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Posted By: Kenny Member Level: Gold Posted Date: 22 May 2008
|
2005 ICFAI University M.B.A Suggested Answers Economics (MB141): April, 2005 Question paper
Suggested Answers Economics (MB141): April, 2005
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.
< TOP >
2. Answer : (c)
Reason : Demand function of the monopolist are given as P=800 – 10Q
TC=300Q + 2.5Q2
TR=P ??Q = 800Q + 10Q2
?MR = 800 – 20Q.
??Profit maximizing output for the monopolist can be determined,
where, MR = MC
MC =
(TC)
Q
?
??= 300 – 5Q
??MR = MC
800 – 20Q = 300 + 5Q
– 25Q =– 500
Q =20
??P = 800 – 10 (20) = 800 – 200 = 600.
< TOP >
3. Answer : (a)
Reason : When the income elasticity is greater than one, the good is said to be luxury.
< TOP >
4. Answer : (b)
Reason : The minimum price below which the firm is shut down its operation is the minimum
average variable cost.
The average variable cost will be equal to price or marginal revenue at the minimum point
on average variable cost curve.
?MC = AVC.
75 – 20Q + 1.5Q2
= 75 – 10Q + 0.5Q2
1.5Q2 – 0.5Q2 – 20Q + 10Q = 0.
Q2 –10Q = 0
Q(Q–10) = 0
Q=10.
At Q = 10, AVC = 75 – 10(10) + 0.5 (10)2
= 75 – 100 +50 = Rs.25.
< TOP >
5. Answer : (c)
Reason: When a decrease in price leads to increase in quantity purchased so much as to increase
the total revenue, the price elasticity of demand is more than unity.
< TOP >
6. Answer : (d)
Reason : Q = 10,000 – 1500(5) + 2(5000) + 200(8)
= 21,600 – 7,500
= 14,100
Income elasticity of demand: dQ/dY ??Y/Q = 2 ??5000/14100 = 0.709
< TOP >
7. Answer : (c)
Reason : TC=100 – 3Q + 5Q2
MC=–3 + 10Q
< TOP >
12
If Q = 5, MC = –3 + (10 ??5) = 47.
8. 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.
< TOP >
9. Answer : (a)
Reason :
Qd
= 3,00,000 – 30 P
When the price is Rs. 2500 per unit
Qd = 3,00,000 – 30 (2500)
= 3,00,000 – 75000 = 2,25,000 units
When the price is Rs. 4000 per unit
Qd = 3,00,000 – 30 (4000)
= 3,00,000 – 1,20,000 = 1,80,000 units
Arc elasticity =
2 1 1 2
2 1 1 2
Q Q P P /2
P P Q Q /2
-??
?
-??
=
6500
45000 2
1500 405000
2
-
?
= – 0.48.
< TOP >
10. Answer : (d)
Reason : Variable costs are those costs that increase with the level of output. Salaries of temporary
staff are an example of variable cost.
< TOP >
11. Answer : (c)
Reason : Oligopoly market has a predominant feature of price leadership.
< TOP >
12. Answer : (b)
Reason : The theoretical highest price that can prevail in the market is when the quantity demanded
is zero.
3,50,000 – 35 P = 0
3,50,000 = 35 P
P =
3, 50, 000
35 = Rs. 10,000.
< TOP >
13. Answer : (a)
Reason : The locus of points of tangency between set of isoquants and the isocost lines indicates the
best possible input combination. (a) Expansion path is the locus of points of tangency
between set of isoqunats and isocost lines.
< TOP >
14. Answer : (a)
Reason : The law of diminishing marginal utility states that the marginal utility of any good tends
to decline as more of the good is consumed over a definite period of time.
< TOP >
15. Answer : (b)
Reason : If the demand curve is perfectly inelastic, the prices rises by the full amount of the tax and
supply remains unchanged. The entire tax is borne by the customers.
< TOP >
16. Answer : (c)
Reason : AP = TP/L = 30L – L2
Maximum AP: ?AP/?L = 0
30 – 2L = 0
Or, L = 15
< TOP >
13
At L = 15, AP = 30(15) – 15 x 15 = 225 units.
17. 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.
(e) Is not the answer because all of the above cannot be the answer.
< TOP >
18. Answer : (d)
Reason : A decrease in price of complementary products will make the demand for a particular
product increase. This is because the total cost of the “system” (total cost of ownership)
will not go down. A fall in demand of substitute goods does not necessarily indicate an
increased demand of the product as the entire product category may be falling out of favor.
< TOP >
19. Answer: (b)
Reason: The law of diminishing returns states that, as more and more units of a variable resource
are combined with a fixed amount of other resources, employment of additional units of
the variable resource will eventually increase output only at a decreasing rate. The total
product curve in the short run is affected by the operation of law of diminishing returns.
a. The law of diminishing marginal utility states that the marginal utility of any good
tends to decline as more of the good is consumed over a definite period of time.
b. The law of diminishing returns states that, as more and more units of a variable
resource are combined with a fixed amount of other resources, employment of
additional units of the variable resource will eventually increase output only at a
decreasing rate.
c. Law of returns to scale refers to the changes in the output as all factors change by the
same proportion. Returns to scale may be constant, increasing or decreasing. It is
applicable only in the long run.
d. Law of demand states that there exists an inverse relationship between the quantity
demanded and the price of the commodity. As the price of the commodity increases,
other things remaining constant, consumers will tend to demand less of the
commodity.
e. Law of supply states that there is a direct relationship between the price of a good
and the amount of it offered for sale. As the price of a product increase, other things
remaining constant, producers will increase the amount of the product supplied to the
market. Hence the correct answer is (b).
< TOP >
20. Answer : (c)
Reason : The demand curve facing a firm under monopoly is a downward sloping curve.
< TOP >
21. Answer : (b)
Reason : Marginal utility starts diminishing as the consumer starts consuming more units of a
product. When marginal utility reaches zero, total utility reaches its maximum and remains
constant.
< TOP >
22. Answer : (c)
Reason : AC = 100/Q + 20 + 4Q
TC = 100 + 20Q + 4Q2
TVC= 20Q + 4Q2
At output 15, TVC = 20(15) + 4(15)2= 300 + 900 =Rs. 1200
< TOP >
23. Answer : (b)
Reason : Break Even Point in perfect competition is at when AR = AC.
< TOP >
14
24. Answer : (b)
Reason : The consumer will consume till MUY = PY
MUY = 0.5Y
0.5Y = 10
Y = 20 units.
< TOP >
25. Answer : (c)
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.
< TOP >
26. Answer : (e)
Reason : The profit of a firm refers to the difference between total revenue and total cost. Hence, to
maximize the profits, the firm should maximize the difference between total revenue and
total cost. The difference between average revenue (AR) and average cost (AC) represents
the average profit of the firm. Hence maximization of difference between average revenue
and average cost also indicates profit maximization. A firm maximizes its profit when it
produces and sells an output at which marginal revenue (MR) is equal to marginal cost
(MC).
< TOP >
27. Answer : (c)
Reason : TPL = 10L – L2
MPL = 10 – 2L
Marginal returns become negative, once MPL equals zero. Thus,
10 – 2L = 0
Or, L = 5.
< TOP >
28. Answer : (c)
Reason : In a perfectly competitive market, an individual seller is the price taker. In a perfectly
competitive market, there are large number of buyers and sellers in the industry/market, so
that no individual buyer can influence the price by changing the purchase or output. This
means that the individual buyer or seller is an insignificant player in the market.
< TOP >
29. Answer : (b)
Reason : In a perfectly competitive market MR = P.
A firm can maximize profits by equating MC and MR.
Here, MR = P = Rs. 10
MC = 4 + 0.04 Q (differentiating in terms of Q)
10 = 4 + 0.04 Q
Q = 6/0.04 = 150.
< TOP >
30. Answer : (a)
Reason : AC = Q3 – 6Q2 + 140Q + 750 +100/Q
TC = AC x Q = (Q3 – 6Q2 + 140Q + 750 +100/Q)Q.
Thus, FC = 100 and VC = Q4 – 6Q3 + 140Q2 + 750Q.
Hence the correct answer is (a)
< TOP >
31. Answer : (c)
Reason : Existence of homogeneous product is not the characteristic of monopolistically
competitive market. Under this market, the firms sell differentiated products.
< TOP >
32. Answer : (e)
Reason : A firm earns normal profits, when TR = TCTR = P ??Q = 30Q – 3Q2TC = 6Q30Q – 3Q2 =
6Q24Q = 3Q2Or, Q = 8 units.
< TOP >
33. Answer : (a)
Reason : Average revenue is the revenue earned per unit of output sold. It can be obtained by
dividing the total revenue by the number of units and sold.
< TOP >
34. Answer : (d) < TOP >
15
Reason : TC = 20Q – 0.30 Q2 + 0.01Q3
MC =
dTC
dQ = 20 – 0.6 Q + 0.03Q2
MC is minimum when
dMC
dQ = 0
dMC
dQ = -0.6 + 0.06 Q = 0
0.06 Q = 0.6
Q = 10.
35. 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.
< TOP >
36. Answer : (b)
Reason :
P1
= 7 Q1 = 15
P2 = 8 Q2 = 30
?P = 1 ?Q = 15
Arc EPS =
1 2
1 2
Q P P
P Q Q
?????
???
=
15 ?7 8?
1 (15 30)
???
?
EPS = 5
< TOP >
37. Answer : (c)
Reason : A variable is a stock if it is measured at a particular point of time. It is a flow variable if it
is measured over a period of time.
a. Capital stock is measured at a particular point of time, hence is a stock variable
b. Money supply are measured at a particular point of time, hence is a stock variable
c. Investment is measured over a period of time hence is a flow variable.
d. Price index is measured at a particular point of time, hence is a stock variable
e. Unemployment level is measured at a particular point of time, hence is a stock
variable.
< TOP >
38. Answer : (c)
Reason : At equilibrium, Y = C + I + G = 50 + 0.6Y + 70 + 20 = 140 + 0.6Y
0.4Y = 140
Y = 140/0.4 = 350.
< TOP >
39. 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.
< TOP >
40. Answer : (c) < TOP >
16
Reason : Unemployment caused by imperfect information about the available jobs and skills in the
market is called fictional unemployment.
41. Answer : (b)
Reason : N1 = NNP at factor cost
= NDP at factor cost + net income from abroad
= (77,000 – 7,700 + 6,700) + (-700)
= 76000 + (-700)
= Rs.75300 Cr
< TOP >
42. Answer : (b)
Reason : Short term inflows of capital are recorded in the capital account.
< TOP >
43. Answer : (b)
Reason : High-powered money (H) = 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
r = 0.3.
< TOP >
44. 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 >
45. Answer : (c)
Reason : Business cycle is the fluctuation in the level of economic activity which forms a regular
pattern
< TOP >
46. Answer : (c)
Reason : GNPMP = GDPFC + Indirect taxes – Subsidies + NFIA
NFIA = GNPMP – GDPFC – Indirect taxes
= 75,000 – 60,000 – 5,000
= 10,000
< TOP >
47. Answer : (e)
Reason : Consumption demand Investment demand and net exports are included in the aggregate
demand for goods and services.
< TOP >
48. Answer : (d)
Reason : Payments related to productive activities undertaken by factors of production during the
year are included in the GDP of a country.
(a) Not included since the car is not produced during the current year
(b) Not included since the house is not constructed during the current year
(c) Not included since sale of stocks and bonds are financial transactions only.
(d) Is included in GDP as the fee is earned for rendering brokerage services and is an
income.
(e) Not concluded since the sale of a used computer is not included in GDP of a country.
< TOP >
49. Answer : (a)
Reason : Phillips curve in the short-run shows an inverse relation between inflation and
unemployment. But in the long run there is no trade-off because Phillips curve is vertical
in the long-run.
< TOP >
50. Answer : (b)
Reason : Marginal Propensity to consume =
C
Y
?
??=
0.5
1.0 = 0.5
< TOP >
51. Answer : (e)
Contractionary (tight) fiscal policy involves increasing tax rate and/or decreasing the
government spending to bring down the aggregate demand and price level in the economy.
Reduced government spending reduces the public borrowings, and thereby interest rate
< TOP >
17
Reduced government spending reduces the public borrowings, and thereby interest rate
and output in the economy. The tight monetary policy, conversely, reduces the money
supply and thereby increases the interest rate in the economy. Increased interest rate
reduces both consumption and investment and thereby reduces output in the economy.
Thus, we can say that the combined effect of tight fiscal policy and tight monetary policy
lowers the output. But, the direction of change in interest rate is not known unless we
know the magnitude of influence of fiscal and monetary policies on interest rate.
52. Answer : (d)
Reason : Slowing of economic activity accompanied by inflation is defined as stagflation.
< TOP >
53. Answer : (e)
Reason : High – Powered money (H) = monetary liabilities or central bank + Government money.
Monetary liabilities = Financial assets + other assets – Non monetary liabilities
= 3,520 + 60 – 280
= 3,300
??M = 3,300 + 100 = 3,400 MUC
< TOP >
54. Answer : (a)
Reason : The principle of the multiplier states that any increase in aggregate spending that causes
the aggregate demand curve to shift will result in a larger increase in national income
< TOP >
55. 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.
(e) Is not the answer because automatic stabilizer is not a monetary policy for stabilizers
exchange rate.
< TOP >
56. Answer : (d)
Reason : If Yd is zero, consumption is 1,000MUC, which is autonomous consumption. This
consumption is financed by dissavings or borrowing. Hence dissavings are 1,000MUC
< TOP >
57. Answer : (c)
Reason : Bank rate, cash reserve requirements, open market operations and statutory liquidity ratio
are the quantitative instruments of RBI’s monetary policy. Is not a moral suasion
quantitative instrument of RBI’s monetary policy. It is a qualitative instrument of
monetary policy
< TOP >
58. Answer : (e)
Reason : Personal Income = National Income – Undistributed corporate profit – corporate tax +
Transfer payments
= 1,357 – 28 – 75 + 242
= Rs.1,496 cr
< TOP >
59. Answer : (c) < TOP >
18
Reason : Supply side economics advocates to reduce government controls, to promote competition,
to restrict the power of trade unions and to remove institutional barriers. Supply side
economics doesn’t recommend to increase corporate tax rate.
60. Answer : (e)
Reason : Unexpected inflation refers to a situation where the actual rate if inflation is more than
what people are expecting. It would mean that prices have increased at a faster rate.
(a) The debtors have an obligation to repay in future in nominal terms, i.e., in money
terms and not in real terms. Hence with higher inflation today, the debtor’s future
payments will fall with higher inflation. Hence he will gain as he need to repay
lesser in real terms.
(b) On the contrary, with the increasing prices the creditor is bound to suffer loss as with
the repayment of the loan, his purchasing power would be reduced as the price have
increased at a faster rate.
(c) Pensioners earn a fixed amount of money and their wages are not adjusted to the
changes in prices very quickly. Hence with unexpected inflation, their real income is
bound to decline and hence they tend to loose in case there is unexpected inflation.
(d) An unexpected inflation is a gain to the firms as it brings not only greater profits, but
the pension amount it has to pay in real terms is declining with increase in prices.
(e) Fixed income group represent those wage earners whose wages are not adjusted to
changes in prices. With unexpected inflation, their purchasing power would decline
and hence they suffer losses. Hence the option is true.
< TOP >
61. Answer : (e)
Reason : A well-developed financial system is vital for the smooth functioning of an economy. The
financial development ratios such as Finance Ratio, Financial Interrelation Ratio, New
Issues Ratio and Intermediation Ratio are indicators of financial development of a country.
(a) Is not the answer because Finance Ratio is an indicator of financial development of a
country.
(b) Is not the answer because Financial Interrelation Ratio is an indicator of financial
development of a country.
(c) Is not the answer because New Issues Ratio is an indicator of financial development
of a country.
(d) Is not the answer because Intermediation Ratio is an indicator of financial
development of a country.
(e) Is the answer because Cost Benefit Ratio is not an indicator of financial development
of a country.
< TOP >
62. Answer : (c)
Reason : Capital inflows – capital outflows = 6,300 – 4,300 = 2,000 MUC (Deficit).
< TOP >
63. Answer : (c)
Reason : Attaining full employment and stable prices in the economy is the objectives for the use of
fiscal policies.
< TOP >
64. Answer : (e)
Reason : Aggregate expenditure in an economy consists of Consumption, Investment, Government
purchases and Net exports. Hence the answer is (e).
< TOP >
65. Answer : (b)
Reason : If the central bank doesn’t impose any reserve ratio, the commercial bank need not keep
on deposit with the Reserve bank certain amount of funds equal to a specified percentage
of its own deposit liabilities. Then the banking sector can create unlimited money supply.
(a) Is not the answer because without the imposition of reserve ratio, the banking system
can affect the supply of money through credit creation
(b) Is the answer because if the central bank doesn’t impose any reserve ratio, the
banking sector can create unlimited money supply
(c) Is not the answer because without reserve ratio, the lending capacity of banks
wouldn’t narrow down to zero
(d) Is not the answer because if the central bank doesn’t impose any reserve ratio, a
rupee deposited in a bank doesn’t reduce the money supply in the economy by one
rupee.
< TOP >
19
(e) Is not the answer because if the central bank doesn’t impose any reserve ratio, money
supply in the economy will not be equivalent to high-powered money.
Money supply = H ??(1+ Cu / Cu + r)
Where, H = Monetary Liabilities of Central Bank + Government Money
Cu = Currency-deposit ratio
r = Cash reserve ratio.
66. Answer : (a)
Reason : Bank rate is the rate at which RBI rediscounts approved bills of exchange.
< TOP >
67. Answer : (a)
Reason : In the Keynesian model, unemployment could be reduced if the aggregate demand
increases. Therefore, unemployment is caused by demand deficiency. The Keynesian
theory of unemployment suggests that governments can play an active role in the economy
by adjusting the aggregate demand through its fiscal and monetary instruments.
(a) Is the answer because unemployment in the Keynesian model is caused by demand
deficiency
(b) Is not the answer because unemployment in the Keynesian model is not caused by
supply deficiency
(c) Is not the answer because unemployment in the Keynesian model is not caused by
demand sufficiency
(d) Is not the answer because unemployment in the Keynesian model is not caused by
supply sufficiency
(e) Is not the answer because unemployment in the Keynesian model is not caused by
both demand deficiency and supply deficiency.
< TOP >
68. Answer : (d)
Reason : The central bank buying government securities in the open market is termed as an
expansionary monetary policy.
< TOP >
69. Answer : (d)
Reason : Levy of taxes refers to the instruments of fiscal policy.
< TOP >
70. Answer : (a)
Reason : Money Supply = Net bank credit to Government + Bank credit to commercial sector +
Net foreign exchange assets of the banking sector – Net non-monetary liabilities of the
banking sector + Government money
Rs.6200billion = 2000+3000+2200-1200+ Government money
Government money = Rs.200billion
< TOP >
71. Answer : (c)
Reason : In the business cycles theory, after a business peak or boom, the economy enters
contraction stage. The sales of most businesses fall and real GNP of an economy grows at
a slow pace. There is a large number of unemployment in the labor market. This phase is
otherwise known as recession.
(a) Is not the answer because the inventory stock increases gradually in recession
(b) Is not the answer because business expectation will be pessimistic with cautious
decision-making
(c) Is the answer because there is an underutilization of existing capacity in the economy
(d) Is not the answer because bank credit starts falling in the recession phase of business
cycle
(e) Is not the answer because there is a decline in the income levels of the people.
< TOP >
72. Answer : (d)
Reason : Y = c + 1
Y = 70 + 0.80Y + 90
0.20Y = 160
Y = 800.
< TOP >
20
73. Answer : (a)
Reason : The relationship between aggregate consumption and aggregate income is known as the
Consumption function.
< TOP >
74. Answer : (b)
Reason : Multiplier =
1
1-MPC
2.5 =
1
1-MPC
2.5 – 2.5 MPC = 1
1.5 = 2.5 MPC
MPC = 0.60
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