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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2004 ICFAI University M.B.A Suggested Answers Economics (MB141) : July 2004 Question paper
Suggested Answers Economics (MB141) : July 2004
1. 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).
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2. 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.
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3. 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) 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.
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4. 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.
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5. Answer :
(a) <
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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.
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(d) & (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
6. 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.
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7. 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).
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8. Answer :
(e) <
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Reason : When marginal product (MP) is greater than average product (AP), AP will be increasing. When
MP < AP, AP will be decreasing. Therefore, AP is maximum when AP is equal to MP.
When MP=0, total product is maximum and AP will be decreasing. Hence option (a) is not
the answer.
When MP is maximum, AP is less than MP and AP will be increasing. Hence option (b) is
not the answer.
When MP is minimum, AP will be decreasing. Hence option (c) is not the answer.
When MP is negative, AP will be decreasing. Hence option (d) is not the answer.
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9. 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.
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11. Answer :
(c) <
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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 MP0. In the third stage
MPd. False. As MP<0, total productivity decreases in the third stage.
e. False. MP is negative in the third stage.
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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 :
(b) <
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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. Is not the answer because (b) is correct.
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14. Answer :
(b) <
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Reason : (a) Profit will be maximum when the MC is equal to MR and the slope of MC curve > slope of
MR curve
(b) As long as MC>AC, AC is increasing and as long as MCwhen MC and AC are equal, AC is at its minimum.
(c) MC is minimum when slope of MC curve is zero
(d) There is no relation between the intersection point of MC & AC and the opportunity cost
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(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
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16. Answer :
(c) <
TOP >
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.
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17. Answer :
(c) <
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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.
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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 : (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).
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21. Answer : (a) < TOP >
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) <
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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.
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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.
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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).
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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.
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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.
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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
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.
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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.
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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
Multiplier = . Therefore, the equilibrium income would also decrease by the same
amount as decrease in investment.
1
1 0
1 ?
-
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32. Answer : (e)
Reason : Aggregate expenditure in an economy consists of Consumption, Investment,
Government purchases and Net exports. Hence the answer is (e).
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33. 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.
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34. 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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35. 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.
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36. 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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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.
37. 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.
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38. 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.
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39. 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.
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40. 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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(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.
41. 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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42. 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.
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43. Answer : (c)
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.
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44. 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.
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45. Answer : (a)
Reason : Ms = m . H
m =
Where, Cu is currency deposit ratio
r is reserve ratio
If banks increase r, m decrease and money supply in the economy would decrease.
C r
1 C
u
u
?
?
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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) 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.
47. 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 Indian agricultural
sector.
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48. Answer : (d)
Reason : Recession is, technically, defined as decline in output for two or more consecutive quarters.
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49. 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.
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50. 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.
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51. Answer : (a)
Reason :Price- elasticity of demand = ?Q/?P ??P/Q = (200 – 300)/(20 – 12) ??12/300 = –0.5=0.5.
< TOP >
52. Answer :
(c) <
TOP >
Reason : Q = 40 – P
When P = 20, Q = 20
ep = = –1 ??= –1
Q
. P
P
Q
?
?
20
20
< TOP >
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).
< TOP >
54. Answer : (b)
Reason : Qs = 400P – 500
Qd = 1500 – 100P
Equilibrium price is determined when Qs = Qd.
< TOP >
??400P – 500 = 1500 – 100P
or, 500P = 2000
or, P = 4
When P = 4, Qs = 400(4) – 500 = 1600 – 500 = 1100.
55. Answer : (d)
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
< TOP >
56. Answer : (c)
Reason :
??PA = = Rs.80.
B
B
A
A
P
MU
P
MU ?
120
900
P
600
A
?
7.5
600
< TOP >
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
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58. Answer : (d)
Reason : Total product of labor (TPL) = APL x units of labor (L).
When L = 10, TPL = 20 x 10 = 200
L = 11, TPL = 19 x 11 = 209.
??MPL = 209 – 200 = 9 units.
< TOP >
59. Answer : (b)
Reason : TC = 500 – 2Q + 3Q2
MC = –2 + 6Q
If Q = 10, MC = –2 + 60 = 58
< TOP >
60. Answer : (d)
Reason : TCn = MC
?Total cost of producing 4 units is 100 + 50 + 40 + 60 = 250.
n
1 i???
< TOP >
61. Answer : (b)
Reason : AVC = = 10
TVC where Q = 100 is 10 ??100 = 1000
FC = TC – TVC
= 1500 – 1000
50
500
Q
TC ?
?
?
< TOP >
= 500
62. Answer : (e)
Reason : (a) AVC = = = 200 – 9Q + 0.25Q2
(b) MC = = = 200 – 18Q + 0.75
(C)TVC = 200Q – 9 + 0.25Q3
TVC
Q
?200Q 9Q2 0.25Q3?
Q
-??
TC
Q
?
?
1000 200Q 9Q2 0.25Q3 / Q
???
?????-?????
???
2Q
2Q
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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
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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.
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65. Answer : (e)
Reason : A firm earns normal profits, when TR = TC
TR = P ??Q = 30Q – 3Q2
TC = 6Q
30Q – 3Q2 = 6Q
24Q = 3Q2
Or, Q = 8 units.
< TOP >
66. Answer : (c)
Reason : Demand function of the monopolist are given as
P = 800 – 10Q
TC = 300Q + 2.5Q2
TR = P ??d = 800Q + 10Q2
?MR = 800 – 20Q.
??Profit maximizing output for the monopolist can be determined, where,
MR = MC
MC = = 300 – 5Q
??MR = MC
800 – 20Q = 300 + 5Q
– 25Q = – 500
Q = 20
??P = 800 – 10 (20) = 800 – 200 = 600.
(TC)
Q
?
?
< TOP >
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
< TOP >
= 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.
< TOP >
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.
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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.
< TOP >
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.
< TOP >
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 =
=
= 4.8 ??1,250
= 6,000 MUC
1 Cu H
Cu r
?
?
?
1 0.20 1, 250
0.20 0.05
?
?
?
< TOP >
73. Answer : (b)
Reason : S = – 60 + 0.25Yd
At equilibrium level of income, S = I
: – 60 + 0.25 Yd = 100
or, 0.25Yd = 100
or,
d
Y 100 640MUC
0.25
???
< TOP >
74. Answer : (d) < TOP >
=< TOP OF THE DOCUMENT >
Reason : ?Y=Multiplier ???I = = Rs.400 crore
100
1 0.75
1 ?
-
75. Answer : (e)
Reason : Multiplier = = 5
0.20
1
MPS
1 ?
< TOP >
76. Answer : (d)
Reason : At break-even level of disposable income, savings are zero.
??S = –300 + 0.25Yd = 0
0.25 Yd = 300
Yd =1200
< TOP >
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.
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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
< TOP >
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 >
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