Mb141 - 2004 - 07 (july)

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

Answer all questions. Marks are indicated against each question.

Sugar is an important ingredient in the preparation of ice cream. Which of the following is/are true, < Answer > ceteris peribus, if price of sugar falls? I. Demand for ice cream will decrease. II. Supply of ice cream will increase. III. Price of ice cream will increase. IV. Price of ice cream will decrease. (a) Only (I) above (c) Only (III) above (e) Both (II) and (IV) above.

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

2.

< Answer >

Among the following goods which has the highest income elasticity of demand? (a) Tea Water.

(b) Ice cream

(c) Milk

(d) Rice

(e) (1 mark)

3.

< Answer >

Which of the following statements is true with regard to price elasticity of demand? (a) (b) (c) (d) (e)

Elasticity remains constant throughout the demand curve Elasticity increases with increase in quantity demanded Elasticity increases as the price decreases Elasticity is equal to the slope of the demand curve Higher the elasticity, more responsive the demand is for a given change in price. (1 mark)

4.

When all income is spent on only two fruits, apples and oranges, the consumer reaches equilibrium < Answer > only when (a) (b) (c) (d) (e)

Marginal utility of apples is equal to marginal utility of oranges Marginal utility of apples is equal to marginal utility of oranges, and the income is exhausted Every rupee spent on apples and oranges gives him the same level of marginal utility Last rupee spent on apples and oranges gives him the same level of marginal utility Both (b) and (c) above. (1 mark)

5.

The cross price elasticity of demand for the products Rolex and Bollix is 10. It implies that Rolex and < Answer > Bollix are (a) Substitutes Independent (d) Inferior goods

(b) Complements

(c)

(e) Luxury goods. (1 mark)

6.

< Answer >

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)

7.

The difference between the price an individual is willing to pay and the price he or she actually pays is (a) Producer cost profit (d) Producer surplus

(b) Monopolist profit (e) Consumer surplus.

(c) Economic

< Answer >

(1 mark) 8.

< Answer >

Maximum point on the average product curve is reached when (a) (b) (c) (d) (e)

Marginal product is zero Marginal product is maximum Marginal product is minimum Marginal product is negative Marginal product equals average product. (1 mark)

9.

< Answer >

The point beyond which no rational firm would employ labor is (a) (b) (c) (d) (e)

When the average product of labor is equal to marginal product of labor When the marginal product of labor is maximum When the marginal product of labor is zero When the total product of labor is zero When the average product of labor is zero. (1 mark)

10.

< Answer >

Marginal product of labor is the (a) (b) (c) (d) (e)

Cost of employing labor for producing one more unit of output Change in output from using one more unit of labor Change in revenue from selling one more unit of output Change in revenue from using one more unit of labor None of the above. (1 mark)

11.

< Answer >

Which of the following is true in the third stage of the three stages of production process? (a) (b) (c) (d) (e)

The total product curve has an increasing slope The marginal product curve has a positive slope The marginal product curve lies below the average product curve Total product increases Marginal product is positive. (1 mark)

12.

< Answer >

Which of the following is not an example of a firm’s explicit cost? (a) (b)

Salaries paid to workers An amount of Rs.500 paid to an employee towards the reimbursement of medical expenses incurred by him (c) Advertisement expenditure incurred by the firm towards promotion of its branded good, ‘Atoka’ (d) The firm’s owner has given up a job, where he was earning Rs.10,000 per month, to run the firm (e) Payment of telephone bills by the firm. (1 mark)

13.

< Answer >

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) 14.

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

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

< Answer >

(e) Minimum (1mark) < Answer >

15.

Which of the following costs should not be considered while making decisions in the short run? (a) Implicit costs (d) Sunk costs

(b) Marginal costs (c) Variable costs (e) Opportunity costs. (1 mark)

16.

< Answer >

Which of the following statements is not true? (a) (b) (c) (d) (e)

Every choice involves opportunity costs Opportunity costs are the highest-valued alternatives that must be forgone when a choice is made Opportunity costs can always be expressed in money terms The full cost of an activity includes the opportunity costs Economists refer to the forgone benefits of the next-best alternative as opportunity costs. (1 mark)

17.

< Answer >

A firm will shut down its operations in the short run if (a) (b) (c) (d) (e)

It incur losses Fixed costs exceed its revenue Variable costs exceed its revenue Total revenue falls short of total costs Total fixed costs exceeds its total variable costs. (1 mark)

18.

< Answer >

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)

19.

< Answer >

Which of the following is not true with respect to a perfectly competitive market? (a) (b) (c) (d) (e)

There are many sellers in the market Individual firms are price makers Products sold by the firms are identical Anyone can enter or exit the industry without difficulty Buyers and sellers have perfect information about the market. (1 mark)

20.

< Answer >

In India which of the following best describes a perfectly competitive market? (a) Sugarcane cultivation (c) Soft drinks industry (e) Electricity distribution.

(b) Indian railways (d) Toilet soap industry (1 mark)

21.

< Answer >

One of the reasons for the existence of natural monopoly is (a) Economies of scale (c) Downward sloping demand curve (e) Lower fixed cost requirement.

(b) Diminishing marginal rate of productivity (d) Formation of cartels (1 mark)

22.

< Answer >

Which of the following is a correct inference, if a monopolist is maximizing profits? (a) (b) (c) (d) (e)

Total revenue is maximum for the monopolist Price charged by the monopolist is equal to the average cost of production The difference between marginal revenue and marginal cost of the monopolist is maximum Marginal revenue is equal to the marginal cost of the monopolist Average variable cost is equal to the marginal cost of the monopolist. (1 mark)

23.

Which of the following factors differentiate perfect competition from monopolistic competition? I.

Number of buyers and sellers.

< Answer >

II. Entry and exit barriers. III. Product differentiation. IV. Selling activities. (a) (I) and (III) above (c) (III) and (IV) above (e) All (I), (II), (III) and (IV) of the above.

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

24.

< Answer >

A kinked demand curve occurs in an oligopoly when a firm (a) (b) (c) (d) (e)

Increases its price and others follow it Increases its price and others do not follow it Decreases its price and others follow it Decreases its price and others do not follow it Both (b) and (c) of the above. (1 mark)

25.

< Answer >

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

(b) Monopoly

(c) Monopolistic

(e) Duopoly. (1 mark)

26.

< Answer >

Which of the following is a stock variable? (a) Gross Domestic Product Inflation (d) National Income

(b) Inventory of a firm

(c)

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

27.

< Answer >

Which of the following ratios best describes the GNP deflator? (a) Nominal GNP to real GNP (c) Nominal GNP to real GDP (e) None of the above.

(b) Real GNP to nominal GNP (d) Real GNP to nominal GDP (1 mark)

28.

Total market value of all the final goods and services produced in a given period by factors of < Answer > production located within a country is (a) (b) (c) (d) (e)

Gross National Product at market prices Gross Domestic Product at market prices Net National Product at market prices Gross National Product at factor cost Gross Domestic Product at factor cost. (1 mark)

29.

< Answer >

Which of the following is not included in personal income? (a) Personal savings (c) Dividends (e) Personal consumption.

(b) Personal income taxes (d) Retained earnings (1 mark)

30.

< Answer >

Consumption demand does not depend upon the level of (a) Income (d) Wealth

(b) Propensity to consume (e) Marginal efficiency of investment.

(c) Propensity to save (1 mark)

31.

If the marginal propensity to consume is zero, a decrease in investment would lead to (a) (b)

A decrease in the equilibrium level of income by the same amount No change in the equilibrium level of income

< Answer >

(c) (d) (e)

An unending downward spiral in equilibrium level of income An unending upward spiral in the equilibrium level of income An increase in the equilibrium level of income by the same amount. (1 mark)

32.

< Answer >

Which of the following is not a component of aggregate expenditure in an economy? (a) Consumption purchases (d) Net exports

(b) Investment

(c) Government

(e) Taxes. (1 mark)

33.

< Answer >

Monetarists prefer monetary policy over the fiscal policy because they feel that (a) (b) (c) (d) (e)

Statistically money demand function can be better determined than consumption or investment demand Money is a substitute for financial assets Demand for money is determined by rate of interest Fiscal policy is ineffective because of ‘crowding out’ effect Both (a) and (d) above. (1 mark)

34.

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

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)

35.

< Answer >

According to the classical economists, the aggregate supply curve is (a) Vertical (c) First horizontal and then vertical (e) Positively sloped.

(b) Horizontal (d) First vertical and then horizontal (1 mark)

36.

< Answer >

The net factor income earned within the domestic territory of a country must be equal to (a) Net Domestic Product at factor cost (c) Net National product at factor cost (e) Personal income.

(b) Net Domestic Product at market price (d) Net National Product at market price (1 mark)

37.

< Answer >

Which of the following is true if the Central Bank reduces the Reserve Ratio? (a) (b) (c) (d) (e)

Money supply and loans given by commercial banks will decrease Money supply will decrease while loans given by commercial banks will increase Money supply and loans given by commercial banks will increase Money supply will increase while loans given by commercial banks will decrease Money supply will remain unaffected while the loans given by the commercial banks will decrease. (1 mark)

38.

Bank rate means (a) (b) (c)

The rate of interest on inter-bank loans The rate of interest charged by banks on borrowers The rate of interest paid by banks to depositors

< Answer >

(d) (e)

The rate of interest charged by banks for loans given to the central bank of the country The rate of interest charged by the central bank of a country on its loans to other commercial banks. (1 mark)

39.

When there is an unanticipated inflation, which of the following sections of an economy benefit? (a) Borrowers (d) Lenders

(b) Fixed income earners (e) None of the above.

< Answer >

(c) Holders of currency (1 mark)

40.

The Philips curve implies that the goal of price stability is most likely to conflict with the goal of (a) Full employment (c) An equitable distribution of income (e) Removal of poverty.

< Answer >

(b) Economic growth (d) Balance in international trade (1 mark) < Answer >

41. Automatic stabilizers refer to (a) (b) (c) (d) (e)

Inherent mechanisms in the stock market that automatically cause stock market gains to be cancelled out by losses, which make expected long-run returns equal to zero The invisible hand mechanisms which automatically bring the economy out of a recession Government revenue and expenditure items that change automatically in response to changes in economic activity Discretionary monetary policy maneuvers designed to keep inflation under control automatically None of the above. (1 mark) < Answer >

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

(d) Falling if there are tax

(1 mark) < Answer >

43. Banks can create money (a) (b) (c) (d) (e)

By printing currency notes By paying interest to their depositors By making loans that result in additional deposits By offering financial services, such as money market accounts By accepting deposits from the public. (1 mark) < Answer >

44. The difference between M3 and M1 is (a) Demand deposits (b) Post office savings deposits (c) Savings deposits (d) Time deposits

(e) M2. (1 mark) < Answer >

45. If banks decide to keep a higher fraction of their deposits as reserves, (a) (b) (c) (d) (e)

The money supply will decrease The money supply will increase The money supply will remain unchanged Interest rate in the economy will decrease None of the above. (1 mark)

46. 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)

< Answer >

(1 mark) < Answer >

47. In which sector of Indian economy do we find a high rate of disguised unemployment? (a) Service sector (d) Manufacture sector

(b) Transport sector (e) Mining sector.

(c) Agriculture sector (1 mark) < Answer >

48. Recession is defined as (a) (b) (c) (d) (e)

Two or more quarters of increasing inflation The period after the trough of a business cycle The period before the peak of the business cycle Two or more quarters of declining output Two or more quarters of declining inflation. (1 mark) < Answer >

49. 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)

50. When a person is employed in a sector where his/her employment does not make any difference to the < Answer > output, it signifies the presence of (a) Frictional unemployment (c) Disguised unemployment (e) None of the above.

(b) Cyclical unemployment (d) Structural unemployment (1 mark)

51. Suppose the price of movie tickets at a theater increases from Rs.12 per couple to Rs.20 per couple. The < Answer > theater manager observed that the increase in price caused attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for the movie? (a) 0.5 5.0.

(b) 1.0

(c) 0.8

(d) 1.2

(e) (2 marks)

52. Demand function of a consumer is estimated to be Q = 40 – P. If the price is Rs.20, price elasticity of < Answer > demand is (a) –4

(b) –2

(c) –1

(d) Zero

1 (e) 4 . (2 marks) < Answer >

53. Demand and supply schedule for a product is given below: Price (Rs. Per unit) 10 12 14 16 18 20 Equilibrium price for the product is (a) Rs.10 (b) Rs.12 Rs.18.

Demand (Units) 500 450 400 350 300 250 (c) Rs.14

Supply (Units) 320 360 400 440 480 520 (d) Rs.16

(e)

(1 mark) < Answer >

54. Supply and demand functions for a product are: Qs = 400P – 500 Qd = 1,500 – 100P Equilibrium output for the product is (a) 1,000 units (b) 1,100 units units.

(c) 1,200 units

(d) 1,300 units

(e) 1,400 (1 mark) < Answer >

55. The Demand schedule for a good is given below. Price of the good Quantity Demanded (Rs.) (Units) 2 200 3 100 3 50 3 200 The arc cross price elasticity of demand for the good is (a) 2.4 6.6.

(b) 5.0

Real income (Rs.) 10,000 10,000 10,000 12,000

(c) 4.5

Price of related good (Rs.) 4 5 4 4 (d) 3.0

(e) (2 marks)

56. Marginal utilities of goods A and B are 600 and 900, and the price of good B is Rs.120. If the consumer < Answer > is in equilibrium, the price of good A is (a) Rs.60 (e) Data insufficient.

(b) Rs.70

(c) Rs.80

(d) Rs.90 (1 mark)

57. If the average product of labor (APL) is 30L – (a) 2,000 units units.

(b) 4,000 units

L2 ,

< Answer >

the maximum possible total product (TPL) is

(c) 6,000 units

(d) 8,000 units

(e) 12,000 (2 marks)

58. Average productivity of labor (APL) for a firm is 20 when labor employed is 10 units. When labor < Answer > employed increased to 11 units, APL decreases to 19 units. Marginal productivity of 11th unit of labor is (a) –1 unit units.

(b) – 9 units

(c) 1 unit

(d) 9 units

(e) 19 (1 mark)

59. Total cost function of a firm is estimated to be TC = 500 – 2Q + 3Q2. If the current output is 10 units, < Answer > marginal cost is (a) Rs.46 above.

(b) Rs.58

(c) Rs.60

(d) Rs.100

(e) None of the (1 mark) < Answer >

60. Marginal cost (MC) schedule of a firm is Output 1 2 3 4 5

MC (Rs.) 100 50 40 60 90

If the firm is producing only 4 units of output, the total cost will be (a) Rs.60

(b) Rs.100

(c) Rs.150

(d) Rs.250

(e)

Rs.340. (1 mark) 61. Total cost of production for a firm to produce 100 units is Rs.1,500 and to produce 150 units it is < Answer > Rs.2,000. Assuming the average variable cost to be constant, fixed cost for the firm is (a) Rs. 100 Insufficient data.

(b) Rs. 500

(c) Rs.1,000

(d) Rs.1,500

(e) (2 marks) < Answer >

62. Consider the following Total Cost function TC = 1,000 + 200Q – 9Q2 + 0.25Q3 Which of the following statements is/are true?

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

1, 000 The average variable cost function is Q + 200 - 9Q + 0.25Q2 Fixed cost is Rs.1,000 Marginal cost function is 200 – 9Q + 0.25Q2 Variable cost function is 200Q – 9Q2 + 0.25Q3 Both (b) and (d) above. (1 mark)

63. The demand function for a good is estimated to be Q = 100 – 2P. The total cost function of the firm is < Answer > given by TC = 50 + 2Q. If the firm produces 12 units, profits made by the firm are (a) Rs. 352 Rs. 502.

(b) Rs. 426

(c) Rs. 454

(d) Rs .472

(e) (2 marks)

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

(b) 1,200 units

(c) 1,550 units

(d) 1,900 units

(e) (1 mark)

65. The demand function for a firm is P = 30 – 3Q. If the average cost (AC) is Rs.6, what is the output at < Answer > which the firm earns normal profits? (a) 3 units units.

(b) 30 units

(c) 10 units

(d)

6 units

(e)

8

(2 marks) < Answer >

66. 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 Rs.400.

(b) Rs.20

(c) Rs.600

(d) Rs.800

(e) (3 marks) < Answer >

67. The following data is taken from National Income Accounts of a country. Particulars GNP at market prices Transfer payments Indirect taxes Personal taxes Consumption of capital Undistributed corporate profits Corporate tax

Rs. Cr. 1,700 242 173 203 190 28 75

Subsidies Personal income in the country is (a) Rs.1,363 cr Rs.1,496 cr.

20

(b) Rs.1,121 cr

(c) Rs.1,230 cr

(d) Rs.1,296 cr

(e) (2 marks)

68. The following information is given from the national accounts of a country for the year 03. Particulars Factor income earned within domestic territory Gross domestic fixed capital formation Net domestic fixed capital formation GNP at market prices Indirect taxes Subsidies The net factor income from abroad for the year 2002-03 is (a) 15,000 MUC MUC.

(b) 13,000 MUC

(c) 16,000 MUC

2002- < Answer >

MUC 65,000 6,000 4,000 85,000 3,000 1,000 (d) 17,000 MUC

(e) 11,000 (2 marks) < Answer >

69. The following is the information from national accounts of an economy: Particulars Direct taxes Indirect taxes Factor income paid abroad Factor income received from abroad Depreciation Surplus

Subsidies National income The GDP at market prices is (a) 24,800 MUC MUC.

(b) 30,200 MUC

(c) 68,400 MUC

MUC 2,400 11,400 12,000 9,000 12,000

1,050 6,000 48,000 (d) 52,350 MUC

(e) 45,600 (2 marks)

70. The following information is extracted from the National Income Accounts of an economy. All figures < Answer > are in millions units of currency (MUC). Particulars Depreciation Government expenditure Corporate taxes Gross domestic investment Transfer payments Personal taxes Net income earned from abroad Retained earnings

MUC 236 1,188 288 1,278 278 810 44 600

If the national income is 10,000 MUC, the personal disposable income in the economy would be (a) 8,960 MUC MUC.

(b) 8,580 MUC

(c) 10,240 MUC

(d) 9,230 MUC

(e) 7,440 (2 marks)

71. The following information is extracted from the National Income Accounts of an economy. All figures < Answer > are in millions units of currency (MUC). Particulars

MUC

Depreciation Government expenditure Gross domestic investment Net exports Personal consumption expenditure

118 594 639 –31 2,191

The NDP at market prices is (a) 1,472 MUC MUC.

(b) 3,275 MUC

(c) 2,346 MUC

(d) 1,782 MUC

(e) 3,393 (2 marks)

72. As on June 30, 2004, monetary liabilities of the central bank are 1,200 MUC and government money is < Answer > 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 MUC.

(b) 5,500 MUC

(c) 6,000 MUC

(d) 6,550 MUC

(e) 6,600 (2 marks)

73. In a two sector economy the savings function is S = –60 + 0.25 Yd. If the investment in the economy is < Answer > 100 Million Units of Currency (MUC), equilibrium income will be (a) 620 MUC MUC.

(b) 640 MUC

(c) 660 MUC

(d) 650 MUC

(e) 630 (2 marks)

74. Marginal Propensity to Consume (MPC) for an economy is estimated to be 0.75. Beginning from a < Answer > position of equilibrium, investment rises by Rs.100 crore. The change in Y that will bring the economy back to equilibrium is (a) Rs.–75 crore crore.

(b) Rs.133 crore

(c) Rs.300 crore

(d) Rs.400 crore (e) Rs.100 (1 mark) < Answer >

75. In an economy Marginal Propensity to Save (MPS) is 0.20. Multiplier for the economy is (a) 0.20 5.00.

(b) 0.80

(c) 1.00

(d) 1.25

(e) (1 mark)

76. Savings function of an economy is S = – 300 + 0.25 Yd. Break-even disposable income for the < Answer > economy is (a) 75 MUC MUC.

(b) 300 MUC

(c) 900 MUC

(d) 1,200 MUC

(e) 1,500 (2 marks) < Answer >

77. The following are the excerpts from the balance sheet of a Central Bank. Particulars Notes in circulation Other deposits Other non-monetary liabilities Statutory and contingency reserves Credit to Central Government Shares & loans to financial institutions Central bank claims on Commercial banks Net foreign exchange assets Other assets

MUC 100 50 100 420 1,120 550 350 150 50

If the government money is 25 MUC, the high powered money in the economy is (a) 1,650 MUC

(b) 1,750 MUC

(c) 1,725 MUC

(d) 1,825 MUC

(e) 1,850

MUC. (2 marks) 78. Monetary liabilities of the Central Bank in an economy are 20,000 MUC and government money is < Answer > 2,000 MUC. The currency-deposit ratio is estimated to be 0.25. If the Central Bank wants to set the money supply at 50,000 MUC, what should be the reserve ratio that the Central Bank should impose on banks to achieve the targeted money supply? (a) 0.25 0.20.

(b) 0.30

(c) 0.50

(d) 0.425

(e) (3 marks) < Answer >

79. 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 Import of services

MUC 500 2,500 4,000

Private remittances to abroad (transfers) Private remittances from abroad (transfers) Exports of services Merchandize exports

500 500 2,000 15,000 12,000

Merchandize imports (a) 1,000 MUC (Surplus) (b) 1,000 MUC (Deficit) (c) 500 MUC (Deficit) (d) 500 MUC (Surplus) (e) Zero.

(2 marks) END OF SECTION B

Suggested Answers Economics (MB141) : July 2004 1.

2.

3.

Answer : (e) Reason : When price of sugar falls, it reduces the cost of production of ice cream. This encourages suppliers to supply more to increase their profits. When supply of ice cream increases (supply curve shifts right), the price of ice cream falls. a. With the fall in price, because of increased supply, the demand for the good increases. (a) Supply increases with the fall in the cost of production. (b) Price of ice cream will fall because of increased supply. Hence, the correct answer is (e). Answer : (b) Reason : Tea, milk, rice and water are necessary because of their importance in daily life. Ice cream is considered to be luxury. For luxuries the income elasticity of demand will be high. Answer : (e) Reason : (a) Is not the answer because it is a false statement that elasticity remains constant throughout the demand curve. Elasticity takes different values at different point on the demand curve. (b) Is not the answer because it is a false statement that elasticity increases with increase in quantity demanded. (c) Is not the answer because it is a false statement that elasticity increases as the price decreases. (d) Is not the answer because it is a false statement that elasticity is equal to the slope of the demand curve. If the demand function is represented by P = f (Q), then the slope of the demand curve is given by ∂P/ ∂Q and its elasticity is given by ep = P/Q. ∂Q/ ∂P. (e)

4.

5.

< TOP >

< TOP >

< TOP >

Is the answer because higher the elasticity, more responsive the demand is for a given change in price. Higher the elasticity, higher is the percentage in quantity demanded than the percentage change in price.

Answer : (d) Reason : When consumer pays price for the commodity he is consuming, he compares the utility he derives from the additional unit of a commodity with the utility he sacrifices in terms of the price paid for that unit of a commodity. The consumer is in equilibrium when marginal utility and price are equal. Therefore, the consumer reaches equilibrium only when last rupee spent on apples and oranges give him the same level of marginal utility. (a) Is not the answer because the consumer doesn’t reach equilibrium when marginal utility of apples is equal to the marginal utility of oranges. (b) Is not the answer because the consumer doesn’t reach equilibrium when marginal utility of apples is equal to the marginal utility of oranges and the income is exhausted. (c) Is not the answer because the consumer doesn’t reach equilibrium when every rupee spent on apples and oranges give him the same level of marginal utility. (d) Is the answer because the consumer reaches equilibrium when last rupee spent on apples and oranges give him the same level of marginal utility. (e) Is not the answer because on (b) and (c) above, the consumer doesn’t reach equilibrium. Answer : (a) < TOP > Reason : The cross price elasticity of demand shows the nature of relationship between two products. (a) Cross price elasticity of demand would be positive for substitutes as increase of price of one good increases the demand for other good. (b) Cross price elasticity of demand would be negative for complementary goods because increase of price of one good decreases the demand for other good. Hence (b) is not the answer. (c) For independents, the cross-price elasticity of demand would be zero because there is no relationship between the goods. Hence (c) is not the answer.

< TOP >

< TOP >

(d)

6.

7.

8.

9.

& (e) goods are classified into inferior and luxury based on the income elasticity of demand and not on the cross price elasticity of demand. Since the cross-price elasticity of demand of Rolex and Bollix is +10, it implies that Rolex and Bollix are substitutes 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 : Consumer surplus is the difference between the willingness price and actual price for a consumer. a. Producer costs represent the cost incurred by the producer in producing the good. b. Monopolist Profit: Economic profit generated as a result of a firm’s market control. It’s termed monopoly profit as a reflection of the most prominent market structure with market control—monopoly. c. Economic Profit: The difference between business revenue and total economic cost. This is the revenue received by a business over and above the minimum needed to produce a good. d. Producers Surplus: The revenue that producers obtain from selling a good over and above the opportunity cost of production. This is the difference between the minimum supply price that sellers would be willing to accept and the price that is actually received. e. Consumer Surplus is the satisfaction that consumers obtain from a good over and above the price paid. This is the difference between the maximum demand price that the consumer would be willing to pay and the price that he actually pays. The correct answer is (e). Answer : (e) < TOP > 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. Answer : (c) Reason : A rational firm always employs labor up to the point when the marginal product of labor is zero. If the firm employs beyond that point, it reduces the efficiency of the fixed factors, which results in a fall in the total product instead of rising. (a) Is not the answer because a rational firm will employ labor when the average product of labor is equal to marginal product of labor. (b) Is not the answer because a rational firm will employ labor when the marginal product of labor is maximum. (c) Is the answer because no rational firm would employ labor when the marginal product of labor is zero. (d) Is not the answer because when the labor is zero, the total product of labor will be zero.

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(e) Is not the answer because when the labor is zero, the average product of labor will be zero. 10. 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. 11. Answer : (c) < TOP > Reason : In the third stage of the production function Marginal Productivity (MP) is negative and decreasing. a. False. As MP is negative, slope of the total product curve is negative and decreasing. b. False. Slope of the MP curve is negative as MP decreasing c. True. In the first stage MP>AP. In the second stage MP<AP, but MP>0. In the third stage MP<AP and MP<0. d. False. As MP<0, total productivity decreases in the third stage. e. False. MP is negative in the third stage. 12. Answer : (d) Reason : Explicit costs refer to those costs that are made out-of-pocket and are recorded in accounting books. Salaries paid to workers, medical expenses of an employee, advertisement expenses and telephone bills are all out-of-pocket costs and are entered in the books of accounts. The amount forgone by the firm’s owner by not working at another job represents the opportunity cost (implicit cost) and hence is the answer. Note that the opportunity cost is the highest valued benefit that must be sacrificed as a result of choosing an alternative. Answer : 13. (b) < TOP > 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 outof-the- 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 selfemployed resources could have earned in their best alternative employment, signifies opportunity cost of self-employed 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. 14. Answer : (b) TOP > Reason : (a)

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Is not the answer because (b) is correct. < TOP >

<

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
(e)

Profit will be minimum when the MC is equal to MR and the slope of MC curve < slope of MR curve

15. Answer : (d) Reason : Sunk cost are costs which are already incurred and does not influence the current decision making. All other costs are relevant for decision making 16. Answer : (c) < TOP rel="nofollow"> Reason : a) True. Whenever we make choice, we choose something over the other. Therefore, opportunity cost of the choice is the value of the alternative forgone. b) True. Opportunity cost is defined as the value of the best alternative forgone. c) False. It may not always be possible to express opportunity cost in monetary terms. d) True. In economics, costs include opportunity costs also. e) True. Opportunity cost is defined as the value of the best alternative forgone. 17. Answer : (c) < TOP > Reason : When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting down its operations. Even if its fixed costs exceed its revenue, the firm may not shut down its operations because the firm can reduce its fixed cost loss through sales. a. In the short run, the firms will continue their operations even though they incur losses. b. If the revenue is more than variable costs, it can reduce the losses caused by fixed costs. c. When the variable costs of the firm exceed its revenue, it can reduce the losses by shutting down its operations d. If total revenue is more than total costs it signifies losses. In the short run, the firms will continue their operations even though they incur losses. e. Revenue is more important to take a decision on continuation of operation. 18. 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)

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Is not the answer because a perfectly competitive firm is not in equilibrium when MR= MC, but P > MR.

19. Answer : (b) Reason : (a) True. In perfect competition there are many sellers and buyers (b) Not true. In perfect competition firms do not have any price making power as there are many sellers and the product is homogeneous. (c) True. In perfect competition product sold by all the firms is assumed to be homogeneous. (d) True. In perfect competition entry and exit of firms is free. (e) True. In perfect competition buyers and sellers have access unlimited information which is available free of cost. 20. Answer : (a) Reason : Perfect competition refers to a market where there are large number of sellers and buyers. There should be free exit and entry in the market should be. As this is possible only in sugarcane cultivation, the answer is (a). 21. Answer : (a)

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Reason :

Natural monopoly is situation where the size of the market may not allow the existence of more than a single large plant. In these conditions it is said that the market creates a natural monopoly, and it is usually the case that the government undertakes the production of the commodity or of the service so as to avoid exploitation of the customers. Large scale economies are one of the main causes of natural monopoly. a. It is appropriate in this instance because a firm can take up the responsibility of producing the total output of the market in a situation when it experiences economies of scale. Economies of scale imply reduction in the firm’s per unit costs that are associated with the use of large plants to produce a large volume of output. b. It is not appropriate in this instance because diminishing marginal productivity does not guarantee formation of a natural monopoly. c. Downward sloping demand curve only shows the inverse relationship between price and output. It is not the cause that helps in the formation of natural monopoly. d. It is not appropriate in this instance because it is representing one of the features of oligopoly. e. Low fixed cost in fact reduces the entry barriers and helps in breaking monopoly. Hence, the correct answer is (a).

22. Answer : (d) < TOP > Reason : To maximize profits a firm should equate MC to MR and the slope of MC should be greater than the slope of MR. (a) is not correct because for profit maximizing MC=MR and to maximize total revenue MR=0. (b) is not correct because P=AC indicates a break-even situation where profits are equal to zero. (c) is not the answer because maximizing the difference between marginal revenue and marginal cost does not maximize profits. (d) is the answer as profit maximizing requires MC=MR (e) is not the answer because MC=AVC indicates minimum AVC situation where profits are not maximized. 23. Answer : (c) Reason : In perfect competition and monopolistic competition there are large number of buyers and sellers and there are no exit and entry barriers. In perfect competition products are homogeneous and there are no selling activities, whereas in monopolistic competition, the products are differentiated and selling activities exist. 24. Answer : (e) Reason : The kinked demand curve model is based on the assumption that when a firm increase price other firms in the industry do not follow and if the firm decrease price other firms also decrease the price. Therefore, the answer is (e). 25. 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

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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). 26. 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. 27. 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. 28. Answer : (b) Reason : a. GNPMP is the total market value of the final goods and services produced in a given period by factors of production owned by the citizens of a country. b. GDPMP is defined as the total market value of all the final goods and services produced in a given period by factors of production located within a country c. NNPMP is GNPMP – depreciation

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d.

GNPFC is the total value of the final goods and services produced in a given period by factors of production owned by the citizens of a country and valued at factor cost. e. GDPFC is the total market value of the final goods and services produced in a given period by factors of production located within a country and valued at factor cost. 29. Answer :(d) Reason : Personal income is the income that is received by the individuals before paying personal taxes. Personal income comprises of three components - personal saving, personal consumption and personal income taxes. Corporate profits consist of dividends, undistributed profits and corporate taxes. Personal income only includes dividends they are distributed to individuals, while undistributed profits and corporate taxes are not given to individuals. Retained earnings are nothing but the undistributed profits of businesses and hence are not included in the personal income. 30. 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.

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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 d.

Consumption demand does not depend upon the level of wealth

e. Consumption demand does not depend upon the level of marginal efficiency of investment. 31. Answer : (a) Reason : When MPC = 0

32.

33.

34.

35.

36.

1 =1 Multiplier = . Therefore, the equilibrium income would also decrease by the same 1− 0 amount as decrease in investment. Answer : (e) Reason : Aggregate expenditure in an economy consists of Consumption, Investment, Government purchases and Net exports. Hence the answer is (e). Answer : (e) Reason : Monetarist opines that demand function for money is better determined than consumption or investment function and hence they prefer monetary policy over fiscal policy. Fiscal policy is ineffective because increase in public expenditure leads to decrease private expenditure. (Crowding out) a. Above reasons shows that option a is true b. Not true, as this is also a Keynesian proposition c. Not true, as it is Keynesian economics which says so and hence demand for money is determined by interest rate. d. ‘Crowding out’ is one of the importance reasons for ineffectiveness of fiscal policy and hence true. e. Since, (a) and (d) are true, this is the correct option. 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 de-stabilizing and advocate laissez- faire economy. Therefore the answer is (a). Answer : (a) Reason : (a) Classical economists assume flexible wages in the economy. Flexibility of wages results in full employment of labor in the economy. Hence the aggregate supply curve becomes vertical at the full employment level. Therefore, the answer is (a). (b) Is not the answer. If Aggregate Supply curve is horizontal, increase in the Aggregate Demand does not exert pressure on the price level and more goods and services are supplied at the same price level. This can happen only if there is very high level of unemployed resources in the economy. But, classical economists assume full employment of resources. (c) If Aggregate Supply curve is first horizontal and then vertical, it implies Aggregate Supply is perfectly elastic until the full employment level is reached and perfectly inelastic at the full employment level of output. Hence, (c) is not the answer. (d) Is not the answer. Aggregate Supply curve with such a shape does not exist. (e) Is not the answer. A positively sloped Aggregate Supply curve is not possible under the classical assumption of perfectly flexible wages. 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

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37.

38.

39.

40.

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 (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Personal income. Answer : (c) Reason : As reserve ratio (r) is reduced banks will be left with more reserves on the basis of which they can lend more thereby creating additional demand deposits (DD). As demand deposits increase money supply also increase as DD is a significant component of the money supply. Answer : (e) Reason : Bank rate is the minimum rate at which the central bank is prepared to discount or rediscount the bills of exchange brought to it by the members of the money market. It is also the interest rate at which the central bank provides loans to the commercial bank when they borrow money from central bank. Hence by definition option (e) is correct. (a) Is not the answer because bank rate doesn’t mean the rate of interest on inter-bank loans (b) Is not the answer because bank rate doesn’t mean the rate of interest charged by banks on borrowers (c) Is not the answer because bank rate doesn’t mean the rate of interest paid by banks to depositors (d) Is not the answer because bank rate does not mean the rate of interest charged by banks for loans given to the central bank of the country (e) Is the answer because bank rate means the rate of interest charged by the central bank of a country on its loans to other commercial banks. Answer : (a) Reason : As the purchasing power of rupee decreases in future, due to inflation, the real value of money paid by the borrowers to the lender would be less. If inflation is anticipated, the lender would include them in the interest rate. a. An unexpected increase in inflation makes the borrower to pay back money that has less real value than was expected. As nominal interest rates do not include unexpected inflation, real interest rate would be less than the expected rate. Thus, borrower will be benefited from unanticipated inflation. b. Fixed income earners get only fixed nominal income. With the inflation, the real value of money received decreases. Hence they are losers during inflation. c. Inflation reduces the purchasing power of the rupee held and thereby reduces the value of rupee held by the currency holders. d. Because of unexpected increase in inflation the lender receives money from the borrower which has a lesser real value than expected. Interest rate on loans only comprises expected inflation. Thus, lenders would suffer from unexpected inflation by quoting less interest rate than it should have been. Answer : (a) Reason : Phillips curve indicates the relationship between rate of inflation and unemployment rate. There exists a trade-off between inflation and unemployment. (a) Is the answer because Phillips curve shows that the goal of price stability or inflation and the goal of full employment can never be achieved simultaneously. The policy makers can choose a particular combination of inflation and unemployment. (b) Is not the answer because Phillips curve doesn’t imply the goal of price stability is most likely to conflict with the goal of economic growth. (c) Is not the answer because Phillips curve doesn’t imply the goal of price stability is most likely to conflict with the goal of equitable distribution of income. (d) Is not the answer because Phillips curve doesn’t imply the goal of price stability is most likely to conflict with the goal of balance in international trade.

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41.

42.

43.

44.

45.

(e) Is not the answer because Phillips curve doesn’t imply the goal of price stability is most likely to conflict with the goal of removal of poverty. < TOP > 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. < TOP > Answer : (e) Reason : Budgetary surplus refers to a situation when government receipts (revenue receipts + capital receipts) is more than government expenditure (revenue expenditure + capital expenditure). Public debt includes borrowings and liabilities of the central government. From the budget surplus it is possible to tell whether the public debt is falling or rising. But, public debt will definitely fall if the government uses the surplus to repay its past debts. Answer : (c) < TOP > Reason : Loans are a form of credit, and as they can be used to purchase goods and services they are the equivalent of money. Banks through the ‘process of credit creation’ creates the money. The process of credit creation is done by accepting deposits and lending loans. < TOP > Answer : (d) Reason : M1 (narrow money) = Currency with public + Demand deposits with banks + Demand portion of savings deposits with banks + other deposits with RBI M2 = M1 + Post Office Savings Deposits M3 (broad money) = M1 + Time deposits with banks Thus, the difference between broad money (M3) and narrow money (M1) is the time deposits with banks. < TOP > Answer : (a) Reason : Ms = m . H

1+ Cu m = Cu + r Where,

Cu is currency deposit ratio r is reserve ratio

If banks increase r, m decrease and money supply in the economy would decrease. 46. 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)

47.

48. 49.

50.

51.

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. Answer : (c) < TOP > Reason : Disguised unemployment is a situation where labor force is apparently employed but Marginal Productivity of labor is either zero or negative. This situation is prevalent in Indian agricultural sector. < TOP > Answer : (d) Reason : Recession is, technically, defined as decline in output for two or more consecutive quarters. < TOP > 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. < TOP > Answer : (c) Reason : a. Frictional unemployment occurs when constant changes in the labour market lead to unemployment. It occurs on account of imperfect information. Hence not correct option. b. Unemployment that arises due to general down turn in business activity is refered to as cyclical unemployment. Hence not related to the output, not the correct option. c. Disguised unemployment occurs due to excess labour force depending on agriculture sector. Some labourers are employed, but their contribution to production is zero. Hence the correct option. d. Structural unemployment occurs due to structural changes in the economy, and such people are not employed and hence there is no question of contribution to production. Not correct option. e. Sectoral unemployment refers to unemployment that exists in any particular sector, for example agricultural sector. Hence not correct option. < TOP > Answer : (a)

Reason :Price- elasticity of demand = ∆Q/∆P × P/Q = (200 – 300)/(20 – 12) × 12/300 = –0.5=0.5. 52. Answer : (c) TOP > Reason : Q = 40 – P

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<

When P = 20, Q = 20

∂Q P 20 . ep = ∂P Q = –1 × 20 = –1 53. Answer : (c) Reason : Equilibrium price is determined, when Demand = Supply D = S = 400, when the price is Rs. 14.00 So, the answer is (c). 54. Answer : (b) 400P – 500 Reason : Qs = Qd

=

1500 – 100P

Equilibrium price is determined when Qs = Qd.

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∴ 400P – 500 = 1500 – 100P or, 500P = 2000 or, P = 4 When P = 4, Qs = 400(4) – 500 = 1600 – 500 = 1100. Answer : (d) 55. Reason : Cross-elasticity of demand = Change in quantity demanded/Change in price of related good x Average price of related good/Average quantity demanded = (50 – 100)/(4 - 5) x (5 + 4)/(100 + 50) = 50 x 9/150 = 3 56. Answer : (c) Reason :

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MU A MU B = PA PB 600 900 = PA 120 ∴ PA

600 7.5 = Rs.80.

=

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57. Answer : (b) Reason :

APL= 30L –

L2

TPL = APL × L = 30L2 – L3 TPL can be maximized when MPL = 0 Therefore, ∂ TPL / ∂ L = 60L – 3L2 = 0 L (60 – 3L) = 0 L =0 or L = 20. ∴Output can be maximized by employing 20 labors. ∴ Maximum possible TPL = 30(20)2 – (20)3 = 12,000 – 8,000 = 4,000 units 58. Answer : (d) Reason : Total product of labor (TPL) = APL x units of labor (L). When

L=

10,

L = 11,

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TPL = 20 x 10 = 200 TPL = 19 x 11 = 209.

∴ MPL = 209 – 200

= 9 units.

59. Answer : (b)

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= 500 – 2Q + 3Q2 MC = –2 + 6Q If Q = 10, MC = –2 + 60 = 58 60. Answer : (d)

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Reason :

TC

n

Reason :

∑

TCn = i=1 MC ∴Total cost of producing 4 units is 100 + 50 + 40 + 60 = 250. < TOP >

61. Answer : (b) Reason :

AVC

=

500 ∆TC = 50 = 10 ∆Q

TVC where Q = 100 is 10 × 100 = 1000 FC

=

TC – TVC

=

1500 – 1000

=

500 < TOP >

62. Answer : (e)

Reason :

(a)

(

)

200Q − 9Q2 + 0.25Q3 TVC Q AVC = Q = = 200 – 9Q + 0.25Q2 2   ∂TC ∂  1000 + 200Q − 9 Q+ 0.25Q3  / ∂Q 2 (b) MC = ∂Q =  = 200 – 18Q + 0.75 Q  2

(C)TVC = 200Q – 9 Q + 0.25Q3 < TOP >

63. Answer : (c) Reason :

TR = P × Q Or, (50 – 0.5Q) Q Or, 50Q – 0.5Q2

Thus, profit at output 12 units is 50 × 12 – 0.5 × 12 × 12 – 50 – 2 × 12 = 454 64. 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. 65. Answer : (e) Reason : A firm earns normal profits, when TR = TC

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TR = P × Q = 30Q – 3Q2 TC = 6Q 30Q – 3Q2 = 6Q 24Q = 3Q2 Or, Q = 8 units. 66. Answer : (c) Reason : Demand function of the monopolist are given as P = 800 – 10Q TC = 300Q + 2.5Q2 TR

=

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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 ∴ P = 800 – 10 (20) = 800 – 200 = 600. 67. 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.

68. Answer : (c) Reason : NNP at market price = GNP at market prices – Depreciation = 85,000 – (6,000 – 4,000) = 83,000 NNP at factor cost = NNP at market prices – Indirect taxes + subsidies = 83,000 – 3,000 + 1,000 = 81,000 Net factor income from abroad = NNP at factor cost –NDP at factor cost (Factor income earned with in the domestic territory) =81,000 – 65,000 = 16,000 MUC. 69. Answer : (c) Reason : National income = NNP at factor cost NNP at factor cost = GDP at market price – Indirect taxes + subsidies + NFIA – Depreciation Or, GDP at market price = NNP at factor cost + Indirect taxes – subsidies - NFIA + Depreciation = 48000 + 11400 – 6000 – (– 3000) + 12000 = 68400 MUC. Where NFIA = (Factor income received from abroad – Factor income paid abroad) = (9000 – 12000) = -3000 MUC. 70. Answer : (b) Reason : Personal income = National income – (corporate taxes + retained earnings) + Transfer payments = 10000 – (288 + 600) + 278 = 9390. Personal disposable income = personal income – personal taxes = 9390 – 810 = 8580. 71. Answer : (b) Reason : GDP at market price = C + I + G + NX = 2191 + 639 + 594 + (134 – 165) = 3393 Thus, NDP at market price = GDP at market price – depreciation = 3393 – 118 = 3275. 72. Answer : (c) Reason : 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

= = =

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1 + Cu ×H Cu + r 1 + 0.20 × 1, 250 0.20 + 0.05

4.8 × 1,250 = 6,000 MUC

73. Answer : (b) Reason : S = – 60 + 0.25Yd

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At equilibrium level of income, S = I : – 60 + 0.25 Yd = 100 or, 0.25Yd = 100 or, 74. Answer : (d)

Yd =

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1 × 100 Reason : ∆Y=Multiplier × ∆I = 1 − 0.75 = Rs.400 crore < TOP >

75. Answer : (e) Reason :

1 1 = Multiplier = MPS 0.20 = 5

76. 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 Yd =1200

77. Answer : (c) Reason : High powered money = Monetary liabilities of central bank + Government money Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary liabilities Financial Assets = Credit to government + credit to government + credit to commercial sectors + foreign exchange assets = 1,120 + 350 + 550 + 150 + 50 = 2,220 Non-monetary liabilities = 100 + 420 = 520 Monetary liabilities of central bank = 2,170 – 470 = 1,700 High powered money = 1,700 + 25 = 1,725 MUC. 78. Answer : (b) Reason : High-powered money (H) = Government money + Monetary liabilities of the Central Bank = 20,000 + 2000 = 22,000 MUC. Money supply, Ms = H x {(1 + Cu)/(Cu + r)} Or, 22,000 x {(1.25/0.25 + r)} = 50,000 0.55 = 0.25 + r Or, r = 0.3 79. 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) =< TOP OF THE DOCUMENT >

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