Mb141 - 2004 - 10 (october)

Question Paper Economics (MB141) : October 2004 • Answer all questions. • Marks are indicated against each question.

1.

< Answer >

Which of the following circumstances refers to a mixed economy? (a) (b) (c) (d) (e)

Prices are fixed by the Government Government plays the pivotal role in the functioning of the economy Prices are automatically fixed only by the market forces Government exercises its power only in the important sectors while in the other sectors a free market economy exists Prices are only fixed by the farmers. (1 mark)

2.

< Answer >

Market equilibrium occurs, when (a) (b) (c) (d) (e)

Demand is greater than supply Quantity demanded equals quantity supplied The price, sellers ask for goods is less than the price consumers pay for those goods A shortage exists Demand is less than supply. (1 mark)

3.

< Answer >

The demand curve is usually (a) Downward sloping from left to right (c) Concave to the origin (e) Vertical.

(b) Upward sloping from right to left (d) Horizontal (1 mark)

4.

< Answer >

The cross-elasticity of demand is measured as (a)

Percentage change in the quantity of a commodity demanded divided by the percentage change in the price of that commodity (b) Percentage change in the price of commodity X divided by percentage change in the quantity demanded of commodity Y (c) Percentage change in quantity demanded of commodity X divided by percentage change in the price of commodity Y (d) Percentage change in quantity demanded of commodity X divided by percentage change in quantity demanded of commodity Y (e) Percentage change in the quantity of a commodity demanded divided by the percentage change in the income. (1 mark) 5.

You can buy any amount of rice at Rs.15 per kg in the local market. The supply curve for rice is (a) Vertical (c) Horizontal

(b) Downward sloping (d) Upward sloping

< Answer >

(e) Data insufficient. (1 mark)

6.

The demand curve shows the relationship between the price of a good and the quantity demanded of < Answer > that good, other thing being constant. The ‘other things’ being held constant include all of the following except (a) Income (c) The price of the good (e) Consumer tastes.

(b) Prices of complementary goods (d) Prices of substitute goods (1 mark)

7.

A curve drawn indicating the slope of the total utility curve closely resembles the (a) Demand curve

(b) Supply curve 1

< Answer >

(c) Average utility curve (e) Indifference curve.

(d) Marginal revenue curve (1 mark)

8.

< Answer >

A consumer cannot go beyond the price line, because (a) (b) (c) (d) (e)

He has no sufficient income He has no taste for other combination of commodities He is restricted to certain custom of the society He has no information about the availability of other combinations The price of the commodity decreases. (1 mark)

9.

< Answer >

‘Utility’ is expressed as (a) The power of commodity to satisfy wants (c) The quantity of a commodity (e) The durability of a commodity.

(b) The quality of a commodity (d) The desire for a commodity (1 mark) < Answer >

10. Isoquants are convex to the origin. This is possible because (a) (b) (c) (d) (e)

Money outlay of the entrepreneur is constant Marginal rate of technical substitution between labor (L) and capital (K) is decreasing It is not possible to have infinite number of combinations of two outputs Both (a) and (b) above (a), (b) and (c) above. (1 mark)

11. When a proportional change in input combination caused the same proportionate change in output, the < Answer > returns to scale is said to exhibit (a) Increasing returns (c) Constant returns

(b) Decreasing returns (d) Negative returns (e) Law of variable proportion. (1 mark) < Answer >

12. Which of the following is not an example of a firm’s explicit cost? (a) Salaries paid to workers (b) 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)

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13. Which of the following is true with respect to marginal cost? (a) (b) (c) (d) (e)

Total variable cost of an output Total fixed cost per unit of output Change in the total cost on account of an additional unit of output Cost that varies with the output level Cost of all inputs. (1 mark) < Answer >

14. The cost curves of a firm are derived from the (a) Demand curve of the commodity (c) Production functions of the firm (e) Budget line.

(b) Price of the output (d) Marginal utility of the consumer (1 mark) < Answer >

15. The marginal revenue product is (a) The selling price of the last unit of output (b) The incremental total revenue resulting from the use of an additional unit of input 2

(c) Used in determining marginal physical product (d) Harder to determine in pure competition than in oligopoly (e) Harder to determine in pure competition than in monopoly. (1 mark) < Answer >

16. Average revenue is (a) (b) (c) (d) (e)

Per unit revenue received from all the units of the output sold Revenue earned by the average size of the product Revenue earned by all the units of the output Revenue earned by the average sized firm in the industry Net addition made to the total revenue by selling one more unit of a commodity. (1 mark) < Answer >

17. In a perfectly competitive market, the marginal revenue curve (a) Slopes downward (c) Is vertical

(b) Slopes upward (d) Is horizontal

(e) Is absent. (1 mark) < Answer >

18. Which of the following is true of a perfectly competitive firm in equilibrium? (a) P = MR = MC (b) P = MR, but MR > MC (c) P = MC, but MR < MC (d) MR = MC and P < MR (e) MR = MC and P > MR. (Where, P = Price, MR = Marginal revenue, MC = Marginal cost). (1 mark)

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19. 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. Which of the following industries most closely approximates to the perfect competitive model? (a) Automobile (d) Wheat farming

(b) Cigarette (e) Home appliances.

< Answer >

(c) Newspaper (1 mark) < Answer >

21. Which of the following reasons does not lead to a monopoly? (a) Ownership of strategic raw material (b) Existence of numerous buyers (c) Possession of patent rights for a product (d) Technological advantages (e) Government licensing. (1 mark)

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22. Which of the following situation does not lead to Price discrimination? (a) Nature of the good (c) Distance (e) Difference in elasticity of supply.

(b) Preference of the buyer (d) Differences in elasticity of demand (1 mark) < Answer >

23. A monopoly aiming to maximize profit in the short run will (a) (b) (c) (d) (e)

Increase output and raise price Increase output and reduce price Reduce output and increase advertisement expenditure Produce an output where marginal cost is equal to marginal revenue Produce an output where average revenue is greater than marginal cost. (1 mark) 3

< Answer >

24. In monopolistic competition, marginal revenue is (a) Less than price (c) Greater than price (e) Always less than zero.

(b) Equal to price (d) Always greater than zero (1 mark) < Answer >

25. Which of the following is not a predominant feature of the oligopolistic market? (a) Group behaviour (b) Few firms supply entire market (c) Interdependence of firms (d) Free entry and exit of firms (e) Some firms have a large share and can influence the price. (1 mark)

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26. Which of the following is a stock variable? (a) Gross Domestic Product (c) Inflation (e) Investment.

(b) Inventory of a firm (d) Exports (1 mark) < Answer >

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

Net Domestic Product at factor cost Net Domestic Product at market price Net National product at factor cost Net National Product at market price Personal income. (1 mark) < Answer >

28. 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) < Answer >

29. Which of the following is/are included in the aggregate demand of an economy? (a) Consumption demand (c) Net exports (e) (a), (b) and (c) above.

(b) Investment demand (d) Both (a) and (b) above (1 mark) < Answer >

30. 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) < Answer >

31. According to the classical theory, 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)

32. An important difference between the approaches of the Classical economists and Keynesian economists < Answer > to achieve a macroeconomic equilibrium is that (a)

Keynesian economists actively promote the use of fiscal policy while the classical economists do not (b) Keynesian economists actively promote the use of monetary policy to improve aggregate economic performance while classical economists do not (c) Classical economists believe that monetary policy will certainly affect the level of output while 4

Keynesians believe that money growth affects only prices (d) Classical economists believe that fiscal policy is an effective tool for achieving economic stability while Keynesians do not (e) Keynesian economists advocate rational expectations while classical economists do not. (1 mark) < Answer >

33. Supply of goods creates its own demand. This is according to the (a) Consumption function (c) Aggregate demand function

(b) Production possibility frontier (d) Says law (e) Keynesian theory. (1 mark) < Answer >

34. “Bank rate” is (a) (b) (c) (d) (e)

The rate at which the Central Bank discounts the government bills The rate at which the Central Bank discounts the eligible bills of commercial banks The rate at which the Commercial banks give loans to other commercial banks The rate at which the Commercial banks lend to the public The rate at which the Central Bank discounts the foreign bills. (1 mark) < Answer >

35. In a deflationary period, the appropriate policy for the RBI would be to (a) (b) (c) (d) (e)

Buy government securities in the open market Discourage commercial banks to increase their loans Increase Cash Reserve Ratio Increase bank rate Reduce the credit to government. (1 mark) < Answer >

36. Which of the following refers to the instruments of monetary policy? (a) Open market operations (c) Collection of taxes (e) Public expenditure.

(b) Deficit financing (d) Automatic stabilizers (1 mark) < Answer >

37. Other things being equal, when the RBI raises the reserve requirement (a) The money supply tends to fall (c) Bank lending tends to increase (d) The money supply is not affected

(b) Bank reserves tend to expand (e) The price level tends to increase. (1 mark)

38. Which of the following is responsible for formulating and implementing monetary policy in India? (a) Central Government (c) Reserve Bank of India (e) Finance Commission.

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(b) State Government (d) International Monetary Fund (1 mark) < Answer >

39. When the inflation reaches double or triple digits, it is called (a) Creeping inflation (c) Running inflation

(b) Galloping inflation (d) Disinflation

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

40. Inflation is the increase in the general _____. which is sustained over a period of time. (a) Price level (e) Production.

(b) Money supply

(c) Unemployment

(d) Investment (1 mark)

41. Which of the following is / are the objectives for the use of fiscal policies? (a) Attaining full employment (c) Widening tax base

(b) Stable prices in the economy (d) Both (a) and (b) above 5

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(e) (a), (b) and (c) above. (1 mark) 42. Expansionary fiscal policy refers to (a) (b) (c) (d) (e)

< Answer >

Increase in government spending and increase in money supply Increase in government spending and decrease in taxes Decrease in government spending and decrease in money supply Decrease in government spending and increase in taxes Increase in government spending and increase in taxes. (1 mark) < Answer >

43. Which of the following refers to the instruments of fiscal policy? (a) Bank rate (c) Cash reserve requirements

(b) Open market operations (d) Levy of taxes

(e) Rationing of credit. (1 mark) < Answer >

44. Automatic stabilizers refer to (a)

Inherent mechanisms in the stock market that automatically cause stock market gains to be cancelled out by losses, which make expected long-run returns equal to zero (b) The invisible hand mechanisms which automatically bring the economy out of a recession (c) Government revenue and expenditure items that change automatically in response to changes in economic activity (d) Discretionary monetary policy maneuvers designed to keep inflation under control automatically (e) Monetary policy that aims at stabilizing interest rates in the economy. (1 mark) 45. Large government borrowings to finance its deficit will (a) (b) (c) (d) (e)

< Answer >

Increase the supply of loanable funds Exert downward pressure on interest rates Have no impact on interest rates Put upward pressure on interest rates Makes it easier for the commercial sector to borrow money. (1 mark) < Answer >

46. 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)

47. In balance of payments statement, short term inflows and outflows of investments are recorded in (a) Current account (c) Official reserves account (e) Transfer payments account.

< Answer >

(b) Capital account (d) Errors and omissions account (1 mark) < Answer >

48. The balance of payments is divided into (a) (b) (c) (d) (e)

Current account and the trade account Trade account and the capital account Current account and the capital account Current account and the reserve account Reserve account and the savings account. (1 mark)

49. In which sector of Indian economy do we find a high rate of disguised unemployment? (a) Service sector (c) Agriculture sector (e) Mining sector.

(b) Transport sector (d) Manufacture sector

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< Answer >

(1 mark) < Answer >

50. The business cycle is defined as (a) (b) (c) (d) (e)

The annual cycle of output The long run path after removing short run variations The variation in the economic activity with a regular pattern The change in the gross domestic product of a country The change in inflation in a year for a country. (1 mark) < Answer >

51. The demand and supply functions of a good are Qs = 400 + 15P Qd = 600 – 10P If the government fixes a price ceiling of Rs.12 for the product, there would be (a) No supply of the good (c) Excess supply of the good (e) No effect on demand and supply.

(b) Shortage of the good (d) Excess demand for the good (2 marks)

52. The total market demand for a product is given by the equation Qd = 400 – 25P. The supply is < Answer > represented by the function Qs = 200 + 25P. The free market equilibrium quantity is (a) 600 units (e) 200 units.

(b) 500 units

(c) 400 units

(d) 300 units (1 mark)

53. Demand for Beynolds pens in Hyderabad decreases to 25 units from 75 units because of increase in its < Answer > price from Rs.6 to Rs.12. It implies that the point price elasticity of demand for Beynolds in Hyderabad is (a) 0.16

(b) 0.23

(c) 0.54

(d) 0.44

(e) 0.67. (2 marks) < Answer >

54. The demand and supply functions of a good are Demand function : P = 104 – 4Q Supply function : P = 2 + 0.5Q (Where, P = price of the good and Q = quantity of goods) If the price of the good is Rs.20, the surplus/shortage of goods in the market is (a) 15 units (surplus) (c) 20 units (surplus) (e) 12 units (surplus).

(b) 15 units (shortage) (d) 20 units (shortage) (1 mark)

55. For a consumer in equilibrium, Marginal Rate of Substitution of X for Y (MRSxy) is 3. If price of the < Answer > good X (Px) is Rs.75, price of good Y (Py) is (a) Rs. 15 (d) Rs.125

(b) Rs. 25 (e) Rs.150.

(c) Rs. 75 (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 < Answer > utility of good Y at equilibrium is (a) 350 utils

(b) 700 utils

(c) 750 utils

(d) 550 utils

(e) 600 utils. (1 mark)

57. Average productivity of labor (APL) for a firm is 15 when labor employed is 100 units. When labor < Answer > employed increased to 101 units, APL decreases to 14 units. Marginal productivity of 101th unit of labor is (a) –1 unit

(b) –100 units 7

(c) 1 unit

(d) 86 units

(e) – 86 units. (1 mark)

58. The Production function of a manufacturing unit, using only labor (L) as inputs in the production < Answer > process, is estimated to be Q = 100 L2 – L3. The labor input at which the firm can maximize average productivity of labor is (a) 25.0 units (e) 75.0 units.

(b) 37.5 units

(c) 50.0 units

(d) 62.5 units (2 marks)

59. MRTSL,K for the production function, Q = 10K0.5L0.5 is (a) 0.5 K/L

(b) 0.5 L/K

< Answer >

(c) K/L

(d) L/K

(e) 0.5+K/L. (2 marks) < Answer >

60. Consider the following Total Cost function 2

TC = 1,000 + 200Q – 9Q + 0.25Q

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Which of the following statements is true?

1000 (a) The average variable cost function is Q + 200 - 9Q + 0.25Q2 (b) Total Fixed cost is Rs.1,200 (c) Marginal cost function is 200 – 9Q + 0.25Q2 (d) Total variable cost function is 200Q – 9Q2 + 0.25Q3 (e) Average fixed cost is Rs.5. (1 mark) < Answer >

61. The total cost (TC) schedule of a firm is given as follows. Output (Units) 1 2 3 4 5 Marginal cost of the third unit is (a) Rs.30 (b) Rs.40

TC (Rs.) 100 150 190 250 340

(c) Rs.150

(d) Rs.60

(e) Rs.190. (1 mark) < Answer >

62. Marginal cost (MC) schedule of a firm is given as follows. Output (units) 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)

63.

< Answer > 500 If the average cost function of a firm is estimated to be AC = Q + 10 + 5Q + 25Q2, the fixed cost of

the firm will be (a) Rs.10

(b) Rs.500

(c) Rs.5

(d) Rs.25

(e) Rs.1,000. (1 mark)

64. For a firm, the average cost function is estimated as

< Answer >

8

100 AC = Q + 20 + 4Q What is total variable cost for the firm at an output of 15 units? (a) Rs.100 (c) Rs.1,200

(b) Rs.750 (d) Rs.1,340

(e) Rs.2,100. (1 mark) < Answer >

65. The total revenue and total cost functions of Nike Shoe Company are

Q2 TR = 400Q – 2 , TC = 600 +70Q + Q2 What is the profit maximizing output for the firm? (a)100 units (e) 200 units.

(b) 110 units

(c) 140 units

(d) 180 units (2 marks) < Answer >

66. The cost and profit functions of a firm are TC = 200 + 10Q Profit = –10Q2 + 200Q – 200 If the firm aims at maximizing total revenue, the output should be (a) 10.0 units (e) 19.0 units.

(b) 9.5 units

(c) 10.5 units

(d) 6.3 units (2 marks) < Answer >

67. Demand functions of a monopolist in two effectively segmented markets are: Qa = 1,000 – 50Pa Qb = 800 – 25Pb Total cost function of the monopolist is TC = 500 + 10Q. If the monopolist does not practice price discrimination, sales maximizing price is (a) Rs.17

(b) Rs.900

(c) Rs.12

(d) Rs.525

(e) Rs.15. (2 marks)

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68. A monopoly firm has the total cost function as TC = 500 + 20Q . The demand function is 20Q. The profit maximizing output is (a) 10 units

(b) 8 units

(c) 6 units

(d) 5 units

P = 400 – < Answer >

(e) 4 units. (1 mark)

69. The following information is given from the national income accounts for a country in the year 2003- < Answer > 04: Particulars GNP at factor cost Depreciation Subsidies Net factor income from abroad Indirect taxes

Rs. crore 2,40,000 20,000 12,000 10,000 36,000

What is the NDP at factor cost? (a) Rs.2,10,000 crore (c) Rs.1,90,000 crore

(b) Rs.2,00,000 crore (d) Rs.1,80,000 crore

(e) Rs.2,58,000 crore. (2 marks)

70. Given the following information, what would be the national income of the economy? Particulars Compensation to employees

Million units of currency (MUC) 2,325 9

< Answer >

Compensation to employees Interest payments made by the firms Rental income received Corporate profits (before tax) Proprietors’ income Personal taxes paid by the individuals (a) 2,786 MUC (e) 2,662 MUC.

(b) 2,996 MUC

2,325 323 43 170 135 260

(c) 2,886 MUC

(d) 3,115 MUC (2 marks) < Answer >

71. 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 Subsidies Personal income in the country is (a) Rs.1,363 cr (b) Rs.1,121 cr (c) Rs.1,230 cr (e) Rs.1,496 cr.

Rs. Cr. 1,700 242 173 203 190 28 75 20 (d) Rs.1,296 cr (2 marks) < Answer >

72. The following information is extracted from the National Income Accounts of an economy. Particulars MUC Depreciation 236 Government expenditure 1,188 Corporate taxes 288 Gross domestic investment 1,278 Transfer payments 278 Personal taxes 810 Net income earned from abroad 44 Retained earnings 600 If the national income is 10,000 MUC, the personal disposable income in the economy would be (a) 8,960 MUC (b) 8,580 MUC (c) 10,240 MUC (d) 9,230 MUC (e) 7,440 MUC. (2 marks)

< Answer >

73. Consider the following information. Disposable income (Rs.) 2,000 4,000 6,000 8,000 10,000

Consumption (Rs.) 2,700 4,100 5,500 6,900 8,300

What is the marginal propensity to consume? (a) 0.60

(b) 0.65

(c) 0.70

(d) 0.75

(e) 0.80. (1 mark)

74. Consider the following information for a country called ‘Dream Land’. Autonomous consumption Marginal propensity to consume Planned investment

: : :

100 MUC 0.75 50 MUC 10

< Answer >

Government purchases : 150 MUC Net Exports : 20 MUC The equilibrium level of output for ‘Dream Land’ is (a) 80 MUC (b) 183 MUC (c) 427 MUC (e) 1280 MUC.

(d) 880 MUC (2 marks) < Answer >

75. If MPC is 0.75 the multiplier is (a) 0.75

(b) 1.33

(c) 4.00

(d) 7.50

(e) 0.25. (1 mark) – 20 + 0.30Yd. < Answer >

76. In a two-sector economy, the savings function is estimated to be S = If the equilibrium output is 600, the level of investment in the economy is (a) 140 MUC (b) 150 MUC (c) 160 MUC (d) 130 MUC (e) 170 MUC.

(2 marks) 77. MPC for an economy is estimated to be 0.75. Beginning from a position of equilibrium, investment < Answer > rises by Rs.100 crore. The change in Y that will bring the economy back to equilibrium is (a) Rs.100 Cr. (b) Rs. 200 Cr. (c) Rs. 300 Cr. (d) Rs. 400 Cr. (e) Rs.2,500 Cr. (1 mark) 78. Assume there is no government or foreign sector. If the MPC is 0.75, a Rs.20 million decrease in < Answer > planned investment will cause aggregate output to decrease by (a) (c)

Rs. 15.67 million Rs. 26.67 million

(b) Rs. 20.00 million (d) Rs. 80.00 million

(e) Rs. 120.00 million. (1 mark) < Answer >

79. The following are the excerpts from the balance sheet of a Central Bank. Particulars

MUC

Notes in circulation

100

Other deposits

50

Other non-monetary liabilities

100

Statutory and contingency reserves

420

Credit to Central Government

1,120

Shares & loans to financial institutions

550

Central bank claims on Commercial banks

350

Net foreign exchange assets

150

Other assets

50

If the government money is 25 MUC, the high powered money in the economy is (a) 1,650 MUC (e) 1,850 MUC.

(b) 1,750 MUC

(c) 1,725 MUC

(d) 1,825 MUC (2 marks)

80. The monetary liabilities of the central bank of an economy are 20,000 MUC. The government money in < Answer > the economy is 200 MUC. Currency deposit ratio for the economy is estimated to be 0.2 and reserve ratio imposed by the central bank is 5 percent. If foreign exchange reserves of the country decline by 200 MUC, what would happen to the money supply? (a) Decline by 960 MUC (b) Increase by 960 MUC (c) Decline by 820 MUC (d) Increase by 820 MUC

(e) Decline by 480 MUC. (2 marks) 11

< Answer >

81. The following data is taken from balance sheet of a Central Bank. Particulars

MUC

Net worth

6,000

Credit to government

10,000

Credit to commercial sector

5,000

Government deposits

150

Credit to banks

4,000

Other non-monetary liabilities

3,000

Other deposits with the central bank Other assets

50 100

The Government money in the economy is 1,050 MUC and Money supply in the economy is 80,000 MUC. If Central Bank imposes a reserve ratio of 10 percent and the currency deposit ratio is estimated to be 20 percent, Net foreign exchange assets with the Central Bank are (a) 8,500 MUC (b) 9,000 MUC (c) 9,750 MUC (d) 10,050 MUC (e) 10,000 MUC. (2 marks) 82. Current account deficit for an economy is 5,000 MUC. If foreign exchange reserves increase by 1,000 < Answer > 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

(d) 6,000 MUC (1 mark)

83

GDP of a country is 8,000 MUC. Value of output produced in domestic country by foreign factors of < Answer > 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

(b) 7,800 MUC

(c) 7,900 MUC

(d) 8,100 MUC (e) 8,200 MUC. (2 marks)

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Suggested Answers Economics (MB141) : October 2004 1.

Answer : (d) Reason : An economy that relies on both markets and command mechanism is called a mixed economy. Government as well as business firm provides goods and services. In such economies government supplies roads, defense, pensions, and sometimes-even schooling directly to the citizens.

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2.

Answer : (b) Reason : When total quantity demanded in the market equals total quantity supplied, the market is said to be in equilibrium.

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3.

Answer : (a) Reason : Demand curve is usually drawn as downward sloping as we move from left to right as demand increases with price fall of a commodity

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4.

Answer : (c) Reason : Cross price elasticity of demand is the percentage change in the quantity demanded of a good due to a change in the price of another good, other things remaining constant.

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5.

Answer : (c) Reason : The supply curve is horizontal as the producer is willing to supply any amount of rice at a given price.

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6.

Answer : (c) Reason : Since the demand curve shows the relationship between the price of a good and the quantity demanded of that good, other things being constant. The ‘other things’ do not include the price of the good.

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7.

Answer : (a) Reason : A curve drawn indicating the slope of the total utility curve represents the marginal utility curve. MU curve closely resembles the demand curve. The only difference between MU curve and demand curve is that demand curve does not go below 0, while MU can be negative. Answer : (a) Reason : A consumer cannot go beyond the price line because income of the consumer is not sufficient to be able to buy those combinations.

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9.

Answer : (a) Reason : People demand goods because they satisfy the wants of the people. The utility means want-satisfying power of a commodity. It is also defined as property of the commodity that satisfies the wants of the consumers.

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10.

Answer : (b) Reason : Isoquants represents all the technically efficient combinations of two inputs that can be used to produce a given level of output. Isoquants are convex to the origin. This is possible because of decreasing MRTCL,K.

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11.

Answer : (c) Reason : When an increase in all inputs leads to proportional increase in output or vice versa, it is called constant returns to scale. (a) Is not the answer because increasing returns to scale occurs when an increase in all inputs leads to more than proportional increase in output or vice versa. (b) Is not the answer because decreasing returns to scale occurs when an increase in all inputs leads to less than proportional increase in output. (c) Is the answer because constant returns to scale occur when an increase in all inputs leads to proportional increase in output or vice versa. (d) Is not the answer because in case of negative returns, the quantity of variable factor is so large compared to the fixed factors that reduce the fixed factor that results in a fall in the total product instead of rising.

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8.

13

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(e)

Is not the answer because all of the above cannot be the answer.

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.

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13.

Answer : (c) Reason : Marginal cost is the change in the total cost on account of an additional unit of output.

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14.

Answer : (c) Reason : Cost functions are derived from the production functions, which describes the available efficient methods of production at any particular point of time. Hence the correct answer is (c).

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15.

Answer : (b)

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Reason : MRP = (Price × MP). This is also equivalent to the additional revenue generated by employing one more unit of input. 16.

Answer : (a) Reason : Average revenue is the revenue earned per unit of output. It can be obtained by dividing the total revenue by the number of units produced and sold.

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17.

Answer : (d) Reason : Perfect competition is a form of market structure which represents a market without rivalry among the individual firms. The characteristics of perfect competition are:Large number of buyer and sellersHomogeneous productNo barriers to entryPerfect informationPerfect mobility of factors of production.There are large number of buyers and the demand curve which is the marginal revenue curve is horizontal to the x-axis implying that the producer can produce as much as the quantity of output for a given level of price. All the additional goods can be sold at the market price only, hence in a perfect competition, P = MR = AR. Hence the correct answer is (d).

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

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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.

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20.

Answer : (d) Reason : Wheat farming is most closely approximates to the perfectly competitive market. In wheat farming, all firms in the industry produce a homogeneous product, there are large number of buyers and sellers in the market and there is free entry and exit of firms in the market.

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21.

Answer : (b) Reason : Existence of numerous buyers does not lead to monopoly.

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22.

Answer : (e)

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14

Reason : Discrimination on account of differences in elasticity of supply does not lead to price discrimination. 23.

Answer : (d) Reason : A monopoly will produce an output where MC = MR.

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24.

Answer : (a) Reason : In imperfect competition the demand curve is downward sloping where the marginal revenue curve bisects the y-axis and the demand curve and hence MR < P.

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25.

Answer : (d) Reason : Free entry and exit of firms is not a predominant feature of the oligopolistic market.

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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. Exports is an example of flow variables. e. Investment is an example of flow variables.

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27.

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 (b) Is not the answer because the net factor income earned within the domestic territory of a country is not equal to Personal income.

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28.

Answer : (e) Reason : Personal disposable income = Personal income – Personal taxes. (a) Is not the answer because the difference between personal disposable income personal income is not residential investment. (b) Is not the answer because the difference between personal disposable income personal income is not indirect taxes. (c) Is not the answer because the difference between personal disposable income personal income is not subsidies. (d) Is not the answer because the difference between personal disposable income personal income is not transfer payments. (e) Is the answer because the difference between personal disposable income personal income is personal taxes

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and and and and and

29.

Answer : (e) Reason : Consumption demand Investment demand and net exports are included in the aggregate demand for goods and services.

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30.

Answer : (e) Reason : (a)

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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 15

income. Hence propensity to consume effects consumption. 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 depend upon the level of wealth (e) Consumption demand does not depend upon the level of marginal efficiency of investment. (c)

Answer : (a) Reason : (a)

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32.

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).

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33.

Answer : (d) Reason : Supply of goods creates its own demand. This is according to the Says law.

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34.

Answer : (b) Reason : Bank rate is the rate of which commercial banks can borrow from the Central Bank by discounting eligible bills with the Central Bank.

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35.

Answer : (a) Reason : It would be appropriate for the RBI to pursue a expansionary monetary policy during a period of deflation. Through expansionary monetary policy RBI would like to increase the aggregate demand in the economy thereby causing the prices to increase. Of all the options, only open market purchase of government securities is an expansionary monetary policy. All other options are contractionary monetary policies.

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36.

Answer : (a) Reason : Open market operations refers to the instruments of monetary policy.

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37.

Answer : (a)

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31.

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.

 1 + Cu    Reason : Ms = H x  Cu + r  If reserve requirement (r) is raised, bank lending decrease thereby decreasing the money supply (Ms) in the economy. As Ms decrease, Price level tend to fall in the economy. 38.

Answer : (c) Reason : RBI is responsible for formulating and implementing monetary policy in India.

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39.

Answer : (b) Reason : When the inflation reaches double or triple digits, it is called galloping inflation.

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40.

Answer : (a) Reason : Inflation is rate of change in the price level.

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16

41.

Answer : (d) Reason : Attaining full employment and stable prices in the economy is the objectives for the use of fiscal policies.

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42.

Answer : (b) Reason : Expansionary fiscal policy refers to increase in government spending and decrease in taxes.

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43.

Answer : (d) Reason : Levy of taxes refers to the instruments of fiscal policy.

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44.

Answer : (c) Reason : Every economy goes through cyclical fluctuations in output, employment and prices. This will have an automatic impact on certain government expenditures and revenues. The changes in the government spending and revenues that results automatically as the economy fluctuates are called non-discretionary fiscal policy. Automatic stabilizers are features of the government budget that automatically adjust net taxes to stabilize aggregate demand as the economy expands or contracts. (a) Is not the answer because an automatic stabilizer is not a mechanism in the stock market that automatically cause stock market gains to be cancelled out by losses. (b) Is not the answer because automatic stabilizer is not the invisible hand mechanisms,which automatically bring the economy out of a recession. (c) Is the answer because automatic stabilizer refers to Government revenues and expenditures that change automatically in response to changes in economic activity. When the economy is in a contraction phase, these stabilizers increase transfer payments and reduce tax collections in order to stimulate aggregate demand. On the other hand, when the economy begins to expand, the automatic stabilizers increase tax collections and reduce transfer payments in order to restrain growth in the aggregate demand. (d) Is not the answer because automatic stabilizer is a discretionary fiscal policy.

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45.

Answer : (d) Reason : Keeping the supply of loanable funds at the same level increase in government borrowings increase the demand for loanable funds and put upward pressure on the rate of interest.

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46.

Answer :(e) Reason : Transaction demand for money refers to money used for carrying out daily transactions. (a) When income of the consumer is high, the demand for money for transaction purposes also increases. (b) Rate of interest discourages individuals from holding money because it increases the cost of holding money. Thus, higher the interest rate, the lower is the transaction demand for money. (c) The greater the wealth of the person, the higher is the transaction demand for money. (d) If the frequency with which income is received is higher, the consumer does not want to hold more money with him for transaction purposes because he receives the money in short intervals. (e) Since ‘rate of interest’ and ‘frequency of income received’ affect the transaction demand for money inversely, the correct answer is (e).

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47.

Answer : (b) Reason : In balance of payments statement, short term inflows and outflows of investments are recorded in capital account.

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48.

Answer : (c) Reason : The balance of payments is divided into two major accounts, the current account and the capital account.

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49.

Answer : (c) 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

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17

Indian agricultural sector. 50.

Answer : (c) Reason : The business cycle is defined as the variation in the economic activity with a regular pattern

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51.

Answer : (e) Reason : At equilibrium, Qs = Qd 400 + 15P = 600 – 10P 25P = 200 Or, P = 8 Since, price ceiling is above the equilibrium price of Rs.8, there would not have any affect on demand and supply of the good.

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52.

Answer : (d) Reason : At equilibrium Qs = Qd Qs= 200+25P (given) Qd = 400 – 25P (given) Therefore 200+25P = 400 – 25P 50P = 200 P = 200/50 = 4

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Therefore equilibrium quantity is Qs = 200+25×4 = 300 53.

Answer : (e) Reason : Price elasticity of demand is calculated as follows: Ep = Percentage change in quantity demanded for pens/ Percentage change in the price of pens. Thus, Ep = (Q2 – Q1)/(P2 – P1) x P1/Q1 = (25 – 75)/(12 – 6) x 6/75 = 0.67. Hence, the correct answer is (e).

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54.

Answer: (a) Reason : Demand : 20 = 104 – 4Q 4Q = 84 Q = 21 Supply : 20 = 2 + 0.5Q 0.5Q = 18 Q = 36 Surplus : 36 – 21 = 15 units.

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55.

Answer : (b) Reason : When the consumer is in equilibrium,

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Px

MRS xy

=

Py

75 Py

∴ 3= Py=25. 56.

Answer : (c) Reason : MUx/Px = MUy/Py 300/12 = MUy/30 9000/12 = 750

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57.

Answer : (e) Reason : TP = APL × L

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TP when L is 100 = 15 × 100 = 1500 18

TP when L is 101 = 14 × 101 = 1414

∆TP −86 = 1 = –86 MPL = ∆L ∴MP of 101st unit of labor is –86. 58.

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Answer : (c) Reason : APL is maximum when APL = MPL dQ MPL = d L = 200 L – 3L2 = 0 Q APL = L = 100 L – L2 200 L – 3 L2 – 100 L – L2 200L – 3L2 – 100L +L2 = 0 or 2L2 + 100L = 0 or, L (– 2L + 100) = 0 – 2L = – 100 100 = 50 L= 2

59.

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Answer : (c) MPL Reason : MRTSL,K = MPK Q = 10K0.5 L0.5 5 ∂Q 0.5 0.5 – 1 –0.5 L L ∂ = 5L = 5(L) = MPL= 5 ∂Q 0.5 0.5 –1 –0.5 MPK = ∂K = 5K = 5(K) = K

∴ MRTSL,K

5 L0.5 5 K 0.5 K 0.5 K 5 × 0.5 0.5 0.5 5 L L K = = = = L.

60.

Answer : (d) Reason : Total variable cost = 200Q-9Q2+0.25Q3

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61.

Answer : (b) Reason : Marginal cost = Change in the total cost as a result of producing one additional unit of output. Thus, marginal cost of producing third unit is equal to total cost of producing three units ‘minus’ total cost of producing two units = 190 – 150 = 40.

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62.

Answer : (d)

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n

∑ Reason : TCn = i=1 MC∴Total cost of producing 4 units is 100 + 50 + 40 + 60 = 250. 63.

Answer : (b) Reason : AC = 500/Q + 10 + 5Q + 25Q2TC = 500 + 10Q + 5Q2 + 25Q3; where, 500 = fixed cost and 10Q + 5Q2 + 25Q3 = TVC.

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64.

Answer : (c) Reason : AC = 100/Q + 20 + 4QTC = 100 + 20Q + 4Q2TVC= 20Q + 4Q2At output 15, TVC = 20(15) + 4(15)2= 300 + 900 =Rs. 1200

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19

65.

Answer : (b) Reason : Profit maximizing output is determined where MR = MC. MR= 400 – QMC = 70 + 2Q

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∴400 – Q = 70 + 2Q 3Q = 330 Q=

330 3 = 110 units.

66.

Answer : (c) Reason : Revenue = Profits + Total Cost= -10Q2 + 200Q – 200 + (200 + 10Q)= -10Q2 + 210Q Revenue will be maximum, when ∂R/∂Q = 0∂R/∂Q = -20Q + 210 = 0Or, Q = 210/20 = 10.5.

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67.

Answer : (c) Reason: Qa=1,000 – 50Pa Qb=800 – 25Pb TC=500 + 10Q. If the monopolists does not practice price discrimination,

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Qa

=

1,000 – 50Pa

Qb

=

800 – 25Pb

2Q

=

1,800 – 75P

or, Q = 900 – 37.5P or, 37.5P = 900 – Q or, P = 24 – 0.027Q TR = 24Q – 0.027Q2 MR = 24 – 0.054Q Sales maximization is possible, when MR = 0 ∴ 24 – 0.054Q = 0 24 = 0.054Q Q = 444 P = 24 – 0.027(444) P = (24 – 11.988) = 12.012 = Rs.12.00. 68.

Answer : (d) Reason : To find profit maximizing output MC must be equated to MR.P = 400 – 20 Q, TR = 400Q – 20 Q2.MR =dTR/dQ=400 – 40 Q and MC = dTC/dQ =40QMR = MC =400 – 40 Q =40 Q80Q = 400Q = 5 units.

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69.

Answer : (a) Reason : GNP at market prices

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NNP at market prices

NDP at market prices

NDP at factor cost

= GNP at factor cost + Indirect taxes – Subsidies = 240000 + 36000 – 12000 = 264000 Cr. = GNP at market prices – depreciation = 264000 – 20000 = 244000 Cr. = NNP at market prices – Net factor income from abroad. = 244000 – 10000 = Rs.234000 Cr = NDP at market prices – Indirect taxes + subsidies = 234000 – 36000 + 12000 = Rs.210000 Cr. 20

70.

Answer : (b) Reason : National income = Compensation of employees + Proprietor’s income + Interest payments made by the firms + Corporate profits = 2,325 + 135 + 323 + 170 + 43 = 2,996.

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71.

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 = 1,357

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∴Personal Income = Rs.1,496 cr 72.

= 1,357 – 28 – 75 + 242

Answer : (b) Reason : Personal income = National income – (corporate taxes + retained earnings) + Transfer payments = 10,000 – (288 + 600) + 278 = 9,390

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∴ Personal disposable income = Personal income – Personal taxes = 9,390 – 810 = 8,580. 73.

Answer : (c) Reason : MPC = 1400/2000 = 0.70

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74.

Answer : (e) Reason : Y = C+I+G+NX C = a+by Or C = 100+0.75Y Y = C+I+G+NX Or, Y = 100+0.75Y+50+150+20 Or, 0.25 Y= 320

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Or, Y 75.

320 = 1280 = 0.25 < TOP >

Answer: (c) MPC = 0.75 1 1 − − 1 MPC 1 0.75 = = 4. Multiplier =

76.

Answer : (c) Reason : Savings function S = –20 + 0.30Yd ∴C = 20 + 0.70Yd At Y=600, S = –20 + 0.30(600) = – 20 + 180 = 160 MUC. = Investment as S = I.

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77.

Answer : (d)

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Reason : ∆Y =

1 × 100 = Rs.400 crore. Multiplier × ∆I = 1 − 0.75

78.

Answer : (d) Reason : The multiplier is: 1/(1-MPC) which is equal to 4 so the change in aggregate output will be 4 X 20 million which equals Rs. 80 million.

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79.

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

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21

= 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. 80.

Answer : (a) Reason : Ms = High-powered money x {(1 + Cu)/(Cu + r)}; where High powered money = monetary liabilities of the central bank + government money. ∆Ms = ∆H. m When foreign exchange reserves of the country decline by Rs.200 MUC, the monetary liabilities also fall by 200 MUC. Thus, money supply decline by 4.8 x 200 = 960.

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81.

Answer : (b) Reason : Money supply = High-powered money (H) x Money multiplier 80000 = H x {(1 + 0.2)/(0.2 + 0.1)} Or, H = 20,000 MUC H = Monetary Liabilities of the Central Bank + Government money = ML + 1050 Or, ML = 20000 – 1050 = 18950. Total assets = Total liabilities (= Non-ML + ML) Total liabilities = Net worth (6000) + Government deposits (150) + Other non-monetary liabilities (3000) + Monetary liabilities (18950) = 28100. Thus, total assets = 28100 = (10000 + 4000 + 5000 + 100 + Net foreign exchange assets) Or, Net foreign exchange assets = 28100 – 19100 = 9,000.

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82.

Answer : (d) Reason : Change in forex reserves = ∴ Capital a/c balance = = =

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83.

Answer : (c) Reason : GNP NFIA

∴ GNP

Current a/c balance + Capital a/c balance ∆ Forex reserves + Current a/c deficit 1000 + 5000 6000. < TOP >

=

GDP + NFIA

=

Factor income received from abroad – Factor income paid abroad.

=

100 – 200

=

– 100

=

8000 – 100

=

7900. < TOP OF THE DOCUMENT >

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