

– 100

=

8000 – 100

= 7900. Answer : (d) Reason : At break-even level of disposable income, savings are zero. ∴

S

=

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–300 + 0.25Yd = 0 0.25 Yd = 300

300 Yd = 0.25 = 1200.

72.

73.

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Answer : (d) Reason : Domestic savings = Private savings + Public savings Private savings = 1500 – (–500) = 2000. ∴ The answer is (d) Answer : (c) Reason :

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C = α + βYd Where, α = autonomous consumption and β = marginal propensity to consume (MPC) β = ∆C/∆Yd = (475 – 400)/100 = 0.75 If MPC = 0.75, autonomous consumption: 475 = a + 0.75(500) Or, a = 100. Thus, C = 100 + 0.75Yd Or, S = – 100 + 0.25Yd When S = 100, 100 = –100 + 0.25Yd or, 200 = 0.25Yd or, Yd = 800 Since the economy is a two sector economy, Y = Yd (disposable income).

74.

75.

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 + 15,00] – [2,500 + 500 + 4,000 + 12,000] = 18,000 – 19,000 = –1,000 i.e. 1,000 MUC (Deficit) Answer : (b) Reason : Revenue Deficit = Revenue expenditure – Revenue taxes Revenue expenditure = Non-plan expenditure + Plan Expenditure Revenue receipts = Tax revenue + Non-tax revenue Revenue expenditure Revenue receipts

76.

= =

2,89,384+ 76,843 1,84,169 + 69,766

= =

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3,66,227 2,53,935.

∴Revenue Deficit = 3,66,227 – 2,53,935 = Rs.1,12,292 crore. Answer : (e) Reason : High – Powered money (H) = monetary liabilities or central bank + Government money.

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77.

∴ M = 3,300 + 100 = 3,400 MUC Answer : (a) Reason : MPC = Change in consumption / Change in disposable income

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= ∆C/∆Yd = (4200 – 2000) / (4000 – 1250) = 0.8 If MPC = b = 0.8, then 4200 = a + 0.8(4000) 4200 = a + 3200 or, a = 4200 – 3200 = 1000. 78. 79.

Answer : Reason : Answer : Reason :

(e) Multiplier = 1/0.25= = 4. (c) Stock of high powered money ( H) = monetary liabilities of the central bank + government money = 1,250 MUC Current deposit ratio (Cu) = 0.20 Reserve ratio (r) = 0.05 ∴ Money supply Ms

1 + 0.20 × 1, 250 0.20 + 0.05

4.8 × 1,250 6,000 MUC.

= =

81.

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1 + Cu ×H Cu + r

= =

80.

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Answer : (d) Reason : For any economy APS + APC = 1. Therefore, if APS = -0.05, APC = 1.05 Answer : (e)

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Reason : % ∆Q EP = % ∆ P

%∆Q = ∴

=

EP × %∆P

–3 × 5 = –15%

Impact on sales of luxury car

Sales in the next year

=

1000 × (1 – 0.15)

= =

82.

83.

Capital a/c balance

Answer : (c) Reason : GNPMP

850 units. < TOP >

Answer : (d) Reason : Change in forex reserves = ∴

–15%

Current a/c balance + Capital a/c balance

=

∆ Forex reserves + Current a/c deficit

=

1000 + 5000

=

6000. < TOP >

=

GDPFC + NFIA + Indirect taxes – Subsidies

=

2000 + 200 + 542 – 450

=

Rs.2292 cr.

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