Question Paper
Economics-I (MB141): January 2007
•
•
1.
Answer all questions.
Marks are indicated against each question.
In which of the following type of economic systems price plays an important role?
I.
II.
III.
(a)
(b)
(c)
(d)
(e)
Market Economy.
Command Economy.
Mixed economy.
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
Both (II) and (III) above.
(1 mark)
2.
Which of the following is/are not qualitative technique(s) of demand forecasting?
I.
Expert opinion.
II.
Survey.
III. Market experiments.
IV. Time series analysis.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Only (IV) above
Both (I) and (II) above.
(1 mark)
3.
If a person has to purchase two commodities X and Y, then his budget constraint can be represented
as
(a)
(b)
(c)
(d)
(e)
Income for consumption ≥ price of X
Income for consumption ≤ price of X
Income for consumption ≥ price of X
Income for consumption ≥ price of X
Income for consumption ≤ price of X
×
×
×
×
×
quantity of X + price of Y × quantity of Y
quantity of X + price of Y × quantity of Y
quantity of X / price of Y × quantity of Y
quantity of X × price of Y × quantity of Y
quantity of X - price of Y × quantity of Y.
(1 mark)
4.
The demand function of a monopolist is given as follows:
P = 500 – 8Q
If the marginal cost of the firm is MC = 9Q, the profit maximizing price of the firm is
(a)
(b)
(c)
(d)
(e)
Rs.320
Rs.340
Rs.360
Rs.350
Rs.355.
(2 marks)
5.
The total cost function of a firm producing Computer Peripherals is
TC = 4,000 + 40Q – 2.8Q2 + 0.2Q3.
At what level of output will the average variable cost be at a minimum?
(a)
(b)
(c)
(d)
(e)
4 units
5 units
6 units
7 units
8 units.
(2 marks)
6.
Expecting a rise in demand of Bouquets a florist increases the price of Bouquets from Rs.280 to
Rs.305. As a result the demand for Bouquets declined from 1,200 units to 1,000 units. The price
elasticity of demand for Bouquets is
(a)
(b)
(c)
(d)
(e)
–1.86
–2.78
–2.87
1.86
2.78.
(2 marks)
7.
Which of the following statements is/are not true about isoquants?
I.
An isoquant is upward sloping from left to right.
II.
A higher isoquant represents a lower output.
III. No two isoquants intersect or touch each other.
IV. Isoquants are convex to the origin.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
Both (III) and (IV) above.
(1 mark)
8.
Which of the following is not a sunk cost?
(a)
(b)
(c)
(d)
(e)
Building rent of firm for five years paid in advance
Payment made to the supplier for supplying raw material for two consecutive years as per
agreement
Payment made in advance to erect an oil refining device at a paint factory
Payment made for spraying pesticide at office premises
Payment made by a garment firm for using a warehouse for contract period of one year.
(1 mark)
9.
A toy manufacturing firm has incurred a fixed cost of Rs.4,97,200. It sells each unit for Rs.650. The
average variable cost is Rs.85. What will be the break-even quantity and revenue respectively?
(a)
(b)
(c)
(d)
(e)
880 units and Rs.5,72,000
860 units and Rs.5,72,000
880 units and Rs.7,52,000
860 units and Rs.7,52,000
840 units and Rs.5,72,000.
(2 marks)
10.
A firm has a production function Q=K + 2L, where Q is the output, K is the capital input and L is the
labor input. If both the wage and the cost of capital are equal to Rs.100 per unit, the cost minimizing
output is
(a)
(b)
(c)
(d)
(e)
Produced at any point along the isoquant
Produced by using labor input only
Produced by using capital input only
Is impossible to produce
Produced by using both labor and capital in equal amounts.
(1 mark)
11.
The production function of a firm is Q = 24L2 – L3. How much labour should the firm employ to
maximize output?
(a)
(b)
(c)
(d)
(e)
10 units
11 units
12 units
13 units
16 units.
(1 mark)
12.
The total cost function of a firm is given as TC = 500 – 2Q + 3Q2. If the current output is 5 units,
average cost is
(a)
(b)
(c)
(d)
(e)
Rs.110
Rs.111
Rs.112
Rs.113
Rs.114.
(2 marks)
13.
A shaving cream manufacturing company manufactures two varieties of shaving creams – foam based
and non foam based. When the price of foam based cream was increased from Rs.200 to Rs.250 per
tube, the demand for non foam based cream increased from 20 tubes to 35 tubes. The cross price
elasticity between the two types of cream is
(a)
(b)
(c)
(d)
(e)
1.5
2.0
2.5
3.0
3.5.
(2 marks)
14.
The marginal utilities of product X and product Y are 520 utils and 650 utils respectively at
equilibrium. If the price of product Y at equilibrium is Rs.75, what is the price of product X at
equilibrium?
(a)
(b)
(c)
(d)
(e)
Rs.55
Rs.50
Rs.60
Rs.65
Rs.70.
(2 marks)
15.
Which of the following is/ are not true regarding Consumer Surplus?
I.
II.
III.
Consumer surplus is helpful to the government in fixing taxes.
Consumer surplus helps the monopolists in fixing price of a commodity.
In case of imported products which are cheaper than domestic products the consumer surplus is
less.
IV. A higher consumer surplus indicates that the economy is stable.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Both (I) and (III) above
Both (II) and (IV) above.
(1 mark)
16.
When marginal product is maximum the total product will
(a)
(b)
(c)
(d)
(e)
Decrease at an increasing rate
Decrease at a decreasing rate
Increase at an increasing rate
Increase at a decreasing rate
Remain constant.
(1 mark)
17.
Which of the following is true of a straight-line demand curve?
(a)
(b)
(c)
(d)
(e)
The price elasticity of demand is equal to zero at the midpoint
As we move down along the curve, the price elasticity of demand decreases
As we move down along the curve, the price elasticity of demand increases and then decreases
As we move down along the curve, the price elasticity of demand increases
The price elasticity demand remains unchanged throughout the curve.
(1 mark)
18.
Which of the following is an example of variable cost of production?
(a)
(b)
(c)
(d)
(e)
Cost of building
Purchasing heavy machines
Salaries of top-level managers
Salaries of temporary staff
Acquiring copyrights of the products.
(1 mark)
19.
When a proportionate change in input combination causes the same proportionate change in output,
the returns to scale is said to exhibit
(a)
(b)
(c)
(d)
(e)
Increasing returns
Decreasing returns
Constant returns
Negative returns
Infinite returns.
(1 mark)
20.
The break-even point for a perfectly competitive firm is achieved when
(a)
(b)
(c)
(d)
(e)
Average Revenue = Marginal Cost
Average Revenue = Average Cost
Total Revenue = Marginal Cost
Marginal Revenue = Average Variable Cost
Marginal Revenue = Marginal Cost.
(1 mark)
21.
A producer produces 200 units of a commodity by spending Rs.1,50,000. He expects an increase in
demand and produces 100 more units. If his total expenditure for producing 300 units is Rs.3,80,000,
what is the marginal cost per unit?
(a)
(b)
(c)
(d)
(e)
Rs.2,300
Rs.3,800
Rs.1,500
Rs. 500
Rs.2,800.
(2 marks)
22.
The income effect of decrease in price of a good is the extent to which
(a)
(b)
(c)
(d)
(e)
The purchasing power of the consumer has decreased
The incomes of the suppliers increases
The real income of the consumer increases
The consumers of substitutes are better off
The demand for the product decreases.
(1 mark)
23.
A consumer with a given income will obtain maximum utility when
(a)
(b)
(c)
(d)
(e)
The marginal utility of each commodity is equal
The marginal utility of each commodity is in the same ratio to its price
The utility derived for the first unit of each commodity is equal
The marginal utility of each commodity is in the same ratio to its cost of production
The marginal utility of one commodity is higher than others.
(1 mark)
24.
Which of the following is not an example of a firm’s explicit cost?
(a)
(b)
(c)
(d)
(e)
Salaries paid to workers
An amount of Rs.500 paid to an employee towards the reimbursement of medical expenses incurred by
him
Advertisement expenditure incurred by the firm towards promotion of its branded good, ‘Atoka’
The firm’s owner has given up a job, where he was earning Rs.10,000 per month, to run the firm
Payment of telephone bills by the firm.
(1 mark)
25.
Average productivity of labor (APL) for a firm is 20 when labor employed is 10 units. When labor
employed increased to 11 units, APL decreases to 19 units. Marginal productivity of 11th unit of labor
is
(a)
(b)
(c)
(d)
(e)
–1 unit
– 9 units
1 unit
9 units
19 units.
(2 marks)
26.
Total cost function of a firm is estimated to be TC = 500 – 2Q + 3Q2. If the current output is 10 units,
marginal cost is
(a)
(b)
(c)
(d)
(e)
Rs.46
Rs.48
Rs.54
Rs.56
Rs.58.
(2 marks)
27.
Total cost of production for a firm to produce 100 units is Rs.1,500 and to produce 150 units it is
Rs.2,000. Assuming the average variable cost to be constant, fixed cost for the firm is
(a)
(b)
(c)
(d)
Rs.450
Rs.475
Rs.525
Rs.500
(e)
Rs.425.
(2 marks)
28.
Radha pharmaceuticals Ltd., has a monopoly in producing a medicine which is used as preventive to a
fatal viral fever. The demand function for this medicine is
Q = 75 – P.
The total cost function is TC = 25Q. What is profit maximizing output and profit at that level of
output respectively?
(a)
(b)
(c)
(d)
(e)
20 units and Rs.400
25 units and Rs.625
30 units and Rs.625
25 units and Rs.400
30 units and Rs.400.
(2 marks)
29.
The supply curve of a monopolist
(a)
(b)
(c)
(d)
(e)
Is the portion of MC curve that lies above the AVC curve
Is the portion of MC curve that lies above the AC curve
Is vertical
Is horizontal
Is absent.
(1 mark)
30.
Output
(units)
1
2
3
4
TC
(Rs.)
25
30
FC
(Rs.)
20
20
20
20
VC
(Rs.)
5
MC
(Rs.)
10
AFC
(Rs.)
20
10
AVC
(Rs.)
5
5
30
12.5
What is the marginal cost of fourth unit?
(a)
(b)
(c)
(d)
(e)
Rs.10
Rs.15
Rs.20
Rs.25
Rs. 5.
(2 marks)
31.
If a monopolist is maximizing his profits, which of the following is a true?
(a)
(b)
(c)
(d)
(e)
He maximized his total revenue
He has set price equal to its average cost
He maximized the difference between marginal revenue and marginal cost
He equated marginal revenue and marginal cost
He equated marginal revenue and average cost.
(1 mark)
32.
In perfect competition, imposition of a lump sum tax in short run will result in upward shift of which
of the following curves?
I.
II.
III.
(a)
(b)
(c)
(d)
(e)
Average fixed cost.
Average variable cost.
Marginal cost.
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
Both (I) and (III) above.
(1 mark)
33.
The firm in a perfectly competitive market is a price taker. This is because
(a)
(b)
(c)
(d)
(e)
The firm has some, but not complete, control over its product price
There are large number of buyers and sellers in the market that any individual firm cannot affect the
market
Each firm produces a homogeneous product
There is easy entry or exit from the market
Of absence of transport cost.
(1 mark)
34.
Which of the following is/are not price floor(s)?
I.
II.
III.
Minimum wages.
Agricultural price supports.
Rent control.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
Both (I) and (III) above.
(1 mark)
35.
Which of the following is not true regarding the relationship between elasticity and tax burden?
(a)
(b)
(c)
(d)
(e)
If the demand curve is perfectly elastic, the price does not rise at all and the entire tax is borne
by the supplier
If the demand curve is perfectly inelastic, the price rises by the full amount of tax and the
supply remains unchanged. The customer bears the entire tax burden
If the supply is perfectly inelastic there will be no increase in the price or decrease in the
supply. The entire tax is borne by the suppliers
If the supply curve is perfectly elastic, the price rises by the full amount of tax
Given the demand schedule, greater the elasticity of supply for the product, the lesser will be
the tax burden borne by the buyers.
(1 mark)
36.
Which of the following is not true?
(a)
(b)
(c)
Indifference curve describes all the possible combinations of two goods which give equal satisfaction to
the consumer
Total utility is the sum of marginal utilities of all units of a good consumed
When price of a product increases, demand for its complement increases
(d)
Utility is a psychological concept and therefore cannot be precisely measured
(e)
Consumer surplus of a good and its economic value are different.
(1 mark)
37.
The horizontal demand curve for a firm is one of the characteristic features of
(a)
(b)
(c)
(d)
(e)
Oligopoly
Monopoly
Monopolistic competition
Perfect competition
Duopoly.
(1 mark)
38.
Which of the following is true in the third stage of the three stages of production process?
(a)
(b)
(c)
(d)
(e)
The total product curve has an increasing slope
The marginal product curve has a positive slope
The marginal product curve lies below the average product curve
Total product increases
Marginal product is positive.
(1 mark)
39.
The production function of RK oil refinery is Q = - 4K - 24K2 + 2K3. At what point of capital the
firm will yield diminishing returns?
(a)
(b)
(c)
(d)
(e)
1
2
3
4
5.
(2 marks)
40.
If the quantity supplied does not change at all when price changes the supply is said to be
(a)
(b)
(c)
(d)
(e)
Perfectly elastic
Perfectly inelastic
Unitary elastic
Relatively elastic
Relatively inelastic.
(1 mark)
41.
In a competitive market with the entry of new firms, the aggregate output expands and the short-run
industry supply curve shifts to right and intersects the market demand curve. At this price level all the
firms in the industry will make
(a)
(b)
(c)
(d)
(e)
Maximum profits
Minimum profits
Zero profit
Normal profits
Abnormal profits.
(1 mark)
42.
In a system of competitive markets the greatest net benefit will be squeezed from available resources
because the marginal benefit of each good equals its
(a)
(b)
(c)
(d)
(e)
Marginal cost
Marginal revenue
Total cost
Variable cost
Fixed cost.
(1 mark)
43.
Which of the following industries is an example of monopoly in India?
(a)
(b)
(c)
(d)
(e)
Telecom
Air transport
Indian railways
Soft drinks
Media.
(1 mark)
44.
Which of the following are decided by the central agency in a Cartel?
I.
Quantity to be produced.
II.
Price of the product.
III. Allocation of production among the members.
IV. Distribution of profits among the members.
(a)
(b)
(c)
(d)
(e)
Both (I) and (II) above
Both (III) and (IV) above
(I), (II) and (III) above
(I), (II) and (IV) above
All (I), (II), (III) and (IV) above.
(1 mark)
45.
The total cost of production for a firm to produce 100 units of product X is Rs.1,500 and to produce
150 units of product X is Rs.2,000. Assuming the average variable cost to be constant, average fixed
cost for the firm to produce product X is
(a)
(b)
(c)
(d)
(e)
Rs.20
Rs.10
Rs.30
Rs.40
Rs.50.
(2 marks)
46.
A school bag manufacturer sells 1,100 bags every month. He charges Rs.250 per bag. In order to
increase his sales, he reduces the price from Rs.250 to Rs.235. The elasticity of demand is 0.75. What
is the impact on revenue earned due to decrease in price?
(a)
(b)
(c)
(d)
(e)
Decrease by Rs.4,867.5
Increase by Rs.4,867.5
Decrease by Rs.4,587.5
Increase by Rs.4,587.5
No change.
(2 marks)
47.
The demand function for a firm is P = 30 – 3Q. If the average cost (AC) is Rs.6, what is the output at
which the firm earns normal profits?
(a)
(b)
(c)
(d)
(e)
12 units
10 units
14 units
11 units
8 units.
(2 marks)
48.
Which of the following represents the marginal rate of technical substitution (MRTS)?
(a)
(b)
(c)
(d)
(e)
Slope of the isocost line
Slope of the indifference curve
Slope of the isoquant
Slope of the budget line
Slope of the average cost curve.
(1 mark)
49.
Long run cost function of a firm is TC = Q3 – 40Q2 + 450Q.
What is the output when average cost is Rs.450?
(a)
(b)
(c)
(d)
(e)
20 units
60 units
10 units
40 units
30 units.
(2 marks)
50.
Average product of a variable input is
(a)
(b)
(c)
(d)
(e)
51.
The total product divided by the price of the product
The same as marginal product when marginal product is maximum
The total product divided by the amount of variable input used
The same as total product when marginal product is zero
The amount of additional output that can be produced by using one more unit of the variable input.
(1 mark)
In a pure oligopoly, a price war refers to
(a)
(b)
(c)
(d)
(e)
52.
Continuous price increases by firms to increase revenues and profits
Unexpected price cut by a firm to improve its sales volumes
A decrease in quantity supplied by the competitive firms to raise prices in order to maximize profits
Entry of a new firm in the industry who charges a lower price
Successive and continued price cuts by competitive firms with an aim to increase market share.
(1 mark)
The diagram below depicts the price leadership (by low cost firm) model of duopoly market, where
the two firms produce a homogeneous product at two different costs (MC1 is marginal cost curve of
first firm and MC2 that of the second one). If the second firm decides not to follow the leader than at
what point its profit will be maximized?
MC2
M C1
E
P2*
B
P1= P2
A
P
r
i
c
e
C
D
AR1=AR2
MR1 = M R2
O
Q2* Q1= Q2
Output
(a)
(b)
(c)
(d)
(e)
A
B
C
D
E.
(1 mark)
53.
In the short run the demand curve of a firm operating in a monopolistic market structure is
– 15Q. The marginal cost is constant at Rs.20. What will be the profit maximizing price?
(a)
(b)
(c)
(d)
(e)
P = 440
Rs.210
Rs.230
Rs.240
Rs.260
Rs.280.
(2 marks)
54.
Marginal Value Product is equal to
(a)
(b)
(c)
(d)
(e)
Marginal Physical Product × Price
Marginal Revenue Product × Price
Marginal Physical Product / Price
Marginal Revenue Product / Price
Average Revenue product × Price.
(1 mark)
55.
The marginal productivity theory of factor pricing is developed to explain which of the following
points?
I.
Reward of each factor unit is equal to its marginal productivity.
II.
Reward for each factor of production will be the same in every use.
III. In the long run, under perfect competition, each factor of production will get its remuneration
that will be equal to MRP which is also equal to it’s ARP.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
All (I), (II) and (III) above.
(1 mark)
56.
A product priced at Rs.500 has price elasticity of demand equal to 5. What is the marginal revenue?
(a)
(b)
(c)
(d)
(e)
Rs.100
Rs.200
Rs.300
Rs.400
Rs.500.
(2 marks)
57.
Which of the following shows the different input points required to produce the same level of output?
(a)
(b)
(c)
(d)
(e)
Isocost line
Isoquant
Production possibility curve
Indifference curve
Demand curve.
(1 mark)
58.
What is the shape of normal demand curve?
(a)
(b)
(c)
(d)
(e)
Upward sloping straight line
Downward sloping straight line
Vertical straight line
Horizontal straight line
U – shaped.
(1 mark)
59.
Which of the following is not a pecuniary economies of scale?
(a)
(b)
(c)
(d)
(e)
Reduction in raw material price bought in by a huge quantity at a discounted rate
A huge capital borrowing availed at a least rate
Use of reserve capacity to avoid disruption due to machine breakdown
Lower advertising rate availed by a large firm by advertising on a large scale
Reduction in unit transport cost due to large volume.
(1 mark)
60.
Which among the following causes the indifference curves to be convex to the origin?
(a)
(b)
(c)
(d)
(e)
Diminishing marginal rate of substitution
Increasing marginal rate of substitution
Constant marginal rate of substitution
Increasing marginal rate of technical substitution
Constant marginal rate of technical substitution.
(1 mark)
61.
The highly elastic demand curve of the firm in a monopolistically competitive market indicates that
the products are
(a)
(b)
(c)
(d)
(e)
Homogeneous
Differentiated and close substitutes
Differentiated but not close substitutes of each other
Differentiated and perfect substitutes
Heterogeneous and perfect substitutes.
(1 mark)
62.
The supply of land is
(a)
(b)
(c)
(d)
(e)
Perfectly elastic
Relatively elastic
Unitary elastic
Perfectly inelastic
Relatively inelastic.
(1 mark)
63.
The wages which are paid depending on the quantity of output produced are known as
(a)
(b)
(c)
(d)
(e)
Service wages
Task wages
Time wages
Piece wages
Kind wages.
(1 mark)
64.
According to the Modern theory of Factor Pricing, changes in demand for a factor of production is
due to which of the following?
I.
II.
III.
(a)
(b)
(c)
(d)
(e)
Change in the demand for the final product produced using the factors of production.
Change in the productivity in terms of quality or quantity being produced.
Change in the price of the substitute or complementary factors used in the
production
process.
Both (I) and (II) above
Both (I) and (III) above
Both (II) and (III) above
Only (III) above
All (I), (II) and (III) above.
(1 mark)
65.
Output &
Sales
(Rs. in thousands)
Marginal
Average total
Revenue/Price
cost
1
20
68.00
2
20
37.00
3
20
26.00
4
20
20.76
5
20
17.80
6
20
17.60
7
20
15.72
8
20
16.24
9
20
18.00
10
20
21.00
The above table shows the marginal approach of profit calculation in a perfectly competitive market.
What is the total profit at 6th unit of output?
(a)
Rs.14.4 thousand
(b)
Rs.13.2 thousand
(c)
Rs.15.6 thousand
(d)
Rs.16.4 thousand
(e)
Rs.17.6 thousand.
(1 mark)
66.
Which of the following is the correct sequence of steps involved in evaluating the feasibility of
different projects?
(a)
(b)
(c)
(d)
(e)
67.
Listing investment proposals, projecting cash flows and selecting method of evaluation
Projecting cash flows, selecting method of evaluation and listing investment proposals
Selecting method of evaluation, projecting cash flows and listing investment proposals
Listing investment proposals, selecting method of evaluation and projecting cash flows
Selecting method of evaluation, listing investment proposals and projecting cash flows.
(1 mark)
If the average product of labor (APL) is 60L – L2, the maximum possible total product (TPL) is
(a)
(b)
(c)
(d)
(e)
32,000 units
24,000 units
42,000 units
52,000 units
34,000 units.
(2 marks)
68.
The intersection of the marginal cost curve and the average cost curve characterizes the point of
(a)
(b)
(c)
(d)
(e)
Maximum profit
Minimum average cost
Minimum marginal cost
Minimum opportunity cost
Minimum profit.
(1 mark)
69.
Diseconomies of scale refer to
(a)
(b)
(c)
(d)
(e)
70.
The forces which reduce the average cost of producing a good as the firm expands the size of its plant
The forces which reduce the marginal cost of producing a good as the firm expands the size of its plant
The forces which increase the average cost of producing a good as the firm expands the size of its plant
The forces which increase the marginal cost of producing a good as the firm expands the size of its plant
The forces which keep the average cost of producing a good constant as the firm expands the size of its
plant.
(1 mark)
A consumer is willing to buy 1,000 units of a product at a price of Rs.25 per unit. If the current price
of the product is Rs.20, the consumer surplus is
(a)
(b)
(c)
(d)
(e)
Rs.3,000
Rs.3,500
Rs.4,000
Rs.4,500
Rs.5,000.
(2 marks)
71.
According to classical theory the difference between market rate of interest with real rate of interest is
(a)
(b)
(c)
(d)
(e)
Demand for capital
Supply of capital
Price level
Savings
Investments.
(1 mark)
72.
According to Keynesian liquidity preference theory of interest, the transaction motive of people
depends upon which of the following factor(s)?
I.
II.
III.
(a)
(b)
(c)
(d)
(e)
Income earned by the individual.
Time period between the successive receipts of income.
Spending habits of the people.
Only (I) above
Only (II) above
Both (I) and (II) above
Both (I) and (III) above
All (I), (II) and (III) above.
(1 mark)
73.
At liquidity trap, the shape of liquidity preference curve is
(a)
(b)
(c)
(d)
(e)
Vertical Straight line
Horizontal Straight line
U Shaped
Downward Sloping Straight line
Upward Sloping Straight line.
(1 mark)
74.
According to the liquidity preference theory of interest of Keynes, the aggregate demand for liquidity
is a function of
I.
II.
III.
Level of income.
Rate of interest.
Price level.
(a)
(b)
(c)
(d)
(e)
Only (I) above
Only (II) above
Only (III) above
Both (I) and (II) above
Both (II) and (III) above.
(1 mark)
75.
Refer to the diagram below:
W
A W1
G
E
W
R
A
T W2
E
P1
AW1 = M W1
P N
AW = M W
P2
M
C1
AW1 = M W1
MRP
ARP
C C2
LABOURS EMPLOYED
The above diagram depicts determination of wages for labour in the long run as per the marginal
productivity theory. In this diagram which point shows the equilibrium for a firm in the long run?
(a)
P1
(b)
P
N
(c)
(d)
M
(e)
P2.
(1 mark)
76.
According to the Walker’s rent theory of profit, the profit of an entrepreneur is “rent” for his
(a)
(b)
(c)
(d)
(e)
Efforts
Ability
Hard work
Planning
Investment.
(1 mark)
77.
Which of the following is not a Modern theory of profit?
(a)
(b)
(c)
(d)
(e)
Clark’s dynamic theory of profit
Schumpeter’s innovation theory of profit
Walker’s rent theory of profit
Knight’s uncertainty theory of profit
Hawley’s risk theory of profit.
(1 mark)
78.
The Classical theory of interest, propounded by Marshall and Fisher is known as
I.
II.
III.
(a)
(b)
(c)
(d)
(e)
Saving-investment theory.
Demand and supply of capital theory of interest.
Real theory of interest.
Only (I) above
Only (II) above
Both (I) and (II) above
Both (I) and (III) above
All (I), (II) and (III) above.
(1 mark)
Suggested Answers
Economics-I (MB141): January 2007
1.
Answer : (a)
Reason : Price plays a major role in the market economy. In the market economy scarce resource are allocated to best
use through price mechanism.
In a command economy prices are controlled by Government. So prices have no role in command economy.
In a mixed economy also price have a very minimal role, here also Government controls price fluctuations.
2.
Answer : (d)
Reason : The techniques used for demand forecasting are divided into two – Quantitative and Qualitative. Qualitative
techniques includes expert opinion, market experiment and survey while Quantitative measures includes time
series analysis and barometric methods. Hence from the given option time series analysis is not a qualitative
technique.
3.
Answer : (a)
Reason : The budget constraint implies that the total income spent on consumpation of the products in question must
be less than or equal to the money income available for consumption. In the given case it is represented as
4.
Income for consumption ≥ price of X × quantity of X + price of Y × quantity of Y.
Answer : (b)
Reason : The demand function of the firm is given as
P = 500 – 8Q
TR = P x Q
= (500 – 8Q)Q
=500Q – 8Q2
∴ MR = 500 – 16Q
A firm maximizes its profits when MR = MC
So 500 – 16Q = 9Q
Or 25Q = 500
Q =20
∴ Price =500 – 8(20)
= 500 – 160 = Rs.340.
5.
Answer : (d)
Reason : The average variable cost is obtained by dividing the total variable cost by Q.
Here total variable cost = 40Q – 2.8Q2 + 0.2Q3( Just removing fixed cost(4000) from TC)
40Q - 2.8Q 2 + 0.2Q3
Q
∴ AVC =
= 40 – 2.8Q + 0.2Q2
Average variable cost is minimum, when it is equal to Marginal cost.
∂TC
∂Q
MC =
= 40 – 5.6Q + 0.6Q2
Now equating MC and AVC we get
40 – 5.6Q + 0.6Q2 =40 – 2.8Q + 0.2Q2
= – 5.6Q + 0.6Q2 = – 2.8Q + 0.2Q2
= – 2.8Q + 0.4Q2 = 0
= Q(– 2.8 + 0.4Q) = 0
= Q = 0 and – 2.8 + 0.4Q = 0
2.8
=7
Q = 0.4
Since quantity cannot be zero Q= 7 units
6.
Answer : (a)
Reason :
Price elasticity(Ep) =
q p
×
p q
Here q = 1000 – 1200 = -200
p = 305 – 280 = 25
p=280 q= 1200
−200 280
×
Ep = 25 1200
= - 8 × 0.233 = - 1.86
7.
Answer : (d)
Reason : Statement (I) is not true because an isoquant is always downward sloping which implies that if one factor of
production is used more, the other is used less for the same level of production.
Statement (II) is not true because an higher isoquant represents higher output.
Statement (III) is true because no two isoquants intersect or touch each other. If two isoquants touch or
intersect each other, it means that there is a common point on two curves and for one set two inputs two levels
of outputs are possible, which is quite unrealistic.
Statement (IV) is true. Convexity of isoquants implies that as we move down the curve, smaller units of one
input are required for substituting a given increment of other input to keep the output level constant.
8.
Answer : (d)
Reason : Sunk costs are those costs which are incurred in past or to be incurred in future as a result of a contractual
agreement.
(a) Is a sunk cost because it is paid in advance.
(b) Is also a sunk cost
(c) Is a sunk cost
(d) Is not a sunk cost as it not according to any contract.
(e) Is a sunk cost.
9.
Answer : (a)
Reason : Quantity required break even (Qx) = fixed cost / P – AVC
= 4,97,200/650 – 85
= 4,97,200/565 = 880
= 880 units.
Total revenue at the toy manufacturer break even is equal to the price of the product multiplied by break even
quantity
= 880 × 650 = Rs. 5,72,000
10.
Answer : (b)
Reason : To operate efficiently, MPK/w = MPL /r.
MPL = ∂TPL / ∂Q = 2 and
MPK = ∂TPK/∂Q =1.Thus MPl /w = 2/100 = 0.02 and
MPK/r = 1/100 = 0.01.
As MPL/w >MPK/r, the firm produces cost minimizing output by using labor input only.
11.
Answer : (e)
Reason : Output will be maximum when dq/dl = 0
Here Q = 24L2- L3
dq/dl = 48L – 3L2
= L (48 – 3L) = 0
L = 0 or L = 16
Labour cannot be zero, hence the output can be maximized if 16 units of labour is employed.
12.
Answer : (d)
Reason :
13.
TC =
AC =
=
=
500 – 2Q + 3Q2
500/Q – 2 + 3Q
500/5 – 2 + 15
Rs.113.
Answer : (d)
Reason :
q nf p f
×
p f q nf
The cross price elasticity =
Change in quantity of non foam based cream = 35 – 20 =15
Change in price of foam based cream = 250 – 200 =50
Pf = 200
qnf = 20
15 200
×
=3
cross price elasticity = 50 20
.
14.
Answer : (c)
Reason : If X and Y are products and MU and P represents marginal utility and price respectively, consumer reaches
an equilibrium where MUx/Px = MUy/Py
So 520/Px = 650/75
520 ×
75
= 60
650
Px =
Px = Rs. 60.
15.
Answer : (c)
Reason : I.
II.
Is true. Consumer surplus is useful to the government to fix taxes. It is useful to fix taxes since the rich
or the upper class people have more consumer surplus compared to the rest. Consumer surplus also
reveals the purchasing pattern of the economy. By observing the nature of the products moving in the
market, the government can fix the taxes through the classification of products.
Is true. Consumer surplus helps the monopolists in fixing price of a commodity.
While pricing a commodity, if a monopolist considers consumer surplus, he can retain the customer for a
longer period.
III.
Is not true. In case of imported products which are cheaper than domestic products the consumer surplus
is more. This is because he is paying less for the imported product which is giving him the same level of
satisfaction.
IV.
Is true. A higher consumer surplus indicates that the economy is stable and vise versa. A negative
consumer surplus indicates that the economy is not functioning efficiently.
16.
Answer : (d)
Reason : When marginal product is maximum the total product will increase at a decreasing rate.
17.
Answer : (b)
Reason : On a straight-line demand curve elasticity of demand at any point is equal to lower segment of the demand
curve / upper segment.
Option (a) is incorrect as elasticity of demand at midpoint is equal to one.
Option (b) is correct as elasticity of demand falls as we move down the demand curve.
Option (c), (d) and (e) are incorrect as elasticity of demand falls as we move down the demand curve.
18.
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.
19.
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.
20.
Answer : (b)
Reason : Break Even Point in perfect competition is at when AR = AC.
21.
Answer : (a)
Reason : The marginal cost of producing 100 additional units is 3,80,000 – 1,50,000 = 2,30,000
Per unit marginal cost = 2,30,000/100 = Rs.2,300
22.
Answer : (c)
Reason : The income effect refers to the effect of a change in the price of a product on the consumer’s purchasing
power. If the price of a product decreases, the consumer is left with some money that can be used for
purchasing additional units of the same product or a different product. This means that his real income has
increased. The income effect rule says that a decrease in price of a commodity leads to an increase in quantity
demanded.
23.
Answer : (b)
Reason : A consumer with a given income will obtain maximum utility when the marginal utility of each commodity is
in the same ratio to its price. Suppose there are two products x and y. MUx represents the marginal utility of x
and MUy that of product y. Now if the value of MUx/Px is more than MUy/Py, the consumer will substitute
product x for product , this substitution will continue till the marginal utility of both the product in ratio to
their respective prices are equal.
24.
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
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.
25.
Answer : (d)
Reason : Total product of labor (TPL) = APL x units of labor (L).
When
L=
10,
L = 11,
TPL = 20 x 10 = 200
TPL = 19 x 11 = 209.
∴ MPL = 209 – 200
26.
Answer : (e)
Reason :
27.
= 9 units.
TC =
MC =
If Q =
500 – 2Q + 3Q2
–2 + 6Q
10, MC = –2 + 60 = Rs.58
Answer : (d)
Reason :
AVC
=
∆TC
500
=
∆Q
50 = 10
TVC where Q = 100 is 10 × 100 = Rs.1,000
FC
=
=
28.
TC – TVC
1500 – 1000 = Rs.500
Answer : (b)
Reason : Demand function of the firm is given as Q = 75 – P
P = 75 – Q
TR = P × Q
= 75Q – Q2
MR = 75 – 2Q
TC = 25Q
MC = 25
Profit maximizing output is obtained when MR = MC
= 75 - 2Q = 25
2Q = 50
Q = 25
P = 75 – Q
= 75- 25 = 50
Profit = TR – TC
TR = P × Q
= 50 × 25 = 1250
TC = 25Q
= 25 × 25 = 625
∴ profit = 1250 – 625 =Rs.625.
29.
Answer : (e)
Reason : For a monopolist, there is no unique relationship between price and quantity supplied. Therefore, the supply
curve of a monopolist is irrelevant.
(a) Is not the answer because the supply curve of a perfectly competitive firm is the portion of its marginal
cost curve that lies above the average variable costs.
(b) Is not the answer because the supply curve of a monopolist is not the portion of its marginal-cost curve
that lies above the average cost curve.
(c) Is not the answer because the supply curve of a monopolist is not vertical.
(d) Is not the answer because the supply curve of a monopolist is not horizontal.
(e) Is the answer because a monopolist has no supply curve.
30.
Answer : (c)
Reason : Marginal cost of fourth unit = TC of fourth unit – TC of Third unit.
TC = FC + VC
FC = 20
VC of third unit = 30
So TC of third unit = 50 (30+20)
FC of fourth unit = 20
VC of fourth unit = AVC of fourth unit x four (number of units)
= 12.5 x 4 = 50
TC = 20 + 50 = 70
MC of fourth unit = 70 – 50 = Rs.20.
31.
Answer : (d)
Reason : Choosing an output where MC equals MR ensures the monopolist maximizes profit. Hence to maximize
profits the monopolists equates the marginal cost with marginal revenue.
32.
Answer : (a)
Reason : The effect of a lump sum tax is similar to that of an increase in the fixed cost, since a lump sum is to be paid
as fixed cost by the firm. The imposition of lump sum tax will result in an upward shift of the average fixed
cost. There will not be any effect on the AVC and MC since a lump sum is like a fixed cost to the firm.
33.
Answer : (b)
Reason : A firm is considered a price taker where there are so many buyers and sellers in the market that any
individual firm cannot affect the market.
34.
Answer : (c)
Reason : Price floor refers to a minimum price established by the law. The two commonly used price floors are
minimum wages and agricultural price supports. Minimum wages prohibits employers from paying less than a
certain stipulated wage. Agricultural price supports guarantee farmers a minimum price for their crops. Price
ceiling is something opposite to price floor. Rent control is a type of price ceiling that the government
authorities sometimes use for rented housing. Rent control can prevent housing market from reaching
equilibrium in case when the rents are set below the market equilibrium rents. Typically rent control limits
increase in monthly rental rate or establishes rules that are then used to determine the fair monthly rents for
housing. Hence rent control is not a price floor. So (c) is the correct answer.
35.
Answer : (e)
Reason : Options (a) (b) (c) and (d) are true option (e) is not true because given the demand schedule, greater the
elasticity of supply for the product, the greater will be the tax burden borne by the buyers. Whenever the
elasticity of supply is greater and the elasticity of demand is less the tax burden borne by the buyers will be
high.
36.
Answer : (c)
Reason : (a) True. Indifference curve is various combinations of two goods which give the same level of total utility
(b) True. Total utility is the sum of marginal utilities of all the goods consumed.
(c) False. When price of a product increases demand for the product decreases. As complimentary goods
are consumed together, demand for the compliment also decreases.
(d) True. Utility is subjective and varies from individual to individual and from time to time for the same
individual, hence cannot be measured precisely.
(e)
True. Consumer surplus is the difference between what the consumer is willing to pay and what he
actually pays. Economic value is the market value of a good.
37.
Answer : (d)
Reason : Perfect competition is a form of market structure which represents a market without rivalry among the
individual firms. When the product is similar and identical, given all other conditions, a perfectly competitive
firm can only be a price taker. The price of the good is determined by the market forces. The demand curve is
horizontal to x-axis implying that the producers can produce as much as quantity of output to the given level
of price.
a.
Oligopoly is a form of market structure where there are few sellers. The demand curve is indeterminable
because of the interdependence between the firms and it depends on the reaction curves of the
competitor.
b.
Monopoly is a form of market structure where there is only one producer of the good. The demand
curve is downward sloping implying that the producer is a price-maker. The distinguishing feature of this
form of market structure is that the average costs of production continually decline with increased output
as a result of which average costs of production will be lowest when a single large firm produces the
entire output demanded.
c.
Monopolistic competition is a market structure where there are many firms selling closely related but
non-identical goods. The demand curve is downward sloping because of product differentiation.
d.
The demand curve in the perfect competition is horizontal to x-axis implying that producer can produce
as much as the quantity of output for a given level of price.
e.
The demand curve of a duopolist is indeterminate because of high degree of interdependence between
the firms.
Hence, the correct answer is (d).
38.
Answer : (c)
Reason : In the third stage of the production function Marginal Productivity (MP) is negative and decreasing.
a.
False. As MP is negative, slope of the total product curve is negative and decreasing.
b.
False. Slope of the MP curve is negative as MP decreasing.
c.
True. In the first stage MP>AP. In the second stage MP<AP, but MP>0. In the third stage MP<AP and
MP<0.
d.
False. As MP<0, total productivity decreases in the third stage.
e.
False. MP is negative in the third stage.
Answer : (d)
Reason : A firm will yield diminishing returns when Marginal product is maximum.
39.
MPk = - 4 - 48K + 6K2
∂MPk
=
∂K
-48 + 12K = 0
K = 48/12 = 4
∴ When the capital is 4 the firm starts yielding diminishing returns.
40.
Answer : (b)
Reason : When there is no change in the quantity supplied even though the price changes the supply is said to be
perfectly inelastic. This situation is also called as zero elasticity of supply. At this situation the supply curve
will be a vertical straight line.
41.
Answer : (c)
Reason : In short run in a perfectly competitive market there is a tendency for the existing firms to earn abnormal
profits. This will attract other firms to enter the industry. With the entry of new firms aggregate output would
expand and the short run supply curve will shift to right until it intersects the market demand curve. At this
level of price all the firms will make zero profits in the long run.
42.
Answer : (a)
Reason : In a system of competitive markets the greatest net benefit will be squeezed from available resources because
the marginal benefit of each good equals its marginal cost which is also equal to the minimum possible
average cost. The system will economize on resource use because each good will be produced at the minimum
possible unit cost.
43.
Answer : (c)
Reason : Indian railways is pure monopoly of the central government of India. No other governmental or non
governmental organization in India can provide this service.
44.
Answer : (e)
Reason : The firms after forming a cartel appoints a central agency. The central agency is delegated the authority to
decide:
I.
Total quantity of the product to be produced.
II.
Price of the product.
III. Allocation of production among the members of the cartel.
IV. Distribution of the maximum joint profits among the members.
Hence option (e) is the correct answer.
45.
Answer : (b)
Reason :
AVC
=
∆TC
500
=
∆Q
50 = 10
TVC where Q = 100 is 10 × 100 = 1000
FC =
=
TC – TVC
1500 – 1000
=
500
Average fixed cost = Total Fixed cost / Number of output = 500/50 = Rs.10.
46.
Answer : (a)
Reason : Price Elasticity (Ep) =
Here P = 250
Q =1100
∂Q P
×
∂P Q
∂P = 250 – 235 = 15
Ep = 0.75
∂Q = x
Submitting the values we get
x 250
×
15 1100
0.75 × 15 × 1100
x=
250
x = 49.5
As the price has decreased, the change in the quantity demanded is 49.5. So the new quantity is 1100 + 49.5 =
1149.5
Total revenue before price reduction = 1100 x 250 = 275000
0.75 =
And revenue after price reduction = 1149.5 x 235 = 270132.5
∴ the reduction in price has resulted in the decline of revenue by Rs. 4,867.5
47.
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.
48.
Answer : (c)
Reason : The slope of the isoquant represents the Marginal Rate of Technical Substitution (MRTS) between labor (L)
and capital (K). MRTS is equal to the ratio of the marginal productivities of two factors.
a.
The slope of the isocost curve represents ratio of wages (w) and interest (r).
b.
The slope of the indifference curve signifies marginal rate of substitution of goods (MRS).
c.
The slope of the isoquant curve signifies the marginal rate of technical substitution (MRTS) between
labor and capital.
d.
The slope of the budget line represents ratio of price of good X and good Y.
e.
The slope of the average cost curve only shows the rate of change in average cost curve with respect
change in output.
49.
Answer : (d)
Reason : AC = TC / Q
= Q2 – 40Q + 450
= 450 = Q2 – 40Q + 450
= Q2 – 40Q + 450 – 450 = 0
= Q2 – 40Q = 0
= Q2 = 40Q
= Q = 40 units.
50.
Answer : (c)
Reason : Average productivity =
51.
Total productivity
No.of units of the input used
Answer : (e)
Reason : In an oligopoly, a price war refers to successive and continued price cuts by the competitive firms to increase
sales and revenues. A price war aims at increasing market share, but not profits.
(a) Is not the answer because a price war doesn’t mean a continuous price cuts by firms to increase
revenues and profits.
(b) Is not the answer because a price war doesn’t mean an unexpected price cut by a firm to improve its
sales volumes
(c) Is not the answer because a price war doesn’t mean a decrease in quantity supplied by the competitive
firms to raise prices in order to maximize profits.
(d) Is not the answer because a price war doesn’t mean an entry of a new firm in the industry who charges
a lower price
(e) Is the answer because a price war means a successive and continued price cuts by competitive firms
with an aim to increase market share.
52.
Answer : (a)
Reason : In Price leadership by a low cost firm the follower has to follow the price at which the low cost firm is
selling its output. In the given case the first firm is the low cost firm whose MC curve lies below the MC
curve of the second firm. The first firm’s MR is equal to its MC at point E1 where it sells Q1 units of output
and sets a price P1. The second firm if it follows the leader will also charge the same price. At this point it
cannot maximize its profits. If at all it decides to maximize its profit it has sell it output at price where his MC
= MR. That is the firm will get maximum profit at point A.
53.
Answer : (b)
Reason : In monopolistic competition the profit maximizing price is obtained by equating MC and MR.
MC = 20
TR = P x Q
= (440 – 15 Q) Q
= 440Q – 15Q2
MR = 440 – 30Q
MR = MC
= 440 – 30Q = 20
Q = 420/30
= 14.
Profit maximizing price = 440 – 210 = Rs.230
54.
Answer : (a)
Reason : Marginal Value Product is the monetary representation of Marginal Physical Product, so, MVP = MPP
price
55.
Answer : (e)
Reason : The marginal productivity theory of factoring pricing explains all the three points
I.
The theory states that the producer being rational tries to maximize profits or minimize losses in the
process of production. Since cost of production according to the producer also includes factor payments,
in order to maximize profits or minimize losses the producer compares the price of a factor with its
productivity.
II.
The theory also states that the remuneration paid for each factor of production is will be same in every
use. This is based on the assumption that all factors of production are perfect substitutes of each other. If
not so, then the various factor of production are substituted for each until their marginal products are
equal.
III. The producer, in the short run, will be in an equilibrium position as long as the average revenue and
marginal revenue of a factor of production are equal. In the long run equilibrium position for utilization
of factors of production can be maintained, only if the marginal revenue productivity, average revenue
productivity and the rate of reward for the factor of production are equal.
So (e) is the correct answer.
56.
Answer : (d)
 1 
AR 1 − 
 e p 
Reason : MR =
 1
500 1 − 
 5  since AR = price
∴ MR =
= 500 ( 4/5)
= 400.
57.
Answer : (b)
Reason : An isoquant is represents the combinations of inputs that can produce same level of output. So the correct
answer is (b).
58.
Answer : (b)
Reason : The demand curve slopes down from left to right.
59.
Answer : (c)
Reason : Pecuniary economies of scales are those economies which a firm accrue due to discounts it can obtain for its
large scale operations.
Using reserve capacity is a technical economy. Hence it is not a pecuniary economy of scale.
60.
Answer : (a)
Reason : The indifference curve are convex to the origin. It follows from the assumption that the marginal rate of
substitution of X for Y (MRSxy) diminishes as more and more of X is substituted for Y. Only a convex
indifference curve can mean a diminishing marginal rate of substitution of X for Y.
61.
Answer : (b)
Reason : In a monopolistic market, the products are differentiated, but they are close substitutes of each other.
62.
Answer : (d)
Reason : Land being a natural product, it cannot be reproduced by human beings
So its supply is permanently fixed. In terms of elasticity it is perfectly inelastic as an increase in price will not
result in increase in supply of land.
So (d) is the correct answer.
63.
Answer : (d)
Reason : Service wages are the wages which are paid through a return service for the service rendered so option (a) is
not the correct answer
Task wages are the wages paid when a task is accomplished. So option (b) is not the correct answer
Time wages are the wages paid on the basis of number of hours worked. . So option (c) is not the correct
answer
Piece wages are the wages paid depending on the quantity of output produced. So option (d) is the correct
answer.
Kind wages are the wages paid in terms of goods. So option (e) is not the correct answer.
64.
Answer : (e)
Reason : I.
Is applicable because as the demand for particular product increase subsequently its production has to
be increased and in order to increase the production more and more factors of production are employed.
II.
Is also applicable because change in productivity of a factor of production may lead to change in the
demand for that factor for example if firm need to produce 5000 units of a particular product in a
specified time and the labor available with it has less productivity then the firm has to employ some
more labor.
III. Is also applicable because change in the price of the substitute or complementary factors used in the
production process may lead to change in the demand for factor of production of production. For
example, demand for labor and machine are interrelated and firms may utilize more or less of one of
them, if the relative price of either of the factors of production increase against each other.
65.
Answer : (a)
Reason : In a perfectly competitive market a firm is price taker hence it’s MR will be equal to it’ AR and price. Total
profit = TR – TC
Here TR = 20 x 6 = 120
TC = 17.6 x 6 = 105.6
Total profit of 6th unit is = 120 – 105.6 = 14.4.
66.
Answer : (a)
Reason : To evaluate the feasibility of different projects, the company has to first list out the various investment
proposals. After listing the various investment proposals the company is required to forecast the cash flows of
the projects. This is a very crucial step in evaluating a project because a wrong forecast will result in huge
losses. The step in evaluating the feasibility is selecting the method of evaluation. Different companies use
different methods of evaluation.
67.
Answer : (a)
Reason : APL= 60L – L2
TPL = APL × L = 60L2 – L3
TPL can be maximized when MPL = 0
Therefore, ∂ TPL / ∂ L = 120L – 3L2 = 0
L (120 – 3L) = 0
L =0 or L = 40.
Since labour cannot be zero L = 40
∴Output can be maximized by employing 40 labors.
∴ Maximum possible TPL = 60(40)2 – (40)3 = 96,000 – 64,000 = 32,000 units
68.
Answer : (b)
Reason : (a) Profit will be maximum when the MC is equal to MR and the slope of MC curve > slope of MR curve
(b) As long as MC>AC, AC is increasing and as long as MC<AC, AC is decreasing. Therefore, when 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
(e) Profit will be minimum when the MC is equal to MR and the slope of MC curve < slope of MR curve
69.
Answer : (c)
Reason : Diseconomies of scale refer to the forces causing the average cost of production to increase as the output
increases. Therefore the answer is (c).
70.
Answer : (e)
Reason : Consumer surplus is the amount of money actually paid by the consumer and the amount of money he is
willing to pay rather than go without it.
Consumer surplus = (1000×25) – (1000 × 20) = Rs.5,000
71.
Answer : (c)
Reason : The market rate of interest is the rate that is prevalent in the market at a given point of time in money terms.
The real rate of interest shows the purchasing power of the capital. It changes with change in price level.
So option (c) is the correct answer.
72.
Answer : (e)
Reason : I.
A rich man’s demand for cash for economic transactions is higher than a poor man’s demand for cash
for economic transactions. Thus the transaction motive differs with the income earned by the individual.
II.
If a person is paid daily wages, then his demand for cash for daily transactions will be lower than the
person who receives income once in a month. Hence the time period between the successive receipts of
income also influences the transaction motive.
III. The economic transactions of various economic agents will be different. Few people spend lavishly and
few thrifty people spend very carefully. Therefore spending habits of the people also affect the
transaction motive.
So option (e) is the correct answer.
73.
Answer : (b)
Reason : At liquidity trap the interest rate remains same even if there is a increase in money supply. According to
Keynes the interest rate cannot be zero or negative, hence at liquidity trap the downward sloping liquidity
preference curve takes the shape of a horizontal straight line
74.
Answer : (d)
Reason : According to Keynes there are three motives for demand for liquidity viz.
Transaction, Precautionary and Speculative. Out of these the first two depends upon the level of income and
the Speculative motive depends upon interest. Hence the aggregate demand for liquidity is a function of level
of income and rate of interest. In the whole theory there is no mention of price level.
Hence option (d) is the correct answer
75.
Answer : (b)
Reason : The firm will be in equilibrium when the wage rate, average revenue product and marginal revenue product
average wage and marginal wage are equal. In the given diagram this condition is satisfied at point P.
76.
Answer : (b)
Reason : According to Walker an entrepreneur earns profit because of his greater ability to run the business when
compared to other entrepreneur. Hence he defined profit as the “rent of ability” of an entrepreneur.
Hence option (b) is the correct answer
77.
Answer : (c)
Reason : The modern theories of profit includes Clark’s dynamic theory of profit, Schumpeter’s innovation theory of
profit, Knight’s uncertainty theory of profit and Hawley’s risk theory of profit. Where as Walker’s rent theory
of profit comes under traditional theory of profit.
Hence option (c) is the correct answer
78.
Answer : (e)
Reason : As the theory tries to explain how interest is determined based on ‘real factors’ like investment and savings.
This theory is called as real theory and also saving-investment theory. Moreover this theory holds that the
determination of the rate of interest can be done when the forces of demand for capital meet the forces of
supply of capital. Hence this theory is also called as demand and supply of capital theory of interest.
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