Theory of Production, Costs and Revenue – CS Foundation Economics Notes

Theory of Production, Costs and Revenue – CS Foundation Economics Notes

1. Production
An economic term is to describe the inputs that are used in the production of goods or services in an attempt to make an economic profit. Things that are brought by producers for production are called input and the final goods or services are called production. The demand for a factor of production is a derived demand, meaning that the firm’s demand for a factor of production is derived from its decision to supply goods in another market. Factors of production – The term factors of production relates to the key factors that go into making goods. The resources that are required for production can be divided into four major groups.

  • Land
  • Capital
  • Labour
  • Entrepreneurship

Land – It is a natural resource that can not be created. It includes the resources that are above ground (climate, rain, etc.), resources that are below the ground (mineral resources, etc.), and resources on the ground (agricultural land, etc.). It is a primary but passive factor in production. It is primary in nature because production can not begin unless this resource is present but passive because it is dependent on other factors of production.
The characteristic feature of land are that

  • it has no social cost as we did not create it we got it free
  • the land is perfectly inelastic and is immobile

Capital-It is like a backbone for production. It includes machines, tools, etc. It is income, assets, money, everything that helps in the creation of input. It is a manufacturing resource. Land and labor are combined with manufactured resources in order to produce the things that we desire. These manufactured resources are called capital.
Certain features of capital are that

  • it is perfectly elastic
  • mobile and unlike labor, it can be increased as well as stored.

Labour – In order to produce the things we desire, a human resource must be used. That human resource consists of the productive contributions of labor made by individuals who work—for example, steelworkers, ballet dancers, etc. It is only human activity that is included thus the work performed by machines or animals is not included. Certain features of labor are that

  • it is inelastic, cannot be increased beyond its availability.
  • It is a mobile and active factor and can not be stored.

Entrepreneurship – There is, in effect, the fourth type of input used in production. It is a special type of human resource; it consists of entrepreneurial ability or entrepreneurship. Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business. He is the person who uses all the other uses to make the production of goods are reality.

2. Theory of production
In economics, an effort to explain the principles by which a business firm decides how much of each commodity that it sells (its “outputs” or “products”) it will produce, and how much of each kind of labor, raw material, fixed capital good, etc., that it employs (its “inputs” or “factors of production”) it will use. The theory involves some of the most fundamental principles of economics. These include the relationship between the prices of commodities and the prices of the productive factors used to produce them. It determines how the producer Production function – The production function relates the output of a firm to the number of inputs, typically capital and labor. It is important to keep in mind that the production function describes the technology, not economic behavior. It states how the desired output can be produced with the minimum input. There are two types of the production function
Y = F (K, L)
Y is the maximal amount of output that is possible to produce given the quantities of the inputs, capital, K, and labor, L. There are two types of the production function
(1) Short-run production function
(2) Long-run production function
1. Short run production function – in this capital input is fixed thus we are required to consider the change of labor.
Thus Y= F (K,L) only L will change
2. Long run production function – in this quantity of all the variables can be changed
Thus Y= F (K,L) K, L both can be changed.
There are two alternative theories for these production functions.

  • – Law of Diminishing Returns
  • – Law of Returns to scale Law of diminishing return
    The law of diminishing returns is a classic economic concept that states that as more investment in an area is made, overall return on that investment increases at a declining rate, assuming that all variables remain fixed. Features of law are
  • – When one variable is increased keeping all other variables constant than the output of production increases till some particular point and diminishes after that.
  • – To continue to make an investment after a certain point (which varies from context to context) is to receive a decreasing return on that input.
  • – It is also known as Law of variable proportions because as the input of one variable i§ increased its proportion with other fixed variable changes.
  • – This law is applied to short-run production.
  • – Alfred Marshall agreed to the law of diminishing return Assumptions of law

The assumptions of the law of diminishing returns are as follows:

  • Units of capital and labor are used as variable factors.
  • The prices of the factors do not change.
  • All units of variable factors are equally efficient.
  • There is no change in the technique of production.
  • The best combination of factors of production has crossed the level of optimum point.
  • There is no change in the fixed factor of production.
  • Law operates in short-run

Consider a factory that employs laborers to produce its product. If all other factors of production remain constant, at some point each additional laborer will provide less output than the previous laborer. At this point, each additional employee provides less and less return. If new employees are constantly added, the plant will eventually become so crowded that additional workers actually decrease the efficiency of the other workers, decreasing the production of the factory.
There are three stages in the law of variable proportion

(1) Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage along with this marginal product as well as average products are also increasing

(2) Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining. It is called the stage of diminishing returns because all three total products (TP), marginal product (MP), and average product (AP) are declining.

(3) Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining.
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

3. Law of returns to scale
The law of returns to scale is concerned with the scale of production. The scale of production of a firm is determined by the amount of factors units.

Changes in production occur when all resources are proportionately changed in the long run. Returns to scale come in three forms—increasing, decreasing, or constant based on whether the changes in production are proportionally more than, less than, or equal to the proportional changes in inputs. Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if the increase in output is 20 % output increases more than 20 %. The constant return to scale -Here with the increase in input-output also increases in the same proportion. Thus if the input is increased by 20% then output also increase by 20%

Decreasing returns to scale – Here with the increase in input there is a decrease in output thus returns to scale are diminishing.
Suppose, for example, that The Willy Company employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed potatoes each month. Returns to scale indicate what happens to production if the scale of operation expands to 2,000 workers in a 10,000 square foot factory-a doubling of the inputs.

If production increases to exactly 2 million Stuffed potatoes, twice the original quantity, then The Wacky Willy Company has constant returns to scale. If production increases by more than 2 million Stuffed potatoes, then The Willy Company has increasing returns to scale. And if production increases by less than 2 million Stuffed potatoes, then The Willy Company has decreasing returns to scale.

4. Theory of costs
In economics, the cost of production theory of value is the theory that the price of an object or condition is determined by the sum of the cost of the resources that went into making it. Cost is the value at which the product can be sold in the market. The cost can be determined by checking the cost of the production of good or services which includes the cost of all the inputs like land, labor etc., cost may be analyzed in two ways.

  • Short run costs
  • Long run costs Short run costs

In the short run, because at least one factor of production is fixed, output can be increased only by adding more variable factors. Hence we consider both fixed and variable costs. We use short run costs primarily to compute how much to produce while maximizing profits. New firms do not enter the industry, and existing firms do not exit.
(i) Fixed costs- Fixed costs are business expenses that do not vary directly with the level of output i.e. they are treated as independent of the level of production. Examples of fixed costs include the rental costs of buildings
(ii) Total cost curve – it comprises of total cost as well as total variable cost.
(iii) TFC – If output is taken on x axis and cost on y axis than total fixed cost curve is parallel to x axis.
(iv) TVC – the variable cost curve is positively related and moves up as variable cost increases. It’s origin is from zero.
(v) Total cost = TFC+TVC
Thus total cost curve is also positive in nature. .
(vi) Average cost curve – It has two categories average fixed cost and average variable cost.
(vii) AFC- it declines with the increase in output. It is rectangular hyperbola (viii) AVC – it first falls and then increases . the curve shape is like U.
Average cost curve lies above average variable cost curve
(ix) Marginal cost curve – since total fixed cost does not change in short run so marginal cost curve is dependent only on average variable cost. Thus marginal cost curve (MC) is also U shaped. MC curve lies below AVC.
Long run costs
In long run the firm can change all the inputs quantity so the cost of all input is variable. To make their long-run decisions firms look at the costs of various inputs and the technologies available for combining these inputs and then decide which combination offers the lowest cost. Characteristic features of long run costs are
As per classical approach TC increases with an increase in output, thus TC curve is straight line. Also AC and MC remains constant throughout.
As per modem economic theory firm experiences varying returns of scale. The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. The law of diminishing marginal productivity does not hold in the long run. The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. There is an envelope relationship between long-run and short-run average total costs.

  • Each short-run cost curve touches the long-run cost curve at only one point.
  • Thus If producing each unit of output becomes less costly there are economies of scale.
  • And if producing each unit of output becomes more costly there are diseconomies of scale.
  • If unit costs remain constant as output rises then there are constant returns to scale.

5. Theory of revenue
The income received by firm on selling the goods or services over a certain period of time is revenue Revenue may be measured in three ways:
Total Revenue (TR)
Average Revenue (AR)
Marginal Revenue (MR)
Total revenue – it is the total amount generated by the firm by selling all the quantity of output.
TR = quantity sold x price per unit
Average revenue – it is calculated by dividing total revenue by quantity to get price per unit
Marginal revenue – MR is the extra revenue that a firm gains when it sells one more unit of a product in a given time period. It is the ratio of change in total revenue to change in total units sold.
Different relationship between MR, AR and TR graphically For first unit
MR = AR = TR After that
When MR is positive TR slopes upwards When MR below X axis TR slopes downwards.
AR if parallel to X axis than MR also parallel to X axis
If AR is straight line than MR curve will bisect each perpendicular distance of it from Y axis.
Kinked demand curve – According to the kinked demand theory, each firm will face two market demand curves for its product. At high prices, the firm faces the relatively elastic market demand At low prices, the firm faces the relatively inelastic market demand curve The two market curve intersect and form kinked demand curve. In such cases AR falls in straight line with 2 unequal slopes and 2 segments. Since the slopes of AR are unequal so they cause a jink and as a result kinked demand curve is formed.

6. Producers equilibrium
Producer’s equilibrium refers to the level of output of a commodity that gives the maximum profit to the producer of that commodity. Therefore, the output level at which ‘total revenue less total cost’ is maximum is called the equilibrium output level. According to this approach there are two conditions of producer’s equilibrium

  • TR-TC Approach.
  • MR-MC Approach

TR-TC Approach – A point where the difference between total revenue and total cost is maximum is the equilibrium point. The total revenue (TR) minus total cost (TC) method (TR – TC) relies on the fact that profit is equal to the difference between revenue and costs MR-MC Approach – As per this approach a firm will adjust the quantity of output it supplies until finding a point where the marginal revenue associated with selling that quantity is equal to the marginal cost of producing that quantity. That is, the firm will produce where MR = MC.

(1) MR-MC
When one more unit of output is produced, MR is the gain and MC is the cost to the producer. Clearly, so long as benefit is greater than the cost, or MR is greater than MC, it is profitable to produce more. Therefore, so long as MR is greater than MC, the maximum profit level, or the equilibrium level is not reached. The equilibrium is not achieved because it is possible to add to profits by producing more. The producer is also not in equilibrium when MR is less than MC because benefit is less than the cost. By producing less the producer can add to his profits. When MC is equal to MR, the benefit is equal to cost, the producer is in equilibrium subject to that MC becomes greater than MR beyond this level of output.

(2) MC is greater than MR after MC = MR output level
‘MC = MR’ is a necessary condition but not sufficient enough to ensure equilibrium. It is because the producer may face more than one MC =MR outputs. But out of these only that output beyond which MC becomes greater than MR is the equilibrium output. It is because if MC is greater than MR, producing beyond MC = MR output will reduce profits. And when it is no longer possible to add to profits the maximum profit level is reached. On the other hand, if MC is less than MR beyond the MC = MR output, it is possible to add to profits by producing more. Therefore this MC = MR level is not the equilibrium level. For a producer to be in equilibrium it is necessary that MC equals MR as well MC becomes greater than MR if more output is produced.

7. Economies and diseconomies of scale
There are benefits and drawbacks in increasing the size of operation of a business. Economies of scale are the cost advantage from business expansion. As some firms grow in size their unit costs begin to fall. A business can become so large that its unit costs begin to rise. Expanding firms can experience diseconomies of scale

8. Economies of scale
It is reduction in cost of production with increase in firm size which may be due to several reasons like administrative economies or bulk purchasing making the cost more efficient and many more.

Example: Assume you are a small business owner and are considering printing a marketing brochure. The printer quotes a price of Rs. 5,000 for 500 brochures, and Rs. 10,000 for 2,500 copies. While 500 brochures will cost you RslO per brochure, 2,500 will only cost you Rs. 4 per brochure. In this case, the printer is passing on part of the cost advantage of printing a larger number of brochures to you. This cost advantage arises because the printer has the same initial set-up cost regardless of whether the number of brochures printed is 500 or 2,500. Once these costs are covered, there is only a marginal extra cost for printing each additional brochure. _
It is divided into two categories

Internal economies of scale – They occur due to indigenous causes. Internal economies of scale arise when firms increase their scale of production. Hence, they incur lower average costs of production, either through specialization or other factors like increase in borrowing power of larger organisation, better utilization of inputs due to technical up gradation, advertising, marketing etc. When average costs fall, giving the price of the good to be constant, profit margins of these firms will be increased. Thus, the individual firm benefits from internal economies of scale. Internal economies of scale affect the firm’s average cost curve by shifting the initial position to the right along the curve.

External economies of scale – The lowering of a firm’s costs due to external factors. There are some external factors that affect the firm such as some research and development in industry. This research and development is going to help whole industry and a single firm of that industry gets the benefit which may help to reduce its cost. External economies of scale will increase the productivity of an entire industry, geographical area or economy. The external factors are outside the control of a particular company and encompass positive externalities that reduce the firm’s costs. Another factor which can*be discussed is getting the information which is a requirement for the whole industry, if this information is collectively collected than it is cheaper than a firm individually trying to get it. Thus getting the information cheaply affects the firm’s production.

9. Diseconomies of scale
After reaching a certain size, it becomes increasingly expensive to manage a gigantic organization for a number of reasons, including its complexity, bureaucratic nature and operating inefficiencies. This undesirable phenomenon is referred to as “diseconomies of scale” Internal Diseconomies of scale -When a firm expands its production scale beyond a certain level, it suffers certain disadvantages. These disadvantages are called internal diseconomies of scale. The result of this diseconomy of scale is a fall in output and an increase in the long-run average cost. There are a number of factors that might give rise to inefficiencies as the size of the firm grows,

As the size of the firm grows beyond a certain level, organization, control, and planning is needed. This makes the administrative duties more difficult. Delegation of much of the management functions to lower personnel becomes very common. Since this personnel lacks the requisite experience to undertake the task, it may result in low output at a higher cost. Again it is often difficult to arrive at quick decisions since large firm often has many entrepreneurs and directors through whom suggestions must pass before they are implemented. All these lead to an increase in the long-run average cost.

External Diseconomies of Sca/e-External factors beyond the control of a company increase its total costs, as output in the rest of the industry increases. The increase in costs can be associated with market prices increasing for some or all of the factors of production. External diseconomies are costs that are outside the control of a single firm and result of the growth of a specific industry. For example, negative externalities, such as road congestion, can result from the growth of an industry in a specific region. Resources may become exhausted and the price of resources may rise as demand outstrips supply.

Theory of Production, Costs and Revenue MCQ Questions

Question 1.
Production is
a. Creation of something
b. Creation of value
c. Creation of Utility
d. Both b& c
Answer:
d. Both b& c

Question 2.
Characteristic feature Uncommon with the primary production of function are
a. It costs money
b. It is inelastic
c. It is immobile
d. It needs Labour
Answer:
a. It costs money

Question 3.
______________ is Not present in the feature of labour
a. Active factor
b. Mobile factor
c. Elastic factor
d. All of the above
Answer:
b. Mobile factor

Question 4.
If 1 orchard, 7 workers, and 3 tons of fertilizer yield 1,000 bushels of peaches, while 1 orchard, 7 workers, and 4 tons of fertilizer yield 1,300 bushels,
a. The average product of labor equal 1,150 bushels.
b. The marginal product of labor cannot be calculated.
c. The average product of fertilizer equals 1,150 bushels.
d. The marginal product of fertilizer cannot be calculated
Answer:
b. The marginal product of labor cannot be calculated.

Question 5.
Which of the following statement best describes the general form of a production function?
(i) It is a purely technological relationship between quantities of input and quantities of output.
(ii) It represents the technology of an organization, sector of an economy
(iii) Prices of inputs or of the output do not enter into the production function
(iv) It is flow concept describing the transformation of inputs into output per unit of time.
a. (i), (ii) and (iv)
b. (i) and (ii)
c. (i) and (iv)
d. all of the above
Answer:
d. all of the above

Question 6.
Marginal cost is:
a. the change in cost following a managerial decision
b. the change in output following a one dollar change in cost.
c. The change in cost following a unit change in output
d. The change in average cost following a one- unit change in output
Answer:
c. The change in cost following a unit change in output

Question 7.
The breakeven level of output occurs when
a. marginal cost equals marginal revenue
b. marginal cost equals marginal revenue.
c. Marginal profit equals zero.
d. Total profit equals zero.
Answer:
d. Total profit equals zero.

Question 8.
If there is an increase in the costs of production it will lead to
a. shift demand curve outwards
b. shift demand curve inwards
c. shift supply outwards and other things unchanged
d. shift supply inwards.
Answer:
d. shift supply inwards.

Question 9.
There is an increase in price but all other things
are unchanged. This will lead to:
a. A shift in supply outwards
b. A shift in supply inwards
c. There is no change in supply
d. An extension of supply
Answer:
d. An extension of supply

Question 10.
A country enjoys a comparative advantage over
another country in producing oil when
a. it has more oil than the other country.
b. It can produce oil at a lower opportunity cost than the other country
c. It does not need to import oil.
d. It wants to export oil as much as it has
Answer:
b. It can produce oil at a lower opportunity cost than the other country

Question 11.
For a given short-run production, function
a. technology is assumed to change as capital stock changes.
b. Technology is assumed to change as the labor input changes.
c. Technology is considered to be constant for a given production function relationship
d. Technology is assumed to change positively until diminishing return set in and then it changes in the other direction.
Answer:
c. Technology is considered to be constant for a given production function relationship

Question 12.
Suppose a firm is using two inputs, labor and capital. What will happen if the price of labor falls?
a. The firm’s average cost curve will shift downward.
b. The firm’s marginal cost curve will shift downward.
c. To produce an unchanged output, the firm would use more labor
d. All of the above
Answer:
d. All of the above

Question 13.
Which of the following is not a reason for the existence of economies of large scale production?
a. bulk buying;
b. small markets;
c. specialized workers;
d. costs not increasing in proportion to volume or output;
Answer:
b. small markets;

Question 14.
Average fixed cost
a. is U-shaped.
b. Declines over the entire output range.
c. Is a long-run concept only.
d. Is influenced by diminishing returns to production.
Answer:
b. Declines over the entire output range.

Question 15.
if average total cost is 100 for a given output and marginal cost is 70, we then know that average fixed cost is
a. 30.
b. 170.
c. 70.
d. Not possible to determine with the information given.
Answer:
d. Not possible to determine with the information given.

Question 16.
Which of the following statements about the relationship between marginal cost and average cost is correct?
a. when MC is falling, AC is falling.
b. AC equals MC and MC’s lowest point.
c. When MC exceeds AC, MC must be rising.
d. When AC exceeds MC, MC must be rising.
Answer:
c. When MC exceeds AC, MC must be rising.

Question 17.
The slope of the total variable cost curve equals
a. average variable cost.
b. Marginal cost.
c. Average cost.
d. Marginal physical product.
Answer:
b. Marginal cost.

Question 18.
X believed that if people were free to pursue their own interests, then
a. greed and cheating would prevail in the market.
b. Less would be produced than if altruism were our guiding principle
c. They would generally be encouraged to produce goods and services that other valued highly (relative to their costs).
d. The public interest would be best served, but the interests of employees would be hurt.
Answer:
c. They would generally be encouraged to produce goods and services that other valued highly (relative to their costs).

Question 19.
An increase in wages will lead the aggregate supply curve to
a. Remains unchanged.
b. Shift outward.
c. Shift inward
d. Becomes flat
Answer:
c. Shift inward

Question 20.
An increase or decrease in consumption of a goods or services is termed as.
a. Marginal utility
b. Revenue curves.
c. Producer’s equilibrium.
d. Total utility
Answer:
a. Marginal utility

Question 21.
The total cost (TC) of producing sports shoes (Q) is given as TC – 200 + 5 Q. What is the variable cost?
a. 5Q
b. 5
c. 5+ (200/Q)
d. 200
Answer:
a. 5Q

Question 22.
The typical production possibilities curve is:
a. an upsloping line that is concave to the origin.
b. A downsloping line that is convex to the origin
c. A downsloping line that is concave to the origin
d. A straight upsloping line
Answer:
c. A downsloping line that is concave to the origin

Question 23.
When per unit price goes up as output is increased it is
a. Diseconomies of scale
b. Economies of scale
c. Production cost
d. None of the above.
Answer:
a. Diseconomies of scale

Question 24.
In the presence of a diminishing marginal rate of technical substitution between labour and capital, output can be kept unchanged only if
a. equal successive sacrifices of capital go hand in hand with even small increases of labor
b. equal successive sacrifices of capital go hand in hand with ever small increases of labor
c. equal successive increases in labor go hand in hand with ever small increases in capital
d. equal successive increases in labor go hand in hand in hand with ever small sacrifices of capital
Answer:
d. equal successive increases in labor go hand in hand in hand with ever small sacrifices of capital

Question 25.
A movement along the demand curve drawn in quantity-price space to the left may because by
a. an increase in supply
b. a rise in income.
c. A rise in the price of complementary good
d. A fall in the number of substitute goods
Answer:
a. an increase in supply

Question 26.
The output where diminishing returns to production begin is also the output where
a. marginal cost is at a minimum
b. average total cost is at a minimum
c. average variable costs is at a minimum
d. marginal and average cost intersects.
Answer:
a. marginal cost is at a minimum

Question 27.
Which of the following statements about marginal cost is incorrect?
a. A U-shaped marginal cost curve implies the existence of diminishing returns over all ranges of output.
b. When marginal cost equals averages cost, average cost is at tits minimum
c. In the short run, the shape of the marginal cost curve is due to the law of diminishing marginal returns.
d. When marginal cost is falling, total cost is rising
Answer:
a. A U-shaped marginal cost curve implies the existence of diminishing returns over all ranges of output.

Question 28.
Which of the following statements about the relationship between marginal cost and average cost is correct?
a. when MC is falling, AC is falling
b. AC equals MC and MC’s lowest point.
c. When MC exceeds AC, must be rising
d. When AC exceeds MC, MC must be rising
Answer:
c. When MC exceeds AC, must be rising

Question 29.
In the short run, diminishing marginal returns are implied by
a. rising marginal cost
b. Rising average cost
c. Rising average variable cost
d. All of the above
Answer:
a. rising marginal cost

Question 30.
Because of fixed cost
a. Marginal cost almost always begins below average total cost
b. Marginal cost is always equal to Total average cost
c. Marginal cost is always above total cost
d. None of the above
Answer:
a. Marginal cost almost always begins below average total cost

Question 31.
If an economy is operating at a point inside the production possibilities curve,
a. its resources are being wasted.
b. The curve will begin to shift inward.
c. The curve will begin to shift outward.
d. This is a trick question because an economy cannot produce at a point inside the curve
Answer:
a. its resources are being wasted.

Question 32.
In any production process the marginal product of labour equals
a. total output divided by total labour inputs.
b. Total output minus the total capital stock.
c. The change in total output resulting from a small change on the labour input
d. Total output produced by labour inputs
Answer:
c. The change in total output resulting from a small change on the labour input

Question 33.
If a new motorway is built near to a company, thus reducing its costs, this is an example of:
a. commercial economies of scale
b. Financial economies of scale
c. Managerial economies of scale
d. External economies of scale
Answer:
d. External economies of scale

Question 34.
Which one of the following is correct in a situation of diminishing marginal returns to labour?
a. Productions remains unchanged
b. Production is increasing
c. Production is decreasing
d. All of the above
Answer:
b. Production is increasing

Question 35.
Supply of labour includes
a. Duration for which they work
b. Intensity with which they work
c. Their efficiency
d. All of the above
Answer:
d. All of the above

Question 36.
Capital includes
a. assets
b. money
c. entrepreneurship
d. Both a & b
Answer:
d. Both a & b

Question 37.
It is Not uncommon for the characteristic feature found in Capital
a. elasticity
b. gift of nature
c. mobile factor
d. All of the above
Answer:
d. All of the above

Question 38.
In the production equation Qx = f(L,K,T ———–n), L is
a. Labour
b. Level of technology
c. Loyalty
d. None of the above
Answer:
a. Labour

Question 39.
When output increases in greater proportion to input it is
a. Constant returns to scale
b. Increasing return to scale
c. Diminishing return to scale
d. all of the above
Answer:
a. Constant returns to scale

Question 40.
As per MR MC approach two conditions are required for a firm to be in equilibrium
a. Marginal revenue should be equal to marginal cost
b. Marginal cost curve should cut marginal revenue curve from below
c. Both a& b
d. None of the above
Answer:
c. Both a& b

Question 41.
Which of the following best describes the law of diminishing marginal returns when an employee is increased?
a. Marginal product of the new employee will be more then that of the previous employee.
b. Marginal product of the new employee will be less then the previous employee.
c. It will remain unchanged
d. None of the above
Answer:
b. Marginal product of the new employee will be less then the previous employee.

Question 42.
Price exceeds Average variable cost but is smaller than average Total cost at the optimum level of output, the firm is
a. making a profit and should continue to produce
b. incurring a loss but should continue to produce
c. incurring a loss and should stop producing immediately
d. break even and maintain current output
Answer:
b. incurring a loss but should continue to produce

Question 43.
The wages paid out to casual workers can be considered
a. at fixed cost
b. at variable cost
c. partly at variable and partly at fixed cost
d. at opportunity cost
Answer:
b. at variable cost

Question 44.
Which of the following industries most closely approximates perfectly competitive market in India?
a. automobile
b. newspapers
c. beverages
d. sachet pure water
Answer:
d. sachet pure water

Question 45.
The following are some of the economic factors influencing the location of an enterprise in India except
a. nearest to state capital
b. availability of raw materials
c. nearest to power supply
d. availability of transportation system
Answer:
a. nearest to state capital

Question 46.
Average cost is defined as
a. Average cost divided by marginal cost.
b. total cost divided by total output
c. total output divided by average cost
d. total output times marginal cost
Answer:
b. total cost divided by total output

Question 47.
The marginal cost when output = 10 is equal to
a. the slope of a line drawn tangent to the total cost curve where output = 10.
b. The total cost of 10 units of output divided by its average cost.
c. The average cost of 10 units
d. None of the above.
Answer:
c. The average cost of 10 units

Question 48.
How will a decrease in the equilibrium price in the market of a perfectly competitive industry affect the total revenue of a typical firm
a. Both total revenue and economic profit will increase at all rates of output
b. Both total revenue and economic profit will remain same
c. Both total revenue and economic profit will decrease at all rates of output
d. None of the above are true
Answer:
c. Both total revenue and economic profit will decrease at all rates of output

Question 49.
The perfectly competitive firm’s short run supply curve is same as the
a. total revenue
b. Supply of other firms in the industry
c. Upward sloping portion of its marginal cost curve at or above minimum AVC curve
d. Upward sloping portion of its MR curve
Answer:
c. Upward sloping portion of its marginal cost curve at or above minimum AVC curve

Question 50.
If average cost is at a minimum, then
a. it is equal to marginal cost.
b. Total cost is also at a minimum
c. Profit is at a maximum
d. All of the above are true
Answer:
d. All of the above are true

Question 51.
The marginal principle asserts that, in general, the net benefit is maximized when
a. total benefit will be equal to total cost.
b. Average benefit will be equal to average cost.
c. Marginal benefit will be equal to average cost.
d. Average cost will be above total cost but below average benefit.
Answer:
c. Marginal benefit will be equal to average cost.

Question 52.
Supply curve reflects
a. Total cost curves.
b. Average cost curves.
c. Marginal cost curves.
d. Average production curves.
Answer:
c. Marginal cost curves.

Question 53.
A constant cost industry is distinguished by the fact that
a. The long run industry supply curve is perfectly inelastic
b. The long run industry supply curve is perfectly elastic
c. average revenue is equal to zero
d. none of the above is correct
Answer:
b. The long run industry supply curve is perfectly elastic

Question 54.
If both average cost (AC) and marginal cost (MC) are U shaped, then
a. AC will reach a minimum at a level of output that is less than that at which MC reaches a minimum
b. AC> MC
c. AC will reach a minimum at a level of output that is greater than that at which MC reaches a minimum
d. AC =MC.
Answer:
c. AC will reach a minimum at a level of output that is greater than that at which MC reaches a minimum

Question 55.
If a firm’s marginal revenue is greater than its marginal cost, then the firm should
a. increase output to increase profit
b. decrease output to increase profit
c. Increase input to decrease profit
d. Marginal revenue should be changed
Answer:
a. increase output to increase profit

Question 56.
In a firm’s average revenue is equal to its average cost, then
a. profit is at a maximum
b. profit is at a minimum
c. profit is equal to zero
d. the firm is in equilibrium
Answer:
c. profit is equal to zero

Question 57.
From the given option-

Theory of Production, Costs and Revenue – CS Foundation Economics Notes Chapter 3 img 1

Figure Time period for supply
Figure (i) (A) Very long run.
Figure (ii) (B) Short run
Figure (iii) (C) Long run
Figure (iv) (D)Yery long run.

a. (a): (i) (B), (ii) (0), (iii) (A), (iv) (C)
b. (i) (A), (ii) (B), (iii) (C), (iv) (0).
c. (i) (B), (ii) (C), (iii) (0), (Iv) (A)
d. (i) (C), (ii) (0), (iii) (B), (iv) (A)
Answer:
a. (a): (i) (B), (ii) (0), (iii) (A), (iv) (C)
Hint
Short run – in this not frequent changes in quantity but frequent changes in prices. Long run – in this frequent changes in quantities but price change is not frequent. Very long run – no change in price in respect to quantity supplied.
Very short run – quantity supplied does not change but price changes.

Question 58.
Marginal product is-
a. Addition to total product by increase in additional units of all inputs
b. Change in total product caused by a fall in additional units of all inputs
c. ≅QO/≅N where II stands for change, TQ stands for total products and N stands for units of a single variable input.
d. ≅N/≅TQ
Answer:
c. ≅QO/≅N where II stands for change, TQ stands for total products and N stands for units of a single variable input.
Hint
≺≺≺≺Q/≺N where △Stands for change, TQ stands for total products and N stands for units of a single variable input.
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.

Question 59.
Average product is rising then marginal product would
a. Keep rising
b. Be more than average product
c. Would be less than the average product
d. Be indeterminate because the units of
Answer:
b. Be more than average product
Hint
Average product is rising then marginal product would be more than average product The relation between average product and the marginal product is

  • If the marginal is less than the average, then the average declines.
  • If the marginal is greater than the average, then the average rises.
  • If the marginal is equal to the average, then the average does not change,

Question 60.

Table A Table B Table C Table D
X Input Y Output X Input Y Output X Input Y Output X Input Y Output
1 5 2 4 1 8 4 40
2 10 4 8 3 24 4 60
3 15 6. 12 10 80 4 80

Which of these does not represent fixed proportion of inputs and outputs of X and Y respectively-
a. Table A
b. Table B
c. Table C
d. Table D
Answer:
d. Table D
Hint
In table D inputs are not changing in corresponding to output which is changing while in all other tables input is changing in fixed proportion in relation to output as in Table A with 1 unit increase in input, output is increasing 5 units. In table B with 1 unit increase in input, output increases 2 units. In table C with 1 unit increase in input, output increases 8 units.

Question 61.
Which one of the following short run cost curves always falls with an increase in the level of output?
a. Average fixed cost curve
b. Total fixed cost curve
c. Average variable cost curve
d. Total cost curve.
Answer:
a. Average fixed cost curve
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola Average fixed cost curve always falls with an increase in the level of output.

Question 62.
Which of the following figures given below represents correct relationship between AC and MC:-

Theory of Production, Costs and Revenue – CS Foundation Economics Notes Chapter 3 img 2

a. Figure (i)
b. Figure (ii)
c. Figure (iii)
d. Figure (iv)
Answer:
c. Figure (iii)
Hint
The relationship between the marginal cost and average cost is the same as that between any other marginal-average quantities. When marginal cost is less than average cost, average cost falls and when marginal cost is greater than average cost, average cost rises.

Question 63.
From the following output schedule, the value of Marginal Product against Y will be

Unit of Variable Input Total Product Marginal Product
4 60 15
7 90 Y

a. 30
b. 90
c. 40
d. 10
Answer:
d. 10
Hint
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.
Marginal Product = □ □□Q/DN whereA stands for change, TQ stands for total products and N stands for units of a single variable input. MP = 90-60/7-4 = 30/3 = 10

Question 64.
in a graph, when we plot AC and AFC curves, the difference between AC and AFC curves measures
a. TFC
b. WC
c. AVC
d.MC
Answer:
c. AVC
Hint
Average cost curve – it has two categories average fixed cost and average variable cost. AFC- it declines with the increase in output. It is rectanguiar hyperbola AVC – it first falls and then increases . the curve shape is like U. Average cost curve lies above average variable cost curve AC = AFC+AVC AC- AFC = AVC

Question 65.
Marginal cost at any level of output is affected
a. Only by fixed costs
b. Only by variable costs
c. Both by fixed costs and variable costs
d. More by fixed costs and less by variable costs.
Answer:
b. Only by variable costs
Hint
Marginal cost curve – since total fixed cost doesnot change in short run so marginal cost curve is dependent only on average variable cost. Thus marginal cost curve (MC) is also U shaped. MC curve lies below AVC.

Question 66.
if on a given straight line demand curve, elasticity of demand is equal to unity, the value of marginal revenue will be
a. Indeterminate
b. Zero
c. Infinite
d. Maximum
Answer:
b. Zero
Hint
In a straight-line demand curve we know that the elasticity at the middle point is equal to one. It follows that marginal revenue corresponding to the middle point of the demand curve (or AR curve) will be equal to zero.

Question 67.
Long-run average cost curve falls due to the application of:
a. The law of increasing returns to a factor
b. The law of increasing returns to scale
c. The law of variable proportions
d. The law of demand.
Answer:
b. The law of increasing returns to scale
Hint
In long run the firm can change all the inputs quantity so the cost of ail input is variable .To make their long-run decisions firms look at the costs of various inputs and the technologies available for combining these inputs and then decide which combination offers the lowest cost. As per modern economic theory firm experiences varying returns of scale .The shape of the long-run cost curve is due to the existence of economies and diseconomies of scale. Long-run average cost curve falls due to the application of the law of increasing returns to scale.

Question 68.
Which of the following statements is not true?
a. As average product rises, marginal product will be more than the average product
b. As average product rises, marginal product will keep on rising
c. Marginal product will be equal to average product when average product is maximum
d. If marginal product becomes negative, total product will begin to fall.
Answer:
c. Marginal product will be equal to average product when average product is maximum
Hint
The relation between average product and marginal product is

  • If the marginal is less than the average, then the average declines.
  • If the marginal is greater than the average, then the average rises.
  • If the marginal is equal to the average, then the average does not change
  • If marginal product becomes negative, total product will begin to fall

Question 69.
Which one of the following graphs is the correct presentation of the relationship between average product and marginal product? (Q is quantity of output and N is unit of variable factor).

Theory of Production, Costs and Revenue – CS Foundation Economics Notes Chapter 3 img 3

The correct option is:
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
Answer:
d. Figure 4
Hint
There are three stages in law of variable proportion
(1) Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage . along with this marginal products as well as average products are also increasing
(2) Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining . It is called stage of diminishing returns because all three total product (TP), marginal product (MP) and average product (AP) all are declining.
(3) Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining but never zero.
In figure 2 and 3 AP is being shown negative which is wrong.

Question 70.

Unit of variable factors Total Product units
1 30
2 70
3 120

In the product schedule as given above, the marginal proddct of the 4th unit of input would be:
a. 30 units
b. 60 units
c. 70 units
d. 25 units.
Answer:
b. &0 units
Hint
Marginal product is the output that results from one additional unit of a factor of production (such as a labor hour or machine hour), all other factors remain constant.
Marginal Product = >
pnnQ/DN where Astands for change, TQ stands for total products and N stands fpr units of a single variable input.
MP for 1st unit =30-0/1 =30
MP for 2nd unit = 70-30/1 =40
MP for 3rd unit = 120-70/1 = 50
MP for 4th unit = 60 (by looking at the sequence)

Question 71.
Which of the following tables represents diminishing returns to scale? (In the tables – K stands for Capital, L for Labour and TP for Total Production)

Table 1
K L TP K L TP K L TP K L TP
1 2 10 1 2 10 1 2 10 1 2 10
2 4 30 2 4 20 2 4 18 2 4 50
4 8 100 4 8 40 4 8 35 4 8 200

The correct option is: _
a. Table 1
b. Table 2
c. Table 3
d. None of the above
Answer:
c. Table 3
Hint
Decreasing returns to scale – Here with the increase in input there is decrease in output thus returns to scale are diminishing. Suppose, for example, that The Willy Company employs 1,000 workers in a 5,000 square foot factory to produce 1 million Stuffed potatoes each month. Returns to scale indicate what happens to production if the scale of operation expands to 2,000 workers in a 10,000 square foot factory–a doubling of the inputs. If production increases to exactly 2 million Stuffed potatoes, twice the original quantity, then The Wacky Willy Company has constant returns to scale. If production increases by more than 2 million Stuffed potatoes, then The Willy Company has increasing returns to scale. And if production increases by less than 2 million Stuffed potatoes, then The Willy Company has decreasing returns to scale.
AP= TP/Q
So for table 1 AP = 5,7.5,12.5 respectively for 1st, 2nd and 3rd unit
Similarly for table 2 AP = 5,5,5 respectively
For table 3 AP = 5,4.5,4.38 respectively
For table 4 AP = 5,12.5,25 respectively

Question 72.
Laws of returns to scale are based on the assumption of:
a. Variable proportions of factor-inputs
b. Fixed proportions of factor-inputs
c. Excess demand for fixed inputs
d. Deficient demand for fixed inputs.
Answer:
a. Variable proportions of factor-inputs
Hint
The law of returns to scale is concerned with the scale of production. The scale of production of a firm is determined by the amount of factors units.
Changes in production occur when all resources are proportionately changed in the long run. Returns to scale come in three forms-increasing, decreasing, or constant based on whether the changes in production are proportionally more than, less than, or equal to the proportional changes in inputs.

Question 73.
Which of the following expressions is not correct?
a. MC — TC<sub>N</sub> – TCN<sub>N_1</sub>
b. MC = TC/<sub>≺</sub>N
c. MC = <sub>≺</sub>TVC/<sub>≺</sub>N
d. MC=<sub>≺</sub>TFC/<sub>≺</sub>N.
Answer:
d. MC=<sub>≺</sub>TFC/<sub>≺</sub>N.
Hint
Marginal cost curve – since total fixed cost doesnot change in short run so marginal cost curve is dependent only on average variable cost.

Question 74.
Match the following:

X. U-shaped curve (i) AC = MC
Y. Rectangular Hyperbola (ii)TC
Z. Continuously rising curve (iii) AFC
W. Optimum output (iv) AC

“The correct option is
a. X (iv); Y (iii); Z (ii); W (i)
b. X (iii); Y (ii); Z (i); W (iv)
c. X (ii); Y (i); Z (iii); W (iv)
d. X (i); Y (iv); Z (ii); W (iii).
Answer:
a. X (iv); Y (iii); Z (ii); W (i)
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola TC(Total cost) = TFC+TVC
Total cost curve is also positive in nature thus continuously rising curve
AC -Average cost curve lies above average variable cost curve and is U shaped.
AC=MC – gives optimum output.

Question 75.
Under Production Theory, the expression ax = f(L.K) represents:
a. Demand function
b. Revenue function
c. Cost function
d. Production function.
Answer:
d. Production function.
Hint
Production Function – The production function relates the output of a firm to the amount of inputs, typically capital and labor.
Y = F (K, L)
Y is the maximal amount of output that is possible to produce given the quantities of the inputs, capital, K, and labor, L.

Question 76.
Study the three tables given below –

Table-1 Table-2 Table-3
Input -X Input -Y Input -X Input -Y Input -X Input -Y
1 20 1 10 1 20
2 10 2 10 2 16
3 4 3 10 3 8

Which of the above tables is showing fixed factor proportions –
a. Table -1
b. Table-2
c. Table – 3
d. None of the above.
Answer:
d. None of the above.
Hint
Fixed factor proportions means the capital labour ratio will be same at all levels of production.

Question 77.
Which of the following figures is showing correct relationship between average product and marginal product under production theory?

Theory of Production, Costs and Revenue – CS Foundation Economics Notes Chapter 3 img 4

Figure 3
Correct option is
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
Answer:
c. Figure 3
Hint
There are three stages in law of variable proportion
1 Stage of increasing returns – in this stage total product is increasing and continues to increase till the end of this stage, along with this marginal products as well as average products are also increasing
2 Stage of diminishing returns – at the end of this stage marginal product becomes zero. Total product and average product are also declining. It is called stage of diminishing returns because all three total product (TP), marginal product (MP) and average product (AP) all are declining.
3 Stage of negative returns – Here marginal product becomes negative while total product and average product are still declining but never zero

Question 78.
With an increase in the units of a variable input, total product keeps rising at a constant rate, marginal product curve will be best represented as a-
a. Rising straight line
b. Falling straight line
c. Vertical straight line
d. Horizontal straight line.
Answer:
a. Rising straight line
Hint
With an increase in input TP keeps rising at constant rate MP will also rise and represent a straight line.

Question 79.
In the production theory, the optimum level of output is represented at a point where
a. Marginal product curve begins to fall
b. Average product curve begins to fall
c. Marginal product becomes zero
d. Average product becomes zero.
Answer:
c. Marginal product becomes zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for production.

Question 80.
Increasing returns to scale are obtained when –
a. Fixed factors begin to yield increasing marginal returns
b. Proportionate increase in output is more than the proportionat increase in inputs .
c. The total output reflects an erratic behaviour
d. None of the above.
Answer:
b. Proportionate increase in output is more than the proportionat increase in inputs .
Hint
Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if increase in output is 20 % output increases more than 20 %.

Question 81.
Subsistence production means –
a. Self consumption
b. Self utilization
c. Self-reliance
d. None of these
Answer:
a. Self consumption
Hint
Subsistence agriculture is self-sufficiency farming in which the farmers focus on growing enough food to feed themselves and their families.

Question 82.
When TP is maximum, then MP will-
a. Start declining
b. Be negative
c. Be declining above AP
d. Be Zero
Answer:
d. Be Zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

Question 83.
Which of these is not a variable factor for the agriculture sector?
a. Land
b. Labour
c. Fertilizers
d. Machinery and Equipment
Answer:
a. Land
Hint
The term factors of production relate to the key factors that go into making goods. The resources that are required for production can be divided into four major groups.

  • Land
  • Capital
  • Labour
  • Entrepreneurship

In case of agriculture land is not a variable factor. A characteristic feature of land are that

  • it has no social cost as we did not create it we got it free
  • land is perfectly inelastic and is immobile

Question 84.
Which of these is a passive factor of production?
a. Land
b. Labour
c. Capital
d. None of these
Answer:
a. Land
Hint
Land – It is a natural resource which can not be created. It includes the resources that are above ground (climate , rain etc.), resources that are below the ground (mineral resources etc.) and resources on the ground (agricultural land etc.). It is primary but passive factor in production . it is primary in nature because production can not begin unless this resource is present but passive because it is dependent on other factors of production.

Question 85.
Which one of the following factors of production gets profit as reward?
a. Land
b. Labour
c. Capital
d. Entrepreneur
Answer:
d. Entrepreneur
Hint
Entrepreneurship – There is, in effect, a fourth type of input used in production. It is a special type of human resource; it consists of entrepreneurial ability, or entrepreneurship. Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business. He is the person who uses all the other uses to make production of goods are reality.

Question 86.
Land is a good or not?
a. Yes, it is a good
b. No, it is not a good
c. It may be a good
d. None
Answer:
b. No, it is not a good
Hint
The land is a natural resource that can not be created. It is not a good but a fixed factor of production.

Question 87.
When the input is increased by 80%, output increases by 100%. This is known as¬
a. Increasing return to scale
b. Decreasing return to scale
c. Constant return to scale
d. None of these
Answer:
a. Increasing return to scale
Hint
Increasing returns to scale – here when the inputs are increased in a given proportion the output increases in a greater proportion. Thus if increase in output is 20 % output increases more than 20 %.

Question 88.
Law of return to scale works in:-
a. Long run
b. Short run
c. Very short run
d. Very Long run
Answer:
a. Long run
Hint
Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Question 89.
When the production is increasing, then AFC will be-
a. Increasing
b. Decreasing
c. Constant
d. None of the above
Answer:
b. Decreasing
Hint
AFC- it declines with the increase in output. It is rectangular hyperbola.

Question 90.
What will we get from fixed factor “Land”?
a. Profit
b. Wages
c. Interest
d. Rent
Answer:
d. Rent
Hint
Land generates rent while.

Question 91.
Which of the following is correct about long run production function?
a. In Long run production function, quantity of all outputs varies
b. In Long run production function, quantity of one input varies while quantities of all other inputs remain constant.
c. In Long run production function, quantity of all inputs varies
d. In Long run production function, the quantity of all inputs remain constant
Answer:
c. In Long run production function, quantity of all inputs varies
Hint
Returns to scale are the guiding principle for long-run production, playing a similar role that the law of diminishing marginal returns plays for short-run production.

Question 92.
For which factor of production, the supply price for society is zero?
a. Capital.
b. Labour
c. Land
d. Material
Answer:
c. Land
Hint
A characteristic feature of land are that

  • it has no social cost as we did not create it we got it free
  • land is perfectly inelastic and is immobile

Question 93.
As per theory of cost, Average Fixed Cost (AFC) curve is
a. Convex and upward sloping
b. Concave and upward sloping
c. Concave and downward sloping
d. Convex and downward sloping
Answer:
d. Convex and downward sloping
Hint
AFC- it declines with the increase in output. It is a rectangular hyperbola. It is convex and downward sloping

Question 94.
As per the theory of revenue, If price is denoted by (P) and quantity is denoted by (0), then the total revenue (TR) will be:
a.\frac { P }{ Q }
b. \frac { Q }{ P }
c. P × Q
d. P × \frac { P }{ Q }
Answer:
c. P × Q
Hint
The income received by a firm on selling the goods or services over a certain period of time is revenue.
Total revenue – it is the total amount generated by the firm by selling all the quantity of output.
TR = quantity sold x price per unit

Question 95.
Which of the following explains the functional relationship between ‘input and output?
a. Production Function
b. Demand Curve
c. Input Function
d. Consumer Surplus
Answer:
a. Production Function
Hint
Production function – The production function relates the output of a firm to the number of inputs, typically capital and labor: It is important to keep in mind that the production function describes the technology, not economic behavior. It states how the desired output can be produced with the minimum input.

Question 96.
When a total product is maximum, then the marginal product will be:
a. Each one is possible
b. Positive
c. Zero
d. Negative
Answer:
c. Zero
Hint
In the stage of diminishing returns there comes a point where total production is maximum and marginal production is zero. This stage is the most fruitful stage for the production.

Question 97.
Which of the following is known as an increase in total output that results from a one-unit increase in the input keeping all other inputs constant:
a. Average product
b. Total product
c. Marginal product
d. All are correct
Answer:
c. Marginal product
Hint
An increase in total output that results from a one-unit increase in the input keeping all other inputs constant is a Marginal product.

Question 98.
According to the Law of Constant Returns to Scale, what is the rate of increase in output?
a. Output increases with a lesser speed than the increase in inputs
b. Output increases with a greater speed than the increase in inputs
c. Output Increases with the same speed as inputs
d. Output increases with a constant speed irrespective of the increase in inputs.
Answer:
c. Output Increases with the same speed as inputs
Hint
The constant return to scale —Here with the increase in input-output also increases in the same proportion. Thus if the input is increased by 20% than an output also increase by 20%

Question 99.
If a firm’s wage cost increases, this will cause:
a. Average fixed cost will rise as output will increase
b. The marginal cost to increase as output falls
c. Marginal revenue to increase as output to fall
d. Opportunity cost to increase, the firm will dose.
Answer:
b. The marginal cost to increase as output falls
Hint
If wage cost increases MC will increase.

Question 101.
For using which factor of production, profit is the economic reward?
a. Labour
b. Entrepreneur
c. Land
d. Capital.
Answer:
b. Entrepreneur
Hint
Entrepreneurship is associated with the founding of new businesses or the introduction of new products and new techniques. The entrepreneur also takes on all of the risks and rewards of the business, He is the person who uses all the other uses to make the production of goods are reality.

Question 101.
Which of the following is not an assumption of production function?
a. The firm uses its output at the maximum level of efficiency
b. The level of technology remains constant
c. The firm uses its maximum level of efficiency to increase the output
d. The firm uses its inputs at the maximum level of efficiency
Answer:
c. The firm uses its maximum level of efficiency to increase the output
Hint
Assumptions of production function are

  • The firm uses its input at the maximum level of efficiency
  • Technology level remains constant

CS Foundation Business Economics Notes

Statistics: An Overview – CS Foundation Statistics Notes

Statistics: An Overview – CS Foundation Statistics Notes

Statistics is the study of the collection, organization, analysis, interpretation, and presentation of data. It deals with all aspects of data, including the planning of data collection in terms of the design of surveys and experiments. Statistics has perhaps its origin from Latin word ‘Status meaning political state’, word ‘Stato ‘ (Italian) and ‘Statisik’ (German) is also used for statistics. The word statistics is used in two senses

  • Statistics data
  • Statistical method

1. Statistics as numerical data
Webster defined Statistics as “The classified facts respecting the condition of the people in a state- especially those facts which can be stated in numbers or in tables of numbers or in any tabular or classified arrangement”.
The basic feature of statistics as quantitative or numerical data is as follows:

  • Statistics are aggregates of facts.
  • Statistics does not refer to a single figure but refers to a series of figures. Although the figure may be numerical if there is only one numerical figure it can not be compared. Thus for statistics, it is required that more than one figure be there.
  • Statistics are numerically expressed.
  • Statistics must have a numerical value. In the case of statistics data like old young, slow-fast are immaterial unless they have numerical data. This qualitative data is of no use for statistics.
  • Statistics must be comparable to each other. Thus the figures collected should be comparable. It means the figures collected should be homogeneous for comparison and not heterogeneous.
  • Statistics are affected to a marked extent by a multiplicity of causes.

2. Statistics as the statistical method
Bowley says “Statistics, may be called the science of counting”. At another place, he says that “Statistics may rightly be called the science of averages”.

3. Stages of statistical enquiry
Different stages of enquiry are

1. Planning the enquiry
Before collecting the data it is to predefine about the purpose, so that only the relevant data is collected The plan section is about how the data will be gathered.. After the purpose is decided, then it is to be decided what all data will be required

2. Collection of data
The collection part is the backbone of the inquiry. If the collection of data is not in proper form, in that case the conclusions drawn can never be reliable. The source of data may be primary i.e., collected directly, or the data may be secondary i.e., available from existing published sources. The first hand collection of data is one of the
most difficult and important tasks faced by file investigator. Primary data is the one that is collected directly from the source by investigator and secondary data is the one which is collected from already published one. Reasons for preferring a primary source

– The secondary source may contain mistakes due to errors which may not be easy to detect.
– The primary source usually includes definitions of terms and units used.
– The primary source often includes a copy of the schedule/questiortnaire and description of the procedures used in selecting the sample and in collecting the data.
– The primary source usually shows data in greater detail. The secondary source may omit some of the information.

3. Organisation of the data
The most important point in organizing a group of data is editing. This is done to correct omission, inconsistencies and wrong calculations in the survey. The classification is done to arrange the data according to some common characteristics. The last step in organisation is tabulation. The object of tabulation is to arrange the data in columns and rows for complete clarity.

4 Presentation of the organised data
After collection and organisation, the data should be presented. Finally the data is given the shape of diagram, chart and graph wherever necessary.

5 Analysing the presented data
Once the data are collected, organized and presented, the next step is that of analysis. The methods most commonly used are measures of Central Tendency and are called measures of the first order. Measures of Dispersion are called measures of the second order. Skewness, Correlation, Regression, Interpolation etc. are called measures of the third order. The analysis of facts based on observation is termed as (a) Scientific analysis, (b) Numerical analysis, (c) empirical analysis.

6 Interpretation of the collected data andforecasting
The last stage of statistical investigation is to derive the results and give comments on the inquiry in question. The interpretation of data is not an easy job and requires a high degree of skill and experience. If the analyzed data are not properly interpreted, the whole object of the inquiry may be erroneous. It is only correct interpretation which may lead to reliable conclusions.

4. Importance and functions of statistics
The various functions performed by statistics in modem times are discussed under:

1. Simplification of Complex Facts
The foremost purpose of the statistics is to simplify huge collection of numerical data. It is beyond the reach of human mind to remember and recollect the huge facts and figures. Statistical method makes it possible to understand the whole in the short span of time and in a better way.

2. Comparison
Comparison of data is yet another function of statistics, simplifying the data; it can be correlated or compared by a certain mathematical questions like averages, ratios, coefficients etc.
Some of the techniques used for comparison are averages, graphs, index numbers etc

3 . Relationship between Facts
Statistical methods are used to investigate the cause and effect relationship between two or more facts.

4. Formulation and Testing of Hypothesis
The most theoretical function of statistics is to test the various types of hypotheses and discover a new theory. For instance, by using appropriate statistical tools we can test the hypothesis of whether a particular coin is fair or not, whether Indian consumers are brand loyal etc.

5. Forecasting
Statistical methods are of great use to predict the future course of action of the phenomenon. It is only on the basis of statistical techniques like time series etc we can forecast.

6. Enrich the Individual Knowledge:
Statistical methods sharpen the faculty of rational thinking and reasoning of an individual. It is a master-key that solves the problems of mankind in every sphere of life.

7. Classification of Data:
Classification refers to a process of splitting up the data into certain parts which helps in the matters of comparison and interpretation of the various features of the data. This is done by the various improved ‘ techniques statistics.

8. To Draw Rational Conclusion:
In various fields of uncertainty like business and commerce, it is very much necessary to draw rational conclusions on the basis of facts collected and analyzed. For this, the mind of the decision-maker should be free from any bias and prejudices.

5. Statistics science or art
Statistics is science as it is the science of collecting, analyzing, presenting, and interpreting data. Governmental needs for census data as well as information about a variety of economic activities provided much of the early impetus for the field of statistics. Currently, the need to turn the large amounts of data available in many applied fields into useful information has stimulated both theoretical and practical developments in statistics.
Statistics can be termed as art because its application is dependent on the knowledge and skill of the person who is using it. It does not tell the facts but instead analyzes and gives us the merit and demerit and explains how to achieve the objective.

Actually, statistics is both sciences as well an art. Statistics is the art and science of deciding:

  • what are the appropriate data to collect
  • deciding how to collect them efficiently
  • then use them to give information

6. Laws of statistics
There are two laws of statistics

1. Law of statistical regularity
2. Law of Inertia of a large number

1. Law of statistical regularity
The law of statistical regularity is the basic assumption in statistics that a random sample taken from a larger group will reflect the characteristics of the larger group. The larger the size of the sample in relation to the whole group, the more accurately it will reflect the group. This law holds good if the sample is large and is random.

2. Law of Inertia of large numbers
It is important because it guarantees stable long-term results for the averages of random events. The theorem is probability theory which states that the number of successes increases as the size of the sample increases.

7. Divisions of statistics

• Descriptive Statistics
Descriptive statistics are those which help reveal patterns in one or more sets of data through numerical analysis, Here the goal is to describe. Numerical measures are used to tell about features of a set of data. Descriptive statistics simply describe data. They include modes, means, ranges, and frequencies which help demonstrate striking trends, similarities, and differences within a set of data or between multiple sets of data. Descriptive statistics is concerned with telling about certain features of a data set. Although this is helpful in learning things as such it can not generalize.

• Inferential Statistics,
Inferential statistics refer to those used after analysis to make conclusions, evaluations, and further predictions based on previous research. Inferential statistics study a statistical sample, and from this analysis is able to say something about the data from which the sample came. Inferential statistics does start with a sample and then generalizes.

• Inductive statistics
The branch of statistics that deals with predictions, estimations, and decisions from data initially presented e.g. forecasting

• Mathematical statistics
It is the study of statistics from a mathematical standpoint, using other branches of mathematics such as linear algebra for analysis. Some of the techniques used are algebra, trigonometry, matrix theory, etc.

• Applied statistics,
This method is used to apply statistical methods to tackle a specific problem. Thus if we have to find out for which product there will be demand in the market we use applied statistics.

• Analytical statistics
A statistical study in which action will be taken on the basis of comparison.

8. Application of statistics
Statistics involves the collection, analysis and interpretation of data. A number of specialties have evolved to apply statistical theory and methods to various disciplines.
The areas where statistics can be applied are many

1. Business and economics.
Statistics in business process applies statistical methods to data sets (often very large) to develop new insights and understanding of business performance & opportunities. Business statistics is the science of good decision making in the face of uncertainty and is used in many disciplines such as financial analysis, econometrics, auditing, production and operations including services improvement, and marketing research.

Thus statistics is able to answer the basic question of economics that is what to produce when to produce and how much to produce out of our limited resources.
Statistics play a major role in economics. On the basis of data economic problems are understood and with the help of various techniques of statistics time series analysis, forecasting etc. Analysis can be done so that on the basis of this analysis suitable policies can be drafted

2. Education
Statistics help to understand the education level in the country. We can analyse on the base of data how many students are going to school ?, how many children from rural area are going to school etc. and on this basis the policies can be drafted by government.

3. State
State authorities are always in need of statistics as it can help them in drafting policies for the government. With the help of data collected the real picture of the work and after results of various policies drafted is revealed. Government has its own agencies which collect data for the government. What are the best combinations of fertilizers, pesticides, etc are all replied with the help of statistics.

4. Social science
It has vast application in this field also. So much information like mortality rate, population control, birth rate, etc are of great importance for our economy and statistics is the answer to sought out such problems.

5. Management
Various functions of management planning, organizing, control, etc need an analytical approach. We need data to make such analyses and take decisions. In business, decisions can not be done on a hit and trial basis thus the techniques of statistics are used to get informed decisions.

6. Natural Science
It helps to find the causes for the diseases, how the disease did spread, how it was controlled, and various other things. In research work also it is of great importance.

9. Limitations of statistics

1. Statistics does not study qualitative phenomena:
Statistics deals with facts and figures. So the quality aspect of a variable or the subjective phenomenon falls out of the scope of statistics. For example, qualities like honesty, intelligence, etc. Which cannot be numerically expressed Can not form part of statistical data. This limits the scope of the subject.

2. Statistical laws are not exact:
Statistical laws are not exact as incase of natural sciences. These laws are true only on average. They hold good under certain conditions. They cannot be universally applied. So statistics has less practical utility.

3. Statistics does not study individuals:
Statistics deals with an aggregate of facts. Single figures are not statistics. This is considered to be a major handicap of statistics. It is the study of group data.

4. Statistics can be misused:
Statistics is mostly a tool of analysis. Statistical techniques are used to analyze and interpret the collected information in an inquiry. As it is, statistics are more dependent on the analyst and his experience. Statistical methods used by fewer expert hands will lead to inaccurate results. Here the fault is not of the data but with the person who makes wrong use of it. Statements supported by statistics are more appealing and are commonly believed. For this, statistics are often misused. Statistical methods rightly used are beneficial but if misused these become harmful.

Statistics: An Overview MCQ Questions

Question 1.
Organization of data does Not include
a. Editing
b. Classification
c. Collection
d. Tabulation
Answer:
c. Collection

Question 2.
Statistics is essential to psychologists because
a. People differ a lot and in many respects.
b. It is compulsory
c. People’s experiences are much the
d. By using statistic psychologist can claim to be the cleverest researchers
Answer:
a. People differ a lot and in many respects.

Question 3.
Descriptive statistics are:
a. The number of adjectives.
b. About whether or not you can generalize from a sample.
c. The methods used to describe the essential characteristics of the data.
d. All of the things.
Answer:
c. The methods used to describe the essential characteristics of the data.

Question 4.
A procedure used to select a sample of n objects from a population in such a way that each member of the population is chosen strictly by chance, each member of the population is equally likely to be chosen, and every possible sample of a given size, n, has the same chance of selection is known as
a. Statistics thinking
b. Inferential statistic
c. Descriptive
d. All of the above
Answer:
d. All of the above

Question 5.
A specific characteristic of a population is known as an
a. sample
b. parameter
c. statistic
d. descriptive statistic
Answer:
b. parameter

Question 6.
A specific characteristic of a sample is known as an
a. sample
b. parameter
c. statistic
d. information
Answer:
c. statistic

Question 7.
Statistics was also termed as
a. The science of king
b. Science of statecraft
c. Political arithmetic
d. All of the above Data is
Answer:
d. All of the above Data is

Question 8.
a. Collection of information about a person
b. Collection of information regarding the comparative things
c. Both a & b
d. None of the above
Answer:
b. Collection of information regarding the comparative things

Question 9.
Both descriptive and inferential statistic is used to change data into information that in turn is converted into ____________ that lead to better decision making.
a. knowledge
b. a process
c. a forecast
d. a parameter
Answer:
a. knowledge

Question 10.
An observed set of the population that has been selected for analysis is called
a. a sample
b. a process
c. a forecast
d. descriptive statistics
Answer:
a. a sample

Question 11.
Keeping in view of all the statistical methods like tabulation etc. we can call statistics as
a. It’s application depends on the skill 7 experience of the statistician
b. It’s methods are systematic and have general application
c. Both a & b
d. None of the above
Answer:
a. It’s application depends on the skill 7 experience of the statistician

Question 12.
As per the law of statistics given by King
a. If data is chosen randomly from a large group then that data will invariably show the characteristic of the group
b. The law developed by King is more correct if applied to a large group
c. Data sample which is to be taken for a large group should be systematic so that invariably it shows the characteristic of large group
d. Both a &b
Answer:
d. Both a &b

Question 13.
Where conclusions are taken out on the basis of estimates regarding the population. It is _______ type of statistics
a. Inductive statistics
b. Descriptive statistics
c. Applied statistics
d. None of the above
Answer:
d. None of the above

Question 14.
Inferential statistics is a process that involves all of the following EXCEPT
a. estimating a parameter
b. estimating a statistic
c. test a hypothesis
d. analyze relationships
Answer:
b. estimating a statistic

Question 15.
Why do we use inferential statistics?
a. Inferential statistics are used to help us to compare the sample to the whole population.
b. Inferential statistics are used to help us to generalize from the sample to the whole population.
c. Inferential statistics are used to help us to show the difference between the sample and the whole population.
d. All of the above apply to the use of inferential statistics.
Answer:
b. Inferential statistics are used to help us to generalize from the sample to the whole population.

Question 16.
Statistics is an indispensable function of the State as
a. Suitable policies are to be formed
b. It is dispensable if applied only to Central Government
c. Improve the working of the system
d. Both a & c
Answer:
d. Both a & c

Question 17.
The allocation of limited resources in the most appropriate manner amongst unlimited ends is
a. Statistics
b. Economics
c. Market
d. All of the above
Answer:
b. Economics

Question 18.
For studying the various national income components it is required that data should be collected on
a. Expenditure
b. Investments
c. Income
d. All of the above
Answer:
d. All of the above

Question 19.
Business managers also need statistics for planning as
a. Decisions can not be made on a trial basis
b. Always systematically; organized data help in the formation of developing decision policies
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 20.
Natural science uses statistics
a. For finding the data related to disease
b. To find IQ
c. For studying fertility
d. All of the above
Answer:
a. For finding the data related to disease

Question 21.
In statistics the facts
a. Should be expressed numerically
b. Should be related to other facts for comparison
c. Should be datum
d. Both a & b
Answer:
d. Both a & b

Question 22.
Statistical data can be collected by
a. Actual counting
b. Estimation
c. Measurement
d. All of the above
Answer:
d. All of the above

Question 23.
Statistical data of estimation should be
a. Able to draw meaningful conclusions
b. Have reasonable accuracy
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 24.
We use inferential statistics to generalize from our samples and descriptive statistics to describe our samples.
a. True
b. False
c Partially true
d None of the above
Answer:
a. True

Question 25.
For data to be statistics it should Not
a. Be numerically expressed
b. Be estimated
c. Have predetermined purpose
d. None of the above
Answer:
d. None of the above

Question 26.
You’ve been given a data group that contains 256 students’ first names’ last names’ grades in school, and six standardized test scores. Which of the following is the most appropriate way to I code the names of the students?
a. Sort the date on a first-name basis and assign consecutive numbers to each name beginning with 100.
b. Sort the data on last name basis and assign consecutive numbers to each name beginning with 001.
c. assigns random numbers to students’ names.
d. Sort the data on the basis of test results and assigning consecutive numbers to each rank starting with 001.
Answer:
b. Sort the data on last name basis and assign consecutive numbers to each name beginning with 001.

Question 27.
The definition of statistics explaining statistics to be the collection, presentation, analysis, and interpretation of numerical data was given by
a. A.L. Bowley
b. Lovin
c. Hing
d. Coxton and Cowden
Answer:
d. Coxton and Cowden

Question 28.
Secondary data is the data collected
a. By Investigation
b. From published data
c. From unpublished but collected data
d. Both b & c
Answer:
d. Both b & c

Question 29.
Which of the following statistics would give you the estimate of the typical examination score of a class of 35 students?
a. A correlation coefficient
b. The variance
c. The standard deviation
d. The mean
Answer:
d. The mean

Question 30.
What is a reasonable explanation for a data set of the test scores of 75 students in which the mean score is 81 and the median is 68?
a. An extremely low score
b. A number of typical scores
c. Too many scores
d. Two extremely high scores
Answer:
d. Two extremely high scores

Question 31.
the study of the methods of organization summarization and presentation of statistical data is referred to as
a. inferential statistics
b. descriptive statistics
c. sampling
d. none of the above
Answer:
b. descriptive statistics

Question 32.
The commonly found limitations to statistics are
a. It is dealing for individuals
b. Statistics gives precise and accurate information
c. Results of statistics are based on assumptions
d. All of the Above
Answer:
c. Results of statistics are based on assumptions

Question 33.
Select the principles and methods used in statistics
a. Organization of data
b. Collection of data
c. Interpretation of data
d. All of the above
Answer:
d. All of the above

Question 34.
Descriptive statistics is concerned with ______ while the goal of statistical inference is to ______ with the help of ________
a. generalizing sample data, draw inductive conclusions, probabilities
b. summarizing data, draw inductive conclusions probabilities
c. describing data, draw deductive concussions, probabilities
d. describing data, draw deductive conclusions, histograms
Answer:
b. summarizing data, draw inductive conclusions probabilities

Question 35.
The only science that enables different experts using the same figures to draw different conclusions is called
a. Economics
b. philosophy
c. Statistics
d. Mathematics
Answer:
c. Statistics
Hint
Statistics is the study of the collection, organization, analysis, interpretation and presentation of data. It deals with all aspects of data, including the planning of data collection in terms of the design of surveys and experiments.

Question 36.
The techniques that are used in summarizing and describing the main features of data constitute
a. Descriptive Statistics
b. Inductive Statistics
c. Mathematical Statistics
d. Applied Statistics
Answer:
a. Descriptive Statistics
Hint
Descriptive statistics are those which help reveal patterns in one or more sets of data through numerical analysis, Here the goal is to describe. Numerical measures are used to tell about features of a set of data. Descriptive statistics simply describe data. They include modes, means, ranges and frequencies which help demonstrate striking trends, similarities and differences within a set of data or between 1 multiple sets of data.

Question 37.
One of the following does not qualifies to be called “statistics”
a. Tables of numbers
b. Census results for a number of districts
c. The daily number of cars passing through a traffic intersection
d. A time series of marks scored by a student in each year till class 12<sup>th</sup>
Answer:
a. Tables of numbers
Hint
The basic feature of statistics as quantitative or numerical data are as follows:
– Statistics are aggregates of facts.
– Statistics does not refer to a single figure but it refers to a series of figures. Although the figure may be numerical if there is only one numerical figure it can not be compared. Thus for statistics, it is required that more than one figure be there.
– Statistics are numerically expressed.
– Statistics must have a numerical value. In the case of statistics data like old young, slow-fast are immaterial unless they have numerical data. This qualitative data is of no use for statistics.
– Statistics must be comparable to each other. Thus the figures collected should be comparable. It means the figures collected should be homogeneous for comparison and not heterogeneous.
– Statistics are affected to a marked extent by the multiplicity of causes.

Question 38.
Arrange the following steps in order of a statistical enquiry
(i) Interpretation of data
(ii) Analysis of data
(iii) Collection of data
(iv) Organisation of data
The options are
a. (a) (iii), (iv), (ii), (i)
b. (b) (iv), (iii), (ii), (i)
c. (C) (i), (ii), (iii), (iv)
d. (d) (ii), (iii), (iv), (i)
Answer:
a. (a) (iii), (iv), (ii), (i)
Hint
Stages of statistical inquiry Different stages of enquiry are
1. Planning the enquiry
2. Collection of data
3. Organisation of the data
4. Presentation of the organised data-
5. Analysing the presented data-
6. Interpretation of the collected data and forecasting

Question 39.
Which of the following statements can be ranked as statistics?
a. India’s real per capita income in 2013 is ~ 50,000 whereas in China, Japan, South Korea and other ‘countries it is more than ~1,00,000
b. Neha is taller than Amrita
c. Abdul earns Rs. 5 crores for a single endorsement.
d. Today rainfall was estimated at 6 cm.
Answer:
a. India’s real per capita income in 2013 is ~ 50,000 whereas in China, Japan, South Korea and other ‘countries it is more than ~1,00,000
Hint
The basic feature of statistics as quantitative or numerical data are as follows:
– Statistics are aggregates of facts.
– Statistics does not refer to a single figure but it refers to a series of figures. Although the figure may be numerical but if there is only one numerical figure it can not be compared. Thus for statistics, it is required that more than one figure be there .
– Statistics are numerically expressed.
– Statistics must have a numerical value. In case of statistics data like old young, slow-fast are immaterial unless they have numerical data. This qualitative data is of no use for statistics.
– Statistics must be comparable to each other. Thus the figures collected should be comparable. It means the figures collected should be homogeneous for comparison and not heterogeneous.
– Statistics are affected to a marked extent by the multiplicity of causes.

Question 40.
in the method, the sample is selected on a basis other than on probability considerations. Which one of the following is the correct option to fill in the blank space?
a. Non-random sampling
b. Stratified sampling
c. Systematic random sampling
d. Simple random sampling.
Answer:
b. Stratified sampling
Hint
A type of probability sampling method in which sample members from a larger population are selected according to a random starting point and a fixed, periodic interval.

Question 41.
Arrange the following stages of a statistical inquiry in proper order:
(I) Organisation and presentation of data
(II) Interpretation of data
(III) Collection of data
(IV) Analysis of data
The correct option is –
a. (a) (III), (I), (IV), (II)
b. (b) (I), (II), (III), (IV)
c. (c) (IV), (III), (II), (I)
d. (d) (II), (I), (III), (IV)
Answer:
a. (a) (III), (I), (IV), (II)
Hint
Stages of statistical enquiry Different stages of enquiry are
1. Planning the enquiry
2. Collection of data
3. Organisation of the data
4. Presentation of the organised data-
5. Analysing the presented data- .
6. Interpretation of the collected data and forecasting

Question 42.
Which of the following statements qualifies to be called ‘statistics’?
a. Metro rail length all over India is 600 Kms.
b. Indian automobile industry produced 2 million cars during the year 2012-13
c. The minimum support price for wheat for the crop season 2013-14 has been fixed at Rs.1,800 per quintal, as against Rs. 1,750 in the previous season
d. More people0 are making use of public transport, thereby causing traffic problems.
Answer:
b. Indian automobile industry produced 2 million cars during the year 2012-13
Hint
The basic feature of statistics as quantitative or numerical data are as follows:

  • Statistics are aggregates of facts.
  • Statistics does not refer to a single figure but it refers to a series of figures. Although the figure may be numerical but if there is only one numerical figure it can not be compared. Thus for statistics, it is required that more than one figures be there .
  • Statistics are numerically expressed.
  • Statistics must have a numerical value. In the case of statistics data like old young, slow-fast are immaterial unless they have numerical data. This qualitative data is of no use for statistics.
  • Statistics must be comparable to each other. Thus the figures collected should be comparable. It means the figures collected should be homogeneous for comparison and not heterogeneous.
  • Statistics are affected to a marked extent by a multiplicity of causes.

Question 43.
The quote about the nature of statistics, “Statistics are like they clay from which you can make a God or a devil as you please”, is attributed to-
a. Croxton and Cowden
b. W. I. King
c. A. L. Bowley
d. Lincoln L. Chao.
Answer:
b. W. I. King

Question 44.
Bio-statistics is a part of
a. Biology
b. Management
c. Social-Science
d. Economics
Answer:
c. Social-Science

Question 45.
Which of the following can not be considered as a use of statistics in Business Management:
a. Fertility rate
b. Quality control
c. Forecasting
d. Production planning
Answer:
b. Quality control

Question 46.
From the view of nature, statistics is:
a. An art
b. Neither science nor art
c. Science and art both
d. A science
Answer:
c. Science and art both
Hint
Statistics is science as it is the science of collecting, analyzing, presenting, and interpreting data. Governmental needs for census data as well as information about a variety of economic activities provided much of the early impetus for the field of statistics. Statistics can be termed as art cause its application is dependent on the knowledge and skill of the person who is using it. Actually, statistics is both science as well as art.

Question 47.
The lower limit of class interval 20 – 30 is:
a. 25
b. 20
c. 30
d. 15
Answer:
b. 20

Question 48.
“If a large sample is taken from a population in a random way, it will be fairly representative of the population”. This statement forms the:
a. Doesn’t form any law
b. Law of inertia of large numbers
c. Law of statistical regularity
d. Central limit theorem.
Answer:
c. Law of statistical regularity
Hint
The law of statistical regularity is the basic assumption in statistics that a random sample taken from a larger group will reflect the characteristics of the larger group. The larger the size of the sample in relation to the whole group, the more accurately it will reflect the group This law holds good if the sample is large and is random.

Question 49.
Which of the following is not a function of statistics?
a. Giving Decisions
b. Testing Hypothesis
c. Framing Hypothesis
d. Facilitating comparisons.
Answer:
a. Giving Decisions
Hint
The most theoretical function of statistics is to test the various types of hypotheses and discover a new theory. For instance, by using appropriate statistical tools we can test the hypothesis of whether a particular coin is fair or not, whether Indian consumers are brand loyal etc. Giving decisions is not a function of statistics.

CS Foundation Business Economics Notes

Measures Of Central Tendency – CS Foundation Statistics Notes

Measures Of Central Tendency – CS Foundation Statistics Notes

Central tendency is defined as “the statistical measure that identifies a single value as representative of an entire distribution.” It aims to provide an accurate description of the entire data. It is the single value that is the most typical representative of the collected data.

1. Average
‘An average is an attempt to find one single figure to describe the whole of figures’ this was the definition given by Clark and Sekkade for average. Simpson defined average as ‘A measure of central tendency is a typical value around which other figures congregate’. Average refers to the sum of numbers divided by n. Sums of data divided by the number of items in the data will give the mean average.
Average should have some characteristic features like

  • It should be firmly defined. For the end-user, there should not be any confusion regarding the figure of average provided
  • Average should take into consideration all the items of the series
  • Even the layman should be able to understand the average provided.
  • If the average has obtained two different sources for the same subject then it should not differ too much.

2. Types of average

  1. Mathematical average
  2. Positional average

1. Mathematical average
Mathematical averages cover arithmetic mean, geometric mean, and harmonic mean.
(a) Arithmetic means – The arithmetic mean of a set of data is found by taking the sum of the data, and then dividing the sum by the total number of values in the set. A mean is commonly referred to as an average. When the values are large then special methods are used so as to cut short the labor. One of these methods is called the ‘short cut method’, some middle value or if there is frequency then the largest frequency is subtracted from all the values. The values so obtained are averaged.

In case the class interval is uniform then the computation of average can be done by step deviation method. In the above three mean all the observations were equally important but there may be some situations where some observations may be more important than other observations. In such a situation, the weighted average method is used.

Example
The following frequency distribution showing the marks obtained by 50 students in statistics at a certain college.

Marks 20-29 30-39 40-49 50-59 60-69 70-79 80-89
Frequency 1 5 12 15 9 6 2

 

Direct

Method

Short-Cut Method Step-Deviation Method
Marks f X fx D=x-A fD U=x-A/h fu
20-29 1 24.5 24.5 -30 -30 -3 -3
30-39 5 34.5 172.5 -20 -100 -2 -10
40-49 12 44.5 534.5 -10 -120 -1 -12
50-59 15 54.5 817.5 0 0 0 0
60-69 9 64.5 580.5 10 90 1 9
70-79 6 74.5 447.5 20 120 2 12
80-89 2 84.5 169.5 30 60 3 6
Total 50 274.5 20 2

Direct Method:
274.5/50 = 54.9 or 55 marks
Short-cut method:
54.5 +20/50 = 54.5 + . 4 = 54.9
Step – Deviation Method
A = 54.5
h – 10
54.5+2/50*10 = 54.9
Properties of arithmetic
The properties are explained below with suitable illustrations.
Property 1:
If x is the arithmetic mean of n observations x1, x2, x3,.. xn; then
(x1 – x) + (x2 – x) + (x3 – x) + … + (xn – x) = 0.
Property 2:
The mean of n observations x1, x2, . . ., xn is x. If each observation is increased by p, the mean of the new observations is (x + p).
Property 3:
The mean of n observations x1, x2, . . ., xn is x. If each observation is decreased by p, the mean of the new observations is (x – p).
Property 4:
The mean of n observations x1, x2, . . ,,xn is x. If each observation is multiplied by a nonzero number p, the mean of the new observations is px.
Property 5:
The mean of n observations x1, x2, . . ., xn is x. If each observation is divided by a nonzero number p, the mean of the new observations is (x/p).

3. Merits of Arithmetic Mean

  • Arithmetic Mean is simple to understand.
  • Arithmetic Mean can be easily calculated.
  • Arithmetic Mean can be determined in most cases.
  • Arithmetic Mean is based on the observations of the series.
  • Arithmetic Mean is capable of further algebraic treatment.
  • Arithmetic Mean is stable. It does not differ from sample to sample.

4. Demerits of Arithmetic Mean

  • Arithmetic Mean is affected by extreme values.
  • Arithmetic mean need not coincide with any of the observed values.
  • It is not good in the case of ratios and percentages.
  • Sometimes it will give us absurd answers.
    For example, the mean number of children in a family is 3.2. This can never happen. The mean number of children can be either 3 or 4 but not 3.2. Hence, the result can be misleading.
  • It is not suitable in the case of open-end classes. When the classes are open, we are not sure what must be the upper limit of the class.

5. Median
In statistics and probability theory, the median is the numerical value separating the higher half of a data sample, a population or a probability distribution from the lower half. If you place a set of numbers in order, the median number is the middle one. If there are two middle numbers, the median is the mean of those two numbers.

6. Determination of Median
The following steps are involved in the determination of median:
(i) The given observations are arranged in either ascending or descending order of magnitude.
(ii) Given that there are n observations, the median is given by:

  • The size of n+1/2 the observations, when n is odd.
  • The mean of the sizes of n/2th and n+1/2 of observations, when n is even.
    Consider the observations: 13, 16, 16, 17, 17, 18, 19, 21,23. On the basis of the method given above, their median is 17.

7. Characteristic features

  1. Since the variable, in a grouped frequency distribution, is assumed to be continuous we always take an exact value of N/2, including figures after decimals, when N is odd.
  2. The above formula is also applicable when classes are of unequal width.
  3. Median can be computed even if there are open-end classes because here we need to know only the frequencies of classes preceding or following the median class.

8. Merits of median

  • Median is often used to convey the typical observation. It is primarily affected by the number of observations rather than their size.
  • It is easier to calculate the median than the mean in many cases. In some cases, the median can be calculated just by inspection
  • Median is very useful in the case of open-ended classes
  • The Median can be measured graphically.
  • Median is not affected by extreme values.
  • Median serves as the most appropriate average to deal with qualitative data.
  • The median value is always a certain and specific value in the series.

9. Demerits of median

  • Median is incapable of further algebraic treatment.
  • Though the median considers the frequency of all observations, it does so only for counting purposes and does not really consider their magnitude.
  • The value of the median is affected more by sampling fluctuations than the value of the mean.
  • For computing, median data needs to be arranged in ascending or descending order.
  • It is not based on all the observations of the data.
  • It is not accurate when the data is not large.
  • In some cases, the median is determined approximately as the mid-point of two observations whereas for the mean this does not happen.

10. Mode
The mode is the value that appears most often in a set of data. For categorical or discrete variables the mode is simply the most observed value. To work out the mode, observations do not have to be placed in order, although for ease of calculation it is advisable to do so. For example in the set: 3, 3, 6, 9, 16,16,16, 27, 27, 37,52 16 is the mode since it appears more times than any other number.

A set of numbers can have more than one mode (this is known as bimodal) if there are multiple numbers that occur with equal frequency, and more times than the others in the set. 3,3,3, 9,16, 16, 16, 27, 37,48 In this example, both the number 3 and the number 16 are modes. If no number in a set of numbers occurs more than once, that set has no mode Broadly speaking, the mode is the value of the variable occurring most frequently. It is the most common value found in a series.

The mode can be calculated in three ways
(a) Just by inspection
(b) By method of grouping
(c) By interpolation formula
(a) When frequency distribution is regular then just by looking at the series we can tell which observation is maximum times in the series and that is the mode, (just by inspection)
(b) When the distribution is not regular then this method is used, (method of grouping)

Data table

 

Size Frequency Size Frequency
5 48 13 52
6 52 14 41
7 56 15 57
8 60 16 63
9 63 17 52
10 57 18 48
11 55 19 40
12 50

Location of mode by grouping

Probability – CS Foundation Economics Notes Chapter 10 img 1

The frequencies in columns (1) are first added in two’s in columns (2) and (3). Then they are added in three’s in columns (4), (5), and (6). The maximum frequency in each column is indicated by thick letters. It will be observed that mode changes with the change in a grouping. Thus according to column (1) mode should be 9 or 16. To find out t4g point of maximum concentration the data can be arranged in the shape table as follows:

Analysis Table

Columns Size of item containing maximum frequency
(1) 9 16
(2) 9 10 15 16
(3) 8 9
(4) 8 9 10
(5) 9 10 11
(6) 7 8 9
No. of times a 1 3 6 3 1 1 2
Size occurs

Since the size 9 occurs the largest number of times it is the model size or mode is 9. If we look at the frequencies in the original table, we shall find that the frequency of 63, which is the maximum single frequency, is against two values, 9 and 16. The series thus appears to be bi-modal but the process of grouping leads us to the conclusion that the concentration of items round 9 is more than the concentration round 16. Even if the frequency against 16 was 64 instead of 63 probably grouping would have disclosed that the concentration of items around about 9 is more, even though the individual frequency against 9 is only 63. It is thus never safe to rely only on the inspection of a series and to locate the mode at the point of maximum frequency. Mode is affected by the frequencies of the neighboring items also, and, therefore, grouping is essential, as it reveals the true point of maximum concentration.

The exact location of the mode of grouped frequency is found by this method (Interpolation formula) Calculating mode of a grouped frequency distribution by Interpolation formula

Class- Interval 5-10 10-15 15-20 20-25
Frequency 4 5 7 2

Step 1:
Here the frequency of class interval 15 – 20 is the maximum.
=> 15-20 = modal class Step 2:
L = Lower limit of modal class =15
fm = Frequency of modal class = 7
fl = Frequency of class preceding the modal class = 5
f2 = Frequency of class succeeding the modal class = 2
h = Size of class interval =10-5 = 5
Step 3:
Mode = L + (fm-fI )/2fm-fl -f2 *h
= 15 + (7-5)/2 *7-5-2 * 5
= 15 + 10/7
= 15 + 1.42 = 16.42
=> Mode = 16.42.
Thus by interpolation formulae, we get 16.42 as the median.

11. Advantages of the Mode

  • It is useful in counting the number of times an event occurs.
  • It helps in identifying whether an event has occurred more than once.
  • It is not affected by extremely large or small values.
  • It can be computed in an open-end frequency table.
  • It can be located only by inspection in ungrouped data and discrete frequency distribution.
  • Mode also is important as it helps us identify the nominal data for various situations. Take the example of the counting of votes. Here, a single-mode value would determine the victory of any particular leader and vice-versa. So, the mode has its own importance and we cannot neglect it at any cost.

Disadvantages

  • It is not well defined.
  • It is not based on all the values.
  • It is stable for large values and it will not be well defined if the data consists of a small number of values.
  • It is not capable of further mathematical treatment.
  • Sometimes, the data having one or more than one mode, and sometimes the data having no mode at all.

In conclusion, circumstances generally dictate which measure of central tendency—mean, median, or mode—is the most appropriate. If you are interested in a total, the mean tends to be the most meaningful measure of central tendency because it is the total divided by the number of data. For example, the mean income of the individuals in a family tells you how much each family member can spend on life’s necessities. The median measure is good for finding the central value and the mode is used to describe the most typical case.

12. Dispersion
Dispersion measures how the various elements behave with regards to some sort of central tendency, usually the mean. Measures of dispersion include range, inter-quartile range, variance, standard deviation, and absolute deviation. It is a group of analytical tools that describes the spread or variability of a data set.

Definitions
As per A.L. Bowley ‘dispersion is the measure of the variation of items’
As per L.R. Conner ‘dispersion is the measure of the extent to which individual items vary’

13. Importance of the measures of dispersion

  • supplements an average or a measure of central tendency
  • compares one group of data with another
  • indicates how representative the average is.
  • reliability of average can be decided with the help of dispersion

14. Methods of dispersion
Some of the methods of dispersion are

  • Range- The range is the most obvious measure of dispersion and is the difference between the lowest and highest values in a dataset.
  • Inter-quartile range – The inter-quartile range is a measure that indicates the extent to which the central 50% of values within the dataset are dispersed. It is based upon and related to, the median.
  • Mean deviation – It is the arithmetic mean of the absolute values of deviation.
  • Standard deviation
  • Lorenz curve

15. Standard deviation
Since mean can not be further expressed algebraically, a method called standard deviation be used. Standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. A measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance. Formula for calculating standard deviation For a data set, the mean is

S2 == \frac{\Sigma(\mathrm{X}-\mathrm{M}) 2}{\mathrm{n}-1}

Where Σ = Sum of
X = Individual score
M = Mean of all scores
N = Sample size (number of scores) Example: To find the Standard deviation of the data set: 3,2,4,1,4,4.

Step 1: Calculate the mean and deviation.
Step 2: Using the deviation, calculate the standard deviation
(0+l+l+4+l+l)/6-l = 8/5
S2 =1.6
S = 1.265
S2 (standard deviation) =1.6
Variance S= 1.265

Short cut Method
The standard deviation that we calculated above formula is correct and will work for calculations, there is another equivalent, shortcut formula that does not require us to first calculate the sample mean. This shortcut formula for the sum of squares is

Σ(xi2)-(Σ xi)2/n

Here the variable n refers to the number of data points in our sample.
An Example – Standard Formula
We take a sample that is 2, 4, 6, 8. The sample mean is (2 + 4 + 6 + 8)/4 = 20/4 = 5. Now we calculate the difference of each data point with the mean 5.
2 – 5 = -3
4 – 5 = -1
6 – 5 = 1
8 – 5 = 3
We now square each of these numbers and add them together. (-3)2 + (-1)2 + l2 + 32 = 9 + 1 + 1 + 9 = 20.

An Example – Shortcut Formula
Now we will use the same set of data: 2, 4, 6, 8, with the shortcut formula to determine the sum of squares. We first square each data point and add them together: 22 + 42 + 62 + 82 = 4 + 16 + 36 + 64 = 120.

The next step is to add together all of the data and square this sum: (2 + 4 + 6 + 8)2 = 400. We divide this by the number of data points to obtain 400/4 =100.
We now subtract this number from 120. This gives us that the sum of the squared deviations is 20. This was exactly the number that we have already found from the other formula.

The standard deviation plays a dominating role in the study of variation in the data. It is a very widely used measure of dispersion. As far as the important statistical tools are concerned, the first important tool is the mean and the second important tool is the standard deviation.

16. Coefficient of variation
In probability theory and statistics, the coefficient of variation (CV) is a normalized measure of the dispersion of a probability distribution or frequency distribution. It is also known as unitized risk or the variation coefficient. The coefficient of variation (CV) is defined as the ratio of the standard deviation σ to the mean µ:

Cv = \frac{\sigma}{\mu}

The standard deviation of data must always be understood in the context of the mean of the data therefore the coefficient of variation is useful. The coefficient of variation is a dimensionless number. So when comparing between data sets with different units or widely different means, one should use the coefficient of variation for comparison instead of the standard deviation

17. Advantages and disadvantages of standard deviations

Merits

  • is based on every item of the data
  • takes care of both positive and negative deviation
  • is less affected by variation in sampling
  • is most popularly used in statistics

Demerits

  • is somewhat not easy to understand.
  • The extreme values unduly affect the standard deviation

Measures Of Central Tendency MCQ Questions

Question 1.
The sum of the mean and the median of 4, 6, 3, 2, 5 is
a. 6.0
b. 9.0
c. 8.0
d. 8.5
Answer:
c. 8.0

Question 2.
The numerical value separating the higher half of a sample from a lower half is
a. Median
b. Mode
c. Mean
d. Standard deviation
Answer:
a. Median

Question 3.
The most frequent value in a data set is
a. Median
b. Mode
c. Arithmetic mean
d. Geometric mean
Answer:
b. Mode

Question 4.
When there is a linear relationship between two numerical variables it can be measured by
a. Mean
b. Mode
c. Scatter diagram
d. Coefficient of correlation
Answer:
d. Coefficient of correlation

Question 5.
Which of the following statements about the median is NOT true?
a. It is more affected by extreme values than the mean
b. It is the middle value that separates the upper half from the lower half
c. It is equal to the mode in bell-shaped distributions.
d. Both b & c
Answer:
a. It is more affected by extreme values than the mean

Question 6.
A measure of central tendency that attempts to describe a set of data by identifying the central position within the data is
a. Mean
b. Mode
c. Median
d. All the above
Answer:
d. All the above

Question 7.
Average is a value that is a representation of a set of data, this definition of average was given by
a. Clark
b. Goxtor
c. Murry R. Spiegal
d. None of the above
Answer:
c. Murry R. Spiegal

Question 8.
Average make it easy for
a. Completing the data
b. For making data short so it becomes manageable
c. Account relations could be formed among variables
d. All of the above
Answer:
d. All of the above

Question 9.
Average can be used
a. Only in unity
b. Can be combined with other average
c. Both a & b
d. None of the above
Answer:
b. Can be combined with another average

Question 10.
The harmonic mean is a part of
a. Positional average
b. Mathematical average
c. Both a & b
d. None of the above
Answer:
b. Mathematical average

Question 11.
From the below mentioned about the mean which is not there in asthmatic mean
a. Assigns equal weightage to both high & small observations used for averages
b. Can not be determined by graphical location
c. It can not use fro data that is not measurable
d. All of the above
Answer:
d. All of the above

Question 12.
Find the median of the below-mentioned observation 15, 20, 45, 30, 60, 36
a. 32
b. 33
c. 47.5
d. None of the above
Answer:
b. 33

Question 13.
The formulae for calculating the median if individual observations are given will be
a. (N+1)/2th if n is add
b. (N+1)th/2 if n is add
c. (N/2)th if n is odd
d. (both a & c
Answer:
a. (N+1)/2th if n is add

Question 14.
For calculation of median through interpolation formulae, “h” in the formulae is
a. Frequency of the median
b. The lower limit of the median class
c. width of the median class
d. Median
Answer:
c. width of the median class

Question 15.
It is not uncommon in a median
a. To locale it graphically
b. To use it then data is qualitative
c. To use it when data is rigidly defined
d. All of the above
Answer:
d. All of the above

Question 16.
The object of statistical averages is to
a. help in comparison
b. help in delusion making
c. helps in the collection of data
d. Both a &b
Answer:
a. help in comparison

Question 17.
In the interpolation formulae used for calculation of mode “h” is
a. Mode
b. width of modal calls
c. Frequency of modal class
d. Lover limit of modal class
Answer:
b. width of modal calls

Question 18.
The mode can be
a. Located graphically
b. Can be computed in an open-and frequent distribution.
c. can be located by just inspection
d. Both B & C
Answer:
d. Both B & C

Question 19.
Only _______ can be used for all algebraic calculations
a. Mean
b. Made
c. Median
d. All of the above
Answer:
d. All of the above

Question 20.
All of the data is highly affected by extreme observation then which type of average it is
a. Mean
b. Mode
c. Median
d. All of the above
Answer:
c. Median

Question 21.
When we want to find the most common data that is being displayed in the series than the best way of calculating it is
a. mean
b. mode
c. media
d. All of the above
Answer:
b. mode

Question 22.
co-efficient of variation is
a. absolute variation
b. static
c. relative variation
d. mane of the above
Answer:
c. relative variation

Question 23.
The following is arranged in ascending order. If the median of the data is 63, find the volume of x in a series 29, 32, 48, 50, x, x + 2, 72, 78, 84, 95,
a. 60
b. 62
c. 63
d. 64
Answer:
b. 62

Question 24.
The number of Wickets taken by a team in series of 10 matches are 2, 3, 4, .5, 0, 1, 3, 3, 4, 3 find the mode of the set
a. 3
b. 2.8
c. 3.3
d. 2.9
Answer:
a. 3

Question 25.
The average (arithmetic mean) of a set of seven numbers is 8. When an eighth number is added to the set, the average of the eight numbers is still 8. What number was added to the set?
a. 6
b. 7
c. 8
d. 9
Answer:
c. 8

Question 26.
If x is the average (arithmetic mean) of 5 consecutive odd integers, what is the median of integers?
a. 0
b. 1
c. x-2
d. x
Answer:
d. x

Question 27.
The sum of 7 consecutive even integers is 224. What integer has the least value in the list?
a. 16
b. 18
c. 26
d. 29
Answer:
c. 26

Question 28.
1, 3, 5, 8, 10, 13. How many different sums can be made by adding any two different numbers from the list above?
a. 6
b. 8
c. 10
d. 12
Answer:
b. 8

Question 29.
In a list of 37 consecutive integers, the median is 70. What is the largest integer in the list?
a. 96
b. 97
c. 98
d. 99
Answer:
c. 98

Question 30.
The mean is a measure of
a. association
b. location
c. relative location
d. variability
Answer:
b. location

Question 31.
The correlation coefficient is a measure of
a. association
b. location
c. relative location
d. variability
Answer:
b. location

Question 32.
Mathematical averages include.
a. Arithmetic means
b. Median
c. Harmonic mean
d. Both a & c
Answer:
d. Both a & c

Question 33.
The most frequently occurring data value in a data set is the
a. median
b. arithmetic mean
c. population parameter d. mode
Answer:
d. mode

Question 34.
A measure of central location which splits the data set into two equal groups is called the
a. mean
b. mode
c. median
d. standard deviation
Answer:
c. median

Question 35.
The coefficient of variation is
a. the same as the variance
b. a measure of central tendency
c. a measure of absolute variability
d. a measure of relative variability
Answer:
d. a measure of relative variability

Questions 36.
The sum of the deviation of the individual data elements from their mean is always
a. equal to zero
b. equal to one
c. negative
d. positive
Answer:
a. equal to zero

Question 37.
An automobile club has four different types of members: A, B, C, and D, depending on the type of membership. For each member, let X indicate his/her membership type.
a. the arithmetic mean of X is meaningful
b. the mode of X is meaningful
c. A histogram is appropriate to display the distribution of X.
d. A box plot is appropriate to display the distribution of X
Answer:
b. the mode of X is meaningful

Question 38.
In general, which of the following statements is FALSE?
a. the sample mean is more sensitive to extreme values than the median.
b. The sample range (i.e. maximum minus minimum) is more sensitive to extreme values than the median.
c. the sample standard deviation is a measure of spread around the sample mean
d. the sample standard deviation is a measure of central tendency around the median
Answer:
d. the sample standard deviation is a measure of central tendency around the median

Question 39.
For ‘n’ observations x<sub>1</sub>, X<sub>2</sub> x<sub>3</sub> ……….. and X<sub>4</sub> of a distribution. From the following what does X denote
x = \frac{X_{1}+X_{2}+\ldots-X_{n}}{n}
a. Arithmetic mean
b. Median
c. Mode
d. None of the above
Answer:
a. Arithmetic mean
Hint
Arithmetic mean = sum of all observations/Total number of observations

Question 40.
The average friend request for a weak excluding Sunday on Facebook was 10. On Sunday, the average of all 7 days rose to 15. How. many friends visited you on Sunday.
a. 45
b. 15
c. 35
d. 20
Answer:
a. 45
Hint
Mean for 6 days = 10
Mean for 7 days = 15
Total friend request in 6 days = 60
Mean for 7 days = total number of friend requests/total number of days
Mean for 7 days = total number of friend request (total friend request in 6 days + number of friend requests
on Sunday)/total number of days
15= 60 + number of a friend requests on Sunday/7
105 = 60 + number of friend request on Sunday
105-60 = number of a friend requests on Sunday
45= number of a friend requests on Sunday

Question 41.
In a normal distribution-
a. Mode» 3 Median-2 mean
b. Median=3 Mode-2 Mean
c. Mean= 3 Median-2 Mode
d. None of the above
Answer:
a. Mode» 3 Median-2 mean
Hint
Mode = 3 Median – 2 Mean

Question 42.
Coefficient of variation of a distribution is 12.5% and standard deviation is 100. The value of mean will be
a. 100
b. 300
c. 500
d. 800
Answer:
d. 800
Hint
mean = SD/CV × 100 = 100/12.5 × 100 = 800

Question 43.
Two distributions with 100 and 200 items have a mean of 20 and 10 respectively. The combined mean of two distributions will be:
a. 30.50
b. 10.16
c. 13.33
d. 11.12.
Answer:
c. 13.33
Hint
Combined mean = n11 + n22/n1 + n2
= 100 × 20 + 200 × 10/100+200 = 4000/300 = 13.33

Question 44.
A histogram can be used to estimate graphically the value of:
a. Mean
b. Median
c. Mode
d. Upper quartile
Answer:
c. Mode
Hint
The mode is the value that appears most often in a set of data. Mode can be calculated graphically using histogram.

Question 45.
A Lorenz Curve is used to measure:
a. Correlation
b. Variation
c. Arrangements of frequencies
d. Association of attributes.
Answer:
b. Variation
Hint
It is a graphical method.

Question 46.
In a given distribution the value of coefficient of variation is 80%, the value of arithmetic mean is 20. The value of standard deviation would be:
a. 16
b. 20
c. 36
d. 80
Answer:
a. 16
Hint
C.V. * S.D./mean × 100
S.D. = C.V. × mean/100
= 80 × 20/100 =16

Question 47.
The square, root of the arithmetic mean of the squared deviations of items taken from arithmetic mean is called:
a. Mean deviation
b. Quartile deviation
c. Standard deviation
d. Variance
Answer:
c. Standard deviation
Hint
The square, root of the arithmetic mean of the squared deviations of items taken from arithmetic mean is called
For a data set, the standard deviation is S2 = \frac{\Sigma(X-M) 2}{n-1}
Where Σ = Sum of
X = Individual score
M = Mean of all scores
N = Sample size (number of scores)

Question 48.
In moderately symmetrical distribution, the mode is 49 and median is 44. The value of mean will be:
a. 43
b. 57.3
c. 46
d. 58.0
Answer:
b. 57.3
Hint
Mode = 3 Median – 2 Mean
2Mean = 3 median – Mode
2 mean = 3 × 44 -40 = 132-40 =92
Mean = 92/2 =46

Question 49.
In a moderately a symmetrical distribution. Arithmetic mean = 50, and Mode = 37.5. The value of median will be—
a. 45.83
b. 42.15
c. 43.20
d. 44.00
Answer:
a. 45.83
Hint
Mode = 3 Median – 2 Mean
3Median = mode+2 Mean
= 37.5 +2 × 50
Median =137.5/3 = 45.83

Question 50.
The sum of deviations of a set of observations is zero when the deviations are taken from their –
a. Mode
b. Median
c. Arithmetic mean
d. None of the above
Answer:
c. Arithmetic mean
Hint
The sum of deviations of a set of observations is zero when the deviations are taken from their mean.

Question 51.
The mean and standard deviations of 10 observations are 35 and 2 respectively. If each observation is increased by 4, the changed mean and standard deviation respectively will be-
a. 35 and 2
b. 40 and 4
c. 39 and 2
d. None of the above
Answer:
c. 39 and 2
Hint
If each observation is increased by 4 then mean will be old mean +4 as mean is dependent on change of origin. Thus new mean is 35+4 = 39. But S.D. is not dependent on origin so new S.D. will be same as old S.D.

Question 52.
Mean of first 10 natural numbers is:—
a. 5.5
b. 6.5
c. 8
d. 5
Answer:
a. 5.5
Hint
Mean = sum of observations/No. of observations
Sum of first 10 natural numbers is 1+2+3+4+5+6+7+8+9+10=55
Thus Mean = 55/10 = 5.5

Question 53.
A series was given: – 2,3,6,9, …………………….., what will be the median of the following?
a. 3
b. 6
c. 9
d. 4.5
Answer:
d. 4.5
Hint
Median = n/2th term + (n/2 +1)th term/2 = 4/2 + (4/2+ 1)/2 = 2nd term + 3rd term/2 = 3+6/2 = 4.5

Question 54.
Standard of variance (15, 20, 25), find the mean:-
a. 20
b. 30
c. 40
d. 50
Answer:
a. 20
Hint
Mean = sum of observations/number of observations = 60 (15+20+25)/3 = 20

Question 55.
C.V. is 1600, then find Standard Deviation if A.M is 2.5
a. 40
b. 50
c. 60
d. 70
Answer:
a. 40
Hint
C.V. = S.D./mean × 100
S.D. = C.V. × mean/100
S.D. = 1600 × 2.5/100
= 40

Question 56.
Pie – Chart is:
a. 90°
b. 180°
c. 360°
d. 60°
Answer:
c. 360°
hint
Pie chart is a circle so 360 degree.

Question 57.
The average of 7 numbers is 27. If we include one more number, then average becomes 25. Find the included number.
a. 11
b. 13
c. 15
d. 14
Answer:
a. 11
hint
Average = sum of observations/No. of observations
Sum of 7 numbers = 27 x 7 =189
After adding one more number say x new sum is 189+x .
Average = 189+X/8
25 = 189+X/8
X = 11

Question 58.
When mean, median & mode are equal, then it is a situation of –
a. Positive skewness
b. Negative skewness
c. Symmetrical
d. None of these
Answer:
c. Symmetrical
Hint
According to symmetrical skewness principle A.M. = Median =Mode

Question 59.
The Ogive is formed by-
a. Cumulative frequency
b. Central tendency
c. Both (a) & (b)
d. None of the above
Answer:
a. Cumulative frequency
Hint
Cumulative frequency curve – Cumulative histograms, also known as ogives, are graphs that can be used to determine how many data values lie above or below a particular value in a data set.

Question 60.
When does the value of mean changes-
a. Change of scale
b. Change of origin
c. Both (a) & (b)
d. None of the above
Answer:
c. Both (a) & (b)
Hint
The value of mean changes by change of scale and change of origin.

Questions 61.
Graphical representation of cumulative frequency distribution is known as –
a. Mean
b. Median
c. Mode
d. None of the above
Answer:
b. Median
Hint
Graphical representation of cumulative frequency distribution is known as median.

Question 62.
Find mean of 0.3,5,6,7,9,12,0.2?
a. 5.34
b. 6
c. 5.64
d. 7
Answer:
c. 5.64
Hint
Mean = sum of observations/no. of observations = 39.5/7 = 5.64

Question 63.
Find SD of 10,10,10,10,16,16,16,16.
a. (8) 10
b. 16
c. 3
d. 2
Answer:
c. 3
Mean = sum of observations/no. of observations = 104/8 = 13
Deviation = individual unit – mean = 10-13 =-3
Similarly deviation is -3,-3,-3, -3 ,3 ,3 ,3 ,3
S.D. = \sqrt{\frac{\sum \text { deviation }^{2}}{\mathrm{n}}}
= \sqrt{\frac{9+9+9+9+9+9+9+9}{8}}
= 3

Question 64.
Standard deviation is a measure of:
a. Central tendency
b. Symmetry
c. Probability
d. Dispersion
Answer:
d. Dispersion
Hint
Standard deviation is a measure of the dispersion of a set of data from its mean.

Question 65.
Which of the following would be appropriate average for determining the average size of readymade garments:
a. Geometric Mean
b. Mode
c. Arithmetic Mean
d. Median
Answer:
b. Mode
Hint
The mode is the value that appears most often in a set of data. Thus for determining the average of ready made garment this is the best method.

Question 66.
The mean of first 10 even numbers is:
a. 10
b. 9
c. 12
d. 11
Answer:
d. 11
Hint
Mean = sum of observations/no. of observations = 110 (2+4+6+8+10+12+14+16+18+20)/10 = 11

Question 67.
What is the major assumption that one makes, when computing a mean from a grouped data?
a. No value shall occur more than once
b. Each class contains exactly the same number of values
c. All values are discrete
d. Every value in a class interval is equal to its midpoint.
Answer:
c. All values are discrete

Question 68.
If the variance of a sample is 1600, then the value of standard deviation would be:
a. 40
b. 10
c. 1600
d. 160
Answer:
a. 40
Hint
S.D. = \sqrt{\text { Variance }}
= \sqrt{\text { 1600 }}
= 40

Question 69.
The mean of first 10 even numbers is:
a. 12
b. 11
c. 10
d. 9
Answer:
b. 11

CS Foundation Business Economics Notes

Mathematics Of Finance – CS Foundation Statistics Notes

Mathematics Of Finance – CS Foundation Statistics Notes

1. Interest
The amount charged, expressed as a percentage of the principal, by a lender to a borrower for the use of assets. It involves two persons
Borrower – When you borrow money, you pay interest Moneylender- When you lend money, you earn interest.
Some of the terms used in interest calculation are

  • Principal or Capital – sum borrowed
  • Interest – Extra money charged by the lender for use of his money
  • Moneylender – a person who gives money to the borrower
  • Conversion period – the period of time for which interest is calculated
  • Simple interest – Simple interest is just the amount of money paid on a loan.
  • Compound interest – over here Interest is charged on interest too.

2. Simple interest
Simple interest is called simple because it ignores the effects of compounding. The interest charge is always based on the original principal, so interest on interest is not included.
The formula for this is very simple:
I=PRT,
where I am interested,
P is Principal,
R is the percentage rate expressed as decimal and
T is time, which is generally expressed in years, assuming your rate is an annual rate.
Steps to calculate simple interest

Find the Principal. This is the amount of money borrowed or lent at the start of the year for which the interest will be calculated for.

Find the Rate as a decimal. This is the percentage of the Principal you will pay back each year. Divide the percentage by 100 to give the decimal value.

Specify the Time in years over which you want the interest calculating

Multiply Principle × Rate × Time to calculate the simple interest. This is the money you will pay/be paid on top of what was lent or borrowed.

Example
A sum of money at simple interest amounts to Rs. 815 in 3 years and to Rs. 854 in 4 years. The Principal sum is Rs.
Explanation:
S.I. for 1 year = Rs. (854 – 815) = Rs. 39.
S.I. for 3 years = Rs. (39 × 3) = Rs. 117.
Principal = Rs. (815 – 117) = Rs. 698.
Example
A sum fetched a total simple interest of Rs. 4016.25 at the rate of 9 p.c. per annum, in 5 years. The principal sum is Rs. 8925
Principal = Rs. \left(\frac{100 \times 4016.25}{9 \times 5}\right)
= Rs. \left(\frac{401625}{45}\right)
= Rs. 8925.

3. Compound interest
Compound interest is where interest is paid on the amount already earned leading to greater and greater amounts of interest.
Formula
Total Amount = Principal + Cl (Compound Interest)
(a) Formula for Interest Compounded Annually Total Amount = P (1+(R/100))n
(b) Formula for Interest Compounded Half Yearly Total Amount = P(1+(R/200))2n
(c) Formulae for Interest Compounded Quarterly Total Amount = P( 1 +(R/400))4n
(d) Formulae for Interest Compounded Annually with fractional years (e.g. 2.5 years)
Total Amount = P(1+(R/100))a ×(1+(bR/100))
here if year is 2.5 then a =2 and b=0.5
(e) With different interest rates for different years Say x% for year 1, y% for year2, z% for year3
Total Amount = P(1+(x/100))*(1+(y/100))*(1+(z/100))
where,
CI = Compound Interest,
P = Principal or Sum of amount,
R = % Rate per annum,
” n = Time Span in years
Example
An amount of Rs 1,500.00 is deposited in a bank paying an annual interest rate of 4.3%, compounded quarterly. Find the balance after 6.years.
Solution
Use the regular compound interest formula,
A = P (1 + r/n) with P = 1500, r = 4.3/100 = 0.043,
n = 4 (not 1/4), t = 6. Therefore,
A = 1500 \left(1+\frac{0.043}{4}\right)^{4(6)} = $ 1,938.84

So, the balance after 6 years is approximately Rs. 1,938.84.

4. Annuities
An annuity is a type of investment in which regular payments are made over the course of multiple periods. Annuities help both the creditor and debtor have predictable cash flows, and it spreads payments of the investment out over time.

5. Various types of annuity
1. Contingent annuity – An annuity arrangement in which the beneficiary does not begin receiving payments until
a specified event occurs. A contingent annuity may be set up to begin sending payments to a beneficiary upon the death of another individual who wishes to ensure financial stability for the beneficiary or upon retirement or disablement of the beneficiary. ”

2. Ordinary annuity – Payments are required at the end of each period. For example, straight bonds usually pay coupon payments at the end of every six months until the bond’s maturity date.

3. Annuity due – Payments are required at the beginning of each period. Rent is an example of an annuity due. You are usually required to pay rent when you first move in at the beginning of the month, and then on the first of each month thereafter.

4. Deferred Annuity- An annuity in which the annuitant does not begin to receive payments until some future date. A deferred annuity has two phases: a savings phase and an income phase. During the savings phase, the annuitant places money into the annuity, which invests it on behalf of the annuitant. In the income phase, the annuitant receives payments. It is important to note that a deferred annuity is not taxed until the income phase begins. It also pays a death benefit to the survivor(s) of the annuitant. Nearly all retirement plans are deferred annuities

5. Immediate annuity – If at the end of the period the periodic payments are made.

6. Forborne annuity – The annuity that is left unpaid for years is called a forborne annuity.

6. Amount of annuity or future value of the annuity
The value of a group of payments at a specified date in the future. These payments are known as an annuity or a set of cash flows. The future value of annuity measures how much you would have in the future given a specified rate of return or discount rate.
The total amount of Annuity = sum of all periodic payments+ sum of all interest on periodic payments.

1. Ordinary annuity – Here the payments are made when the period ends. It is also called an immediate annuity. Most installment loans can be classified as ordinary annuities. Mortgages with the first payment due a month after the initial loan date are one of the most common examples of an ordinary annuity.

2. Annuity due – The payments are made at the beginning of each period. Any fixed payment for a service or property that occurs before a service period begins is an example of an annuity payment. Common applications include rent payments
Present Value – Present Value (PV) is a formula used that calculates the present-day value of an amount that is received at a future date. The premise of the equation is that there is a “time value of money”.
Time value of money is the concept that receiving something today is worth more than receiving the same item at a future date.

7. Present value of the annuity
The present value of the annuity formula determines the value of a series of future periodic payments at a given time. The present value of the annuity formula relies on the concept of the time value of money, in that one Rupee present day is worth more than that same Rupee at a future date. It is helpful for calculating the series of retirement payments etc.

8. Present value of ordinary annuity
The Present Value of an Ordinary Annuity is the value of a stream of expected or promised future payments that have been discounted to a single equivalent value today. It is extremely useful for comparing two separate cash flows that differ in some way.

9. Present value of an annuity due
The Present Value of an Annuity Due is identical to an ordinary annuity except that each payment occurs at the beginning of a period rather than at the end. Since each payment occurs one period earlier, we can calculate the present value of an ordinary annuity and then multiply the result by (1 + i).
PV Ordinary Annuity = C * \left[\frac{1-(1+\mathrm{i})^{-\mathrm{n}}}{\mathrm{i}}\right]
C = Cash flow per period
i = Interest rate
n = Number of payments
This calculates the present value of an ordinary annuity.
To calculate the present value of an annuity due, multiply the result by (1+i). (The payments start at time zero instead of one period into the future.)

Mathematics Of Finance MCQ Questions

Question 1.
Interest is
a. Money Loaded
b. Money borrowed
c. Extra money paid on borrowed money
d. Borrowed run and above
Answer:
c. Extra money paid on borrowed money

Question 2.
The conversion period is
a. The time for which loan is given
b. The time for which interest is calculated
c. Period of conversion of simple interest into compound interest
d. None of the above
Answer:
b. The time for which interest is calculated

3. It is correct for annuity
a. It is the run paid
b. Fixed run paid at regular intervals
c. Fixed sum paid at regular interest under stared condition
d. All of the above
Answer:
c. Fixed sum paid at regular interest under the stared condition

Question 4.
Annuity due is the periodic payment made
a. At the end of each period
b. At the beginning of each period
c. Start only after a specified period
d. After a fixed number of interest
Answer:
b. At the beginning of each period

Question 5.
The time between two successive payment dates of an annuity is called
a. Annuity certain
b. For borne annuity
c. Payment Period
d. Terms of an annuity
Answer:
c. Payment Period

6. Amount of an annuity is
a. Total amount of all provide payment and total interest on the payments
b. Total time from the beginning of the first payment to the last payment
c. The total amount paid from the time loan taken till loan and
d. None of the above
Answer:
a. Total amount of all provide payments and total interest on the payments

Question 7.
If the principal amount is 99 and the amount payable is 199 at the end of the year then the rate of interest is
a. 100%
b. 99%
c. 100.5%
d. 200%
Answer:
c. 100.5%

Question 8.
There are __________types of annuity
a. 7
b. 8
c. 9
d. 6
Answer:
b. 8

Question 9.
An insurance company designed to pay a certain amount at a specified intervals is
a. Annuity
b. Simple interest
c. Compound interest
d. none of the center
Answer:
a. Annuity

Question 10.
The rate of interest is decided by
a. Borrower
b. Lender
c. Bank
d. Both a & b
Answer:
d. Both a & b

Question 11.
Compound interest is
a. The interest on principal amount
b. The interest on previously accumulated interest as well as interest on principal amount
c. The interest on principle for a number of years
d. All of the above
Answer:
b. The interest on previously accumulated interest as well as interest on the principal amount

Question 12.
If an investment yields an interest rate of 10% annually compounded quarterly. What is the effective interest rate?
a. 10.4%
b. 4%
c. 10%
d. 10.2%
Answer:
a. 10.4%

Question 13.
Calculate the total amount received after 5 years if yearly Rs. 200 is being invested and the rate of interest is 6% annually compounded
a. Rs. 1000
b. Rs. 1200
c. Rs. 1500
d. Rs. 1127.42
Answer:
d. Rs. 1127.42

Question 14.
If after 10 years the desired balance is Rs. 5000 then how much should be invested if the rate of interest is 5% compounded quarterly
a. Rs. 3042
b. Rs. 3042.07
c. Rs. 3042.70
d. Rs. 3040
Answer:
b. Rs. 3042.07

Question 15.
Historically which type of annuity did all the companies possessed?
a. Fixed annuity
b. Annuity due
c. Deferred annuity
d. None of the above
Answer:
a. Fixed annuity

Question 16.
Raj borrowed Rs. 8000 for 180 days at 5% interest. On the 90th day he makes a partial payment of Rs. 2500. What will be the adjusted principal on the maturity date?
a. Rs. 2500
b. Rs. 8000
c. Rs. 5600
d. None of the above
Answer:
c. Rs. 5600

Question 17.
Ajay has purchased a second-hand car by taking a loan of Rs. 5000 from the bank at a rate of interest of 8% for 4 years. Calculate the total amount he will be paying to the bank on a loan of Rs. 5000 at the end of 4 years
a. Rs. 6820
b. Rs. 6820.44
c. Rs. 6800.44
d. Rs. 6802.44
Answer:
d. Rs. 6802.44

Question 18.
If it is written, “interest is compounded semi-annually”. It means.
a. In 2 years there is one conversion period
b. The conversion period is 2 per year
c. Every year interest is halved
d. None of the above
Answer:
b. Conversion period is 2 per year

Question 19.
If the final amount received is 1938.84 for a deposit made for 6 years. What will be the principal amount? The annual interest rate is 4.3% compounded quarterly
a. Rs. 1200
b. Rs. 1000
c. Rs. 1600
d. Rs. 1500
Answer:
d. Rs. 1500

Question 20.
Interest rate per conversion period is calculated by.
a. Rate of interest
b. Conversion period/annual interest rate
c. Annual interest rate/conversion period
d. None of the above
Answer:
c. Annual interest rate/conversion period

Question 21.
Suppose you purchase a share of a company at a price of Rs. 77 a share and sold it after a month for Rs. 82 a share. You have received a dividend of Rs. 1 at the end of the month. Calculate your annual rate of return, assuming monthly compounding
a. 146%
b. 140%
c. 100%
d. 200%
Answer:
a. 146%

Question 22.
If the question arises that how much the company should pay lump sum today so that a future pension plan could be purchased then it is.
a. Future value of annuity
b. Present value of annuity
c. Both a & b
d. None of the above
Answer:
b. Present value of the annuity

Question 23.
What will be the total amount of interest (rounded off) received .by Ajay if he invests Rs. 10000 for 5 years at an interest rate of 7.5 % compounded quarterly.
a. Rs. 4499
b. Rs. 4490
c. Rs. 4500
d. Rs. 4994
Answer:
a. Rs. 4499

Question 24.
If a firm’s debt ratio is 45% this means ________ of the firm’s assets are financed by equity financing provided debt ratio = debt/Total Assets
a. 50%
b. 55%
c. 45%
d. Cannot be terminated without more information
Answer:
b. 55%

Question 25.
A firm has paid out Rs. 150,000 as dividends from its net income of Rs. 250,000 what is the retention ratio for the firm? (Retention ratio = net income – dividend/Net income)
a. 12%
b. 25%
c. 40%
d. 60%
Answer:
c. 40%

Question 26.
When the market’s required rate of return for a particular bond is much less than its coupon rate, the bond is selling at:
a. Premium
b. Discount
c. Par
d. Cannot be determined without more information
Answer:
a. Premium

Question 27.
If you plan to save Rs. 5,000 with a bank at an interest rate of 8% what will be the worth of your amount after 4 years if interest is compounded annually?
a. Rs. 5,400
b. Rs. 5,900
c. Rs. 6,600
d. Rs. 6,802
Answer:
d. Rs. 6,802

Question 28.
Which of the following measure reveals how much profit a company generates with the money shareholders have invested ?
a. Profit margin
b. Return on Assets
c. Return on equity
d. Debt-Equity Ratio
Answer:
c. Return on equity

Question 29.
If you have Rs. 850 and you plan to save it for 4 years with an interest rate of 10%, what will be the future value of your savings?
a. Rs. 1,000
b. Rs. 1,244
c. Rs. 1,331
d. Rs. 1,464
Answer:
b. Rs. 1,244

Question 30.
You need Rs. 10,000 to buy a new television. If you have Rs. 6, 000 to invest at 5 percent compounded annually, how long will you have to wait to buy the televisions?
a. 8.42 years
b. 10.51 years
c. 15.75 years
d. 18.78 years
Answer:
b. 10.51 years

Question 31.
How many years will it take to pay a Rs. 11,000 loan with an Rs. 1241.08 annual payment and a 5% interest rate?
a. 6 years
b. 12 years
c. 24 years
d. 48 years
Answer:
b. 12 years

Question 32.
Which one of the following terms refers to the risk that arises for bond owners from fluctuating interest rates?
a. Fluctuations Risk
b. Interest rate Risk
c. Real-Time Risk
d. Inflation Risk
Answer:
b. Interest rate Risk

Question 33.
A sum of Rs.1,200 becomes Rs.1,323 in two years at compound interest compounded annually. Find the rate percent?
a. 5%
b. 6%
c. 7%
d. 8%
Answer:
a. 5%
Hint
Amount=P(1+r)n
1323 = 1200(1 + r)2
r=0 .05
r = 5%

Question 34.
The difference between simple interest and compound interest compounded annually on X sum of money for 2 years at 4% per annum is Rs.1. The value of ‘X’ is
a. Rs. 100
b. Rs. 300
c. Rs. 500
d. Rs. 625
Answer:
d. Rs. 625
Hint
S.I. = PRT
where I am interested,
P is Principal,
R is the percentage rate expressed as decimal and T is time x is principal
S.I. =x 2.4/100 = ,08x
Total Amount = Principal + Cl (Compound Interest)
Cl = Total amount – Principal
Amount =P(1+r)n
= X (1+.04)2
Cl = X(1+.04)2 – X = x({1 +.04}2 – 1)
= 0816x
According to question C.l. – S.l. = 1
X (.0816- .08) = 1
X = 170016 = 625

Question 35.
The time between two successive dates of an annuity is called
a. Payment interval
b. Future value of annuity
c. Contingent annuity
d. Annuity certain
Answer:
a. Payment interval
Hint
The time period between two successive dates of an annuity is called payment interval.

Question 36.
Compound interest for Rs. 1 ,000 for 4 years at 5% per annum when it is compounded quarterly-
a. Rs. 215
b. Rs. 218
c. Rs. 220
d. Rs. 225
Answer:
c. Rs. 220
Hint
Total amount when Interest compounded quarterly = P(1+(R/400))4n
A = 1000(1+(5/400)4×4
A = 1220
C.l. = A-P = 1220-1000 = 220

Question 37.
Amjad invested a sum of money at 8% per annum at simple interest for’t’ years. At the end of’t’ year, Amjad got back 4 times his original investment.’ The value of ‘t; 3
a. 5 Years
b. 10.5 Years
c. 25.5 Years
d. 37.5 Years
Answer:
d. 37.5 Years
Hint
r = 8% , Let Principal = P
S.I. = Prt
A = S.I. + P
As per question amount = 4 P
Thus putting these value we get
A = S.I. + P
4P = S.I. + P
S.I. = 3P
Prt = 3 P
P x ,08 x t = 3P
t = 3P/Px .08 = 3/.08 =37.5 yrs

Question 38.
An annuity is a fixed sum paid at regular intervals. An annuity that continues for a number of years is called:
a. Deferred annuity
b. Immediate annuity
c. Uniform annuity
d. Perpetual annuity
Answer:
d. Perpetual annuity
Hint
A perpetual annuity is an annuity in which the periodic payments begin on a fixed date and continue indefinitely.

Question 39.
In what period, the compound interest on ~ 30,000 at 7% per annum amounts to Rs.4,347
a. 2 years
b. 1.5 years
c. 3 years
d. 4 years
Answer:
a. 2 years
Hint
C.I.= 4347
r = 7%
P= 30000
A = P + C.I.
A = 34347
A = P(1+(R/100))n
34347 = 30000 (1+(7/100)n
34347= 30000 (1+ .07)n
1.1449 = 1.07n
n = 2 yrs

Question 40.
What is the present value of Annuity on t1 for 2 years @ 10% p.a.?
a. 0.18
b. 2
c. 3
d. 0.67
Answer:
b. 2
Hint
PVOrdinary Annuity = C *

C=cash flow per period
i = interest rate
n=number of payments
i= 10%/12 = .1/12 = .00833
n= 1 × 2 = 2
c = 1
PV = 1(1 – \frac{.00833)^{-2}}{(.00833)}
PV = 1 × 1.975
PV =2

Question 41.
Cl = Rs. 30,000, @7% rate is Rs. 4347. Find the number of years.
a. 4 years
b. 2 years
c. 2.5 years
d. 3 years
Answer:
b. 2 years
Hint
P =A – C.l.
= 30000-4347 = 25653
A =P (1+r/100)n
30000 = 25653 (1+.07)n
1.1695 = (1.07)n
(1.07)2 = (1.07)n
2 = n

Question 42.
When the loan amount is given @ 9% then what will be the outstanding amount after 3 months?
a. 1014
b. 1000
c. 1012.5
d. 1013.6
Answer:
c. 1012.5
Hint
t= 3 months = 1/4 yrs
r =9% p.a.= 2.25 per quarter
A = 1000(1+ 2.25/100)1/4×4
A = 1000 x 1.0225 = 1022.5

Question 43.
The difference, between 81 & Cl is 1, the time period is 2 years, rate 4% p.a., find the principal amount?
a. 629
b. 625
c. 700
d. 600
Answer:
b. 625
Hint
S.I. = PRT
where I am interested,
P is Principal,
R is the percentage rate expressed as decimal and T is time
x is principal
5.1. = × 2 .4/100 = .08x
Total Amount = Principal + Cl (Compound Interest)
CI = Total amount – Principal
Amount =P(1+r)n
= x (1+.04)2
CI = x (1+.04)2 – X
= X({1+.04}2 – 1)
= 0816x
According to question C.I. – S.l. = 1 x(.0816 – .08) = 1 x= 1/.0016 = 625

Question 44.
On what sum will the compound compounded interest at 5% p.a. for 2 yeas annually be Rs. 1,640?
a. 10,000
b. 12,000
c. 15,525
d. 16,000
Answer:
d. 16,000
Hint
Amount = P(1+r)n
1640 = P{(1 +5/100)2 -1}
1640 = P{1.1025-1}
1640 = 1025 P
P = 16000

Question 45.
A man took a loan from a bank at the rate of 12% р.a. on simple interest. After 3 years he had to pay Rs.5,400 interest only for the period. The principal amount borrowed by him was:
a. Rs. 10,000
b. Rs. 20,000
с. Rs. 15,000
d. Rs. 18,000
Answer:
с. Rs. 15,000
Hint
S.l. =PRT
P = S.I./RT = 5400 × 100/12 × 3 =15000

Question 46.
With an interest rate of 5 percent, the present value of ~ 100 received one year from now is approximate:
a. Rs. 95.238
b. Rs. 105
c. Rs. 100
d. Rs. 95
Answer:
b. Rs. 105
Hint
A =P(1+R/100)t
= 100(1+5/100)t = 105

Question 47.
Vidhya Signed a contract in which she will receive ~ 3 million immediately and 1 million will be paid to her every year for the next 5 years. If the interest rate is 10%, the present value of the contract is approximate:
a. Rs. 7 million
b. Rs. 6.79 million
c. Rs. 8 million
d. Rs. 8.79 million
Answer:
b. Rs. 6.79 million
Hint
PV = 3 + 1 × \frac{1}{(1+0.01)^{1}} + 1 × \frac{1}{(1+0.01)^{2}} + 1 × \frac{1}{(1+0.01)^{3}} + 1 × \frac{1}{(1+0.01)^{4}} + 1 × \frac{1}{(1+0.01)^{5}}
= 3 + 3.79 = 6.79 million

Question 48.
A sum fetched a total Simple Interest of Rs 4016.25 at the rate of 9% p.a. in 5 years. Find the sum?
a. Rs. 8900
b. Rs. 4462.50
c. Rs. 8032.50
d. Rs. 8925
Answer:
d. Rs. 8925
Hint
S.l. = PRT
P = S.I./RT = 4016.25 × 100/5 x 9 = 8925

CS Foundation Business Economics Notes

Probability – CS Foundation Statistics Notes

Probability – CS Foundation Statistics Notes

1. Probability
Probability or likelihood is a measure or estimation of how likely it is that something will happen or that a statement is true. Probabilities are given a value between 0 (0% chance or will not happen) and 1 (100% chance or will happen) Probability theory is a branch of mathematics concerned with the analysis of random phenomena. The outcome of a random event cannot be determined before it occurs, but it may be any one of several possible outcomes. The actual outcome is considered to be determined by chance.

The fundamental ingredient of probability theory is an experiment that can be repeated, at least hypothetically, under essentially identical conditions and that may lead to different outcomes on different trials. The set of all possible outcomes of an experiment is called a sample space. For example, individuals in a population favoring a particular candidate in an election may be identified with balls of a particular color, those favoring a different candidate may be identified with a different color, and so on. Probability theory provides the basis for learning about the contents of the urn from the sample of balls drawn from the urn; an application is to learn about the electoral preferences of a population on the basis of a sample drawn from that population.

2. Basic concepts of set theory
The word ‘set’ in mathematics was first of all used by George Cantor. According to him, ‘A set is any collection into a whole of definite and distinct objects of our intuition or thought’. However, Cantor’s definition faced controversies due to the forms like ‘definite’ and ‘collection into a whole’.

3. Set
A set is a collection of objects which are called the members or elements of that set. If we have a set we say that some objects belong (or do not belong) to this set, are (or are not) in the set. We say also that sets consist of their elements.

Examples: the set of students in this room; the English alphabet may be viewed as the set of letters of the English language; the set of natural numbers 1; etc.
For example: is the letter q the same thing as the letter Q? Well, it depends on what set we are considering. If we take the set of the 26 letters of the English alphabet, then q and Q are the same elements. If we take the set of 52 upper-case and lower-case letters of the English alphabet, then q and Q are two distinct elements. Either is possible, but we have to make it clear what set we are talking about, so that we know whether or not q = Q.
Sets are to be distinct and well defined.
Subset
Subset and Proper Subset
Set A is a subset of set B if every element of A is also an element of B.
Set A is a proper subset of B if every element of A is also an element of B, but A CANNOT be exactly the same as B.

For example:
A = {a,b,c,d,e}
B = {a,b,c,d,e,f}
A is said to be a subset and a proper subset of B.
The number of subsets of a set with n elements is 2n.
For example: If a set has 5 elements, it will have 25 or 32 subsets.
The number of proper subsets of a set with n elements is 2n – 1.
For example: If a set has 5 elements, it will have 25 – 1 or 31 proper subsets.

4. Union of Sets
The union of sets A and B, written as AUB, is the set of elements that appear in either A or B.
For example:
A ={1,2,3,4,5}
B= {2,4,6,8,10}
The union of A and B (i.e. AUB) is {1, 2, 3, 4, 5,

5. Difference of Sets
The difference between sets A and B, written as A-B, is the Set of elements belonging to set A and NOT to set B.
For example:
A ={1,2,3,4,5}
B = {2,3,5}
The difference of A and B (i.e. A-B) is {1,4}.
A-B ≠ B-A

6. The Universal Set
In some problems involving sets, it is necessary to consider one or more sets under consideration as belonging to some larger set that contains them.
For example
If we were considering the set of skilled workers (S, say) on a production line, it might be convenient to consider the universal set (U, say) as all of the workers on the line. In other words, where a universal set has been defined, all the sets under consideration must necessarily be subsets of it.

7. The complement of a set
If A is any set, with some universal set U defined, the complement of A, normally written as A’, is defined as ‘all those elements that are not contained in A but are contained in U’.
For an example of the workers on the production line (given above), S was specified as the set of skilled workers within the universal set of all workers on the line. Therefore, S’ would be all the workers that were not skilled, i.e. the set of unskilled workers.

8. Set Intersection
The intersection of two sets A and B is written as AC B and defined as that set that contains all the elements lying within both A or B.
For example, if A = (a,b,c,d,f,g,) and B = (c,f,g,h,j), then the intersection of A and B is A << B = (c,f,g), since these are the elements that lie in both sets. The intersection of three or more sets is a natural extension of the above. If P, Q, and R are any three sets then PC QC R is the set containing all the elements that lie in all three sets. Any combinations of union and intersection can be used with sets. For, example, if X and Y are the sets specified above and Z = (d,f,g,j). then: (XCy) >>Z = (c,f,g) >>(d,f,gj) =(c,d,f,gj) which can be described in words as ‘the set of elements that are in either both of X and Y or in Z’.

9. Factorial
The product of a given positive integer multiplied by all lesser positive integers: The quantity four factorial (4!) =4 • 3 • 2 • 1 = 24. Symbol: n! where n is the given integer.

10. Factorials are a recursive function
n! = n*(n-1)! Where 0! = 1
So l! = 1*1
2! =2*1*1=2
3!=3*2*1*1=6
4! =4*3*2*1*1=24
etc.
Factorials often come up in probability because of the way permutations work.

For example
If you pick a single card out of a deck, there are 52 different ways for your card drawing to turn out. Any of the 52 cards could be drawn. If you now pick a second card without putting the first back, there are 51 ways for that second card to be drawn (Any of the 51 remaining cards) So the amount of different combinations of card picks that could happen would be 52*51.

You can then see that if you were to draw every card in the deck, there would be 52*51*50*……. = 521 ways for you to draw them. This means that if you draw 52 cards, then the order that you drew them in had a 1/(52!) chance of occurring, a very small chance (Factorial is one of the fastest-growing functions that’s often used). Many situations in probability can be likened to card decks, so you might be able to imagine that factorials can come up in all sorts of applications for probability.

11. Experiment
It is an operation that has two or more results and performing the experiment is called a trial.

  • Probability experiment

An action through which specific results (counts, measurements, or responses) are obtained.

  • Outcome

The result of a single trial in a probability experiment.

  • Sample Space

The set of all possible outcomes of a probability experiment

  • Event

One or more outcomes and is a subset of the sample space

  • Simple event

A simple event is the number of occurrences divided by the number of possible occurrences.

  • Compound event

Compound events are the combination of multiple simple events, such as rolling two dice

  • Mutually Exclusive

Mutually Exclusive means you can’t get both events at the same time. It is either one or the other, but not both

Examples:
Turning left or right are Mutually Exclusive (you can’t do both at the same time)
Heads and Tails are Mutually Exclusive
Kings and Aces are Mutually Exclusive

Equally likely events
Two or more events that have an equal probability of occurrence are said to be equally likely, i.e. if on taking into account all the conditions, there should be no reason to accept any one of the events in preference over the others.

Examples
First example
A : The event of getting a “HEAD” and
B: the event of getting a “TAIL”
Events “A” and “B” are said to be equally likely events Both the events have the same chance of occurrence.
2-second example Where
A: The event of getting 1
B: the event of getting 2…….
F: the event of getting 6
Events “A”, “B”, “C”, “D”, “E”, “F” are said to be equally likely events All these events have the same chance of occurrence.

• Exhaustive events
One or more events are said to be exhaustive if all the possible elementary events under the experiment are covered by the events considered together. In other words, the events are said to be exhaustive when they are such that at least one of the events compulsorily occurs. Exhaustive events maybe elementary or compound events. They may be equally likely or not Equally likely.

12. Mathematical probability
The probability of an event consisting of n out of m possible equally likely occurrences, defined to be a mathematical probability. It is also known as classical probability.
The number of outcomes favorable to the occurrence of an event is divided by the total number of possible outcomes. In order for this ratio to be valid, each of the outcomes must be equally likely. Distributions are gained from actual occurrences in long-run experience and experimentation. An example is repeated trials under a constant-cause situation.
Probability of an event = m/m+n
Where m= number of outcomes in favor of event
m+n=total number of equally likely mutually exclusive and exhaustive events
The probability of rolling a six on a single roll of a die is 1/6 because there is only 1 way to roll six out of 6 ways it could be rolled. The probability of getting a sum of 5 when rolling two dice is 4/36 = 1/9 because there are 4 ways to get a five and there are 36 ways to roll the dice (Fundamental Counting Principle – 6 ways to roll the first times 6 ways to roll the second).

Do not make the mistake of saying that the probability of rolling a sum of 5 is 1/11 because there is one 5 out of a sample space of 11 sums (2 through 12). When the sample spaces are not equally likely, do not divide by the number in the sample space.

13. Properties of Probabilities
All probabilities are between 0 and 1 inclusive.
A probability of 0 means an event is impossible, it cannot happen.
A probability of 1 means an event is certain to happen, it must happen.
Example out of the below mentioned a) and c) cannot be a probability because A probability is always greater than or equal to 0 and less than or equal to 1
(a) -0.00001
(b) 0.5
(c) 1.001
(d) 0
(e) 1
Example A die is rolled, find the probability that an even number is obtained.

Solution
Let us first write the sample space (total number of cases) M of the experiment. M= {1,2,3,4,5,6}
Let A be the event “an even number is obtained” and write it down.
A ={2,4,6}
We now use the formula of the classical probability.
P(A) = n(A)/M
= 3/6
= 1/2

Example
Two dice are rolled, find the probability that the sum is
(a) equal to 1
(b) equal to 4
(c) less than 13 Solution

(a) The sample space S (total number of events) of two dice is shown below.
S = { (1,1),(1,2),(1,3),(1,4),(1,5),(1,6)
(2.1) ,(2,2),(2,3),(2,4),(2,5),(2,6)
(3.1) ,(3,2),(3,3),(3,4),(3,5),(3,6)
(4.1) ,(4,2),(4,3),(4,4),(4,5),(4,6)
(5.1) ,(5,2),(5,3),(5,4),(5,5),(5,6)
(6.1) ,(6,2),(6,3),(6,4),(6,5),(6,6)}
Let E be the event “sum equal to 1”. There are no outcomes which correspond to a sum equal to 1, hence P(E) = n(E)/n(S) = 0/36 = 0
(b) Three possible outcomes give a sum equal to 4: E = {(1,3),(2,2),(3,1)}, hence. P(E) = n(E)/n(S) = 3/36 = 1/12
(c) All possible outcomes, E = S, give a sum less than 13, hence. P(E) = n(E)/n(S) = 36/36 = 1

14. Addition Rules of probability
When you want to find the probability of one event OR another occurring, you add their probabilities together. To find the probability of event A or B, we must first determine whether the events are mutually exclusive or non-mutually exclusive. Then we can apply the appropriate

15. Addition Rule

Addition Rule 1
When two events, A and B, are mutually exclusive, the probability that A or B will occur is the sum of the probability of each event P(A or B) = P(A) + P(B)

Addition Rule 2
When two events, A and B, are non-mutually exclusive, there is some overlap between these events. The probability that A or B will occur is the sum of the probability of each event, minus the probability of the overlap.
P(A or B) = P(A) + P(B) – P(A and B)
Addition Rule 1: When two events, A and B, are mutually exclusive, the probability that A or B will occur is the
the sum of the probability of each event.
P(A or B) = P(A) + P(B)
A single 6-sided die is rolled. What is the probability of rolling a 2 or a 5?
Let’s use this addition rule to find the probability

Probabilities: P(2) = \frac{1}{6}
P(5) = \frac{1}{6}
P (2 or 5) = P (2) + P (5)
= \frac{1}{6} + \frac{1}{6}
= \frac{2}{6}
= \frac{1}{3}

Let’s look at some experiments in which the events are non-mutually exclusive.
Example: A single card is chosen at random from a standard deck of 52 playing cards. What is the probability of choosing a king or a club?
Probabilities: P(king or club) = P(king) + P(club) – P(king of clubs)
= \frac{4}{52} + \frac{13}{52}\frac{1}{52} = \frac{16}{52} = \frac{16}{52} = \frac{4}{13}

In Example, the events are non-mutually exclusive. The addition causes the king of clubs to be counted twice, so its probability must be subtracted. When two events are non-mutually exclusive, a different addition rule must be used.

Addition Rule 2: When two events, A and B, are non-mutually exclusive, the probability that A or B will occur is:
P(A or B) = P(A) + P(B) – P(A and B)
In the rule above, P(A and B) refers to the overlap of the two events

16. Multiplication Rules
When you want to find the probability of two events that are jointly occurring, then you need to apply the multiplication rule. This principle can be extended to probabilities.

-Independent Events
Independent Events are events where one occurring doesn’t change the probability of the other occurring. When events are independent, the probability of them both occurring is…
P(A and B) = P(A) * P(B)
We don’t have time to get into probability very deeply. If we did, we would cover conditional

17. Probability – the probability of dependent events.
Suppose we roll one die followed by another and want to find the probability of rolling a 4 on the first die and rolling an even number on the second die. Notice in this problem we are not dealing with the sum of both dice. We are only dealing with the probability of 4 on one die only and then, as a separate event, the probability of an even number on one die only.
P(4) = 1/6
P(even) = 3/6
So P(4 ∩ even) = (l/6)(3/6) = 3/36 = 1/12

18. Complementary Events
The root word in complementary is “complete”. Complementary events complete, or make whole. Complementary events are mutually exclusive, but when combined make the entire sample space. The symbol for the complement of event A is A’. Some books will put a bar over the set to indicate its complement. Since complementary events are mutually exclusive, we can use the special addition rule to find their probability. Furthermore, complementary events are all-inclusive, *so they make the sample space when combined, so their probabilities have a sum of 1.

The sum of the probabilities of complementary events is 1.
P(A) + P(A’) = 1
P(A’) = 1 – P(A)
Suppose you have a box with 3 blue marbles, 2 red marbles, and 4 yellow marbles. We are going to pull out the first marble, leave it out, and then pull out another marble. What is the probability of pulling out a red marble followed by a blue marble?

We can still use the multiplication rule which says we need to find P(red) • P(blue). But be aware that in this case when we go to pull out the second marble, there will only be 8 marbles left in the bag.
P(red) = 2/9
P(blue) = 3/8
P(red ∩ blue) = (2/9)(3/8) = 6/72= 1/12

19. Random variable
A random variable, usually written X, is a variable whose possible values are numerical outcomes of a random, phenomenon. There are two types of random variables, discrete and continuous.

20. Discrete Random Variables
A discrete random variable is one that may take on only a countable number of distinct values such as 0,1,2,3,4, Discrete random variables are usually (but not necessarily) counts. For a discrete random variable, its probability distribution is any table, graph, or formula that gives each possible value and the probability of that value. It is also called the probability distribution function.

Example
Consider an experiment where a coin is tossed three times. If X represents the number of times that the coin comes up heads, then X is a discrete random variable that can only have the values 0,1,2,3 (from no heads in three successive coin tosses to all heads). No other value is possible for X.

21. Continuous Random Variable
A continuous random variable is one that takes an infinite number of possible values. Continuous random variables are usually measurements. Examples include height, weight, the amount of sugar in an orange, the time required to run a mile. Consider an experiment where a coin is tossed three times. If X represents the number of times that the coin comes up heads, then X is a discrete random variable that can only have the values 0,1,2,3 (from no heads in three successive coin tosses to all heads). No other value is possible for X.

An example of a continuous random variable would be an experiment that involves measuring the amount of rainfall in a city over a year or the average height of a random group of 25 people.

22. Probability Distribution
The probability distribution of a random variable is a list of probabilities associated with each of its possible values. It is also sometimes called the probability function or the probability mass function, An example will make clear the relationship between random variables and probability distributions. Suppose you flip a coin two times. This simple statistical experiment can have four possible outcomes: HH, HT, TH, and TT. Now, let the variable X represent the number of Heads that result from this experiment. The variable X can take on the values 0, 1, or 2. In this example, X is a random variable; because its value is determined by the outcome of a statistical experiment.

A probability distribution is a table or an equation that links each outcome of a statistical experiment with its probability of occurrence. Consider the coin flip experiment described above. The table below, which associates each outcome with its probability, is an example if a probability distribution.

Number of heads Probability
0 0.25
1 0.50
2 0.25

The above table represents the probability distribution of the random variable X.
Types of the probability distribution

  • Discrete probability distributions- The probability distribution of a discrete random variable is a list of probabilities associated with each of its possible values. It shows the following properties. Firstly the probability of a discrete random variable is between 0 to 1 and secondly, the sum of all properties is 1.
  • Continuous probability distributions- The number of possible values in a range is infinite in the case of a continuous probability distribution. The probability function is determined by the area under the graph.

23. Expected value
Expected value is a concept employed in statistical analysis. It is a weighted average approach that involves multiplying each possible outcome in a situation with its probability to arrive at the expected outcome. Thus Expected value is a measurement of the center of a probability distribution.
Example
Flip a coin three times and let X be the random variable of the number of heads. This has probability distribution of 1/8 forX= 0, 3/8 forX= 1, 3/8 for A= 2, 1/8 forX= 3. Use the expected value formula to obtain: (1/8)0 + (3/8)1 + (3/8)2 + (1/8)3 = 12/8 =1.5

Probability MCQ Questions

Question 1.
Probability is
a. the study of the randomness of happening of an event
b. the haphazard happening of an event
c. mathematical study of the randomness of happening of an event
d. the mathematical study of a haphazard happening
Answer:
c. mathematical study of the randomness of happening of an event

Question 2.
If two sets are denoted as ACB it shows that
a. B is proper to set of set A
b. B is smaller and A is a set and A is a set of B
c. A is smaller than B and A is a proper sub-set of B
d. None of me above
Answer:
c. A is smaller than B and A is the proper subset of B

Question 3.
If it is shown as B>A it shows that
a. B is a Subset of A
b. A is Subset B
c. B is a superset of A
d. A is a superset of B
Answer:
c. B is a superset of A

Question 4.
Equal sets in probability mean
a. Element in both the sets are equal
b. Element in one set is monthly equal to the elements in other set
c. both a & b
d. None of the above
Answer:
a. Element in both the sets are equal

Question 5.
We can depict the two-set union as
a. A = B
b. A + B
c. A Ω B
d. A ∪ B
Answer:
d. A ∪ B

Question 6.
The intersection of sets is denoted as
a. A ∪ B
b. A Ω B
c. A > B
d. A< B
Answer:
b. A Ω B

Question 7.
There are 600 electric bulbs in a box out of which 20 bulbs are defection if one bulb is chosen at random from the box. What is here probability that the chosen bulb is defective?
a. 1/19
b. 1/30
c. 1/25
d. 1/16
Answer:
b. 1/30

Question 8.
The probability of a sure event is
a. 1
b. 0
c. Nil
d. unknown
Answer:
a. 1

Question 9.
The most appropriate definition of Experiment is
a. where two or more outcomes are received when a trial is alone
b. depilate one outcome is received when a trial is done
c. Both a & b
d. alone of the above
Answer:
a. where two or more outcomes are received when a trial is alone

Question 10.
Sample space is also called
a. universal space
b. event space
c. possibility space
d. All of the above
Answer:
b. event space

Question 11.
If E be an event then P(E) + (None)=
a. 0
b. 1
c. 2
d. None of the above
Answer:
b. event space

Question 12.
When a choice is a thousand then possible events are
a. 1
b. o
c. 6
d. 4
Answer:
c. 6

Question 13.
A coin is tossed 60 times with the following result head -28 times Tail -32 times Find the probability of getting head if the coin is thrown once
a. 1
b. 7/15
c. 2
d. none of the above
Answer:
b. 7/15

Question 14.
The probability of occurrence of any limit lies between
a. 0 and 1
b. 0 and 2
c. 0 and 3
d. 0 and infinite
Answer:
a. 0 and 1

Question 15.
Each outcome of the sample space is called
a. event space
b. sample point
c. possibility point
d. universal point
Answer:
b. sample point

Question 16.
If E is an event, then <P(E)< is
a. 0
b. 1
c. both a & b
d. Indefinite
Answer:
c. both a & b

Question 17.
Probability can be
a. measured numerically
b. Can not be measured numerically
c. Can be measured but not necessarily nominally
d. All Of the above
Answer:
a. measured numerically

Question 18.
A box contains 3 red balls 4 white balls and 7 black balls one ball is chosen at random what the probability of choosing the black ball is.
a. 2/5
b. 2/4
c. 1/3
d. 5/7
Answer:
d. 5/7

Question 19.
If the events in the probability are independent then
a. The occurrence of one event does not affect the occurrence of record
b. The occurrence of one event still affects the occurrence event
c. It is innovative
d. Both a & b
Answer:
a. The occurrence of one event does not affect the occurrence of record

Question 20.
How many types of random variables are there
a. 2
b. 3
c. O
d. 4
Answer:
a. 2

Question 21.
Weight, lengths are examples of typing of _______ random variable
a. Concrete random variable
b. continuous random variable
c. Both a & b
d. None of the above
Answer:
b. continuous random variable

Question 22.
It is given that the probability of winning a game is
0. 7 what is the probability of losing the game?
a. 3
b. 7
c. 7
d. 4
Answer:
a. 3

Question 23.
Suppose you toss a coin twice what is the probability of tossing two heads?
a. 1/16
b. 1/4
c. 1/8
d. 1/5
Answer:
b. 1/4

Question 24.
Suppose you toss a coin twice. What is the probability of tossing two heads given that your first toss is ahead?
a. 1/16
b. 1/8
c. 1/4
d. 1/2
Answer:
d. 1/2

Question 25.
The collection of all possible events is called
a. A probability
b. A sample space
c. An event
d. Random variable
Answer:
b. A sample space

Question 26.
The term ______ probability of A and B is used to denote the probability of the intersection of A and B
a. Marginal
b. Conditional
c. Subjective
d. Joint
Answer:
d. Joint

Question 27.
There is a bag filled with 8 balls 3 white and 5 black. If ball is drawn from the bag without replacement the probability that the second ball drawn is black is, given that the first ball drawn is black is
a. 2/7
b. 5/7
c. 4/7
d. None of the above
Answer:
c. 4/7

Question 28.
Cholesterol measurements constitute
a. Continuous random variable
b. Discrete random variable
c. Qualitative random variable
d. None of the above
Answer:
a. Continuous random variable

Question 29.
Consider two events A & B. Event A has a probability of 1/2 while event B has a probability of 1/20 then
a. A is less probable to occur
b. A has more probability to occur
c. At least 20 trails are needed for B to appear
d. None of the above
Answer:
b. A has more probability to occur

Question 30.
Suppose you draw one card from a standard 52 card deck. What is the probability that the card is black and a jack?
a. 1/26
b. 1/64
c. 1/52
d. 1/25
Answer:
d. 1/25

Question 31.
The blood groups of 200 people are distributed as follows: 50 have type A blood, 65 have a B blood type, 70 have the O blood type and 15 have type AB blood. If a person from this group is selected at random, what is the probability that this person has an O blood type?
a. 0.35
b. 0.25
c. 0.45
d. none of the above
Answer:
a. 0.35

Question 32.
A die is rolled, find the probability that the number obtained is greater than 4.
a. 1/3
b. 2/3
c. 1/4
d. 2/4
Answer:
a. 1/3

Question 33.
Two coins are tossed, find the probability that one head only is obtained
a. 1/3
b. 2/3
c. 1/2
d. 2/4
Answer:
c. 1/2

Question 34.
Two dice are rolled, find the probability that the sum is equal to 5.
a. 1/9
b. 2/3
c. 1/6
d. 2/4
Answer:
a. 1/9

Question 35.
If all the elements of set A belong to set B and all the elements of set B belong to set A. This set is called.
a. Equal set
b. Disjoint set
c. Null Set
d. Void set
Answer:
a. Equal set
Hint
Equal sets in probability mean Element in both the sets are equal.

Question 36.
Three unbiased coins are tossed. The probability of obtaining at least one head is
a. 1/8
b. 2/8
c. 6/8
d. 7/8
Answer:
d. 7/8
Hint
Probability of an event = m/m+n
Where m= number of outcomes in favor of event
m+n=total number of equally likely mutually exclusive and exhaustive events finding m
total number of coins = 2 × 2 × 2=8
there is only one chance when no head appears which is tail,tail, tail
thus the number of out comes in favor of event = 8-1 =7
m=7
probability = 7/8

Question 37.
A bag contains 4 white, 5 red, and ~ blue balls. Three balls are drawn at random from the bag. The probability that all of them are red, is
a. 1/15
b. 2/91
c. 3/107
d. 15/107
Answer:
b. 2/91
Hint
Probability of all three balls to be red = 5 × 4 × 3/15 × 14 × 13= 2/91 a

Question 38.
An event that corresponds to a single possible outcome of an experiment is caned:
a. Elementary event
b. Compound event
c. Dependent event
d. Exhaustive event
Answer:
a. Elementary event
Hint
In probability theory, an elementary event is an event that contains only a single outcome in the sample space.

Question 39.
if a card is drawn at random from a pack of 52 cards, the chance that it will be a king of hearts is:
a. 1/13
b. 4/13
c. 1/52
d. 4/26
Answer:
c. 1/52
Hint
Only one king of hearts Probability = 1/52

Question 40.
The total number of all possible outcomes of a random experiment constitutes:
a. Equally likely events
b. Exhaustive events
c. Mutually inclusive events
d. None of the above
Answer:
b. Exhaustive events
Hint
One or more events are said to be exhaustive if all the possible elementary events under the experiment are covered by the events considered together. In other words, the events are said to be exhaustive when they are such that at least one of the events compulsorily occurs.

Question 41.
What is the probability of getting a sum of 9 from two throws of a dice?
a. 1/9
b. 2/9
c. 1/36
d. 1/3
Answer:
a. 1/9
Hint
Probability = no. of favourable events/total no. of events = 4/36 = 1/9
No. of favourable events = (3,6), (4,5),(5,4),(6,3)

Question 42.
Mutually exclusive events mean –
a. No events can be expected to occur in preference to any other event in the same experiment
b. Events that can be decomposed further into elementary events
c. The occurrence of one event prevents the occurrence of another event in the same experiment
d. Events that are independent of one another.
Answer:
c. The occurrence of one event prevents the occurrence of another event in the same experiment
Hint
Mutually Exclusive means you can’t get both events at the same time. It is either one or the other, but not both

Question 43.
A bag contains 6 black and 8 white balls. One ball is drawn at random. The probability that the ball drawn is white will be
a. 1/14
b. 1/7
c. 3/7
d. 4/7
Answer:
d. 4/7
Hint
Total balls = 14 Favourable evnts = 8 P = 8/14 = 4/7

Question 44.
When 2 coins are tossed, then what is the probability of getting one head?
a. 1/2
b. 1/4
c. 1
d. 3/4
Answer:
a. 1/2
Hint
No. of possible outcome = 2
Total no. of outcome =4 (HH,HT,TH,TT)
P = 2/4 =1/2

Question 45.
Which set is it in which no elements are present?
a. Sub set
b. Null set
c. Disjoint
d. Equal set
Answer:
b. Null set
Hint
The null set, also called the empty set, is the set that does not contain anything.

Question 46.
If a dice is thrown once, what is the probability of getting an even number?
a. 1/2
b. 1
c. 2/6
d. None of the above
Answer:
a. 1/2
Hint
Total no. of outcome = 6
No. of even favourable outcome = 3 (2,4,6)
P = 3/6 =1/2

Question 47.
What is the probability of getting a queen from a pack of cards?
a. 1/52
b. 4/52
C. 2/13
d. 13/52
Answer:
b. 4/52
Hint
Total no. of outcome = 52
No. of favorable outcome of getting queen = 4
P = 4/52

Question 48.
What is the probability of getting king of heart from the pack of cards?
a. 1/52
b. 13/52
c. 2/52
d. 2/13
Answer:
a. 1/52
Hint
Total no. of outcome = 52
No. of favorable outcome (rings of the heart) = 1
P = 1/52

Question 49.
Find the probability that a leap year has 53 Sundays.
a. 2/7
b. 54
C. 1/9
d. 53
Answer:
a. 2/7
Hint
There are 366 days in leap year out of Which there are 52 Sundays and 2 days.
2 days may be (SU,M)(M,T)(T,W)(W,TH)(TH,F)(F,S)(S,SU)
Thus total outcome =7
No. of favourable outcome = 2 (SU,M) and (S,SU)
P= 2/7

Question 50.
Given A = (1,2,3,4.5) & B = (4,3,1,5,6). find (B-A)
a. 6
b. 2
c. 1
d. 3
Answer:
a. 6
Hint
B-A means elements of B not included in A = 6

Question 51.
If set A = {1 ,2,3,4}, 8 = {1 ,2,} Then, which one is correct?
a. Set A is a subset of set 8
b. Set 8 is a subset of set A
C. 80th (a).& (b)
d. None of the above
Answer:
b. Set 8 is a subset of set A
Hint
Set B is a subset of set A because both elements 1,2 are present in set A.

Question 52.
In a box, there are 8 red, 7 blue, and 6 green balls. One ball is picked up randomly. What is the probability that it is neither red nor green?
a. 10/21
b. 7/21
c. 8/21
d. 15/21
Answer:
b. 7/21
Hint
Total no. of outcome = 8+7+6=21 No. of favorable outcome =7 P= 7/21

Question 53.
A town has a total population of 50,000. Out of it, 28,000 read the newspaper X and 23,000 read Y while 4,000 read both the papers. The number of persons not reading X and Y both are:
a. 3,500
b. 2,500
c. 3,000
d. 2,000
Answer:
c. 3,000
Hint
n(AUB) = n(A)+n(B)-n(ADB)
= 28000+23000-4000 = 47000 n(ADB) =50000-47000 = 3000

Question 54.
If all the elements of set A belongs to set B and all the elements of set B belong to set A they can be referred to as:
a. Equal sets
b. Supersets
c. Disjoint sets
d. Subsets
Answer:
a. Equal sets
Hint
Two sets are equal if they have exactly the same elements.

Question 55.
Two coins are tossed, find the probability that two heads are obtained:
a. 0.75
b. 0.25
c. 1
d. 0.50
Answer:
d. 0.50
Hint
Total outcomes = 4
No. of favouable outcome =2
P = 2/4 =1/2= 5

CS Foundation Business Economics Notes

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes

Market, as defined by Stonier and Hague, means ‘ any organization whereby buyers and sellers of a good are kept in close touch with each other’ Market involves buyers, sellers, price, and contact. So for a perfect market firstly there should be some buyers for that product and sellers who are selling that product. Further, the price of the product should be such that is acceptable to buyers and lastly, buyers and sellers should be in contact with each other. Thus market can be defined as a process by which the prices of goods and services are established.

Firm and Industry are the two parts of the market. A firm is an individual unit. The decisions taken in a firm may be of a single person or of many persons whereas Industry is a set of firms. Thus firms either of the same business or of different businesses collectively form an industry.

When economists analyze the production decisions of a firm, they take into account the structure of the market in which the firm is operating. The structure of the market is determined by four different market characteristics: the number and size of the firms in the market, the ease with which firms may enter and exit the market, the degree to which firms’ products are differentiated, and the amount of information available to both buyers and sellers regarding prices, etc. The market can be in various forms

  • Perfect Competition
  • Monopoly
  • Monopolistic competition

Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at a predefined price.
Characteristic features are

  • It is a hypothetical market where every seller takes the market price as its own price.
  • There must be many firms in the market, none of which is large in terms of its sales.
  • Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
  • There are many buyers and sellers, so each buyer or seller is a price taker, all sellers supply the same, identical product.
  • Firms should be able to enter and exit the market easily.
  • Each firm in the market produces and sells a nondifferentiated or homogeneous product
  • Each unit of input, such as units of labor, is also homogeneous.
  • There is no need for government regulation, except to make markets more competitive.
  • It is impossible for a single firm to affect market price.
  • All firms and consumers in the market have complete information about prices, product quality, and production techniques.
  • As there are large sellers so there are large buyers

In perfect competition market prices can not be changed only output can be changed. On this basis, four equilibrium stages are defined.

  • Short-run equilibrium in a competitive firm
  • Short-run equilibrium in a competitive industry
  • Long-run equilibrium in a competitive firm
  • Long-run equilibrium in a competitive industry

1. Short-run equilibrium in a competitive firm
Under perfect competition, firms can make super-normal profits or losses depending on the given market price.

  • if the firm’s losses get too big in the short-run (i.e. AR < AVC) then it will have to shut down
  • In the short run when the market price exceeds the average total cost at the best level of output a firm earns a supernormal profit.
  • In a competitive firm, equilibrium is reached when TR is less than TC or where MR=MC
  • Taking TR, the TC concept equilibrium point on the graph is that point where the distance between TR and TC curve is maximum.
  • Since perfect competition is price taker so demand curve is straight and begins from zero and is a positive curve
  • The distance between TR and TC at the equilibrium point on the graph is the maximum profit a firm can get.
  • In the short run, a firm has to incur fixed costs even if the production is zero so thus total cost curve starts from Y-axis and is a positive curve.
  • The short-run average cost curve is U-shaped.
  • In the short-run MC -MR approach is used to reach equilibrium,
  • In this supply, the curve lies below the MC curve but is upward sloping.
  • Actual equilibrium is the point formed by the intersection of supply and demand curves
  • Super-normal profits attract new entrants, which shifts the demand curve for existing firms to the left

2. Short-run equilibrium in a competitive industry

  • The equilibrium market price is determined by the interaction between market demand and market supply.
  • In the case of the firm the total sale of the firm can be increased but in industry total sales can not be increased which shows that the Demand curve is not negatively sloped
  • Total sales can only be changed when the prices of an industry as a whole are changed
  • In the short run, the demand curve will show change only when the price of the product falls down which will depict that the demand curve is negatively sloped. Thus whenever the demand curve is negatively sloped it shows that there has been a fall in price
  • The place of the interaction of the demand curve and supply curve is the equilibrium point.
  • There is never a non-equilibrium position
  • Whenever there is a non-equilibrium position it automatically corrects it to the equilibrium position

3. Long-run equilibrium in a competitive firm

  • Here the firm can change all its inputs thus there is no fixed cost and the average fixed cost curve disappears.
  • Average total cost curve is the average cost curve
  • In the long run, every competitive firm will earn a normal profit
  • In the long-run firms are attracted into the industry if the incumbent firms are making supernormal profits.
  • There are no barriers to entry and exit
  • There is perfect knowledge.
  • The effect of this entry into the industry is to shift the industry supply curve to the right, which drives down the price until the point where all super-normal profits are exhausted.
  • If firms are making losses, they will leave the market as there are no exit barriers, and this will shift the industry supply to the left, which raises the price and enables those left in the market to derive normal profits.
  • For a firm to reach equilibrium MC curve should intersect the MR curve from below and average revenue should be greater than the average cost.
  • But when AR>AC then the equilibrium is not reached as the firm is making an abnormal profit.
  • Thus to reach equilibrium AC=AR=MC=MR

4. Long-run equilibrium in a competitive industry

  • In the long run, industry is in equilibrium when all competitive firms are earning normal profit.
  • In the long-run demand curve is negative
  • One of the features of the long run is that when the industry is in equilibrium then firms are also in equilibrium
  • The change in the average cost of all firms leads to three situations

5. Constant returns
Here average cost of the industry remains constant. The demand curve is downward sloping and the supply curve is parallel to X-axis. When the demand changes there is a shifting of the demand curve but prices do not change and only output changes.

6. Diminishing return
When an existing industry increases its output then the average cost of production also increases. This shows that when there is an increase in production it leads to diseconomies thus a new firm that enters the market faces higher average product cost. The demand curve of the industry is upward sloping. When there is an increase in demand the price as well as quantity of output required increases. Equilibrium is reached at the intersection of demand and supply curves

7. Increasing returns
This theory says that as the industry expands, the average cost of production declines. Thus in this case demand curve and supply curve are both negatively sloped. When the production increases there is a fall in cost price

8. Monopoly
A monopoly is simply a market with only one seller and no close substitutes for that seller’s product. Technically, the term “monopoly” is supposed to refer to the market itself, but it’s become common for the single seller in the market to also be referred to as a monopoly. Characteristic features

  • Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
  • Products manufactured by the firm are such that they have no substitute which could be because of some technology or inputs etc. Which is confined to that particular firm.
  • Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
  • Sometimes markets become monopolies simply because it is more cost-effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
  • In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward-sloping.
  • Production occurs where marginal cost and marginal revenue intersect.
  • They are price makers,
  • Produce unique products
  • The profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve. Short-run equilibrium of a monopolist – here in the short-run all the variables leading to production can not be changed.

Thus there is a fixed cost as well as a variable cost. To reach equilibrium MC should cut MR curve from below as well as AR>= AC
Long-run equilibrium of a monopolist – Here in contrast to short-run all the inputs can be varied thus equilibrium is determined by marginal cost (MC) and average cost (AC). For equilibrium two conditions should be satisfied firstly MC should cut MR from below and AR should be equal to AC.

9. Discriminating monopoly
A single entity that charges different prices, which are not associated with the cost to provide the product or service, for its products or services for different consumers. A discriminating monopoly, by using its monopolistic position, can do this as long as there are differences in price elasticity of demand between consumers or markets, and barriers to prevent consumers from making an arbitrage profit by selling among themselves. By catering to each type of customer the monopoly makes more profit.

10. Monopolistic competition
The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality, neither monopoly nor competitive market exists. The real market that is seen is monopolist competition.
Characteristic features are

• This market is monopolistic as each firm is producing a particular kind of product that is different from other products in context to shape, color, etc. And has its own individual price.
• This market can be said competitive as there are a large number of sellers as well as products supplied by sellers have close substitutes which give choice to the consumer making the market competitive.
• Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
• Knowledge is widely spread between participants, but it is unlikely to be perfect.
• There are a large number of buyers and sellers in the monopolistic market
• The entrepreneur has a more significant role than in firms that are perfectly competitive because of the increased risks associated with decision-making.
• In a monopolistic competition firms spend a lot of money on advertisement to attract the consumers
• As the product of each firm is different from each other in regard to quality, price, etc. Thus a buyer can make a difference and decide which product it wants to purchase.
• There is the freedom to enter or leave the market, as there are no major barriers to entry or exit.
• In monopolistic competition, the new firm can easily enter into the market because the size of the firms is small in the market.
• In-efficient firms also live in the market side by side.
• Sometimes advertising expenses are done not just to increase the demand for their own product but to neutralize the bad publicity.
• Average selling cost curve is U-shaped but after assigning sales budget its shape changes to a rectangular hyperbola.
• The demand curve of the firm is negatively slopped when there are many firms that are producing a similar commodity, the demand for the product of each firm is elastic:
• A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:

  • Physical product differentiation
  • Marketing differentiation
  • Human capital differentiation
  • Differentiation through distribution

• Firms are price makers and are faced with a downward-sloping demand curve.
• monopolistically competitive firms are assumed to be profit maximizers because firms tend to be small with entrepreneurs actively involved in managing the business.
• There are two conditions in monopolistic competition regarding reaching equilibrium.
• When the change of price of the firm is associated with the rivalry firm. In this case demand curve is downward sloping and much steeper.
• When the change of price of the firm is not associated with the rivalry firm. In this case, the demand curve is downward sloping but less steep. Monopolistic competition in the short run At profit maximization, MC intersects MR from below. AR and MR are having negative slopes.

11. Monopolistic competition in the long run

  • There are no fixed costs and all the variables can be changed. When deciding on price firm has to check that it also has to keep in mind about rivals.
  • Firms are not allowed to have supernormal profits however new firms can enter and exit any time. In this kind of market firms always run below their optimum capacity.
  • In equilibrium, the demand curve will be tangent to the firm’s long-run average cost.

12. The advantages of monopolistic competition can bring the following advantages:

  • Companies functioning in monopolistic competition market have to differentiate their products from those of their competitors which creates choice for consumers
  • Most local companies under monopolistic competitive market enjoy some level of liberty for the price of their product
  • Monopolistic competition is characterized by few barriers to market entry; it is easy for new firms to enter and leave such markets without facing the many barriers This allows creativity and an active business environment with ample competitors.

13. The disadvantages of monopolistic competition

  • It fails to recognize that the consumer is dependent on the retailer for deciding about which product is more beneficial as he himself is not aware of the technical qualities of the product.
  • Some differentiation does not create utility but generates unnecessary waste, such as excess packaging.
  • Advertising may also be considered wasteful, though most are informative rather than persuasive.
  • Theory fails to account for the determination of equilibrium quantities and prices of goods like raw materials and other inputs.

Forms Of Market And Its Equilibrium MCQ Questions

Question 1.
A market is dependent on basic component
a. Firm
b. Industry
c. Price
d. All of the above
Answer:
c. Price

Question 2.
Perfect competition market is
a. Most prominent market
b. Hypothetical market
c. Resourceful Market
d. All of the above
Answer:
b. Hypothetical market

Question 3.
In perfect market Competition the price is Not dependent on
a. Transportation cost
b. Products of individual firms
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 4.
In a long run equilibrium of a competitive firm
a. fixed cost vanishes
b. Average fixed cost curve vanishes
c. Average total cost are present
d. All of the above
Answer:
d. All of the above

Question 5.
In a long run equilibrium of a competitive firm
a. AR<AC
b. AR>AC
c. AR__>AC
d. AR = LRAC
Answer:
c. AR__>AC

Question 6.
In a perfect competitive firm
a. it can sell as much as it wants at unchanged prices
b. It has no market power
c. It is a price taker
d. All of the above
Answer:
d. All of the above

Question 7.
Monopolistic competition is
a. Real form of market
b. Hypothetical market
c. Neither a nor b
d. Both a & b
Answer:
a. Real form of market

Question 8.
Monopolistic competition market form is
a. A differential product is produced
b. seller has individual rights over his products
c. Heterogeneous
d. All of the above
Answer:
d. All of the above

Question 9.
There are a large number of demand curve is not elastic in nature. It is _________ type of market
a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. All of the above
Answer:
c. Monopolistic competition

Question 10.
Which of the following is Not the feature of monopoly form of market?
a. Not elastic in nature
b. Legal barriers
c. Size of the market is too small
d. All of the above
Answer:
a. Not elastic in nature

Question 11.
To induce new buyers in the market in a monopolistic form of market
a. Reduce the price of the product
b. Increase the price of the product
c. reduces the production of the product
d. Increase the production of the product
Answer:
a. Reduce the price of the product

Question 12.
Price discrimination of second degree is
a. monopolist selling his output in batches and charging a separate price for each batch
b. monopolist charging price for each unit
c. monopolist selling his output as per the different categories of buyers
d. None of the above
Answer:
a. monopolist selling his output in batches and charging a separate prices for each batch

Question 13.
In a free-market economy, the optimal quality of goods and services is determined by
a. customers.
b. Workers.
c. Firms.
d. Government
Answer:
a. customers.

Question 14.
The elements which decide the market structure are
a. Number and size distribution of firms
b. Entry conditions
c. Production priorities
d. Both a& b
Answer:
d. Both a& b

Question 15.
When a price floor is above the equilibrium price
a. quantity demanded will exceed quantity supplied.
b. Quantity supplied will exceed quantity demanded
c. The market will be in equilibrium.
d. This is a trick question because price floors generally exist below the equilibrium price
Answer:
b. Quantity supplied will exceed quantity demanded

Question 16.
A firm operating under conditions of perfect conditions will find that its
a. marginal costs are more than its average costs
b. average revenues are the same as its margins revenues
c. marginal costs are below its average revenue
d. marginal revenues will be higher than its available revenues
Answer:
b. average revenues are the same as its margins revenues

Question 17.
The monopolistic competition differs from perfect competition primarily because
a. in monopolistic competition, firms can differentiate their products
b. in perfect competition, firms can differentiate their products.
c. In monopolistic competition, the industry produces all of the market supply of goods.
d. In Perfect competition, the exits are too less
Answer:
a. in monopolistic competition, firms can differentiate their products

Question 18.
In monopolistic competition, firms achieve some degree of market power
a. By virtue of size alone
b. By producing differentiated products.
c. Many interdependent industries produce a homogenous product
d. Because of barriers to exit from the industry
Answer:
b. By producing differentiated products.

Question 19.
A monopolistically competitive firm will produce as long as the price that the firm charges is sufficient to cover
a. Product costs
b. Marginal costs
c. Average costs
d. Variable costs
Answer:
d. Variable costs

Question 20.
A firm in a monopolistically competitive industry
a. Can sell an infinite amount of output at the market-determined price
b. Must lower price to sell more output
c. Must raise to sell more output
d. Is dependent on the oligopolistic firm
Answer:
b. Must lower price to sell more output

Question 21.
Short-run curves of monopolistic Firms are
a. similar to the short-run curves of perfect competition
b. Different to the short-run curves of perfect competition
c. similar to the long, run curves of perfect competition
d. None of the above
Answer:
a. similar to the short-run curves of perfect competition

Question 22.
In short-run equilibrium of a monopolistic, a plant will be shut down only if
a. Loss is equal to its fixed cost
b. Loss is more than its fixed cost
c. Profit is more than its fixed cost
d. all of the above
Answer:
b. Loss is more than its fixed cost

Question 23.
The demand curve in the long run Equilibrium should be
a. Tangent to AC curve
b. Must lie to the right of the AC curve and intersect it
c. Must lie to the right of the AC curve and intersect it twice
d. Both a & c
Answer:
c. Must lie to the right of the AC curve and intersect it twice

Question 24.
In long run, monopolistic competitive firms earn profits only when
a. The efficient output level will be produced in the long run.
b. They earn zero economic profit
c. Firms will only earn a normal profit==
d. Firms realize all economies of scale
Answer:
c. Firms will only earn a normal profit==

Question 25.
which of the following statements best describes the outcome under monopolistic competition?
a. In monopolistic competition, there are too few firms and each firm gets a price leadership in the market.
b. In monopolistic competition, there are too many firms and each firm produces a slightly different product at a scale that is less than optimal.
c. In monopolistic competition, there is the correct number of firms and each firm produces a slightly different product at an optimal scale.
d. In monopolistic competitions, there are too many firms and each firm produces a slightly different product at the optimal scale.
Answer:
b. In monopolistic competition, there are too many firms and each firm produces a slightly different product at a scale that is less than optimal.

Question 26.
The situation in which buyers are able to affect the price of a good is referred to as _________ power.
a. Monopoly
b. Purchasing
c. Monophony
d. Countervailing
Answer:
c. Monophony

Question 27.
If a monopolist sets her output such that marginal revenue, marginal cost, and average total cost are equal, economic profit must be:
a. negative.
b. Positive
c. Zero
d. Indeterminate from the given information
Answer:
b. Positive

Question 28.
The efficient level of output can be achieved under perfect competition as
a. government regulates the output level that must be produced
b. firms earn only normal profit in the long run
c. firms can earn an economic profit in the long run
d. price equals marginal cost
Answer:
d. price equals marginal cost

Question 29.
The characteristic feature of perfect competition is
a. large number of firms; heterogeneous product; easy entry and exit
b. a large number of firms homogeneous product; incomplete information
c. a large number of firms; homogeneous product; easy entry and exist
d. few firms; homogenous product; difficult entry and exit
Answer:
c. large number of firms; homogeneous product; easy entry and exist

Question 30.
In perfectly competitive industries firms are termed as
a. price takers
b. Price creators
c. Price makers
d. Price setters
Answer:
a. price takers

Question 31.
Select that is not a valid option for a perfectly competitive firm
a. Zero long-run profit
b. decreasing its output
c. increasing its price ==
d. increasing its resources
Answer:
c. increasing its price ==

Question 32.
Select the most appropriate option for price discrimination in the monopoly form of market
a. Ignorance regarding the cost of product
b. legal barrier leading to monopoly form of market
c. The size of the market of the monopolistic items is too small
d. Hurdles in the entry to this market
Answer:
a. Ignorance regarding the cost of the product

Question 33.
Which of the market structures will have only normal profits in long term?
a. Monopolistic competition
b. Perfect competition
c. Monopoly
d. productive efficiency
Answer:
a. Monopolistic competition

Question 34.
In a firm if the price a firm receives for its product is equal to the marginal cost of producing that product, we can say the firm is
a. always earning an long term profit
b. always productive and economically efficient
c. always allocatively efficient
d. always experiencing an economic loss
Answer:
c. always allocatively efficient

Question 35.
The characteristic feature of a perfectly competitive firm should be
a. Earn an economic profit
b. Earn a zero economic profit in short run
c. Produce the quantity where its marginal cost equals its marginal revenue
d. produce at the productively efficient level of output
Answer:
c. Produce the quantity where its marginal cost equals its marginal revenue

Question 36.
Non technical product differentiation is
a. Performance
b. Packing
c. size
d. Both b& c
Answer:
d. Both b& c

Question 37.
Demand curve of each firm in monopolistic competition is
a. Downward sloping
b. Parallel to X axis
c. Corresponds to industry as a whole
d. both a & c
Answer:
d. both a & c

Question 38.
Selling expenses in monopolistic include
a. Advertisement
b. discounts
c. Both a & b
d. Input Cost
Answer:
c. Both a & b

Question 39.
A firm operating under monopolistic competition is able to make a choice between
a. Product differentiation
b. selling costs
c. Product quality
d. All of the above
Answer:
d. All of the above

Question 40.
If a consumer is paying higher price for a given product and for a given price they are getting inferior product. It describes ____________ form of market
a. Long run equilibrium under monopolistic competition
b. Short run equilibrium under monopolistic competition
c. long run equilibrium under monopolistic
d. short run equilibrium under monopolistic
Answer:
a. Long run equilibrium under monopolistic competition

Question 41.
The long run equilibrium under monopolistic competition has
a. free exit and entry of forms
b. Competition among firms
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 42.
Invariably if a typical firm in a perfectly competitive market is experiencing an average revenue that is greater than its average cost.
a. price will increase.
b. Other firms will enter the market
c. Other firms will leave the market
d. Demand will decrease
Answer:
b. Other firms will enter the market

Question 43.
When the demand of the product increase and product price increases
a. the marginal revenue product curve will shift to the right.
b. The marginal revenue product curve will shift to the left
c. The firm will move up the marginal revenue product curve and hire fewer units of the input.
d. The firm will move down the marginal revenue product curve and hire more units of the input
Answer:
a. the marginal revenue product curve will shift to the right.

Question 44.
Short-run market supply curve is
a. the horizontal summation of ach firms’ short- run supply curve.
b. The vertical summation of each firms short- run supply curve
c. The horizontal summation of each firm’s short-run average cost curve.
d. The vertical summation of each firms short- run average cost curve
Answer:
a. the horizontal summation of ach firms’ short- run supply curve.

Question 45.
Recently India has experienced a large growth in population. As a result, the demand curve for telephone service in India
a. has shifted to the right.
b. Has shifted to the left
c. Has shifted down
d. None of the given options
Answer:
a. has shifted to the right.

Question 46.
Which of the following is true for ? The law of diminishing returns applies to:
a. the short run only
b. the long run only
c. both the short and the long run
d. neither the short nor the long run
Answer:
c. both the short and the long run

Question 47.
The feature of a monopolistic firm is
a. cannot determine the price, which is determined by consumer demand.
b. Will never sell a product whose demand is inelastic at the quantity sold
c. Cannot sell additional quantity unless it raises the prices on each unit
d. None of the above
Answer:
b. Will never sell a product whose demand is inelastic at the quantity sold

Question 48.
A Monopolistic competition is
a. cut-throat price competition
b. product differentiation
c explicit consideration at firm level of the feedback effects of other firms pricing decisions.
d. High profit margins.
Answer:
b. product differentiation

Question 49.
In monopolistic competition a firm
a. earns positive monopoly profits because each sells differentiated product
b. earns positive oligopoly profits because each firm sells a differentiated product.
c. Earns zero economic profits because it is in perfectly or pure competition.
d. Earns Zero economic profits because of free entry.
Answer:
d. Earns Zero economic profits because of free entry.

Question 50.
In long run with increasing returns in a firm it still earns normal profit. This feature is present in _______ form of market
a. Perfect Competition
b. Monopoly
c. Monopolistic competition
d. All of the above
Answer:
c. Monopolistic competition

Question 51.
In monopolistic Completion
a. Close substitution can be defined
b. Close substitute can not be defined
c. Both a& b
d. None of the above
Answer:
b. Close substitute can not be defined

Question 52.
The estimation of consumer demand by questioning a sample of consumer is referred to as the
a. consumer survey approach
b. Product research approach
c. selling approach
d. marketing approach
Answer:
a. consumer survey approach

Question 53.
After doing the thorough calculation of consumer demand by setting up simulated stores, providing a sample of consumers with money, and then allowing them to purchase and keep the commodities they select in the stores is called the
a. consumer survey approach
b. observational approach
c. consumer clinic approach
d. Product research approach
Answer:
c. consumer clinic approach

Question 54.
If the long-run average cost curve is a downward sloping curve for a. firm, it implies that the unit is subject to the law of …………………………. always.
a. Diminishing returns to factor
b. Diminishing return to scale
c. Increasing return to scale
d. Constant returns
Answer:
c. Increasing return to scale
Hint
Increasing returns
This theory says that as the industry expands ,the average cost of production declines. Thus in this case demand curve and supply curve are both negatively sloped . When the production increases there is a fall in cost price. In the long-run average cost curve is a downward sloping curve for a. firm, It implies that the unit is subject to the law of increasing returns to scale .

Question 55.
A firm would be in equilibrium at the level of
output where its-
a. MR = Me
b. AR = AC
c. MR > MC
d. MR< AR
Answer:
a. MR = Me
Hint
In a competitive firm equilibrium is reached when TR is less than TC or where MR=MC

Question 56.
Which of the following commodities best represents a monopolistic competitive market?
a. Market for motorbikes
b. Market for parlours and saloons
c. Metro rail
d. Market for vegetables.
Answer:
c. Metro rail
Hint
Monopolistic competition
The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality neither monopoly nor competitive market exists. The real market that is seen is monopolist competition

Question 57.
In which of the following market structures, a firm is not a price maker-
a. Perfect competition
b. Monopoly
c. Duopoly
d. Oligopoly
Answer:
a. Perfect competition
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. Firm is not a price maker in such market.

Question 58.
In which of the following market structures, a firm in long-run equilibrium earns abnormal profit
a. Perfect competition
b. Monopoly
c. Monopolistic competition
d. None of the above
Answer:
c. Monopolistic competition
Hint
A monopoly is simply a market with only one seller and no close substitutes for that seller’s product. Technically, the term “monopoly” is supposed to refer to the market itself, but it’s become common for the single seller in the market to also be referred to as a monopoly. They are price makers. A monopolist can earn abnormal profits in both the short run and the long’run unlike perfectly competitive market where abnormal profits are competed away In monopolist firm earns abnormal profits.

Question 59.
In the figure below, a perfectly competitive market is represented by figure:-

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes Chapter 4 img 1

a.Figure (i)
b. Figure (ii)
c. Figure (iii)
d. Figure (iv)
Answer:
d. Figure (iv)
Hint
In perfectly competitive market AR = MC =MR.

Question 60.
For a firm in short-run equilibrium its AR <AC, i.e. it is incurring losses, it will-
a. Immediately stop production
b. Increase its level of output so that its AR becomes more than MR
c. Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC
d. Pray to God and flood the market with its own product and begin to charge very high prices.
Answer:
c. Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC
Hint
Under perfect competition, firms can make super-normal profits or losses depending on the given market price. If the firm’s losses get too big in the short run (i.e. AR < AVC) then it will have to shut down but for a firm in short-run equilibrium its AR <AC, i.e. it is incurring losses then it will Continue to produce the equilibrium level of output if its AR is either equal to or more than its AVC

Question 61.

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes Chapter 4 img 2

Excess capacity for a monopolistic competition firm equals-
a. OS
b. OZ
c. SZ
d. None of the above
Answer:
c. SZ
Hint
OS is the quantity produced when AR intersects LAC curve at E. But in long run LAC cuts LMC curve to produce OZ quantity. The excess capacity produced = OZ-OS = SZ.

Question 62.
A firm has to take decision about the nature and extent of product differentiation and hence the level ot ‘ selling expenses in …………………………. market structure.
a. Monopoly
b. Monopolistic competitive
c. Perfectly competitive
d. Any of the above
Answer:
b. Monopolistic competitive
Hint
Monopolistic competition -The model of monopolistic competition describes a common market structure in which firms have many competitors, but each one sells a slightly different product. In reality neither monopoly nor competitive market exists. The real market that is seen is monopolist competition.
Some of the features are
• This market is monopolistic as each firm is producing a particular kind of product which is different from other products in context to shape , colour etc. And has its own individual price.
• This market can be said competitive as there are large number of sellers as well as products supplied by sellers have close substitutes which gives choice to the consumer making the market competitive.
• Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.
Thus in such market a firm has to take decision about the nature and extent of product differentiation.
• A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:

  • Physical product differentiation
  • Marketing differentiation
  • Human capital differentiation
  • Differentiation through distribution

Question 63.
Under monopolistic competition, loss making firms leave the group
a. To cover production costs
b. To recover selling costs
c. To maintain profits
d. To increase market share
Answer:
a. To cover production costs
Hint
One of the advantage of the Monopolistic competition is characterized by few barriers to market entry; it is easy for new firms to enter and leave such markets without facing the many barriers. Thus loss making firm can leave the market to cover production cost.

Question 64.
‘Government should increase expenditure on social services to benefit the poor1. Which one of the following represent the correct reason that establishes that the above given statement is a normative statement?
a. It states the facts as they are
b. It passes a value judgment
c. It states that there is a direct relationship between public expenditure and poverty alleviation
d. It states that poverty cannot be removed by market forces.
Answer:
b. It passes a value judgment
Hint
It is a normative statement. Normative economics deals heavily in value judgments and theoretical scenarios.

Question 65.
Marginal Revenue (MR) curve is a straight horizontal line in:
a. Perfectly competitive market
b. Monopolistic competitive market
c. Oligopoly market
d. Monopoly market.
Answer:
a. Perfectly competitive market
Hint
MR curve is a straight horizontal line in perfectly competitive market.

Question 66.
Which of the following figures correctly represents the revenue curves of a monopolistic competitive firm?

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes Chapter 4 img 3

The correct option is:
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4.
Answer:
a. Figure 1
Hint
In monopolistic competitive firm AR falls But MR falls faster and becomes negative as shown in figure.

Question 67.
Which of the following monopolistic competitive firm perfectly competitive firm?
a. Differentiated products
b. Number of sellers .
c. Number of buyers
d. Free entry and exit of the firm
Answer:
a. Differentiated products
Hint
A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:

  • Physical product differentiation
  • Marketing differentiation
  • Human capital differentiation
  • Differentiation through distribution
    Companies functioning in monopolistic competition market have to differentiate their products from those of their competitors which creates choice for consumers

Question 68.
A perfectly competitive firm attains equilibrium at a point where:
a. Marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below
b. MC is equal to MR
c. MC is falling but is equal to average cost (AC)
d. MC is constant.
Answer:
a. Marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below
Hint
A perfectly competitive firm attains equilibrium at a point where marginal revenue (MR) is equal to marginal cost (MC) and MC curve intersects MR curve from below

Question 69.
A kinked revenue curve best represents:
a. Monopoly
b. Duopoly
c. Oligopoly
d. Monopolistic competition.
Answer:
c. Oligopoly
Hint
The Kinked-Demand curve theory is an economic theory regarding oligopoly . The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms to a change in its price or another variable.

Question 70.
In the given figure below, a firm:

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes Chapter 4 img 4

(a) is making an abnormal profit in a monopolistic competitive situation
(b) is undergoing losses in a monopoly
(c) is at break-even in a perfectly competitive market
(d) does not know if it is making a profit or is undergoing a loss.
Answer:
(a) is making an abnormal profit in a monopolistic competitive situation
Hint
At profit maximization, MC intersects MR from below. AR and MR are having negative slopes.

Question 71.
Which of the following type of commodities, normally, do not operate in an oligopoly market structure?
a. High-brand luxury goods
b. Air-line services
c. High end beauty parlours
d. Metro rails.
Answer:
c. High end beauty parlours
Hint
Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition,monopoly, and monopolistic competition. An oligopoly is a market structure in which a few firms dominate. Not many firms dominate airline service, metro rails , high brand luxury goods but there are too many high end beauty parlour. Even if a few firms may dominate, many small firms may also operate in the beauty parlour market .Thus high end beauty parlour do not operate in oligopoly market structure.

Question 72.
Market for mobile phone-sets in India demonstrates the characteristics of a-
a. Perfectly competitive market
b. Oligopoly
c. Monopsony
d. Monopoly.
Answer:
a. Perfectly competitive market
Hint
Perfect Competition – It is a market structure where there is maximum competition. The mobile company in India demonstrates a perfectly competitive market. There are many firms in the market, none of which is large in terms of its sales.

Question 73.
Given below is the short-run cost-sheet of a perfectly competitive firm, at equilibrium level of output:
Average variable cost = Rs. 9 per unit Average fixed cost = Rs. 2 per unit The firm would be well advised to continue to produce if the per unit market price of the commodity is –
a. Rs.6
b. Rs. 7
c. Rs. 8
d. Rs.10.
Answer:
d. Rs.10.
Hint
In case of short run production is to be continued till the variable cost is being recovered. So production can be done till the market price is equal to AVC or above . AVC is Rs 9 so production can be continued till market price is Rs 9 or above i.e Rs 10.

Question 74.
Which of the following figures best represents the profit being earned by a perfectly competitive firm?

Forms Of Market And Its Equilibrium – CS Foundation Economics Notes Chapter 4 img 5

Correct option is –
a. Figure 1
b. Figure 2
c. Figure 3
d. None of the above
Answer:
a. Figure 1
Hint
In order to maximize profits in a perfectly competitive market, firms set marginal revenue equal to marginal cost i.e. i r
MR=MC
Since perfect competition is price taker so demand curve is straight and is a positive curve. Figure 1 best represents the profit being earned by a perfectly competitive firm.

Question 75.
Under which market system, seller can influence the price to the maximum?
a. Perfect competition
b. Monopoly
c. Monopolistic
d. Oligopoly
Answer:
b. Monopoly
Hint
Characteristic features of monoploy
• Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
• Products manufactured by the firm are such that they have no substitute which could because of some technology or inputs etc. Which is confined with that particular firm.
• Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
• Sometimes markets become monopolies simply because it is more cost effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
• In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward- sloping.
• Production occurs where marginal cost and marginal revenue intersect.
• They are price makers
• Produce unique products
• Profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve.

Question 76.
Under which market, price discrimination is not possible?
a. Perfect competition
b. Monopoly
c. Monopolistic
d. Oligopoly
Answer:
a. Perfect competition
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. It is impossible for a single firm to affect market price.

Question 77.
Which statement is correct under perfect competition market?
a. Large number of sellers and buyers
b. Large number of sellers and small number of buyers
c. Large number of sellers only
d. Large number of buyers only.
Answer:
a. Large number of sellers and buyers
Hint
Characteristic features of perfect competition are
– It is a hypothetical market where every seller takes the market price as its own price.
– There must be many firms in the market, none of which is large in terms of its sales.
– Firms can only make normal profits in the long run, but they can make abnormal profits in the short run.
– There are many buyers and sellers, so each buyer or seller is a price taker, all sellers supply the same, identical product.
– Firms should be able to enter and exit the market easily.
– Each firm in the market produces and sells a non differentiated or homogeneous product
– Each unit of input, such as units of labour, are also homogeneous.
– There is no need for government regulation, except to make markets more competitive.
– It is impossible for a single firm to affect market price.
– All firms and consumers in the market have complete information about prices, product quality, and production techniques.
– As there are large sellers so there are large buyers

Question 78.
When does the firm gets equilibrium points? OR When the firm is said to be in equilibrium?
a. MR = MC
b. AR = MR
c. AR = MC
d. Both (a) & (b)
Answer:
d. Both (a) & (b)
Hint
To reach equilibrium AC=AR=MC=MR

Question 79.
“Differentiated product” is the feature of-
a. Perfect competitive market
b. Monopoly market
c. Monopolistic market
d. None of the above
Answer:
c. Monopolistic market
Hint
A central feature of monopolistic competition is that products are differentiated. There are four main types of differentiation:
– Physical product differentiation
– Marketing differentiation
– Human capital differentiation
– Differentiation through distribution

Question 80.
In which type of market, the firm is the “price taker”.
a. Perfect competitive market
b. Monopoly Market
c. Monopolistic market
d. All of the above
Answer:
a. Perfect competitive market
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. The firm is a price taker in such market.

Question 81.
In monopolistic competition the price policy is-
a. Relatively high
b. Low
c. Moderate
d. Very low
Answer:
b. Low
Hint
One of the characteristic feature of monopolistic competitive market is that each firm is producing a particular kind of product which is different from other product in context to shape , colour etc. and has its own individual price.

Question 82.
An Oligopoly is a market in which:
a. Firms are price takers
b. The actions of one seller in the market have no impact on the other seller’s profits
c. There are only a few sellers, each offering- a product similar/dissimilar to the others
d. Firms are price giver
Answer:
c. There are only a few sellers, each offering- a product similar/dissimilar to the others
Hint
Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition,monopoly, and monopolistic competition. An oligopoly is a market structure in which a few firms dominate.

Question 83.
Which of the following is the difference between perfect competition and monopolistic competition?
a. In monopolistic competition, firms produce identical goods, while in perfect competition, firms produce slightly different goods.
b. Perfect competition has no barriers to entry, while monopolistic competition does
c. In perfect competition firms produce identical goods, while in monopolistic competition, firms produce slightly different goods
d. Perfect competition has a large number of small firms, while in monopolistic competition does not.
Answer:
c. In perfect competition firms produce identical goods, while in monopolistic competition, firms produce slightly different goods
Hint
Perfect Competition – Each firm in the market produces and sells a non differentiated or homogeneous product Monopolistic completion – A central feature of monopolistic competition is that products are differentiated.

Question 84.
A perfectly competitive firms short run shutdown point is the level of output at which:
a. Price equals average fixed costs.
b. Price is above the minimum average total cost but below the minimum average fixed cost
c. Price equals average total cost
d. Price equals the minimum average variable cost
Answer:
a. Price equals average fixed costs.
Hint
A firm will produce at the level of output where MR = MC (or P = MC). that is, the marginal cost curve for a firm tells us how many units of a product the firm is willing to sell at any given price. Thus, a perfectly competitive firm’s marginal cost curve also is its supply curve. But a firm will shut down if its total revenue is less than its variable cost P x Q < VC P < AVC.

So, the firm’s marginal cost curve is its supply curve only for prices at or above average variable cost. Another way to state the rule is that a firm should compare the profits from operating to those realized if it shutdown and select the option that produces the greater profit. A firm that is shutdown is generating zero revenue and incurring no variable costs. However, the firm still has to pay fixed cost. So the firm’s profit is all used up in fixed costs . Thus if firm’s profit is equal to fixed cost then it should shut down .

Question 85.
In a free market, which of the following will be caused by excess supply for a commodity?
a. A fall in the price of commodity
b. A rise in the price of commodity
c. Either a or b
d. Can’t say
Answer:
a. A fall in the price of commodity
Hint
Price is derived by the interaction of supply and demand. The resultant market price is dependant upon both of these fundamental components of a market. Thus Producers would have to lower their prices in order to clear the market of excess supplies.V\/e already know price and demand are inversely proportional. When price falls demand increases.

Question 86.
Which of the following is a characteristic of Monopoly?
a. Large number of sellers and buyers
b. A single seller and large number of buyers
c. Large number of sellers and small number of buyers
d. Small number of sellers and small number of buyers
Answer:
b. A single seller and large number of buyers
Hint
Characteristic features of monopoly

  • Monopolies arise because of barriers to entry that inhibit other companies from entering the market and exerting competitive pressure on the monopolist.
  • Products manufactured by the firm are such that they have no substitute which could be because of some technology or inputs etc. Which is confined to that particular firm.
  • Monopoly firm decides the price at which it wants to sell the product but it can not compel the buyers to purchase its products beyond utility.
  • Sometimes markets become monopolies simply because it is more cost-effective to have one firm serving an entire market than it is to have a number of smaller firms competing with one another
  • In a monopoly market, the marginal revenue curve and the demand curve are distinct and downward-sloping.
  • Production occurs where marginal cost and marginal revenue intersect.
  • They are price makers
  • Produce unique products
  • The profit-maximizing point is the intersection between their downward sloping MR curve and their MC curve.
    Thus a monopoly is simply a market with only one seller and no close substitutes for that seller’s product.

Question 87.
In case of monopolistic competition, the size of the market for each firm would be ………………………
a. large
b. small
c. Infinite
d. very large
Answer:
b. small
Hint
In case of monopolistic competition, the size of the market for each firm would be small. Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production.

Question 88.
In case of monopoly, capacity utilization of the firm would be ……………………
a. Minimum
b. Sub-optimum
c. Optimum
d. Not optimum
Answer:
b. Sub-optimum
Hint
Capacity utilisation is the extent to which an enterprise or a nation actually uses its installed productive capacity. It is the relationship between output that is actually produced with the installed equipment, and the potential output which could be produced with it, if capacity was fully used. The economic approach, on the other hand, defines the potential output as being the optimum level of output from the economic point of view. In case of monopoly, capacity utilization of the firm would be suboptimum

Question 89.
In case of Perfect Competition, number of selling firms would be:
a. Large
b. Only two
c. Varied but not too many
d. Single
Answer:
a. Large
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at predefined price. There are many firms in the market, none of which is large in terms of its sales.

Question 90.
In a market that is characterised by imperfect competition:
a. Firms are price takers
b. The actions of one firm in the market never have any impact on the other firms profits
c. There is always a large number of firms
d. There are at least a few firms that compete with one another.
Answer:
d. There are at least a few firms that compete with one another.
Hint
Imperfect competition is a type of market structure showing some but not all features of competitive markets. Imperfect competition is a competitive market situation where there are many sellers, but they are selling heterogeneous (dissimilar) goods unlike perfect competitive market. In such market, there are at least a few firms that compete with one another unlike the perfect competition.

Question 91.
In case of Perfect Competition a firm is a ………………………..
a. Price Controller
b. Price taker
c. Price maker
d. Price creator
Answer:
b. Price taker
Hint
Perfect Competition – It is a market structure where there is maximum competition. It is a condition when all the firms are selling their goods at a predefined prices. Each firm in the market produces and sells a nondifferentiated or homogeneous product. A firm is a price taker in this kind of market.

CS Foundation Business Economics Notes

Money and Banking – CS Foundation Economics Notes

Money and Banking – CS Foundation Economics Notes

Money is a good that acts as a medium of exchange in transactions. Classically it is said that money acts as a unit of account, a store of value, and a medium of exchange. Money has been ever-changing its form in the past. Its major role was to come over with the difficulties that were faced by the barter system. Economists have adopted 2 approaches to define money

  • Functional approach
  • Liquidity approach

Functional approach – the basis of this approach was the functional aspect of money. The functional approach has further been classified under three heads

  • Primary functions
  • Secondary functions
  • Contingent functions

1. Primary function
The primary function of money is that it acts as a medium of exchange Features of money

  • Money gave more freedom to people in comparison to the barter system.
  • As in the barter system, the evaluation of commodities was difficult as every commodity has its different importance. Thus the introduction of money helped to overcome this difficulty.
  • Moreover, it was easy to manage accounts with the help of money.

2. Secondary function
There are some other functions of money such as

  • it can easily be stored unlike goods used in barter systems which were difficult and cumbersome to be stored, especially in the case of perishable goods.
  • It is the best means in the case of deferred payment. Thus in the case of loans repayment interest can easily be calculated with the help of money.
  • Money can easily be transferred from one place to another unlike goods whose transferability is difficult,

3. Contingent functions
Prof. Kinley has mentioned that money is the basis of credit.

  • Some examples of credit money are cheque, draft, bill of exchange, etc.
  • Money helps in the proper distribution of national income.
  • It is the general form of keeping all the wealth.
  • It gives people maximum pleasure as they can decide about the utility of the product and can distribute their income accordingly.

Liquidity approach – As per the liquidity approach any assets for which no nominal capital gain or loss is possible are perfectly liquid. As per this approach, money has a generalized purchasing power. It can be used for purchasing goods and services.

Some of the features of this approach are:

  • The liquidity approach emphasizes the function of money as a store of money. :
  • It implies that money is not qualitatively different from other assets.
  • Liquidity is the property of all assets; only the degree of liquidity varies.
  • The liquidity of an asset is inversely related to the average time taken to convert it into cash.
  • The higher the cost of the asset less liquid it is.
  • The prevalence of near-money assets greatly increases the overall level of liquidity and hence the level of economic activity.

Certain problems delating to the concept of liquidity creates difficulties in adopting the liquidity approach:

  • It is not easy to quantify the liquidity content of an asset
  • The liquidity contents of an asset may not be constant.

4. Credit
Credit is the trust which allows one party to provide resources (money) to another party where that second party does not reimburse the first party immediately (thereby generating a debt) but instead repay or return those resources at a later date.

It is the amount of money given by the lender to a borrower looking at its worth, his ability to pay back. The money to be paid back by the borrower is more than the money taken by the borrower as he has to pay the interest along with the principal amount. Banks have a major role in providing loans. People are depositing their money in banks and they get paid interest on this amount deposited by them as the bank becomes a borrower in such case.

The commercial banks create multiple expansions of their bank deposits and due to this, these are called the factories of credit. The banks advance a major portion of their, deposits to the borrowers and keep a smaller part with them. The customers have full confidence in the bank. The rate of interest charged by banks is more than the rate of interest paid by the banks. This difference in the rate of interest is the profit of the bank. The banks expand loans by much more than the amount of cash possessed by them. This tendency on the part of the banks to lend more than the amount of cash possessed by them is called the Creation of credit in economics.

Interest charged by the bank is based on the creditworthiness of the borrower. A creditworthy borrower may get loans at a lower rate of interest in comparison to a borrower with less creditworthiness. The whole credit creation process starts with an initial deposit with the bank. Out of these initial deposits, the bank keeps a certain ratio of money as a reserve, and the rest is given in the market as a loan.

The whole process of credit creation is divided into
Case 1 No leakage one bank
Case 2 No cash leakage but multiple banks
Case 3 Some cash leakage one bank
Case 4 Cash leakage multiple banks

Case 1 No leakage
In this case, it is presumed that there is no cash leakage. Let us understand by the below-mentioned example Suppose the Cash Reserve Ratio is 20% and a person deposits Rs. 10,000/- with Bank X. This is the primary deposit. The bank keeps Rs. 2000 as CRR and balance of Rs. 8000 is used for granting credit.

Now suppose Bank X lends Rs. 8000 to Mr. A and Mr. A pays a cheque of Rs. 8000 to Mr. B, who has an account in Bank X. Then Bank X receives Rs. 8000 as a primary deposit. It keeps Rs. 1,600 (20%) as CRR and an excess amount of Rs. 6,400 is used for giving credit. Now if, Mr. C is granted this loan and Mr. C gives a cheque of Rs. 6,400 to another person who may deposit it in Bank X. Bank will again keep Rs. 1,280 as CRR and issue a loan of Rs. 5,120. This process continues until the original excess reserves of Rs. 8000 with the first Bank of India, have been parceled out among various banks and have been required resources. As a result, the aggregate of derivative deposits in the entire banking system approximates 5 times the initial derivative deposit over a period of time.

Let us explain with the help of the table:—

PROCESS OF MULTIPLE EXPANSION OF CREDIT

BANK PRIMARY DEPOSIT CRR 20% Credit Creation or Creation of Derivative Deposits
Bank X 10,000 2000 8000
Bank X 8,000 1,600 6,400
Bank X 6,400 1,280 5,120
Total 50,000 10,000 40,000

In the above Eg., the credit expansion is five times the initial excess reserve of Rs. 8,000 when CRR is 20%.

Case 2 No cash leakage but multiple banks
In this case, although there is no cash leakage multiple banks are involved in credit creation.

Let us under with the help of the below-mentioned example Suppose the Cash Reserve Ratio is 20% and a person deposits Rs. 10,000/- with Bank X. This is the primary deposit. The bank keeps Rs. 2000 as CRR and balance of Rs. 8000 is used for granting credit.

Now suppose Bank X lends Rs. 8000 to Mr. A and Mr. A pays a cheque of Rs. 8000 to Mr. B, who has an account in Bank Y. Then Bank Y receives Rs. 8000 as a primary deposit. It keeps Rs. 1,600 (20%) as CRR and an excess amount of Rs. 6,400 is used for giving credit. Now if, Mr. C is granted this loan and Mr. C gives a cheque of Rs. 6,400 to another person who may deposit it in Bank Z. Bank Z will keep Rs. 1,280 as CRR and issue a loan of Rs. 5,120. This process continues until the original excess reserves of Rs. 8000 with the first Bank X, have been parceled out among various banks and have been required resources. As a result, the aggregate of derivative deposits in the entire banking system approximates 5 times the initial derivative deposit over a period of time.
Let us explain with the help of the table:—

BANK PRIMARY DEPOSIT CRR 20% Credit Creation or Creation of Derivative Deposits
Bank X 10,000 2000 8000
Bank Y 8,000 1,600 6,400
Bank Z 6,400 1,280 5,120
Total 50,000 10,000 40,000

in the above Eg., the credit expansion is five times the initial excess reserve of Rs. 8,000 when CRR is 20%.

Case 3 Some cash leakage one bank Here there is some cash leakage.

Let us understand with the help of an example

As explained in case I the deposit pattern is the same, thus the deposits are being made in the same bank but over here there is some cash leakage thus out of 8000 received by B from A, he only deposits 6000 and keeps 2000 with himself so now bank can create a credit of only 4800 instead of 6400 as done in case I so the process of deposits keeps going on in the fashion shown in the above table. Thus it can be seen that credit expansion is less than 3times in comparison to case 1 where there was no cash leakage.

BANK PRIMARY DEPOSIT CRR 20% Credit Creation or Creation of Derivative Deposits
Bank X 10,000 2000 8000
Bank X 8,000 1,200 4800
Bank X 4600 920 3680
Total 20600 4120 16480

Case 4 Cash leakage multiple banks
In this case, we are presuming cash leakage and multiple banks are involved. Let us understand the procedure of taking all the banks together.
Here also the case is similar to case 2 but the only difference is cash leakage amongst different banks. Keeping the initial deposit as Rs 10,000 and CRR as 20% and the pattern of deposit as shown in case 3 we get credit expansion less than 3X. The only difference is that instead of 1 bank there are 3 banks as in case 2

5. Limitations of credit creation

  • The total amount of cash in the country limits the credit creation
  • The amount of cash that the public wishes to hold affects the total amount of credit creation
  • Banks when creating credit they take into account the cash available with them
  • The minimum percentage of cash to deposits which the banks consider safe.
  • Every bank is required to keep margin reserve money
  • The creditworthiness of borrower so that loan doesn’t turn out to be bad debt.

6. Quantity theory of money
The quantity theory of money states that there is a direct relationship between the quantity of money in an economy and the level of prices of goods and services sold. According to QTM, if the amount of money in an economy doubles, price levels also double, causing inflation.

(a) Fisher’s Transactions Approach
This approach first emerged in Fisher’s book The Purchasing Power of Money (1911). For most economists of that period, money was viewed solely as a means of exchange. As per him the essential function of money is to be used as a medium of exchange. The purchasing power of money depends on the quantity of money relative to the number of goods to be purchased MV= PT where M = Money Supply
V= Transactions Velocity of Circulation of money (the number of times the money stock changes hands per period).
P = Price level.
T = The number of Transactions undertaken per period
Supply of money (MV) -It is the total volume of money that is in supply in the market at a particular time. Thus it is the total expenditure that is being done in the market at a particular time period.
Total expenditure per period or total demand of money (PT) – Money is needed by people for making transactions. Thus equation MV=PT suggests that the price level is determined by the money supply.
This equation implies that the quantity of money determines the price if V and T remain constant.
Here only primary money is taken.
Earlier Fisher took into consideration money that is currency money (notes etc.) but later the definition of money changed. Along with currency money bank money that is credit money also formed a part of the money. As per this money meaning which included currency as well as credit Fisher equation becomes MV+M’V’=PT Where
M’ =Money deposited in the bank (credit money)
V’ = velocity of circulation of credit money
This equation shows that price level is directly related to M, M’, V,V’ but inversely related to T.

(b) Cash Balance Approach.
This theory assumed that money was only held to expedite transactions and had no further purpose. Thus, if the money supply increased, agents holding the increased money stock would seek to get rid of it. However, the emphasis in this approach concentrated on establishing the quantity of money that agents would voluntarily desire to hold, p = kR/M
where p = the purchasing power of money
k = the proportion of income that people like to hold in the form of money;
R = the volume of real income; and
M = the stock of supply of money in the country at a given time.
This equation shows that the purchasing power of money or the value of money (p) varies directly with k or R, and inversely with M.
Since p is the reciprocal of the general price level; that is p = 1/P, the equation, p = kR/M can be expressed alternatively as:
1/P = kR/M or M = Krp (1)
If we multiply the volume of real income (R) by the general price level (P), we have the money national income(Y). Therefore,
M = kY
Where Y is the country’s total money income. We can also write equation (1) in terms of the general price level thus:
P = M/kR
This equation implies that the price level (P) varies inversely with k or R and directly with M.
In the Cash Balance approach, k was more significant than M for explaining changes in the purchasing power (or value) of money. This means that the value of money depends upon the demand of the people to hold money.

7. Central Banks
The central bank is the apex institution that regulates, guides, and helps the financial system. This entity is responsible for overseeing the monetary system for a nation (or group of nations). Central banks have a wide range of responsibilities, from overseeing monetary policy to implementing specific goals such as currency stability, low inflation, and full employment. Central banks also generally issue currency, function as the bank of the government, regulate the credit system, oversee commercial banks, manage exchange reserves and act as a lender of last resort. Central banks came into existence in the 20th century. Central banks perform various functions which are (/) Leading functions

– Issue of notes – Note issue primarily is the main function of a central bank in every country. These days, in all the countries where there is a central bank generally it has got the monopoly of the sole right of note issue. There are many advantages with the monopoly of issue of notes by central banks. These are

• There will be uniformity in the currency system in the country.
• By controlling the amount of currency in circulation, the volume of credit can be controlled to quite a large extent.
• People have more confidence in the currency issued by the control bank
• Central bank earns profit from the issue of paper notes ^
• As central banks operate independently thus there is no political influence on the central bank.

– As bankers to the government, the central bank provides all those services and facilities to the government which the public gets from ordinary banks. It operates the account of the public enterprise. It mangers government departmental undertaking and government funds and where there is a need gives loans to the government. It is collecting all the taxes of the government.

– Central bank is the bank of banks. This signifies that it has the same relationship with the commercial banks in the country that they gave with their customers. It provides security to their cash reserves, gives them loans at the time of need, gives. their advice on the financial and economic matter and work as clearinghouse among various members bank.

– Central bank is the custodian of the foreign currency obtained from various countries. This has become an important function of the central bank.
– Another major work of the central bank is to manage and regulate the exchange rate. It assesses the financial trends and the type of corrective measures that will be required to manage the exchange rate of the currency.

– Central bank works as lender of the last resort for commercial banks because in the time of need it provides them financial assistance and accommodation. Whenever a commercial bank faces a financial crisis, the central bank as lender of the last resort comes to its rescue by advancing loans, and the bank is saved from being failed.

– All commercial bank have their accounts with the central bank. Therefore, the central bank settles the mutual transactions of banks and thus saves all banks

– the most important function of a central bank is to control the volume of credit for bringing about stability in the general price level and accomplishing various other socio-economic objectives

(2) Other Functions

  • It collects statistical data regularly relating to economic aspects of money, credit, foreign exchange, banking, etc.
  • It can play an important role by mobilizing people to make investments and to promote saving.

8. Reserve Bank of India
The Reserve Bank of India is India’s central banking institution, which controls the monetary policy of the Indian rupee. It was nationalized on Jan 1, 1949. Governor is the executive head of the bank.

9. Commercial banks
Commercial Banks are a financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner.

Major functions of commercial banks are
• Banks operate by borrowing funds-usually by accepting deposits from the public in the form of saving deposits, fixed deposit and current deposits. Saving accounts are such accounts in which bank gives interest on the money deposited by the public while in current deposit you do not get any interest but mostly gets an overdraft facility. Fixed deposits are deposits made by the public for fixed period of time and they get interest on this deposit. The rate of interest for fixed deposits is higher than that of a saving accounts.

• Giving loans to public in the form of loans and advances, overdraft, cash credit, discounting of bill etc. Bank use deposits and borrowed funds (liabilities of the bank) to give loans. Banks make these loans to businesses, other financial institutions, individuals, and governments (that need the funds for investments or other purposes). This is the earning source for banks.

Overdraft is an arrangement where current account holders are allowed to draw in excess of their deposit and pay interest on the amount overdrawn Banks lend without any collateral security is bill of exchange. Cash credit is an arrangement where customers are allowed to borrow money from the bank up to a certain limit against some tangible securities.

• Besides these banks also provide some of the utility services like lockers, traveller’s cheque, transfer of fund from one bank to another, collect dividend and interest on securities, collection and payment of cheques, bills and promissory notes, provides various trade information and statistics, issues personal and commercial letters of credit, maintain customers demat account etc.

10. Monetary policy of India
Monetary policy of any country is made by its central bank. Monetary policy involves influencing the availability and cost of money and credit to promote a healthy economy. Central bank of country drafts many policies so that to cash and credit availability is regulated. In India these policies are being drawn by government with the help of RBI. It helps in the stabilization of money supply, interest etc. In the market, some of the general credit control measures taken are:

Bank rate -This is traditional way of regulation put by central bank. Central bank decides at which rate of interest the bank will give loans to commercial banks. It is also the rate at which central bank discounts the bills and other instruments of commercial banks.

When the rate of interest charged by central bank from commercial bank is high, than commercial bank’s lending rate of interest also rises which ultimately decreases the number of borrowers. This leads to recession in market. On contrary when central bank decreases the rate of interest for commercial banks i.e. the loan can be taken by commercial banks from central bank at lower rate of interest than commercial banks also give loans at lower rate of interest which ultimately increases the borrowers.

Repo rate and Reverse repo rate – Repo rate is the interest rate at which commercial bank borrow money from central bank. Repo rate is also called repurchase rate. When Repo rate falls than commercial banks are more tempted to borrow more money from central bank. This is called repurchase rate because when they borrow money from the RBI, they keep government securities with the central bank as collateral. When they pay the money back to RBI, they take the collateral back.

While Reverse Repo rate is the rate at which when they keep their surplus money with the RBI. Repo rate is always higher than the reverse repo rate. By controlling these rates, the RBI controls the rate of interest in the economy Open market operations – Open market operations are the market operations conducted by the Reserve Bank of India by way of sale/purchase of Government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis. When the RBI feels there is excess liquidity in the market, it resorts to sale of securities thereby sucking out the rupee liquidity. Similarly, when the liquidity conditions are tight, the RBI will buy securities from the market, thereby releasing liquidity into the market.

CRR and SLR – CRR or cash reserve ratio is the minimum proportion/percentage of a bank’s deposits to be held in the form of cash. Banks actually don’t hold these as cash with themselves, but deposit the same with RBI/currency chests, which is considered equivalent to holding cash with themselves. This ratio keeps changing and acts as a controlling measure in the hands of central bank. A lower CRR means banks have more money to lend.

SLR or statutory liquidity ratio is the minimum percentage of deposits that a bank has to maintain in form of gold, cash or other approved securities. It is the ratio of liquid assets (cash and approved securities) to the demand and term liabilities/deposits. An increase in SLR restricts the bank’s leverage position to pump more money into the economy, thereby regulating credit growth.

Regulation, Supervision and Development of Financial Stability Regulation of non banking financial institution. Besides these there are other control measures adopted by Central bank which can be called selective control measures such as rationing of credit, issuing directives to commercial banks, issuing consumer credit regulation etc.

Money and Banking MCQ Questions

Question 1.
Factors responsible for the change in the form of money are
a Political
b. Economic
c. Government
d. All of the above
Answer:
d. All of the above

Question 2.
The reason for giving monopoly to Central Bank is
a. It can have a control on the credit of commercial banks
b. Brings uniformity to the monetary system
c. Management of the paper money becomes easier
d. All of the above
Answer:
d. All of the above

Question 3.
The assets that RBI acquire against the currency printed by it are
a. Non income yielding assets
b. Income yielding assets
c. Bonds
d. All of the above
Answer:
a. Non income yielding assets

Question 4.
For Banks, Central Bank acts as
a. Clearing agent
b. Borrower
c. Lender
d. Both a &c
Answer:
d. Both a &c

Question 5.
Central Bank acts as a custodian of the cash preserves of commercial banks which means
a. Acts as a lender of last resort
b. As clearing agent
c. Maintains the cash reserves of the commercial banks
d. None of the above
Answer:
c. Maintains the cash reserves of the commercial banks

Question 6.
With the help of cash reserve deposited by commercial banks with Central bank commercial banks can
a. Increase their credit in the market
b. A cash reserve ratio can be formed
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 7.
Following are considered as money
a. Metallic money
b. Financial investment
c. Both a &b
d. None of the above
Answer:
c. Both a &b

Question 8.
All these characteristics are required for any item to qualify as money except.
a. be countable
b. be made of metal
c. be portable
d. be divisible
Answer:
b. be made of metal

Question 9.
As a measure of value money provides
a. Its holder with perfect liquidity
b. Its fixed return in future
c. A common denominator for determining value of goods
d. A mechanism for allocating resources and distributing output
Answer:
c. A common denominator for determining value of goods

Question 10.
Near money assets are
a. assets for which no nominal capital gain is possible
b. assets for which slight capital gain is possible
c. assets for which high capital gain is possible
d. none of the above
Answer:
b. assets for which slight capital gain is possible

Question 11.
A government bond is being matured after five years in comparison to Rs. 50000 that is lying with Ram. Which is more liquid?
a. Government bond
b. Rs. 50000
c. Both are equally liquid
d. None of the above
Answer:
b. Rs. 50000

Question 12.
The interest rate are different for financial institutions in comparison to general borrower because
a. Financial institutions are more credit worthy
b. Financial institutions are in the market of borrowing and lending
c. Average of term for which loan has been taken by financial institutions is shorter
d. Both a &c
Answer:
d. Both a &c

Question 13.
Out of the following which assets is most liquid?
a. shares of stock
b. government securities
c. land
d. currency
Answer:
c. land

Question 14.
When the liquidity trap occurs the demand for money
a. becomes perfectly interest elastic
b. becomes perfectly interest inelastic
c. means that an increase in money supply leads fall in the interest rate
d. means that an increase in the money supply to an increase in the interest rate
Answer:
a. becomes perfectly interest elastic

Question 15.
The quantity theory of money says an increase in the money supply is most likely to lead to inflation if;
a. the velocity of circulate in decreases
b. the number of transactions decreases
c. there is deflation
d. the velocity of circulation and the number of transaction is constant
Answer:
d. the velocity of circulation and the number of transaction is constant

Question 16.
For reducing the supply of money the government –
a. reduce interest rates
b. buy back government bonds
c. sell government bonds
d. encourage banks to lend
Answer:
c. sell government bonds

Question 17.
The open market operations occur when the government:
a. reduces spending
b. buys and sells bonds and securities
c. increases taxation
d. increases the exchange rate
Answer:
b. buys and sells bonds and securities

Question 18.
Some of the functions that are Not done by Central Bank are
a. banker to Government
b. banker to customer
c. collection of taxes
d. foreign exchange resources
Answer:
b. banker to customer

Question 19.
Central Bank is collecting data related to economic aspects of
a. money
b. credit
c. foreign exchange
d. all of the above
Answer:
d. all of the above

Question 20.
Name of the central Bank of USA is
a. American Central Bank
b. Federal Reserve
c. Federal Reserve Bank
d. Federation Reserve
Answer:
b. Federal Reserve

Question 21.
Executive head of the RBI is called
a. Chairman
b. Governor
c. President
d. None of the above
Answer:
b. Governor

Question 22.
In current account the banks
a. Pay against the deposits of the customer
b. Pay above the deposits of the customer in certain condition
c. Both a &b
d. Pay only up to a certain limit as described by bank
Answer:
c. Both a &b

Question 23.
Collection of dividend for their customers is the _____________ type of function of the commercial banks
a. Primary function
b. Agency service
c. General utility service
d. None of the above
Answer:
b. Agency service

Question 24.
Deposits with the bank are considered ________ of that bank.
a. an assets
b. Credit
c. Share worth
d. a liability
Answer:
d. a liability

Question 25.
The difference between a bank’s actual reserves and its required reserves is its.
a. Capital
b. Share value
c. net worth
d. excess reserves
Answer:
d. excess reserves

Question 26.
Banks decrease the rate of interest for borrowing because the banks are holding excess reserves as business firms and consumers are not willing to borrow money A decrease in the discount rate is likely to
a. not change the money supply because banks already have excess reserves which they cannot lend
b. As borrowing money from banks will become difficult people will start depositing more money with the banks
c. There will be a sharp increase in the deposits made by the business firms as the rates of loans given by banks have fallen sharply.
d. None of the Above
Answer:
a. not change the money supply because banks already have excess reserves which they cannot lend

Question 27.
Because money serves as a medium of exchange, it eliminates
a. the need to write checks.
b. The need for specialization.
c. The use of commodities as money
d. The need for a double coincidence of wants
Answer:
d. The need for a double coincidence of wants

Question 28.
Money’s function as a medium of exchange means that
a. money is a common denominators for expressing the value of goods and services
b. money can be sued to store wealth.
c. money serves as an acceptable means of payment
d. money is a standard f deferred payment on exchange contracts extending into the future
Answer:
c. money serves as an acceptable means of payment

Question 29.
Which of the following is correct? Money is
a. medium of exchange.
b. A store of value
c. A unit of account
d. All of the above
Answer:
d. All of the above

Question 30.
Suppose an increase in the supply of money occurs, while the demand for money is constant, according to the quantity theory of money, the price level will .
a. stay the same because of an offsetting decrease in the demand for money
b. rise because as people try to spend excess money balances, prices are driven up.
c. Fall because real GDP will rise as interest rates fall
d. Raise because of a decrease in the demand for money
Answer:
b. rise because as people try to spend excess money balances, prices are driven up.

Question 31.
The main source of profits to commercial banks is
a. the service charges on bank accounts
b. the interest earned on their loans.
c. The proceeds from home and card foreclosures.
d. The interest re earned on the securities
Answer:
b. the interest earned on their loans.

Question 32.
The Lorenz curve shows the relationship between
a. asset creation and income generation
b. population groups and their respective income shares
c. unemployment and inflation
d. wages, labour hours and leisure
Answer:
b. population groups and their respective income shares

Question 33.
In India Central Bank is
a. Federation Bank of India
b. State bank of India
c. Reserve Bank of India
d. Central Bank Of India
Answer:
c. Reserve Bank of India

Question 34.
The primary function of Central Bank is
a. Issue of notes
b. Collection of data
c. Central banking in developing countries
d. Both a &c
Answer:
a. Issue of notes

Question 35.
Marshall – Lerner condition states that the foreign exchange market would be stable if the sum of the price elasticity of the demand for imports and the demand for exports is:
a. greater than one
b. less than one
c. equal to one
d. equal to zero
Answer:
c. equal to one

Question 36.
You deposit money into your bank account, which of the following entry Bank will pass in its books of account.
a. debit cash account
b. debt your account
c. reverse the entry
d. debit assets account
Answer:
a. debit cash account

Question 37.
Which of the following represents the fisher’s equation?
a. nominal interest rate = real interest rate + inflation
b. nominal interest rate + inflation – real interest rate
c. nominal interest rate – real interest rate – inflation
d. nominal interest rate – real interest rate/inflation
Answer:
d. nominal interest rate – real interest rate/inflation

Question 38.
Credit creation is
a. Process where money is given by banks through loan
b. Process where the money is taken by lenders
c. Process by which the money is taken by depositors
d. All of the above
Answer:
a. Process where money is given by banks through loan

Question 39.
Derived deposits are
a. Deposits created by depositors
b. Deposits created due to the loans extended by banks to borrowers
c. Deposits with the financial institutions
d. Deposits created with the cash of the customers
Answer:
b. Deposits created due to the loans extended by banks to borrowers

Question 40.
In the accounts of banks “loans and advances” are
a. High interest income
b. Loans given to customer
c. Liabilities of bank
d. Both a & b
Answer:
d. Both a & b

Question 41.
Credit creation is done only
a. After primary deposits are made by bank
b. Reserves have been created with RBI
c. Banks have started giving loans
d. All of the above
Answer:
d. All of the above

Question 42.
For deciding the credit of a bank
a. It has to be checked what is the total amounts of deposits bank has
b. Loans granted must earn more interest than its deposits
c. Banks should be able to pay its commitment to deposits
d. Both b & c
Answer:
d. Both b & c

Question 43.
Cash deposit ratio is
a. Total deposits which are kept for encashment by depositors
b. A fraction of cash reserve that a bank is required to keep for encashment
c. Both a &b
d. None of the above
Answer:
b. A fraction of cash reserve that a bank is required to keep for encashment

Question 44.
Which among the following is the full form of FDI in Indian Economics?
a. Foreign Depository investors
b. Foreign departmental investors
c. Foreign direct investment
d. Foreign development investment
Answer:
c. Foreign direct investment

Question 45.
One of the following is not the function of Reserve Bank Of India
a. Issuing currency notes
b. Formulating monetary policies
c. Exercising control over all banks of India
d. Lending money to exporters
Answer:
d. Lending money to exporters

Question 46.
All of the following is function of money except
a. to provide durability
b. to be portable
c. to be divisible
d. None of the above
Answer:
a. to provide durability

Question 47.
The approach used by economics to describe money are
a. Functional approach
b. Purchasing power approach selling
c. Both a & b
d. Purchasing power approach
Answer:
d. Purchasing power approach

Question 48.
Functions of money as per functional approach are
a. Medicine
b. Measure
c. Saving
d. Both a & b
Answer:
d. Both a & b

Question 49.
Unit of account is
a. Monetary unit used in selling
b. Monetary unit used is purchasing
c. Monetary unit used in calculation
d. None of the above
Answer:
c. Monetary unit used in calculation

Question 50.
Difficulty with barter system was
a. Exchange was difficulty due to Lacks of double concordance of wants
b. Persons of credit was difficulty as nature of commodity kept changing
c. Evaluation of the commodity was difficulty as the commodities exchanged were different
d. All of the above
Answer:
d. All of the above

Question 51.
Derived function are
a. Primary function
b. Secondary function
c. Both a & b
d. Neither a nor b
Answer:
b. Secondary function

Question 52.
Limitations for the demand of credit are
a. Demand should exist in the market
b. Amount of loan granted should increase the paying capacity of borrower
c. Bad debts should be avoided
d. All of the above
Answer:
d. All of the above

Question 53.
Which of the following is not included in money?
a. Note
b. Demand deposit of banks
c. Diamond
d. Gold
Answer:
c. Diamond

Question 54.
The contingent function of money are
a. Distribution of national income
b. Distribution from of capital
c. Basis of credit
d. All of the above
Answer:
d. All of the above

Question 55.
Liquidity means
a. A highly acceptable item in the market
b. A credit money
c. A debit money
d. All of the above
Answer:
a. A highly acceptable item in the market

Question 56.
It is uncommon for an item to be liquid if
a. It is not acceptable in the market
b. Can not be sold in the market
c. Not accepted by creditors
d. Both a &b
Answer:
d. Both a &b

Question 57.
Liquidity of an asset is __________ related with the average time taken to convert it into cash in the market
a. Directly
b. Inversely
c. Equally
d. Proportionately
Answer:
b. Inversely

Question 58.
Liquidity is related _________ to price fluctuation
a. Inversely
b. Directly
c. Equally
d. None of the above
Answer:
a. Inversely

Question 59.
As per Fisher transaction approach for inflation
a. If Quantity of money is doubled the price level will also double
b. If quantity of money is doubled price will double and the value of money will half
c. If Quantity of money is doubled price level will double and the value of money will double
d. If quantity of money is doubled price level will be half
Answer:
b. If quantity of money is doubled price will double and the value of money will half

Question 60.
Value of money is dependent on holding power of money. It is
a. Transaction approach
b. Cash balance approach
c. Debit balance approach
d. Asset approach
Answer:
b. Cash balance approach

Question 61.
Central bank came into existence in
a. Early 18th century
b. Early 20th century
c. Late 20th century
d. Late 18th century
Answer:
b. Early 20th century

Question 62.
The role played by Central Bank is
a. Organizing financial system
b. Earning profits
c. Supervising financial system
d. Both a & b
Answer:
d. Both a & b

Question 63.
Some of the policy of Central Bank are
a. High rate of growth in GDP
b. Price stability
c. Reduction in income inequalities
d. All of the above
Answer:
d. All of the above

Question 65.
Primary function of money is that-
a. It serves as a medium of exchange
b. It serves as a standard of deferred payment
c. It serves as a store of value
d. It serves as a general form of capital
Answer:
a. It serves as a medium of exchange
Hint
The primary function of money is that it acts as a medium of exchange

Question 66.
Match the following:

Functions of Money Classification of Money
1. Medium of Exchange (i) Contingent Function
2. Distribution of National Income (ii) Secondary Function
3. Transfer of value (iii) Primary Function

The correct option is
a. 1. (i), 2. (ii), 3. (iii)
b. 1. (ii), 2. (iii), 3. (i)
c. 1. (iii), 2. (i), 3. (ii)
d. 1. (iii), 2. (ii), 3. (i)
Answer:
c. 1. (iii), 2. (i), 3. (ii)
Hint
Primary function
The primary function of money is that it acts as a medium of exchange Secondary function
There are some other functions of money such as
– it can easily be stored unlike goods used in barter system which were difficult and cumbersome to be stored .specially in case of perishable goods.
– It is best means in case of deffered payment. Thus in case of loans repayment interest can easily be calculated with the help of money.
– Money can easily be transferred from one place to another unlike goods whose transferability is difficult.

Contingent functions
Prof. Kinley has mentioned that money is the basis of credit.

  • Some examples of credit money are cheque, draft, bill of exchange etc.
  • Money helps in the proper distribution of national income.
  • It is the general form of keeping all the wealth. ,

It gives people maximum pleasure as they can decide about the utility of the product and can distribute their income accordingly

Question 67.
In a POW Camp during the Second World War, biddies came to perform the function of money although-
a. It did not work as a medium of exchange
b. It did not work as a store of value
c. It did not serve as a standard of deferred payments
d. It was not declared a legal tender.
Answer:
d. It was not declared a legal tender.

Question 68.
____________ is the rate at which the central bank discounts the bill of commercial banks.
a. Bank Rate
b. Interest Rate
c. Growth Rate
d. None of the above
Answer:
a. Bank Rate
Hint
Bank rate -This is traditional way of regulation put by central bank. Central bank decides at which rate of interest the bank will give loans to commercial banks. It is also the rate at which central bank discounts the bills and other instruments of commercial banks.

Question 69.
A Commercial bank cannot—
a. Advance you cash loans
b. Advance you home loans
c. Purchase a house for you
d. Advance educational loan
Answer:
c. Purchase a house for you
Hint
Commercial banks
Commercial Banks are financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. Commercial banks play an important role in the financial system and the economy. Major functions of commercial banks are
• Banks operate by borrowing funds
• Giving loans to public in the form of loans and advances, overdraft, cash credit, discounting of bill etc.

Question 70.
The Central Bank of a country is not empowered to:
a. Change the cash reserve ratio for commercial banks
b. Lend call loans to corporates
c. Extend financial assistance to commercial banks
d. Supervise the functioning of commercial banks.
Answer:
b. Lend call loans to corporates
Hint
Central Banks
Central bank is the apex institution that regulate , guide and help financial system.
Leading functions

  • Issue of notes
    As banker to the government, central bank provides all those service and facilities to the government which public gets from the ordinary banks.
  • Central bank is the bank of banks. It provides security to their cash reserves, give them loan at the time of need, gives them advice on financial and economic matter and work as clearinghouse among various members bank.
  • Central bank is the custodian of the foreign currency obtained from various countries.
  • Another major work of the central bank is to manage and regulate the exchange rate.
  • The central bank works as lender of the last resort for commercial banks
  • All commercial bank have their accounts with the central bank. Therefore, the central bank settles the mutual transactions of banks and thus saves all banks
  • the most important function of a central bank is to control the volume of credit for bringing about stability in the general price level and accomplishing various other socio-economic objectives

Other Functions

  • It collects statistical data regularly relating to economic aspects of money, credit, foreign exchange, banking, etc.
  • It can play an important role by mobilizing people to make investments and to promote saving.

Question 71.
A commercial bank normally, does not pay interest on
a. A fixed deposit with the bank
b. A current deposit with the bank
c. A saving deposit with the bank
d. Long-term deposit with the bank
Answer:
b. A current deposit with the bank
Hint
Banks operate by borrowing funds-usually by accepting deposits from public in the form of saving deposit, fixed deposits and current deposit. Saving accounts are such account in which the bank gives interest on the money deposited by the public while in the current deposit you do not get any interest but mostly gets an overdraft facility.

Question 72.
If a bank has an initial deposit of Rs. 100 crores and cash deposit reserve. maintained by the bank is 10%, then the total amount of credit creation will be?
a. Rs. 1,000 Crares
b. Rs. 500 Crores
c. Rs. 1,250 Crares
d. Rs. 1,500 Crores
Answer;
a. Rs. 1,000 Crares
Hint
Credit creation by the bank = initial deposit/cash deposit reserve = 100/10% = 1000 crores.

Question 73.
In the fisher’s equation of exchange- P = r\frac{r V T V+M^{1} V^{\prime}}{T}
P indicates-
a. The amount of money in circulation
b. The total amount of transaction in the economy
c. The value of money
d. The velocity of money.
Answer:
c. The value of money

Question 74.
Match the following:

Name of the Bank Country
1. Reserve Bank of India (i) Europe
2. Federal Reserve Bank (ii) USA
3. European CentralBank (iii) China
4 People’s Bank of China (iv) India

The given options are:
a. 1. (iv), 2. (ii), 3. (i), 4. (iii)
b. 1. (iii), 2. (iv), 3. (ii), 4. (i)
c. 1. (ii), 2. (iii), 3. (iv), 4. (i)
d. 1. (i), 2. (ii), 3. (iii), 4. (iv)
Answer:
a. 1. (iv), 2. (ii), 3. (i), 4. (iii)
Hint
Reserve Bank of India – India Federal Reserve Bank – USA European Central Bank – Europe People’s Bank of China -China

Question 75.
A primary function of money is to:
a. Serve as a medium of exchange
b. Serve as a standard of deferred payments
c. Serve as a general form of capital
d. Serve as a store of value.
Answer:
a. Serve as a medium of exchange
Hint
The primary function of money is that it acts as a medium of exchange.

Question 76.
Among the following assets the most liquid asset is:
a. Gold
b. Stocks of commodities
c. Equity shares of blue-chip companies
d. Currency notes.
Answer:
d. Currency notes.

Question 77.
An increase in bank rate results in:
a. Banks’ ability to create credit falls
b. Banks can give new loans more easily
c. Demand for bank loans rises
d. Demand for bank loans falls.
Answer:
d. Demand for bank loans falls.
Hint
When the rate of interest charged by central bank from commercial bank is high than commercial banks lending rate of interest also rises which ultimately decreases the number of borrowers. This leads to recession in market.

Question 78.
Depreciation of rupee would normally result in:
a. Increase in India’s imports of luxury goods
b. Increase in India’s exports
c. Fall in India’s external debt burden
d. Domestic deflation.
Answer:
b. Increase in India’s exports
Hint
Currency depreciation is the loss of value of a country’s currency with respect to one or more foreign reference currencies. Thus if the Indian currency will fall then goods of India will become much cheaper in comparison to other countries thus will lead to increase in exports.

Question 79.
An important monetary-policy tool among the following is
a. Better access to Public Distribution System (PDS)
b. Higher expenditure on social services
c. Rationing of credit
d. Increased subsidies on petroleum, food, exports and fertilizers.
Answer:
c. Rationing of credit
Hint
Credit rationing refers to the situation where lenders limit the supply of additional credit to borrowers who demand funds, even if the latter are willing to pay higher interest rates. These are the control measures adopted by Central bank which can be called selective control measures such as rationing of credit, issuing directives to commercial banks, issuing consumer credit regulation etc.

Question 80.
If the target of the Central Bank is to reduce the rate of inflation in the economy, it should not –
a. Reduce the bank rate
b. Raise the Cash Reserve Ratio (CRR)
c. Raise the Statutory Liquidity Ratio (SLR)
d. Raise the Repo rate.
Answer:
a. Reduce the bank rate
Hint
Bank rate -This is traditional way of regulation put by central bank. Central bank decides at which rate of interest the bank will give loans to commercial banks. It is also the rate at which central bank discounts the bills and other instruments of commercial banks.

Question 81.
Central Bank in India is known as-
a. Federal Bank
b. People’s Bank
c. RBI
d. None
Answer:
c. RBI
Hint
RBI – Reserve Bank of India

Question 82.
In which city are the head quarters of R.B.1. situated?
a. New Delhi
b. Bangalore
c. Mumbai
d. Hyderabad
Answer:
c. Mumbai

Question 83.
In which bank interest rate is not changed-
a. RBI
b. SBI
c. Swiss Bank
d. Federal Bank
Answer:
a. RBI

Question 84.
In which city head office of Andhra bank is situated?
a. Hyderabad
b. Kolkata
c. Chennai
d. Coimbatore
Answer:
a. Hyderabad

Question 85.
Who controls CRR & SLR?
a. Central Government
b. RBI
c. Commercial Bank
d. None
Answer:
b. RBI

Question 86.
Which of the following are the functions of money-
a. Medium of exchange
b. Store of value
c. The measure of value
d. All of the above
Answer:
d. All of the above
Hint
Features of money

  • Money gave more freedom to people in comparison to the barter system.
  • As in the barter system, the evaluation of commodities was difficult as every commodity has its different importance. Thus the introduction of money helped to overcome this difficulty.
  • Moreover it was easy to manage accounts with the help of money
  • Acts as a medium of exchange .

Question 87.
People’s bank is an open bank of which country?
a. India
b. China
c. USA
d. UK.
Answer:
b. China

Question 88.
Transaction Approach is given by-
a. Alfred Marshall
b. Irving fisher
c. Adam smith
d. Hicks
Answer:
b. Irving fisher
Hint
The transactions Approach was given by Irving Fisher. This approach first emerged in Fisher’s book The Purchasing Power of Money

Question 89.
Which of the following is not a Quantitative credit control measure
a. Bank Rate
b. Open market operation
c. Variable cash reserve requirement
d. Rationing of credit
Answer:
d. Rationing of credit
Hint
Some of the general credit control measures taken are

  • Bank rate
  • Repo Rate and Reverse Repo Rate
  • Open Market operations
  • CRR and SLR (variable cash reserve requirement)

Question 90.
The rate at which Central Bank borrows money from Commercial Banks is known as-
a. Repo Rate
b. Rate of interest
c. Reverse Repo Rate
d. Loan Rate
Answer:
b. Rate of interest
Hint
Reverse repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) borrows money from commercial banks within the country.

Question 91.
Commercial banks provide the facility of-
a. Providing loans.
b. Accepting deposit
c. Both (a) & (b)
d. None of the above
Answer:
c. Both (a) & (b)
Hint
Major functions of commercial banks are

  • Banks operate by borrowing funds
  • Giving loans to the public in the form of loans and advances, overdraft, cash credit, discounting of bills etc.
  • These banks also provide some of the utility services like lockers, traveller’s cheque, transfer of funds from one bank to another, collect dividend and interest on securities, collection and payment of cheques, bills and promissory notes, provides various trade information and statistics, issues personal and commercial letters of credit, maintain customers Demat account etc.

Question 92.
Which of the following measure is taken by Bank for credit creation?
a. Printing
b. Accepting cheques
c. Lending out a proportion of their deposits
d. Issuing debit cards
Answer:
c. Lending out a proportion of their deposits
Hint
Commercial banks
Commercial Banks are financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit. Commercial banks play an important role in the financial system and the economy. As a key component of the financial system, banks allocate funds from savers to borrowers in an efficient manner. Credit creation is one of the important function of commercial banks. It starts with banks lending money out of primary deposits.

Question 93.
Which of the following lists primary function of money?
a. Medium of Exchanqe, inflation hedge, store
b. Medium of Exchange, standard of deferred
c. Standard of deferred payments, inflation hedge, store of value
d. Medium of exchange, measure of value
Answer:
d. Medium of exchange, measure of value
Hint
The primary function of money is

  • It acts as a medium of exchange
  • It is measure of value

Question 94.
Largest Commercial bank in India, in terms of deposits is:
a. Bank of Baroda
b. Reserve Bank of India
c. State Bank of India
d. Canera Bank
Answer:
c. State Bank of India

Question 95.
Head Office of Reserve Bank of India is situated at:
a. Mumbai
b. Delhi
c. Chennai
d. Ahmedabad
Answer:
a. Mumbai

Question 96.
Reduction in statutory liquidity ratio result into:
a. Increased borrowing powers of the banks,
b. Reduced borrowing powers of the banks
c. Increased lending power of banks
d. Reduced lending power of banks
Answer:
c. Increased lending power of banks
Hint
SLR or statutory liquidity ratio is the minimum percentage of deposits that a bank has to maintain in form of gold, cash or other approved securities. It is the ratio of liquid assets (cash and approved securities) to the demand and term liabilities/deposits. An increase in SLR restricts the bank’s leverage position to pump more money into the economy, thereby regulating credit growth. A decrease in SLR gives more liquidity to the banks.

Question 97.
Which of the following things have been used as money in past times?
a. Shells
b. Goats and Cows
c. Gold, Silver and Rice
d. All are applicable.
Answer:
d. All are applicable.

Question 98.
The executive head of Reserve Bank of India is called
a. Executive Director
b. Chairman
c. President
d. Governor
Answer:
d. Governor

Question 99.
Commercial Banks provide:
a. Free Credit
b. Agency services
c. Both loans and agency services
d. Loans.
Answer:
c. Both loans and agency services
Hint
Commercial Banks are financial institution that provides services, such as accepting deposits, giving business loans and auto loans, mortgage lending, and basic investment products like savings accounts and certificates of deposit.

Question 100.
Which of the following measures is taken by Banks for Credit Creation?
a. Printing
b. Issue debit cards
c. Accepting cheques
d. Lending out a proportion of their deposits.
Answer:
d. Lending out a proportion of their deposits.
Hint
The power of commercial banks to expand deposits through loans, advances and investments is known as “credit creation.”

Question 101.
Which of the following is a measure used by Reserve Bank of India to decrease credit in the economy?
a. Decrease ¡n Bank Rate and decrease in Cash Reserve Ratio (CRR)
b. Decrease In Bank Rate and increase in Cash Reserve Ratio (CRR)
c. Increase in Bank Rate and decrease in Cash Reserve Ratio (CRR)
d. Increase in Bank Rate and ¡ncrease in Cash Reserve Ratio (CRR)
Answer:
d. Increase in Bank Rate and ¡ncrease in Cash Reserve Ratio (CRR)
Hint
CRR or cash reserve ratio is the minimum proportion/percentage of a bank’s deposits to be held in the form of cash. Banks actually don’t hold these as cash with themselves, but deposit the same with RBI/currency chests, which is considered equivalent to holding cash with themselves. This ratio keeps changing and acts as a controlling measure in the hands of central bank. A lower CRR means banks have more money to lend. Increased CRR means banks have less money to lend.

CS Foundation Business Economics Notes

Basic Characteristics Of Indian Economy – CS Foundation Economics Notes

Basic Characteristics Of Indian Economy – CS Foundation Economics Notes

When India became independent it had a highly backward economy. Planning was needed to increase gross domestic savings as well as to increase industrialization and take the deficit balance problem. We were suffering from low per capita income, poor health facilities, very few industries, widespread unemployment, etc. To overcome the problems that were existing India made a planning commission in March 1950 by a regulation of the Government of India.

The functions of the planning commission are
1. To make an assessment of the material, capital, and human resources of the country, including technical personnel, and investigate the possibilities of augmenting those are related resources that are found to be deficient in relation to the nation’s requirement.

2. To formulate a plan for the most effective and balanced utilization of the country’s resources.

3. To define the stages, on the basis of priority, in which the plan should be carried out and propose the allocation of resources for the due completion of each stage.

4. To indicate the factors that tend to retard economic development.

5. To determine the conditions which need to be established for the successful execution of the plan within the incumbent socio-political situation of the country.

6. To determine the nature of the machinery required for securing the successful implementation of each stage of the plan in all its aspects.

7. To appraise from time to time the progress achieved in the execution of each stage of the plan and also recommend the adjustments of policy and measures, which are deemed important vis-a-vis a successful implementation of the plan.

8. To make necessary recommendations from time to time regarding those things which are deemed necessary for facilitating the execution of these functions.

9. Such recommendations can be related to the prevailing economic conditions, current policies, measures, or development programs.

10. They can even be given out in response to some specific problems referred to the commission by the central or the state governments.
After India gained independence, a formal model of planning was adopted, and accordingly the Planning \ Commission, reporting directly to the Prime Minister of India. Planning Commission does not derive its creation from either the Constitution or statute but is an arm of the Central/Union Government.

From a highly centralized planning system, the Indian economy is gradually moving towards indicative planning where the Planning Commission concerns itself with the building of a long-term strategic vision of the future and decides on priorities of the nation. It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction.

1. First five year Plan
In July 1951 the Planning Commission presented a draft outline of a plan of development for the period of five years from April 1951 to March 1956.
The first five-year plan had been made by the planning commission whose objective was to improve the standard of living of the people by effective use of the country’s resources. In India, the first five-year plan’s total outlay was estimated to been worth ₹ 2,069 crores. It was based on Harrod-Domar Model. In the first five-year plan, this amount was allocated to various areas. They are

  • Agriculture development
  • Energy and irrigation
  • Community development
  • Communications and transport
  • Industry
  • Power

The target of GDP growth in the first five-year plan of India was 2.1% per year and the actual growth of GDP that was achieved had been 3.6% per year. It was a successful plan because of the good harvest in the last two years of the plan.

2. Second five year Plan
The second five-year plan India (1956-1961) intends to increase and carry forward the development that had been started by the first five-year plan in India. It is also called Mahalanobis Plan named after the well-known economist The Second Five year Plan focused mainly on heavy industry as against the First Plan which was essentially an agricultural plan. This was done to boost domestic production and manufacturing of goods. The plan is aimed primarily at developing the public sector. The Second Plan started with an emphasis on the expansion of the public sector and aimed at the establishment of a socialistic pattern of society.

In the second year plan, the funds were allocated to various areas such as

  • Power and irrigation
  • Communication and transport
  • Mining and industry
  • Community and agriculture development
  • Social services
  • Miscellaneous

The second five-year plan India has, to a large extent, improved the living standards of the people. The Growth target was 4.5 percent but a growth rate of 4.0 percent was achieved. Third five year Plan It was from 1961-1966 The features of the third five-year plan were

  • To increase the national income by 5% per year
  • To increase the production of agriculture so that the nation is self-sufficient in food grains
  • To provide employment opportunities for every citizen of the country
  • To establish equality among all the people of this country
  • Complete failure in reaching the targets due to unforeseen events – Chinese aggression (1962), Indo-Pak war (1965), severe drought 1965-66

3. Annual Plans
The characteristic features of these three annual plans were

  • Prevailing crisis in agriculture and serious food shortage necessitated the emphasis on agriculture during the Annual Plans
  • During these plans, a whole new agricultural strategy was implemented.
  • Use of HYV’s seeds and extensive use of fertilizers
  • To absorb the shock of the third five-year plan.
  • It paved the path for the planned growth ahead.

4. Fourth five-year Plan It started from 1969-1974. The characteristic features of the fourth five-year plan were

  • Nationalization of 14 major Indian banks
  • The main emphasis was on the growth rate of agriculture to enable other sectors to move forward
  •  Growth with stability
  • Funds kept for industrialization were diverted to war expense
  • Performing smiling Buddha underground test in 1974
  • Target growth expected was 5.7% but actual growth was 3.30%

5. Fifth Five-year Plan It started from 1974-1979. The characteristic features of the plan were

  • Self-reliance in agriculture and defense
  • The emphasis laid on employment
  • Electricity Supply Act was enacted in 1975.
  • Promotion of high rate of growth, better distribution of income, and significant growth in the domestic rate of savings was seen as key instruments
  • Target growth expected was 4.4% and actual growth was 5%

6. Sixth Five-year Plan This was from 1980 – 1985. The characteristic feature of the plan was

  • Family planning program was extended
  • To erode out poverty
  • Emphasized on Increase in national income, modernization of technology
  • Target growth expected was 5.2% and actual growth was 5.4%

7. Seventh Five-year Plan This was from 1985-1990. The characteristic features of the plan were

  • Focus on Socialism and energy production
  • Focus on Production of food grains
  • Use of modem technology
  • Generating employment opportunities.
  • The growth target was 5% and actual growth was 6.01%

8. Eight Five year Plan This was from 1992 – 1997. From the year 1989-1991* there was instability in the Indian economy. India was facing a large foreign reserve deficit so at that time Dr. Manmohan Singh launched free-market reforms which brought the bankrupt nation back from the edge. The features of this plan were.

  • Privatization and liberalization in India
  • Modernization of industries
  • India became a member of the World Trade organization on Jan 1, 1995.
  • Controlling population, poverty
  • Employment generation
  • Can be termed as Rao and Manmohan economic development model.

9. Ninth Five year Plan
It was from 1997-2002. Features of this plan were

  • Create liberal market
  • Improve the quality of life
  • Generation of employment
  • To stabilize the prices in order to increase the growth rate
  • To stress upon the rural development
  • Expected growth was 6.5% but actual growth was 5.35%

10. Tenth five-year plan
It was from 2002-2007. Features of this plan were

  • To attain 8% GDP growth per year.
  • Stress on the education of the child
  • To reduce poverty
  • To reduce gender gaps in literacy and wage.
  • Increase in literacy rate to 72% within the plan period and to 80% by 2012.
  • Reduction of Infant Mortality Rate (IMR)
  • Increase in forest and tree cover
  • All villages to have sustained access to potable drinking water by 2012
  • Cleaning of all major polluted rivers

11. Eleventh five-year plan

  • GDP growth rate to be increased to 10% by the end of the plan.
  • Farm sector growth to be increased to 4%
  • Creation of seven crore job opportunities
  • Reduce educated unemployed youth to below 5 percent
  • Infant mortality rates to be reduced to 28 per 1000 births
  • Maternal death rates to be reduced to 1 per 1000 births
  • Clean drinking water to all by 2009
  • Improve sex ratio to 935 by 2011-12 and to 950 by 2016-17
  • Ensure electricity connection to all villages and broadband over power lines (BPL) households by 2009
  • Roads to all villages that have a population of 1000 and above by 2009
  • Increase forest and tree cover by 5%
  • Achieve the World Health Organization standard air quality in major cities by 2011-12
  • Treat all urban wastewater by 2011-12 to clean river waters
  • Increase energy efficiency by 20 percent by 2016-17

12. Agriculture
Indian Agriculture is one of the most significant contributors to the Indian economy. A brief scenario of Indian agriculture can be depicted as:

• Agriculture is the only means of living for almost 60% of the employed class in India
• Agriculture in India has a significant history. In the earlier times, India was largely dependent upon food imports, but the successive story of the agriculture sector of the Indian economy has made it self-sufficing in grain production.
• India has put a lot of effort to be self-sufficient in food production and this endeavor of India has led to the Green Revolution
• The services enhanced by the Green Revolution in the agriculture sector of the Indian economy are as follows:
– Acquiring more area for cultivation purposes;;
– Expanding irrigation facilities
– Use of an improved and advanced high-yielding variety of seeds
– Implementing better techniques that emerged from agriculture research
– Water management
– Plan protection activities through prudent use of fertilizers, pesticides. The government’s role in agriculture has mainly been providing infrastructure including research.

• The first-ever National Agriculture Policy was announced on 28th July 2000. Over the next two decades, it aims to attain:

  • A growth rate in excess of 4 percent per annum in the agriculture sector
  • Growth that is based on efficient use of resources and conserves our soil, water, and biodiversity
  • Growth with equity, i.e., growth which is widespread across regions and farmers
  • Growth that is demand-driven and caters to domestic markets and maximizes benefits from exports of agricultural products in the face of the challenges arising from economic liberalization and globalization
  • Growth that is sustainable technologically, environmentally, and economically

• Today, India ranks second worldwide in farm output. Agriculture and allied sectors like forestry and fisheries accounted for 16.6% of the GDP in 2009, about 50 % of the total workforce.
• Agriculture, with its allied sectors, is unquestionably the largest livelihood provider in India, more so in the vast rural areas.
• It also contributes a significant figure to the Gross Domestic Product (GDP).
• Sustainable agriculture, in terms of food security, rural employment, and environmentally sustainable technologies such as soil conservation, sustainable natural resource management, and biodiversity protection, are essential for holistic rural development, I
• Indian agriculture and allied activities have witnessed a green revolution.
• Despite record foodgrain production during the course of the past few years, the share of agriculture and allied sectors to India’s gross domestic product (GDP) has declined by more than 4.5% between 2004-05 and 2010-11; while the share of services in the gross domestic product has increased by more than 4.6% during the same period.
• Minimum support price scheme was announced by the government so that farmers get remunerative prices for their produce.
• A centrally sponsored scheme named ‘ Micro Irrigation’ was approved for water management
• Agriculture diversification was recognized as another important sector and thus National Horticulture Mission was approved as a step towards the agriculture diversification
Low productivity – there were several causes of low productivity in India which can be grouped as

1. General factors such as inadequate infrastructure facilities, area of land cultivation per cultivator have declined from .43 hectare in 1901 to .23 hectare in 1981 because of population increase which had a direct impact on productivity. Moreover, dependency on monsoon and traditional system of cultivation further declined the production

2. Industrial factors – Due to small holding of land by farmers and prevailing of zamindari system.

3. Technological factors – Irrigation facilities available were inadequate. Farmers were using poor quality seeds, an old techniques for farming, etc.

13. Measures to improve productivity
Some of the measures to improve agricultural productivity are

  • Farmers should be provided with stable agricultural prices for their agricultural products
  • Adequate marketing facilities
  • Increase educational opportunities
  • Good land use
  • government subsidies
  • Support measures to increase agricultural productivity
  • The land tenure system should be changed in favor of the cultivator.
  • The modem inputs like fertilizers. Pesticides and improved seeds should be made available to the farmers at reasonable prices
  • Conserving and Enhancing Soil and Water

Land reforms – At the time of independence ownership of land was concentrated in the hands of a few. This led to the exploitation of the farmers and was a major hindrance to the socio-economic development of the rural population. Land reforms, therefore, became one of the vital aspects of the agricultural development policy especially after the concept of the Five-Year Plan came to stay. Land reform legislation in India consisted of these main categories:

1. Abolition of intermediaries- The Zamindars acted as the intermediaries. The land was owned by zamindars and, the tenants were burdened with high rents, unproductive cultivation, and other forms of exploitation. By 1972, laws had been passed in all the States to abolish intermediaries. By conferring the ownership of land to the tiller, the Government provided an incentive to improve cultivation.

2. Tenancy reforms to regulate fair rent and provide security to tenure- Towards this end, the Government has taken three measures: (1) declaring tenants as owners and requiring them to pay compensation to owners in suitable installments (2) acquisition of the right of ownership by the State on payment of compensation and transfer of ownership to tenants and (3) the states’ acquisition of the landlords’ rights bring the tenants into direct relationship with the States.

3. Ceilings on holdings and distribution of surplus land among the landlords- With the help of legislation a ceiling for the holding of the agricultural land was announced on zamindars. There were only a few cases where exemptions were provided from the ceiling.

4. Consolidation of holdings and prevention of their further fragmentation – through this land was consolidated in order to give economic holding to farmers. With the help of this method, farmers got one land instead of scattered land.

5. Development of cooperative farming- The Planning Commission in the first three Five Year Plans, chalked out detailed plans for the development of cooperative farming.

14. Green revolution
It was started as a major development in 1967-68. It included the use of high yield seeds, chemicals, fertilizers, improved technology, multiple cropping, etc. This revolution made the country self-sufficient in food grains. The green revolution is still going on with a stress being made on the self-sufficiency in pulses and oilseeds.

15. Globalization and agriculture
Globalization of agriculture means that every country of the world has free access to the markets of other countries for its agricultural products. Globalization of agriculture paved a way to get finance from all over the world for agriculture, to make use of cheap labor that was available in our country, and stand in the global market as a competitor with the use of advanced technology.

Globalization can greatly enhance the role of agriculture as an engine of growth by making it possible for agriculture to grow considerably faster than domestic consumption. It also increases the potential for agriculture to increase food security through enlarged multipliers to the massive, employment-intensive, non-tradable rural non-farm sector.

16. Role of industry
Industrialization is the sharp development of industries in comparison to agriculture. The need and importance of industries can not be denied in any country. The industry supports sustainable growth, maximizes opportunity, and minimizes barriers to growth. Industry development is a key contributing tool to economic development. That is why an emphasis on industrial development was made in various five-year plans.

The planning commission favors industrialization because it is observed that the productivity of labor in industry is much higher than that in agriculture. Industries play a significant and important role for a country like India where there are good natural resources, cheap labor, vast population, etc. which are good enough for industries growth. Thus for a steady and firm development of industries Industrial policy was formed. The 1965 Industrial policy was regarded as the ‘economic constitution of India’
Objectives of the Industrial policy of 1956 were

  • To develop heavy and machine industry
  • To develop a transport system
  • To expand public sector
  • To accelerate the growth and speed of industrialization
  • Industries were divided into Schedule A industries, Schedule B industries, Schedule C industries so that it can be specified that which industries will come under private and which will come under public.
  • 17 industries were put in Schedule A which were in control of the Government
  • 12 industries were put in Schedule B which were to be owned by State
  • Rest industries were in Schedule C which was to be primarily owned by the private sector but was subject to IDRA 1951.
  • To build a cooperative sector
  • – To expand cottage, village, and small-scale industries.

17. Impact of Industries in India
The economic development of any nation totally depends on industries. Growth in the industrial sector is one of the vital figures that affect the Gross Domestic Product (GDP) in India, industrial sector is crucial to greater economic development and takes in a number of areas as a country develops. India has many favorable factors for the development of industries. The various favorable factors present in the country for the development such as country is rich in natural resources, rich in human resources, rich in commercial crops, such as sugar-cane, raw cotton, raw jute, tobacco, oilseeds, etc.
110 Business Economics Paper 3

18. Industrial policy 1948
In 1948, immediately after Independence, the Government of India introduced the Industrial Policy Resolution 1948.
Industries were grouped into three categories as follows:
(a) Exclusive State Monopoly-This includes the manufacture of arms and ammunition, production and control of atomic energy, and the ownership and management of railway transport. These industries were the exclusive monopoly of the Central Government.

(b) State Monopoly for New Units-This category included coal, iron, and steel, aircraft manufacture, shipbuilding, manufacture of telephone, telegraphs, and wireless (apparatus (excluding radio receiving sets), and mineral oils. Cement

(c) Unregulated private enterprise-the industries in this category were left open to the private sector, individual as well as cooperative such as small, medium, and cottage industries

19. Industrial policy 1977
The small scale sector was classified into three categories:

  • Cottage and small industries providing self-employment on a wide scale;
  • Tiny sectors with investment in machinery and equipment up to Rs. 1 lakh in town areas and Rs.50, 0007- in rural areas; and
  • Small scale sectors with an investment of Rs.10 lakhs and in case of ancillary units with an investment in fixed capital up to us 18 lakhs.
  • district industries center was to be established in each district
  • The Policy also proposed to revitalize the Khadi and village industries by drawing special programs in the Khadi and handloom sectors.

20. Industrial policy 1980
The basic objectives of the 1980 Policy were as follows:

  1. Optimum utilisation of the installed capacity,
  2. Maximizing production and achieving higher productivity,
  3. More employment generation,
  4. Promotion of export-oriented and import-substitution units
  5. Strengthening agricultural base by according preferential treatment to agro-based industries and promoting an inter-sectoral relationship, and
  6. Re-orientation of the public sector undertakings and assistance for the growth of private sectors and promotion of small-scale units.
  7. For setting up a unit or expansion of existing unit license from the Government was required.

21. Industrial policy 1984

  • This policy laid emphasis on liberalization from licensing policy for large enterprises.
  • In January 1986 Government de-licensed 23 industries.
  • Many of the Industries were freed from the provisions of the MRTP Act and FERA.

22. Industrial policy 1990
The features of this policy were

  • to take measures for the promotion of small-scale and agro-based industries and to change procedures for grant of industrial approvals.
  • A new scheme of Central Investment Subsidy exclusively for the small-scale sector in rural and backward areas capable of generating a higher level of employment at lower capital cost would be implemented.
  • A New bank SIDBI was established so that it can provide financial assistance to small scale and agro-based industries

23. Industrial policy 1991
The objective of the Industrial Policy Statement – 1991 was

  • to maintain sustained growth in productivity, enhance gainful employment and achieve
  • optimal utilization of human resources
  • to attain international competitiveness
  • to transform India into a major partner and player in the global arena. The characteristic features of policy were

1. industrial licensing will henceforth be abolished for all industries.

2. Compulsory licensing was required only in respect of 18 industries. These included coal and lignite, distillation and brewing of alcoholic drinks, cig; ars and cigarettes, drugs and pharmaceuticals, etc.

3. While freeing Indian industry from official controls, opportunities for promoting foreign investment in India was accorded a significant role.

4. In high-priority industries, requiring large investments and advanced technology, approval for direct foreign investment up to 51% foreign equity in such industries were given.

5. With a view to injecting technological dynamism in the Indian industry, the Government provided automatic approval for technological agreements related to high priority industries and eased procedures for the hiring of foreign technical expertise.

6. A specially empowered Foreign Investment Promotion Board has been constituted to negotiate with international forums to approve direct foreign investment in selected sectors. Restructuring of public sector units (PSUs) was initiated. In order to raise resources and ensure wider public participation in PSUs, it was decided to offer its shareholding stake to mutual funds, financial institutions, the general public, and workers.

Similarly, in order to revive and rehabilitate chronically sick PSUs, it was decided to refer them to the Board for Industrial and Financial Reconstruction (BIFR).
The MRTP Act will be amended to remove the threshold’ Hits of assets in respect of MRTP companies and dominant undertakings.

Basic Characteristics Of Indian Economy MCQ Questions

Question 1.
The number of products reserved for small scale 6. industry till October 2008 is
a. 35
b. 21
c. 81
d. 106
Answer:
b. 21

Question 2.
For 2010-11 the CSO has predicted India’s GDP growth as
a. below 7%
b. 8.6%
c. 805%
d. 9.5%
Answer:
b. 8.6%

Question 3.
Which of the following occupied the highest place in growth rate during the 10th Plan period 2002-2007?
a. Agricultural Sector
b. Service Sector
c. industrial sector
d. mining
Answer:
b. Service Sector

Question 4.
The agriculture sector registered 1.6% growth in 008-09 and it is estimated for the year 2010-11 at
a. 4.00%
b. 4.30%
c. 5.4%
d. 3.61%
Answer:
c. 5.4%

Question 5.
According to Smal and medium enterprise development Act, the maximum limit for medium enterprise is
a. Rs. 25 Lakhs
b. Rs. 1 Crore
c. Rs. 5 Crore
d. Rs. 10 crore
Answer:
d. Rs. 10 crore

Question 6.
India has
a. Socialistic economy
b. Gandhi an economy
c. Mixed economy
d. free economy
Answer:
c. Mixed economy

Question 7.
In India, the public sector is most dominant in
a. transport
b. Steel production
c. commercial banking
d. organized term lending financial institutions.
Answer:
c. commercial banking

Question 8.
One of the reasons for India’s occupation structure remaining more or less the years has been that
a. a. productivity in agriculture has beer’ high enough to induce people to stay with agriculture.
b. people are largely unaware of the significance of the transition from agriculture tA industry for economic development.
c. investment pattern has been directed towards capital intensive industries.
d ceilings on land holdings have enabled more people to own land and hence their preference to stay with agriculture
Answer:
b. people are largely unaware of the significance of the transition from agriculture tA industry for economic development.

Question 9.
Which of the following is correct regarding the gross domestic savings in India?
a. contribution of Household sector is the largest
b. contribution of the government sector is the largest
c. contribution of the corporate sector is the largest
d. none of these
Answer:
a. contribution of Household sector is the largest

Question 10.
With the development of the economy, the contribution of the primary sector in national income is
a. increasing
b. constant
c. decreasing
d. none of the above
Answer:
c. decreasing

Question 11.
Which are the correct statements?
a. Agriculture and industry are interdependent
b. Agriculture is Basic Components for industrial Development
c. Agriculture if affected by monsoon
d. all of these
Answer:
b. Agriculture is Basic Components for industrial Development

Question 12.
What are the problems of rural industrialization in India?
a. lack of Capital
b. lock of Basic infrastructure
c. The traditional technique of production
d. All of the above
Answer:
d. All of the above

Question 13.
The main features of the Indian economy is
a. Rural Poverty
b. Lack of Capital
c. Traditional Technique of production
d. None of these
Answer:
d. None of these

Question 14.
Which of the following type of employment is found in India?
a. Structural unemployment
b. quasi unemployment
c. disguised unemployment
d. All of these
Answer:
d. All of these

Question 15.
The objective of land reforms in India is
a. increase in Agriculture Production
b. Social justice with farmer
c. both a and b
d. None of the above
Answer:
b. Social justice with farmer

Question 16.
For purchasing the seeds, fertilizers, etc the loan distributed is called:
a. Short Term loan
b. long term loan
c. medium-term loan
d. none of these
Answer:
c. medium-term loan

Question 17.
Which of the following are the reasons for the food problem in India?
a. Population expulsion
b. Development of Commercial crops
c. The backwardness of Agriculture
d. All of above
Answer:
c. Backwardness of Agriculture

Question 18.
Main Source of Irrigation in India ls
a. Canals
b. Tanks
c Wells and Tube wells
d. none of these
Answer:
c Wells and Tube wells

Question 19.
The main element of the new Agriculture strategy in India is
a. Agricultural machinery and Tools
b. Finance and marketing
c. Seeds and fertilizer
d. Tenancy and hand reforms
Answer:
c. Seeds and fertilizer

Question 20.
The main Hurdle in steady industrial development in India is
a. Lack of capital
b. insufficient basic infrastructure
c. Limited market
d. technical backwardness
Answer:
c. Limited market

Question 21.
Which of the following were the long-term objectives of economic planning in India up to the 7th plan?
a. economic growth
b. self-reliance
c. Removal of unemployment
d. reduction of income inequalities and elimination of poverty
Answer:
d. reduction of income inequalities and elimination of poverty

Question 22.
In the 5th Plan, though removal of poverty was mentioned as a major objective, only a passing reference was made to the problem.
a. economic inequalities
b. population growth
c. industrial stagnation
d. None of these
Answer:
a. economic inequalities

Question 23.
Until the late 1970s decision-makers in the government and the planning commission were of the view that?
a. Trickle-down effect of growth could alleviate poverty
b. Only special programs can reduce the incidence of poverty in India
c. Land reforms and agricultural development can make a serious dent in the incidence of poverty, as most of the poor reside in rural areas.
Answer:
a. Trickle-down effect of growth could alleviate poverty

Question 24.

Modernization in agriculture implies
a. increased use of fertilizers and HYV seeds
b. extension of irrigation facilities
c. greater mechanization
d. land reforms of these statements
Answer:
c. greater mechanization

Question 25.
The 7th plan development strategy contained some substantive elements of change; these were
1. it gave priority to increasing agricultural production through greater reliance on new technology
2. It undermined the role of the public sector and induced increasing privatization of industries
3. the liberalization of imports it aimed at rearing efficiency in the manufacturing sector
4. planning and administrative procedure and institution were accordingly changed and emphasis was switched from regulate-y to facilitator procedures of this statement:
a. only 1 is correct
b. only 1 and 2
c. only 1, 2 and 3
d. all is correct
Answer:
c. only 1, 2 and 3

Question 26.
Deficit financing contributed to
a. 8.6% of public sector outlay in 8th plan
b. 6.6% of public sector outlay in 8th Plan
c. 4.6% of public sector outlay in 8th Plai
d. none of these
Answer:
a. 8.6% of public sector outlay in 8th plan

Question 27.
The highest allocation of resources in the 8th plan (26.6%) went to?
a. Energy sector
b. Transport and communication
c. S & T and Environment
d. None of these
Answer:
a. Energy sector

Question 28.
Characteristics, which do not describe a nation as underdeveloped are
a. Poor health facilities
b. Good saving
c. Mass poverty
d. Low per capita income
Answer:
b. Good saving

Question 29.
For developing mixed economy of India __________ was done
a. Active role of State was made
b. The role of public and private was established
c. Both a & b
d. Removal of poverty
Answer:
c. Both a & b

Question 30.
In India to avoid multiplicity of objectives after independence, it determined
a. Priorities in terms of economic worth
b. Socialism pattern of society
c. Adequate means of civilization
d. All of the above
Answer:
d. All of the above

Question 31.
Which is the most appropriate planning that was required to be done by India after independence?
a. Increase gross domestic saving
b. Increase gross domestic investment
c. Tackling the deficit payment problems
d. All of the above
Answer:
b. Increase gross domestic investment

Question 32.
India has ________ polity
a. Federal
b. Democratic
c. Both a&b
d. None of the above
Answer:
c. Both a&b

Question 33.
National plan in India comprises
a. Plans of state government
b. Plans for the private sector
c. Plans for public sector undertakings
d. All of the above
Answer:
d. All of the above

Question 34.
It was not the objective of plans made by the Planning Commission to
a. Increase the income of the rich
b. Increase the income of the poor
c. Decrease the income of the rich
d. None of the above
Answer:
d. None of the above

Question 35.
In a mixed economy, the common features that led to the failure of Government were
a. Decisions were guided for s,elf interest
b. They were unable to implement their plans quickly
c. There was lack of strong mechanism of economic incentives
d. Both b & c
Answer:
d. Both b & c

Question 36.
Planning commission was set up in
a. March, 1947
b. March, 1950
c. March 1948
d. None of the above
Answer:
b. March, 1950

Question 37.
Formulating five year plan is the work of
a. Government of India
b. State Government
c. Planning commission
d. Central committees
Answer:
c. Planning commission

Question 38.
As per critics the self reliance plan should have been
a. Able to pay for our imports by increasing exports
b. Able to get freedom from imports
c. Able to have a policy for import substitution
d. All of the above
Answer:
a. Able to pay for our imports by increasing exports

Question 39.
Growth rate achieve in the first five year plan was _____________ of GDP
a. 2.1%
b. 3.1%
c. 2%
d. 3.6%
Answer:
d. 3.6%

Question 40.
Five MT’s were established in
a. First five year plan
b. Second five year plan
c. Third five year plan
d. Fourth five year plan
Answer:
a. First five year plan

Question 41.
__________ was based on Mahalanobis model
a. Power & Irrigation
b. Communication & transport
c. Agriculture
d. Social service
Answer:
c. Agriculture

Question 42.
First five year plan was based on ________ model
a. Mahalanobis model
b. Harrod damodar model
c. Haron domar model
d. Damodaran model
Answer:
b. Harrod damodar model

Question 43.
Eleventh five year plan emphasized that at least __________ of women &girl children should get the benefit of Government schemes
a. 30%
b. 32%
c. 33%
d. 34%
Answer:
c. 33%

Question 44.
Agricultural based states are
a. Uttar Pradesh
b. Madhya Pradesh
c. Haryana
d. All of the above
Answer:
d. All of the above

Question 45.
Amongst below mentioned which 5 year plan achieved actual growth more than target growth
a. 3rd 5 year plan
b. 2nd 5 year plan
c. 4th 5 year plan
d. None of the above
Answer:
d. None of the above

Questions 46.
The reasons of plan holiday were
a. Lack of power and irrigation
b. Less social services
c. Decrease in savings rate
d. Less land rehabilitation
Answer:
c. Decrease in savings rate

Question 47.
Amongst the five year plans 3 annual plans were adopted and termed as plan holiday. They were
a. 1966-69
b. 1967-70
c. 1965-68
d. None of the above
Answer:
a. 1966-69

Question 48.
Distribution of HYVs of seeds were done in
a. Second five year plan
b. First five tear plan
c. Plan holiday
d. None of the above
Answer:
c. Plan holiday

Question 49.
The characteristic features of fourth five year plan were
a. Growth with stability
b. Nationalization of 14 banks
c. Bangladesh liberation war took place
d. All of the above
Answer:
d. All of the above

Question 50.
For the first time national highway was introduced as a focal work in
a. First five year plan
b. Fifth five year plan
c. Both a &b
d. None of the above
Answer:
b. Fifth five year plan

Question 51.
Rao and Manmohan economic development plan made
a. Liberalization in India
b. Privatization in India
c. Increasing productivity of small & large farmers
d. Both a & b
Answer:
d. Both a & b

Question 52.
On 1st Jan1995
a. India became self reliant for foreign exchange
b. Became member of world trade organization
c. Ninth five year plan was launched
d. Became a member of WHO
Answer:
b. Became member of world trade organization

Question 53.
The declining share of agriculture in Indian economy is an indication of
a. Scarcity of food
b. Economic progress
c. Structural changes
d. Both b & c
Answer:
d. Both b & c

Question 54.
In the current years, it has been observed that there has been a rapid increase in the manufacturing sector. Which of the statement is true?
a. Maximum employment lies with the agriculture
b. Maximum employment lies with the manufacturing sector
c. Both a & b
d. None of the above
Answer:
a. Maximum employment lies with the agriculture

Question 55.
The linkages that can be linked between agriculture and production are
a. Savings and investment linkages
b. Production linkages
c. Commodity
d. Both a & b
Answer:
d. Both a & b

Question 56.
A policy was formed by _______ for development in agriculture in such a way that it becomes demand driven and satisfies the demand of the domestic market
a. PDS
b. NAP2000
c. ACRP
d. CACP
Answer:
b. NAP2000

Question 57.
The shortage of finance available to farmers leads to ____________ factors responsible for low productivity of agriculture in India
a. Institutional
b. General
c. Technological
d. All of the above
Answer:
b. General

Question 58.
In the years 2010-11 the contribution of agriculture towards the GDP of the counts was
a. 18.5%
b. 14.2%
c. 20%
d. 14.5%
Answer:
b. 14.2%

Question 59.
Why agriculture is considered as a means of capital formation for the economy
a. It is major source of saving
b. It is a major source of earning
c. It is a large sector of economic activities
d. It has led to the economic progress
Answer:
a. It is major source of saving

Question 60.
Fast economic development of any country can generally happen only
a. When it becomes self sufficient for food
b. When agricultural land has been used to full
c. When there is rapid industrialization
d. When planning commission are set up
Answer:
c. When there is rapid industrialization

Question 61.
Industrialization involves
a. Economic analysis
b. Accountancy
c. Management technique
d. All of the above
Answer:
d. All of the above

Question 62.
Green revolution started in the year
a. 1967-69 with the production of rice and wheat
b. 1967-69 with the production of wheat and barley
c. 1967-68 with the production of rice and wheat
d. 1967-68 with the production of wheat and barley
Answer:
c. 1967-68 with the production of rice and wheat

Question 63.
Period of 1989-1995 was v
a. Idle as there was political unrest
b. Not idle but there was political unrest
c. There were many changes and there was no political unrest
d. There was political unrest so nothing happened in this period
Answer:
b. Not idle but there was political unrest

Question 64.
Some of the economic policies of Government are
a. Industrial policy
b. Fiscal policy
c. Tariff policy
d. All of the above
Answer:
d. All of the above

Question 65.
Match the following:

Name of Revolution Name of Related Commodity
1. Green Revolution (i) Sunflower
2. White Revolution (ii) Marine Products
3. Blue Revolution (iii) Agricultural Crops
4. Yellow Revolution (iv) Milk

a. 1. (iv); 2. (iii); 3. (ii); 4. (i)
b. 1. (iii); 2. (iv); 3. (ii); 4. (i)
C. 1. (ii); 2 (iii); 3. (iv); 4. (i)
d. 1. (i); 2. (ii); 3. (iii); 4. (iv)
Answer:
b. 1. (iii); 2. (iv); 3. (ii); 4. (i)
Hint
Green Revolution -The services enhanced by the Green Revolution is in the agriculture sector of Indian economy.
White Revolution – White Revolution in India made our country self-sufficient in milk and this was achieved entirely through the cooperative society.
Blue Revolution – Blue Revolution means the adoption of a programme to increase the production of fish and marine products.
Yellow revolution – This Revolution in India made our country self-sufficient in oil seeds and also net exporter.

Question 66.
The first industrial policy revolution in independent India was announced in the year-
a. 1948
b. 1949
c. 1950
d. 1951
Answer:
a. 1948
Hint
In 1948, immediately after Independence, Government of India introduced the Industrial PolicyResolution 1948.

Question 67.
The growth strategy adopted in Indias Second Five Year Plan put more emphasis on the growth of-
a. Consumer goods industries
b. Industries producing luxuries and comforts
c. Light capital goods industries
d. Heavy and basic industries
Answer:
d. Heavy and basic industries
Hint
The Second Five year Plan focused mainly on heavy industry as against the First Plan which was essentially an agricultural plan.

Question 68.
Heavy inflows of foreign direct investment to India took place during the period:
a. 1950to 1970
b. 1960to 1975
c. 1980to1995
d. 1995to2010
Answer:
c. 1980to1995
Hint
Heavy inflows of foreign direct investment to India took place during the period 1980-1995

Question 69.
Purchase of equity shares in an Indian joint stock company by a foreigner constitute:-
a. Foreign direct investment
b. Portfolio investments
c. Green investments
d. All of the above
Answer:
a. Foreign direct investment
Hint
A foreign direct investment (FDI) is an investment made by a company or entity based in one country, into a company or entity based in another country.

Question 70.
The time period which is called a “Plan Holiday” is
a. 1961 -1966
b. 1966-1969
c. 1969-1974
d. 1974-1979
Answer:
b. 1966-1969
Hint
Looking at the failures of the third five year plan the planners suspended the impending Fourth Plan, which was due in 1966, until 1969 for a revision of objectives and targets. This came to be called as the ‘Plan Holiday’ extending from 1 April 1966 to 31 March 1969.

Question 71.
The contribution of the agricultural sector to India’s national income in recent years has been about—
a. 50%
b. 30%
c. 25%
d. 15%
Answer:
a. 50%
Hint
Recently the contribution of agricultural sector in national income has been 50%.

Question 72.
Integration of domestic economy with the world economy is called as-
a. Disinvestment
b. Privatization
c. Liberalization
d. Globalization
Answer:
d. Globalization
Hint
Globalisation is the process of international integration arising from the interchange of world views, products, ideas and mutual sharing, and other aspects of culture.

Question 73.
Which one of the following is not true about the Indian economy?
a. Indian population has been rising
b. Output of cereals has been rising
c. Rate of growth of India’s population has been rising
d. The share of work force engaged in agriculture has been falling.
Answer:
b. Output of cereals has been rising
Hint
Agriculture contributes to about 50 % in national income and in year 2009-10 it has come down to 17%.

Question 74.
If the rate of inflation falls down from the current 8% to 6%, the price of your favourite ice-cream may-
a. Fall
b. Rise
c. Remain unchanged
d. None of the above
Answer:
b. Rise
Hint
Inflation is defined as a sustained increase in the general level of prices for goods and services.

Question 75.
The current economic crises in the Euro-zone and the USA have led to-
a. Serious inflation in India
b. Significant fall in the volume of exports from India
c. Heavy fall in agricultural output
d. Sharp rise in the cost of production in the Indian industry.
Answer:
b. Significant fall in the volume of exports from India
Hint
Economic crisis in Europe arise as many of the European member countries were not able to repay or refinance government debt.

Question 76.
Fiscal deficit in India, currently, is financed by
a. Selling the equity in PSUs
b. Raising the interest rates
c. Raising the rate of different taxes
d. Printing of new currency
Answer:
c. Raising the rate of different taxes
Hint
The difference between total revenue and total expenditure of the government is termed as fiscal deficit.

Question 77.
Which of the following is classified as a development bank in India?
a. IOBI Bank
b. ICICI Bank
c. Axis Bank
d. IFCI
Answer:
a. IOBI Bank
Hint
IDBI is known as Industrial Development Bank of India.

Question 78.
Which of the following does not have a fixed tenure?
a. Planning Commission
b. Finance Commission
c. Five year Plan
d. Foreign Trade Policy
Answer:
d. Foreign Trade Policy

Question 79.
NPP was started in which year?
a. 2000
b. 1994
C. 1990
d. 1895
Answer:
a. 2000

Question 80.
Who formulated the first 5 year plan?
a. Pandit Jawaharlal Nehru
b. Abdul Jamal Naseer
c. Broz Tilto
d. None of these
Answer:
d. None of these
Hint
The first five year plan had been made by the planning commission whose objective was to improve the standard of living of the people by effective use of the country’s resources.

Question 81.
Green Revolution was started in :-.
a. First five years plan
b. Second five years plan
c. Third five years plan
d. Seventh five years plan
Answer:
c. Third five years plan
Hint
Green revolution was started as a major development in 1967-68.

Question 82.
Who was the founder of Green Revolution?
a. Norman & Borlang
b. M.S. Swaminathan
c. Joseph Stalin
d. Indira Gandhi
Answer:
b. M.S. Swaminathan
Hint
M.S. Swaminathan is known as “Indian Father of Green Revolution”

Question 83.
When was planning commission started?
a. March, 1950
b. January, 1951
c. February, 1952
d. December, 1951
Answer:
a. March, 1950
Hint
India made a planning commission in March 1950 by a regulation of Government of India.

Question 84.
Which of the following statements is correct?
a. Privatization up to 100 percent has been carried out in all PSU’s in India.
b. Disinvestment never happens in India
c. The disinvestment programme has been successfully carried out in India
d. Under strategic sale market of disinvestment the government sells a major share to strategic buyer.
Answer:
d. Under strategic sale market of disinvestment, the government sells a major share to strategic buyer.
Hint
Disinvestment is an action of an organization or Government in which it liquidates its assets.

Question 85.
The area under irrigation has __________ over the years in India.
a. Remained Constant
b. Decreased
c. Increased
d. First Increased and then Decreased
Answer:
c. Increased
Hint
In 2003 agricultural irrigated land was 29.88% of total agricultural land and in 2010 it was 35.19% which shows that irrigation has increased over the years.

Question 86.
Which of the following Defines Subsistence?
a. Absence of the minimum physical quantities of food required for an individual daily.
b. Absence of good home facilities for an individual
c. Absence of basic cloth availability for an individual
d. All of these
Answer:
d. All of these
Hint
Subsistence agriculture is self-sufficiency farming in which the farmers focus on growing enough food to feed themselves and their families.

Question 87.
In India, which of the following is a reason of failure to achieve industrial production target?
a. Poor planning
b. Power, finance and labour problems
c. Technical complication
d. All are applicable
Answer:
d. All are applicable
Hint
Causes of failure to achieve industrial production targets are

  • lack of finance
  • lack of labour
  • poor planning
  • inadequate infrastructure
  • lack of technology

Question 88.
On which date the first five years plan of India was presented to the parliament?
a. 8 – Aug – 51
b. 8 -Dec-47
c. 8 – Dec – 51
d. 8 – Aug – 47
Answer:
c. 8 – Dec – 51
The first five year plan were presented by Jawahar lal Nehru on 8th December 1951 to the Parliament.

Question 89.
Which of the following was not a part of green revolution?
a. Food grain export
b. Pesticides
c. High yielding variety seeds
d. Fertilizers
Answer:
a. Food grain export
Hint
Green revolution -It was started as a major, development in 1967-68. It included use of high yield seeds, chemicals, fertilizers , improved technology, multiple cropping, etc.. This revolution made the country self-sufficient in food grains.

Question 90.
Which of the following statement is correct?
a. Disinvestment never happens in India
b. Under strategic sale method of disinvestment, the government sells a major share to strategic buyer.
c. Privatisation upto 100 percent has been carried out in allthe PSUs in India
d. The disinvestment programme has been successfully carried out in India.
Answer:
b. Under strategic sale method of disinvestment the government sells a major share to strategic buyer.
Hint
Disinvestment is an action of an organization or Government in which it liquidates its assets .

Question 91.
Which of the following is a basic objective of five year plans in India?
a. Social Justice
b. Rapid Economic growth
c. Full employment
d. All are applicable.
Answer:
d. All are applicable.
Hint
Planning Commission concerns itself with the building of a long term strategic vision of the future and decide on priorities of nation. It works out sectoral targets and provides promotional stimulus to the economy to grow in the desired direction.

Question 92.
Which of the following is a reason for the industrial sector to depend on the agriculture sector?
a. The agriculture sector provides food and other products for the consumption purposes of industrial sector
b. The agriculture sector provides raw materials for the development of agro based industries of the economy.
c. The agriculture sector provides market for the industrial products
d. All are applicable.
Answer:
d. All are applicable.
Hint
India has many favourable factors for the development of industries. The various favourable factors present in the country for the development such as country is rich in natural resources, rich in human resources. Rich in commercial crops, such as sugar-cane, raw cotton, raw jute, tobacco, oil seeds, etc. All these agricultural products are used by Industries.

CS Foundation Business Economics Notes

Theory Of Demand And Supply – CS Foundation Economics Notes

Theory Of Demand And Supply – CS Foundation Economics Notes

Supply and demand are perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of certain goods producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.

1. The Law of Demand
The most famous law in economics and the one economists are most sure of, is the law of demand. On this law is built almost the whole edifice of economics. Demand means the quantity a consumer wants to purchase Features of Law of demand are

  • As per this law fall in the price of a product is inversely proportional to the demand of that product. Thus when the price falls demand increases
  • The Law of demand is ceteris Paribus which means the quantity purchased depends upon all other things being equal at that time. Thus if all the other things incidental to the product remain the same then purchase quantity is dependent on price.
  • If the price falls then purchase quantity increases at that time. Thus if the price of potatoes falls in a week and the desire for potatoes remains the same for that week then purchase quantity increases.
  • This law summarizes the effect price changes have on consumer behavior A demand for a good can be expressed in 3 ways
  • Demand function – The demand function relates to price and quantity. It tells how many units of goodwill be purchased at different prices.

In general, at higher prices, less will be purchased. Thus, the graphical representation of the demand function (often referred to as the demand curve) has a negative slope. The market demand function is calculated by adding up all of the individual consumers’ demand functions.
It is an algebraic way of showing the demand of an individual. A generalized expression for a commodity X can be
Dx = Px, Y, T
Where Dx = quantity demanded for X product
Px = price of X product
Y = income level of consumer
T= his tastes
Thus quantity demanded by an individual is dependent on Px, Y, T

• Demand schedule
In economics, a market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at every different price. A market demand schedule for a product indicates that there is an inverse relationship between price and quantity demanded. The graphical representation of a demanding schedule is called a demand curve. A demand schedule is a simple means of summarizing information about demand price and quantity demanded of a particular good. It is used to highlight the law of demand. It can also be used to derive a demand curve. It can be an individual demand schedule or a market demand schedule which is a summation of the individual demand schedule.

• Demand Curve
In economics, a graphic representation of the relationship between product price and the quantity of the product demanded is the demand curve. It is drawn with a price on the vertical axis of the graph and quantity demanded on the horizontal axis. With few exceptions, the demand curve is delineated as sloping downward from left to right because price and quantity demanded are inversely related (i.e., the lower the price of a product, the higher the demand or number of sales). This relationship is contingent on certain ceteris paribus (other things equal) conditions remaining constant.

Utility approach – Utility is a term used by economists to describe the measurement of “useful-ness” that a consumer obtains from any good. A consumer’s utility is hard to measure. However, we can determine it indirectly with consumer behavior theories, which assume that consumers will strive to maximize their utility.

2. Measurement of utility
The utility may measure how much one enjoys a movie, or the sense of security one gets from buying a deadbolt. Utility measurement provides a basis for discussing the satisfaction of wants and needs derived from consumption, which then enables an understanding of the role utility plays in market demand. The utility approach for determining demand is very much based on individual taste and desire. The desire may not always be for the welfare of consumers. But over here determining the demand is not concerned with the normative approach. There are two approaches that are used for measuring the utility.

  • Cardinal Approach
  • Ordinal Approach

Cardinal Approach

Cardinal approach suggests that utility can be measured in imaginary cardinal numbers 1,3,10 etc. It argues that a consumer has the capacity to measure the level of satisfaction that person derives from the consumption of a given quantity of a commodity.

As we know the resources are scarce and wants are unlimited so choices are to be made in regard to maximum utilization. Let us understand by an example. A man has is hungry he has the choice either to purchase it from the market or cook at home. Now it is on the consumer to decide which choice satisfies him the most and gives the maximum utility. As per this approach this utility can be measured.

The concept of Cardinal Utility was used by Marshal to define Consumer’s Equilibrium. Cardinal Utility means consumers could measure the satisfaction derived by the consumption of any goods or services in terms of number and . unit of that measurement is Utils. Cardinal utility was popular with utilitarian economists in the 18th century. Their belief was that utility could be measured.

As we know resources are scarce and want unlimited so the choices are to be made by consumers. For making choices you need a comparison parameter. As per this approach, a consumer can measure the utility of a good with other goods in cardinal numbers, and accordingly, it can make a choice which good gives him maximum utilization 1 Cardinal utility theory has two drawbacks First, the very first assumption of the cardinal utility approach is that utility is cardinally (or objectively) measurable is untenable. The utility is a subjective concept that cannot be measured objectively or quantifiably.

Secondly, the cardinal utility approach assumes that the MU of cardinal numbers remains constant and serves as a measure I of utility. This assumption is unrealistic because the MU of cardinal numbers, like that of all other goods, is subject to change. And, therefore, it cannot serve as a measure of utility derived from goods and services.

Ordinal approach
The concept was first introduced by Pareto. He said that utility can not be measured in numbers instead it can be depicted in a comparable manner. As per this approach, the utility can not be measured in units but it can be determined by preferences so whenever demand for a product is being accessed then it can be determined on the basis of preferences made by consumers. This is more realistic and better than the cardinal utility. This is totally based on Introspection.

This theory states that while the utility of a particular good or service cannot be measured using a numerical scale bearing economic meaning in and of itself, pairs of alternative bundles (combinations) of goods can be ordered such that one is considered by an individual to be worse than, equal to, or better than the other. This contrasts with cardinal utility theory, which generally treats utility as something whose numerical value is meaningful in its own right. The ordinal utility is also commonly known as indifference curve theory because its analysis is based on the indifference curve.
Concept of utility – a good after being purchased gets its utility divided into
Total utility (TU)
Average utility(AU)
Marginal utility (MU)
Total utility – is the summation of utilities derived from all of the n units
Average utility – when we divide total utility by the number of units we get average utility
Marginal utility – additional satisfaction a consumer gets when he consumes one more unit of a good is marginal utility.
Marginal utility is an important economic concept because economists use it to determine how much of an item a
consumer will buy. Positive marginal utility is when the consumption of an additional item increases the total utility. Negative marginal utility is when the consumption of an additional item decreases the total utility.
The time when marginal utility becomes zero total utility is maximum.

3. Law of Diminishing Marginal Utility
A law of economics stating that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. The concept looks psychological but can be calculated in rational numbers like 2,3, etc. Law has a direct bearing on the market demand, the demand price, and the law of demand. If satisfaction is obtained from a good decline, then buyers are willing to pay a lower price, hence demand price is inversely related to quantity demanded, which is the law of demand.

This law can not be used for all the utility items cause there are certain things whose utility increases as they are added like reading. In such cases the more you get more you want thus here utility demand is not diminishing but instead increasing. The law of diminishing marginal utility is directly linked to determining the price of the commodity. Not only this it is very useful for social welfare programs where you can find out whether the goods and services wants are the same for all people or it is different. Then on basis of finding goods and services can be distributed among society members.

4. Observations for the law of DMU

  • When TU rises, MU diminishes
  • When TU is maximum, MU is zero
  • When TU decreases, MU becomes negative

5. Assumptions of the law of DMU

  • The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.
  • Constant marginal utility of money
  • Consumption to be continuous
  • Utility is cardinally measurable
  • Hypothesis of independent utilities
  • Taste and income of the consumer does not change
  • The units of the commodity are identical
  • There is no time gap between the consumptions
  • Standard unit of consumption Exceptions to the law of DMU is
  • Hobbies of consumers like Reading of more books give more satisfaction
  • For a miser, a person’s greed increases with the acquisition of one additional unit and he wants more.
  • Drunkards enjoy every additional drink so the rule does not apply to them

6. Uses of the law of DMU

  • This law of DMU forms the basis of the law of demand, the law of Equi-marginal utility, the elasticity of demand, etc.
  • A producer can increase the sale of his product by fixing a lower price. Since consumers tend to buy more to equate MU with price, a producer can expect a rise in sales.
  • The Govt can impose and justify progressive income tax on the ground of this law, as the income increases, the MU of income diminishes.

7. Law of Equi Marginal Utility
The law of equity-marginal utility is an extension of the law of diminishing marginal utility. This law states a consumer spends money on the basis of marginal utility it derives from the purchase of that good. Thus when a consumer has to choose from different goods which have fixed price and which obeys the law of diminishing utility than a consumer will purchase that product whose marginal utility is not less than the price paid for it.
Symbolically MUa/Pa = 1
Here MUa is the marginal utility of product ‘a’
Pa is price of product ‘a’
If MUa/Pa > MUb/Pb then we can see that marginal utility of product ‘a’ is more than product ‘b’ thus consumer will shift its purchase from ‘b’ to ‘a’.
Assumptions of the Law of Equi -Marginal Utility

  • There is no change in the prices of the goods.
  • The income of consumers is fixed.
  • The marginal utility of money is constant.
  • The consumer has perfect knowledge of utility obtained from goods.
  • The consumer is a normal person so he tries to seek maximum satisfaction.
  • The utility is cardinally measurable.

8. Limitations to the law of Equi -marginal utility

  • The law of equity-marginal utility may become inoperative if people forced by fashions and customs
  • If the unit of expenditure is not divisible, then again the law may become inoperative.
  • If there is no perfect freedom between various alternatives, the operation of law may be impeded.
  • It assumes that customers are able to calculate the correct marginal utility of all goods
  • Sometimes people are ignorant of the price so they are not able to get maximum benefit by equating the marginal utility.
  • Sometimes the goods are substitutes or complement to each other. In such a case utility of a product is dependent on the quantity of its own product and other product.
  • All goods can not be divided into units like a car can not be purchased in units but bread can be purchased in units.

9. Importance of law of Equi -marginal utility

  • The law of equity-marginal utility is of great practical importance
  • Every consumer consciously trying to get the maximum satisfaction from his limited resources acts upon this principle of substitution
  • It applies equally to the theory of production and the theory of distribution.
  • Government can also use this analysis for evaluation of its different economic prices.

10. Law of demand and its analysis
In economics, the law states that all else being equal, as the price of a product increases, a lower quantity will be demanded; likewise, as the price of a product decreases, a higher quantity will be demanded. Characteristic features of the law of demand

  • When the price of a commodity rises, people buy less of that commodity, and when the price falls, people buy more of it ceteris paribus (other things remaining the same).
  • The Law of demand has a negative slope which means as the price falls the demand for the product increases and as the price rises the demand decreases, thus quantity demanded is inversely proportional to the price of a good.
  • When the price of a product increases the quantity purchased by a buyer decreases. This is called contraction of demand
  • If the price falls consumer moves downward on the demand curve and purchases more which is called expansion
  • If there is no change in the price of the good but still the quantity being purchased by the consumer changes then we draw another demand curve.
  • The demand curve slopes downward from left to right. It has a negative slope showing that the two variables price and quantity work in the opposite directions.

11. Assumptions of the Law of demand

  • There should not be any change in the tastes of the consumers for goods.
  • The purchasing power of the typical consumer must remain constant (M).
  • The price of all other commodities should not vary

12. Exceptions to the law of demand

  • Prestige goods or conspicuous goods There are certain commodities like diamonds, sports cars, etc., which are purchased as a mark of distinction in society. If the price of these goods rises, the demand for them may increase instead of falling.
  • Inferior goods – in such a case when the income of the consumer increases the shift his purchase from inferior goods to superior goods even if inferior goods price falls.
  • Price expectations: If people expect a further rise in the price particular commodity, they may buy more in spite of rising in price. The violation of the law, in this case, is only temporary.
  • Ignorance of the consumer: If the consumer is ignorant about the rise in the price of goods, he may buy more at a higher price.
  • Giffen goods: these are the goods which people keep on buying in spite of the increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). This is known as the Giffen paradox. There is a positive price effect in the case of Giffen goods.
  • Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of other is immaterial
  • Fashion dependent goods

13. Importance of law of Demand

  • The study of the law of demand is helpful for a trader to fix the price of a commodity.
  • The study of this law is of great advantage to the Government for deciding about taxation.

14. Supply
Supply refers to the quantities of a product that producers are willing and able to offer at a given price during some period of time. In other words, it is the total quantity of a particular good that can be given in the market at a certain price. Stock and supply are two different words. Stock means the total quantity of good ‘A’ available that is physically present in the market at a particular time while supply is the total quantity of ‘A’ offered to the market for sale. The law of supply states that the quantity of a good supplied (i.e., the amount owners or producers offer for sale) rises as the market price rises, and falls as the price falls. The Law of supply is opposite to the law of demand

15. Features of the law of Supply

  • A shift in supply refers to an increase (rightward change) or a decrease (leftward change) in the quantity supplied at each possible price. These shifts are influenced by non-price determinants
  • As the price increase producers are ready to supply more Thus Ceteris Paribus (when all conditions remain the same) price rise shows supply rise
  • Supply curve is upward sloping
  • Conditions that affect production are the number of firms, prices of input, technology, cost of production, etc.
  • If the quantity supplied changes without change in price then a new supply curve is made towards the outer side and is called the increase in supply and if the supply curve moves inside it is called reduction
  • The supply curve is positively sloped upward and to right
  • A reduction in quantity supply on account of an increase in price is called ‘contraction’
  • If the price of goods falls the supply of goods increases this is called ‘expansion’

16. Various ways of expressing Supply

  • Supply Curve – It is a graphic representation of the relationship between product price and quantity of product that a seller is willing and able to supply. Product price is measured on the vertical axis of the graph and quantity of product supplied on the horizontal axis.
  • Supply Function – It is the mathematical function that relates the price and quantity supplied for goods or services.
    The supply function tells how many units of a good that producers are willing to produce and sell at a given price.
  • Supply Schedule – A table that contains values for the price of a good and the quantity that would be supplied at that price.

17. Reasons supply curve to be positively sloped are

  • a change in price will push the quantity supplied in the same direction, supply curves will have a positive slope.
  • as the selling price of the product increases, the willingness of producers to create that product increases as well.
  • With the greater incentive (profit) to make that product, production will rise in direct proportion to how much price increases.

18. Exceptions to law of supply

  • Competition may compel the supplier to supply goods even at lower prices
  • Sometimes a seller may know that there will be an increase in price in the future so he may stop supplying and may wait for the price to rise
  • Certain goods production can not be increased even if prices are high like agricultural products – On the contrary when agricultural products are on the verge of being spoilt then the supplier may be forced to sell at a low price
  • Sometimes government puts restrictions like subsidies etc. Where whatever may be the demand of the good the seller has to supply at the subsidized price only.
  • Artistic or auction goods supply can not be increased even if their price increases.
  • If the seller’s number is small then even if the price increases supply can not be increased

19. Equilibrium
An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands.
When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market-clearing price, the quantity is the equilibrium quantity. Thus a seller has to supply goods at a price that is acceptable to consumers. When there is an increase in the income of consumers then there is an increase in demand which in turn pressurizes the supplier to increase supply and that leads to an increase in price to reach equilibrium.

20. Characteristic features of the law of demand and law of supply

  • On a supply and demand curve, the equilibrium price is represented by the point where the demand and supply
    curves intersect.
  • It is the single price at which the quantity demanded and the quantity supplied is the same.
  • if the market for a good is already in equilibrium and producers raise prices, consumers will buy fewer units.
    then they did in equilibrium, and fewer units than producers have available for sale. In that case, producers have two choices. They can reduce the price until supply and demand return to the old equilibrium, or they can cut production until the quantity supplied falls to the lower number of units demanded at the higher price.
  • If the market price is above the equilibrium price, the quantity supplied is greater than the quantity demanded, creating a surplus. The market price will fall.
  • Policymakers set ceiling prices below the market equilibrium price which they believed is too high.
  • An increase in demand will create a shortage, which increases the equilibrium price and equilibrium quantity.
  • An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity.
  • An increase in supply moves the supply curve to the right
  • An increase in demand moves the demand curve to left

21. Elasticity of demand
Price elasticity of demand (PED) shows the relationship between price and quantity demanded and provides a precise calculation of the effect of a change in price on quantity demanded. The following equation enables PED to be calculated.

PED= change in quantity demanded/change in price
Elasticity describes the responsiveness (in percentage terms) of the quantity demanded to changes in price. Knowing how sensitive a product is to a change in price is important in pricing goods and services. Elasticity is a tool that an owner of a business can use to understand how consumers will change their behavior when you, as a business owner, change the price of a product. There are five categories of price elasticity. The categories of perfectly elastic and perfectly inelastic lean towards being more theoretical. There are few real-world examples for those two categories. Different types of elasticity of demand are

1. Perfectly elastic demand would occur when the quantity demanded skyrockets to infinity when the price dropped any amount. It means that a significant change in price leads to an infinite change in quantity demanded. This, of course, could not happen in real life.

  • However, it illustrates the concept that elastic demand has a ratio of anything more than one.
  • The demand curve is parallel to X-axis

2. Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

  • thus elasticity is zero.
  • The demand curve is parallel to Y-axis.

3. Unitary elastic demand is when the increase in price is proportionate to the increase in demand.

  • Thus a given % change in price results in an equal % change in quantity demanded. Thus 10% reduction in price leads to a 10% increase in demand.
  • The demand curve is a rectangular hyperbola.
  • The elasticity coefficient always equals 1.

4. Relatively elastic demand is a concept where a change in the price results in more than proportionate change in the quantity demanded.

  • For eg., a Fall in the price of 3% leads to an increase in demand of 10%.
  • elasticity coefficient is always greater than 1.
  • The demand curve is flatter in shape.

5. Relatively inelastic demand is a concept where a great change in price leads to a small change in quantity.

  • The elasticity coefficient is less than 1.
  • The demand curve is relatively steeper.

22. Methods of measuring price elasticity of demand
The price elasticity of demand measures the sensitivity of the quantity demanded to changes in the price. Demand is inelastic if it does not respond much to price changes, and elastic if demand changes a lot when the price changes. Price elasticity of demand can be measured in three ways

  1. Arithmetic method or percentage method
  2. Total expenditure method
  3. Graphic method or point method

Arithmetic method – According to this method price elasticity is calculated by arithmetic calculation formula instead of the slope because the slope is sensitive to the units of measurement of price and quantity.

Price elasticity of demand = Percentage change in quantity demanded/percentage change in price Total expenditure Method – Some of the factors on which elasticity is dependent is the total expenditure made by the consumer on that particular product. If the expenditure is more than elasticity of demand is higher. Moreover, the demand is inelastic when the goods that are being purchased are too expensive or too moderate whose demand will not be affected as demand is very low.

Graphic Method – demand is measured on different points on a straight-line demand curve and then elasticity is calculated as per the formula written below Point Elasticity = Lower segment of the demand curve below the given point/Upper segment of the demand curve above the given point

23. Determinants of Price elasticity of Demand

  • A number of substitutes: the larger the number of close substitutes for the good then the easier the household can shift to alternative goods if the price increases.
  • Degree of necessity: If the good is a necessity item then the demand is unlikely to change for a given change in price.
  • Price of the good as a proportion of income: elasticity depends on the proportion of consumer’s budget spent on it
  • Habit: some products may be a habit of consumers and in such cases, prices do not matter like for smokers
  • Time lag: The longer the time after the price change, the more elastic will be the demand

24. Cross price elasticity of demand
The measure of the responsiveness of the demand for a good towards the change in the price of a related good is called cross-price elasticity of demand. It is always measured in percentage terms. Thus when there is a change in the price of a product ‘A’ demand of quantity of product ‘b’ changes if they are related to each other. The cross-price elasticity of demand is useful for economists because it tells you whether two goods (A and B) are substitutes, complements, or even unrelated.

Cross price elasticity is positive – when a change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction, eg. tea and coffee is a substitute to each other Cross price elasticity is negative – when a change in the price of good ’b’ causes the change in demand of good in the opposite direction, e.g. pen and ink which are complementary to each other. Cross price elasticity is zero – change in the price of good ‘b’ does not affect the quantity demanded of good ‘a’, such goods are unrelated Cross price elasticity is infinite – the slightest change in the price of good ‘b’ causes a great change in the demand of good ‘a’

25. Income elasticity of demand
The income elasticity of demand measures the responsiveness of demand for a good or service to changes in income. E= percentage change in the quantity of good ‘A ’/percentage change in real income of consumer Above formulae shows how the demand for good changes as the income of consumer changes. This theory was given by Stonier and Hague. Three situations explain the relation of demand of goods with the real income.

In case of inferior goods – as income increases consumer moves towards better goods instead of increasing the number of inferior goods.
In the case of normal goods – as income increases demand also increases but it rises less in the proportion of rising in income. In the case of luxuries – as income increase, it shows a great increase in demand. Demand and income increase are not in proportion.

26. Price elasticity of supply
The elasticity of supply tells us how sensitive the quantity supplied is to the good’s own price at a given point on a supply curve. Price elasticity of supply (PES) measures the responsiveness of quantity supplied to a change in price. It is necessary for a firm to know how quickly, and effectively, it can respond to changing market conditions, especially to price changes.

The elasticity of supply = Percentage change in quantity supplied/percentage change in price.
Unlike elasticity of demand elasticity of supply has a positive sign. The positive sign reflects the fact that higher prices will act as an incentive to supply more. Because the coefficient is greater than one, PES is elastic and the firm is responsive to changes in price. This will give it a competitive advantage over its rivals. The elasticity of supply responds in five ways

• Perfect elastic supply – Supply is perfectly priced elastic if for any percentage increase in price, no matter how small, the percentage change in quantity supplied is also infinitely large. In such conditions, suppliers supply all that they can. Here elasticity’ is equal to infinity, the producer accepts only one price

• Perfect inelastic supply – The other extreme case occurs when the percentage change in quantity supplied is always equal to 0, regardless of the percentage change in price. In this case, supply is said to perfectly price inelastic, or completely nonresponsive to change in prices. Here elasticity is equal to zero, the amount supplied does not depend at all on price

• Relative elastic supply – For a given rise in price, the rise in supply will be proportionately larger. Here elasticity is greater than 1.

• Relative inelastic supply -The quantity supplied increases only a small amount with a rise in price. Here elasticity is less than 1.

• Unitary elastic supply – here elasticity coefficient is equal to 1. Here the percentage of fall and percentage of quantity supply fall are the same. Thus if the price falls by 10% supply also falls by 10%. the supply curve is a straight line through the origin.

27. Determinants of price elasticity of supply

  • If the availability of time is enough so that a seller can organize and adjusts the supply to demand, then supply is more elastic.
  • Supply is more elastic when a product can be sold in another market. This is because when the price of goods falls in one market, it does not fall in other markets, and will make good.
  • If there is excess capacity, and producers can increase output easily with the increase in price then elasticity will be high.
  • If production is more complex then the elasticity of supply is low.
  • If the factors of production can be easily moved and transportation cost is not much then the elasticity of supply is more.

28. Theory of consumer behavior
Besides the theory of demand and supply, it is consumer behavior towards the product which decides the demand of that particular product. The Theory of Consumer Behaviour studies how a consumer spends his income so as to attain the highest satisfaction or utility. Consumer behavior theories are used by businesses in order to optimize their selling and marketing strategies. These theories tend to concentrate on how consumers spend money, what causes them to spend more money, and how the spending of consumer money should impact the planning and strategies practiced by businesses. Different types of consumer behavior theories may focus on the choices consumers make based on their budgets, how consumers make decisions to reach the highest level of satisfaction, how consumers consider the utilities and features of different products, or what and how much consumers know about particular products. There are two theories on how the consumer will behave.

29. Marshallian approach
This approach was given by Alfred Marshall. As per this approach, a consumer tries to derive maximum utilization from the product on which he spends money. Thus consumer’s net utility = units of utility from consumption – utility of money given.

30. Assumptions of this theory

  • Assumes that utility is measurable and additive.
  • The Marshallian assumption of the constant utility of money is also unrealistic
  • Marshallian demand theory is based on a single commodity model.
  • According to Marshall theory, MU of money remains constant
  • The Law of diminishing marginal utility stands true.

31. Limitations of Marshallian Approach

  • It has been asserted that Marshallian utility analysis assumes ‘too much while it explains ‘too little’.
  • Utility of money can not be constant all the time
  • It is not acceptable that there is no substitute for the product
  • The Law of diminishing marginal utility also does not stand true all the time.
  • Also cardinal measurement is not realistic
  • Marshall theory does not break up the ‘price effect’ into ‘income effect’ and ‘substitution effect’ and thereby it does not show the negative price effect in the case of Giffen goods.
  • Marshallian demand theory is based on a single commodity model. Marshall avoids the discussion of substitutes and complementary goods
  • Marshall’s theory does not measure how real income can be measured

32. Indifference curve approach
This approach was developed to remove the drawbacks of Marshallian approach. This approach can be called the ordinal concept. The indifference curve theory of ordinal utility theory is an important concept in Economics, as it suggests a more realistic way to analyze consumer behavior. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer.

33. Assumptions of this theory

  • Consumer is rational and he is interested to maximize his total utility.
  • Utility can not be measured
  • Consumer can rank his various combination of goods according to the satisfaction or utility
  • The principle of diminishing marginal rate of substitution is assumed.
  • The consumer, it is assumed, is consistent in his behavior during a period of time.
  • The goods consumed by the consumer are substitutable.
  • There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
  • Consumers have full information about the relevant aspects of the economic environment
  • A combination of having more commodities is more satisfying than a combination of having fewer commodities

Features of approach

  • The indifference curves must slope down from left to right.
  • A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
  • The curve is moving from up to down between two commodities
  • Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
  • When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
  • When the amount of one good is increased the number of other goods decreases so the curves are downward to the right
  • the relative nature of various goods is explained e.g. Inferior and superior.

Theory Of Demand And Supply MCQ Questions

Question 1.
The more elastic the demand curve for a product is
a. The greater the proportion of income spent on the commodity
b. The longer the period of time considered
c. The greater the number of close substituted available
d. a, b and c
Answer:
d. a, b and c

Question 2.
Substitution effect for a fall in the price of a commodity is given by
a. an upward shift in indifference curve
b. a movement up of a given indifference curve
c. a downward shift in indifference curve
d. a movement down a given indifference curve.
Answer:
d. a movement down a given indifference curve.

Question 3.
The marginal utility (MU) of the last unit of x consumed is twice the MU of the last unit of Y consumed, the consumer is in equilibrium only if
a. the income of the consumer id doubled
b. the price of x is equal to the price of Y
c. the expenditure of X is equal to twice on Y
d. the Price of X is one half of the price of Y
Answer:
d. the Price of X is one half of the price of Y

Question 4.
The demand curve for a human resource will be more elastic under the following conditions
a. More difficult to substitute other resources for it.
b. More and better substitutes are available for it.
c. Shorter the time period under consideration.
d. All of the above.
Answer:
d. All of the above.

Question 5.
If skilled labour is three times the cost of unskilled labour, a profit-maximizing firm will vary the quantity of each type of labor until the
a. marginal product of each is the same.
b. amount of unskilled labour used is three times the quantity of skilled labour used.
c. amount of unskilled labor used is one-third the quantity of skilled labour.
d. marginal product of unskilled labour is one-third that of skilled labour.
Answer:
d. marginal product of unskilled labour is one-third that of skilled labour.

Question 6.
The demand for inputs depends on the demand for outputs it is termed
a. inverse demand.
b. derived demand.
c. proportional demand.
d. notational demand.
Answer:
b. derived demand.

Question 7.
What concept implies that a firm’s marginal revenue product curve for labour will slope downward in the short run?
a. diminishing marginal returns
b. the law of supply
c. the law of decreasing cost.
d. The price equalization principle
Answer:
a. diminishing marginal returns

Question 8.
Which one of the following labour resources will likely have the most inelastic supply schedule in the short run?
a. filling station attendants
b. sales clerks
c. construction labourers
d. dentist
Answer:
d. dentist

Question 9.
Suppose the United Auto Worker Union succeeded in obtaining a 10 percent increase in the wages of its workers and that the wage increase caused automobile prices to rise. Employment in the auto industry would most likely fall if
a. the demand for Indian-made automobiles was highly elastic.
b. the supply of foreign-produced automobiles was highly inelastic.
c. Indian consumers considered foreign automobiles a poor substitute for Indian automobiles.
d. the demand for Indian automobiles was relatively constant and highly inelastic.
Answer:
a. the demand for Indian-made automobiles was highly elastic.

Question 10.
If the demand for a consumer good increases, the demand for resources required to make the goodwill
a. increase.
b. remains the same, but the quantity demanded will increase.
c. decrease due to economies of scale.
d. increase or decrease depending on whether the firm is intensive or capital intensive.
Answer:
a. increase.

Question 11.
The marginal productivity theory most closely relates to the
a. demand for resources.
b. supply of resources.
c. concept of scarcity.
d. noncompetitively aspects of the resource market
Answer:
a. demand for resources.

Question 12.
A decrease in demand for a product will cause the output of the product to
a. decline and the demand for and prices of productive resources used.to produce the product to fall.
b. decrease and both the demand for and prices of productive resources used to produce the product to increase.
c. decrease but the demand for resources used to produce the product will remain constant.
d. increase and the resource price to rise
Answer:
a. decline and the demand for and prices of productive resources used.to produce the product to fall.

Question 13.
If the demand for workers with Ph. Ds. in economics increases, we would expect
a. the wages of economists to increase in the short run and the number of economics employed to expend in the long run.
b. the supply of economists to increase in the short run and their wages to fall in the long run.
c. a rapid increase in the supply of economists, causing wages to remain constant.
d. the wages of economists to decline in the short run the number of economists employed to increase in the long run.
Answer:
a. the wages of economists to increase in the short run and the number of economics employed to expend in the long run.

Question 14.
According to __________ when prices decreases, demand rises, and when price increases, demand falls.
a. the Law of Diminishing Marginal Utility
b. Adam Smith
c. the law of demand
d. the elasticity of demand
Answer:
b. Adam Smith

Question 15.
The law of demand states that:
a. as the quantity demand rises, the price rises
b. as the price rises, the quantity demand rises
c. as supply rises, the demand rises
d. none of the above
Answer:
b. as the price rises, the quantity demand rises

Question 16.
The price elasticity of demand is the:
a. percentage change in price divided by the percentage change in quantity
b. percentage change in price divided by the percentage change in quantity demanded
c. dollar change in quantity demanded divided by the percentage change in quantity supplied.
d. A percentage change in quantity demanded divided by the percentage change in price
Answer:
d. A percentage change in quantity demanded divided by the percentage change in price

Question 17.
The demand for a product would be more inelastic
a. the greater is the time under consideration
b. the greater is the number of substitutes available to buyers
c. the less expensive is the product in relation to income
d. None of the above
Answer:
b. the greater is the number of substitutes available to buyers

Question 18.
If there is a price ceiling, which of the following is not likely to occur?
a. rationing by first-come-first-served basis
b. black markets
c. Grey markets
d. all sellers providing goods for free that were formerly not free
Answer:
d. all sellers providing goods for free that were formerly not free

Question 19.
The quantity demanded of a soft drink brand A has decreased. This could be because:
a. A’s consumers have has an increase in income
b. the price of A has increased.
c. A’s advertising is not as effective as in past.
d. The price of rival brand B has increased.
Answer:
b. the price of A has increased.

Question 20.
Suppose the demand for goods Z goes up when the price of goods Y goes down We can say that goods Z and Y are
a. perfect substitutes.
b. unrelated goods
c. complements
d. substitutes
Answer:
c. complements

Question 21.
Which of the following will NOT cause a shift in the demand curve for compact discs?
a. a change in the price of pre-recorded cassette tapes.
b. a change in wealth.
c. a change in income.
d. a change in the price of compact discs.
Answer:
d. a change in the price of compact discs.

Question 22.
Modern-day economy is based on the study of
a. Capital formation
b. Study of production
c. Employment
d. All of the above
Answer:
d. All of the above

Question 23.
“Determination of wage rate, distribution of national income “was the theory given by
a. Adam Smith
b. A. Marshall
c. Ricardo
d. Pigon
Answer:
b. A. Marshall

Question 24.
One s friends and relatives could be considered as ________ in regard to consumer behavior
a. impersonal influence
b. reference group influence
c. perceptual influence
d. institutional influences
Answer:
b. reference group influence

Question 25.
An imbalance between a consumer’s actual and desired state in which recognize that a gap or problem needs resolving is called
a. motive development
b. an attitude.
c. a self-concept
d. Product Evaluation
Answer:
a. motive development

Question 26.
As per Maslow’s Hierarchy of needs theory, the need for fulfillment, for realizing one’s own potential, and for fully one’s talents capabilities are examples of ______ needs.
a. self-actualization.
b. psychological
c. social
d. environmental
Answer:
a. self-actualization.

Question 27.
The buying behaviors of consumers, which require the least effort is
a. Low involvement in buying.
b. New buying situation.
c. Routine buying
d. Impulsive buying
Answer:
c. Routine buying

Question 28.
When there is a production process the marginal product of labor equals:
a. total output divided by total labour inputs.
b. total output minus the total labour inputs.
c. total output multiplied by total labour input.
d. total change produced by labour inputs.
Answer:
a. total output divided by total labor inputs.

Question 29.
The change to a new indifference curve following a rise in aggregate consumption caused by a price cut is:
a. a consumption effect.
b. a price effect.
c. an income effect.
d. a substitution effect.
Answer:
c. an income effect.

Question 30.
A combination study of economics, which dealt with wealth creation, as well as the study of man was an economics theory given by
a. Adam Smith
b. Ricardo
c. A. Marshall
d. Pigon
Answer:
c. A. Marshall

Question 31.
A utility function is a descriptive statement that relates total utility to
a. price
b. income
c. the production of goods and services.
d. the consumption of goods and services
Answer:
d. the consumption of goods and services

Question 32.
Marginal utility
a. is the extra output a firm obtains when it adds another unit of labor.
b. explains why product supply curves slope upward.
c. typically rises as successive units of a good are consumed.
d. is the extra satisfaction from the consumption of 1 more unit of some good or service.
Answer:
d. is the extra satisfaction from the consumption of 1 more unit of some good or service.

Question 33.
If profit is to rise as output expands, then marginal profit must be:
a. rising
b. falling
c. constant.
d. positive
Answer:
d. positive

Question 34.
According to the law of diminishing marginal utility:
a. as the price of a given product rises, the added benefit eventually diminishes
b. as the consumption of a given product rises, the added benefit eventually diminishes.
c. as the production cost for a given product rises, the added benefit eventually diminishes.
d. the demand curve for some product is upward-sloping
Answer:
b. as the consumption of a given product rises, the added benefit eventually diminishes.

Question 35.
Which of the following is consistent to the law of supply?
a. As the price of the product rises, centers paribus, suppliers will offer more for sale
b. As the price of a product falls, centers parbibus, suppliers will offer less for sale
c. As the price of a product rises, centers paribus the supply will remain steady
d. As the price of a product falls, centers paribus, the supply will remain steady
Answer
a. As the price of the product rises, centers paribus, suppliers will offer more for sale

Question 36.
A shift in the demand curve drawn in the traditional Price-Quantity space be caused by
a. a decrease in supply.
b. a fall in income.
c. a fall in price of a complementary good.
d. a fall in the number of substitute goods.
Answer:
b. a fall in income.

Question 37.
Price elasticity at a given price is not affected by
a. the price of complements.
b. the price of substitutes.
c. the consumer’s income
d. a change in tastes.
Answer:
c. the consumer’s income

Question 38.
The price elasticity of demand is the same thing as the negative of the
a. slope
b. reciprocal of slope.
c. the first derivative of the demand function.
d. reciprocal of slope times the ratio of price to quantity.
Answer:
c. the first derivative of the demand function.

Question 39.
The movement along an indifference curve reflecting the substitution of cheaper products for more expensive ones is:
a. supply effect
b. utility effect.
c. a substitution effect.
d. an income
Answer:
c. a substitution effect.

Question 40.
Supply is directly dependent on
a. Future market scenario
b. Technology changes
c. Goals of the firm .
d. All of the above
Answer:
d. All of the above

Question 41.
The demand curve of TV sales showed a movement towards left
a. It should decrease in demand
b. Prices will fall
c. Decrease the quantity of TV bought and sold
d. All of the above
Answer:
d. All of the above

Question 42.
When a consumer buys a good which of the following is the concept that is Not generated when taking care of utility
a. Average utility
b. Sum utility
c. Marginal utility
d. Total utility
Answer:
a. Average utility

Question 43.
Change in the quantity supplied is caused by a change in
a. price
b. income.
c. Weather.
d. energy costs.
Answer:
a. price

Question 44.
The shortage is a condition of:
a. Excess demand.
b. excess supply
c. a deficiency in demand.
d. market equilibrium.
Answer:
a. Excess demand.

Question 45.
The utility is measured by:
a. income.
b. wealth.
c. price.
d. value or worth.
Answer:
d. value or worth.

Question 46.
Net Benefit is maximized when:
a. marginal benefit equal marginal costs.
b. the slopes of the total benefits curve and total cost curve are equal.
c. All the above.
d. None of the above.
Answer:
c. All the above.

Question 47.
Marginal Analysis:
a. Is the optimal managerial decision involving comparing the marginal benefit with the marginal costs of a decision.
b. Refers to the change in total benefit arising from the managerial control variable.
c. Refers to the change in total costs arising from a change in the managerial control variable.
d. The additional revenues that stem from a yes-or-no decision.
Answer:
a. Is the optimal managerial decision involving comparing the marginal benefit with the marginal costs of a decision.

Question 48.
Marginal analysis can be used to
a. Determine how long to study for a test.
b. Determine how to get to your spring break destination^.e. plane = faster but more expensive, car= slower but less expensive).
c. Determine how much more to write on a workspaces page.
d. All the above.
Answer:
d. All the above.

Question 49.
A Marginal curve shows
a. the integral of the corresponding Total curve up to the quantity at which the marginal is being calculated.
b. The inverse of the corresponding of the Total curve to which it corresponds
c. the slope of the corresponding Total curve, computed at the same consumption quantity.
d. amount of utility derived from the consumption of each number of units
Answer:
c. the slope of the corresponding Total curve computed at the same consumption quantity.

Question 50.
Welfare definition of economics was given by
a. Adam smith
b. Ricardo
c. A. Marshall
d. Both b & c
Answer:
d. Both b & c

Question 51.
As per Robbins economics is the study
a. Which takes care of the wants of man
b. Ways to satisfy the wants of man
c. Collection of wealth to take care of wants of man
d. Both a & b
Answer:
d. Both a & b

Question 52.
When a relationship between DMU of a product and its prices is decided than it helps in determining
a. Total marginal value of a product
b. Average utility of product
c. Price of product in market
d. Total utility value of product
Answer:
c. Price of product in market

Question 53.
The laws of DMU are not helpful for
a. Social welfare program
b. Rationing of products
c. Determining the pricing of product
d. None of the above
Answer:
d. None of the above

Question 54.
As per the law of equal Marginal utility, consumer considers
a. Prices
b. Marginal utility
c. Availability of goods
d. Both a & b
Answer:
d. Both a & b

Question 55.
________ law is unrealistic in nature
a. Law of DMU
b. Law of Equi marginal utility
c. Both a & b
d. None of the above
Answer:
b. Law of equimarginal utility

Question 56.
If the price elasticity of demand is unit then a fall in price will
a. Reduce revenue
b. Leaves revenue unchanged
c. Increase revenue
d. None of the above
Answer:
b. Leaves revenue unchanged

Question 57.
If the cross elasticity of demand is -2:
a. The products are substitutes and demand is cross-price elastic
b. The products are substitutes and demand is cross-price inelastic.
c. The products are complements and demand is cross-price elastic
d. The products are complements and demand is cross-price inelastic
Answer:
c. The products are complements and demand is cross-price elastic

Question 58.
If the price elasticity of demand is negative number this means:
a. Demand is price elastic
b. Demand is price inelastic
c. The demand curve is downward sloping
d. An increase income will reduce the quantity demanded
Answer:
c. The demand curve is downward sloping

Question 59.
Demand is price inelastic, which means
a. An increase in price must raise profits
b. An increase in price decrease revenue
c An increase in price increase revenue
d. A decrease in price reduces sales
Answer:
c An increase in price increase revenue

Question 60.
Which best describe a supply curve?
a. The quantity consumers would like to buy in a market
b. The quantity producers are willing and able to sell at each and every price all other things unchanged
c. The quantity producers are willing and able to sell at each and every income all other things unchanged
d. The quantity producers are willing and able to sell at every point of time and all other things unchanged
Answer:
b. The quantity producers are willing and able to sell at each and every price all other things unchanged

Question 61.
Supply is likely to be more price elastic
a. In the short run rather than the long run
b. If factors of production are relatively immobile between industries
c. If there are very few producers
d. If it is easy to expand output
Answer:
d. If it is easy to expand output

Question 62.
The supply curve which is beginning at the origin has
a. A price elasticity of supply less than one
b. Price elasticity of supply equal to one
c. Price elasticity of supply less than one
d. Positive price elasticity of supply
Answer:
b. A price elasticity of supply equal to one

Question 63.
In the contraction of demand
a. The consumer moves upwards
b. The consumer moves downwards
c. Increase in price
d. Both a& c
Answer:
d. Both a& c

Question 64.
Giffin goods are
a. Goods that are not dependent on price increase
b. Have to be purchased cause there is no substitute for them
c. Both a & b
d. None of the above
Answer:
c. Both a & b

Question 65.
Goods that represent social prestige are
a. Complimentary goods
b. Conspicuous consumption
c. Ignorance
d. Inferior goods
Answer:
b. Conspicuous consumption

Question 66.
The supply curve is
a. Positively stopped
b. Negatively stopped
c. Can stop either positive or negative
d. None of the above
Answer:
a. Positively stopped

Question 67.
What will the supplier do if cashew nuts production is good at this point in time?
Select the most appropriate
a. Decrease the supply and wait for the season when there is no production of cashew nut so that the prices can be increased
b. Offer to sell more quantities at a lower price
c. Can make no changes in the selling price of produce
d. None of the above
Answer:
a. Decrease the supply and wait for the season when there is no production of cashew nut so that the prices can be increased

Question 68.
A politician proposes reducing business taxes, a move she says will encourage risk-taking entrepreneurship. This proposed cut in business taxes is intended to stimulate the economy mainly through
a. an increase in aggregate supply
b. a decrease in aggregate demand
c. a decrease in aggregate demand
d. an increase in aggregate demand
Answer:
a. an increase in aggregate supply

Question 69.
On the basis of the use of utility dependent on the consumption of its quantity, the utility can be divided into ________ concepts
a. 5
b. 4
c. 3
d. None of the above
Answer:
c. 3

Question 70.
MU1/P1<Mu2/P2 means that
a. For consumer MU2/P2buying is more beneficial
b. It is the theory given by law of Equi-Marginal utility
c. It is law of demand curve
d. Both a & b
Answer:
d. Both a & b

Question 71.
When marginal utility falls than average utility
a. Marginally increases
b. Marginally falls
c. Increases
d. Decreases
Answer:
b. Marginally falls

Question 72.
DMU is
a. Diminishing marginal utility
b. Distributive marginal utility
c. Direct marginal utility
d. Display marginal utility
Answer:
a. Diminishing marginal utility

Question 73.
As more labor is added to a fixed amount of input, the rate at which output goes up begins to decrease. This is called
a. diminishing marginal utility
b. diminishing marginal productivity.
c. diminishing marginal costs.
d. diminishing marginal profit.
Answer:
b. diminishing marginal productivity.

Question 74.
If the cost of sugar rises and sugar is a major ingredient in jelly beans, then the jelly bean
a. demand curve shifts to the left.
b. supply curve shifts to the left.
c. supply curve shifts to the right.
d. demand and supply curves both shift to the right.
Answer:
c. supply curve shifts to the right.

Question 75.
A movement along the demand curve (drawn in Quantity-Price space) to the left may because by
a. an increase in supply.
b. a rise in income
c. a rise in the price of a complementary good.
d. a fall in the number of substitute goods.
Answer:
a. an increase in supply.

Question 76.
The output where diminishing returns to production begin is also the output where
a. marginal cost is at a minimum.
b. average total cost is a minimum.
c. average variable cots is at a minimum.
d. marginal and average cost interest.
Answer:
a. marginal cost is at a minimum.

Question 77.
Which of the following statements about marginal cost is incorrect?
a. A U-shappd marginal cost curve implies the existence of diminishing returns over all ranges of output.
b. When marginal cost equal average cost, average cost is at minimum.
c. In the short run, the shape of the marginal cost curve is due to the law of diminishing marginal returns.
d. When marginal1 cost is faffing fotaf cost fs rising
Answer:
a. A U-shappd marginal cost curve implies the existence of diminishing returns over all ranges of output.

Question 78.
In the short run, diminishing marginal returns are implied by
a. rising marginal cost.
b. rising average cost
c. rising average variable cost.
d. all of the above
Answer:
a. rising marginal cost.

Question 79.
In Dx=f(Px,T,Y) Y is
a. Income level of consumer
b. Tastes of consumer
c. Quantity of demand of goods
d. None of the above
Answer:
a. Income level of consumer

Question 80.
Individual demand schedule collectively make
a. Market demand schedule
b. Economic demand schedule
c. Production demand schedule
d. All of the above
Answer:
a. Market demand schedule

Question 81.
A graphical representation of demand is
a. Demand function
b. Demand schedule
c. Demand curve
d. None of the above
Answer:
c. Demand curve

Question 82.
In cardinal utility approach
a. The utility is measured in its absolute value
b. The utility can not be measured in its absolute value
c. Utility is calculated with the concept of evaluation with other utility
d. None of the above
Answer:
a. The utility is measured in its absolute value

Question 83.
What is true in a situation of Diminishing marginal returns to Labour?
a. Diminishing product of labour must be falling
b. Marginal product of labour must be rising
c. Marginal product of labour must be falling
d. None of the above
Answer:
b. Marginal product of labour must be rising

Question 84.
As more labour is added to a fixed amount of input, the rate at which output goes up, decreases. This is called
a. diminishing marginal utility.
b. diminishing marginal productivity.
c. diminishing marginal costs.
d. diminishing marginal profit.
Answer:
b. diminishing marginal productivity.

Question 85.
The main factors that influence supply is/are
a. Input prices
b. Technology.
c. Expectations.
d. All of the above.
Answer:
c. Expectations.

Question 86.
When the liquidity trap occurs the demand for money:
a. Is perfectly interest elastic
b. Is perfectly interest inelastic
c. Means that an increase in money supply leads to a fall in the interest rate
d. Means that an increase in the money supply leads to an increase in the interest rate
Answer:
a. Is perfectly interest elastic

Question 87.
When economists say the demand for a product has increased, they mean that the
a. demand curve for the product has shifted to the left.
b. price of the product has fallen, and consequently consumers are buying more of the product.
c. cost of producing the product has consequently consumers are buying more of the product.
d. amount of the product that consumers are willing to purchase at various prices has increased.
Answer:
d. amount of the product that consumers are willing to purchase at various prices has increased.

Question 88.
The law of supply:
a. reflects the amount, which want to offer at each price in a series of prices.
b. is reflected in an up sloping supply curve.
c. show that the relationship between price and quantity supplied is positive.
d. Is reflected in all of the above
Answer:
d. Is reflected in all of the above

Question 89.
Prices rate is determined on the basis of demand and supply, such kind of an economy is
a. Market driven economy
b. Production driven economy
c. Seller driven economy
d. None of the above
Answer:
a. Market driven economy

Question 90.
To make sports car a demand, a company should check
a. If people will be able to pay for it
b. If it can be produced in large scale
c. If people have a desire for sports car
d. Both a & c
Answer:
d. Both a & c

Question 91.
The law of “leteris paribus “says that
a. Purchase is directly dependent on price
b. Demand of quantity is dependent on time
c. Demand of quality is dependent on time
d. Both a & b
Answer:
d. Both a & b

Question 1.
With a fall in the price of a commodity –
a. Demand for the commodity increases
b. Demand for the commodity decreases
c. Quantity demanded for the commodity contracts
d. Quantity demanded of the commodity expands.
Answer:
a. Demand for the commodity increases
Hint
As per the Law of Demand fall in price of a product is inversely proportion to the demand of that product. Thus when the price falls demand increases.

Question 2.
A consumer changes, his purchase of a
commodity from point T on AB curve to point R on the A, B, curve. This represents –

Theory Of Demand And Supply – CS Foundation Economics Notes Chapter 2 img 1

a. A contraction in demand
b. An expansion in demand
c. An increase in demand
d. A decrease in demand.
Answer:
c. An increase in demand
Hint
The characteristic feature of Law of Demand is when the price of a commodity rises, people buy less of that commodity and when the price falls, people buy more of it ceteris paribus (provided other things remaining the same). If there is a change in influencing factor other then price then the demand curve may shift either to right or left. When demand curve shifts to right it shows that the quantity demanded has increased for a particular price. The factors responsible for such change could be taste of the consumer has changed, purchasing power of the consumer has changed etc.

Question 3.
A consumer would be in equilibrium if he does not has to pay any price for the commodity consumed at the level of consumption where –
a. Total utility in maxim
b. Marginal utility is zero
c. He has reached at the point of full satisfaction
d. All of the above
Answer:
d. All of the above
Hint
As per the ordinal approach of Utility
The consumer gets full satisfaction = The time when marginal utility becomes zero total utility is maximum.

Question 4.
In figure below, new price line AB, reflects-

Theory Of Demand And Supply – CS Foundation Economics Notes Chapter 2 img 2

a. A fall in income of the consumer
b. A fall in the price of commodity-Y
c. A fall in the price of commodity-X
d. A rise in income of consumers and a simultaneous rise in the prices of both commodities X and Y.
Answer:
c. A fall in the price of commodity-X
Hint
The Law of demand has a negative slope which means as the price falls the demand for the product increases and as the price rises the demand decreases, thus quantity demanded is inversely proportional to the price of a good.

Question 5.
Which of the following statements is wrong?
a. With the increase in the level of income, demand for all types of com moderates increases
b. With the increase in the level of income, demand for luxuries and comforts increases
c. With the increase in the level of income demand for inferior goods falls
d. With the increase in the level of income, demand for necessities almost remains unchanged.
Answer:
a. With the increase in the level of income, demand for all types of com moderates increases
Hint
Exceptions to the law of demand eg.
Inferior goods – in such case when the income of the consumer increases he shifts his purchase from inferior goods to superior goods even if inferior goods price falls.

Question 6.
On a straight-line demand curve intercepting both horizontal and vertical axes, the elasticity of demand would be equal to the unit at the-
a. Middle point on the curve
b. Point where the curve forms an intercept with the x-axis
c. Point where the curve forms an intercept with y-axis
d. None of the above.
Answer:
a. Middle point on the curve
Hint
Price elasticity of demand can be measured in three ways

  • Arithmetic method or percentage method
  • Total expenditure method
  • Graphic method or point method

Graphic Method – demand is measured on different points on a straight-line demand curve and then elasticity is calculated as per the formula written below
Point Elasticity = Lower segment of the demand curve below the given point/Upper segment of the demand curve above the given point

Theory Of Demand And Supply – CS Foundation Economics Notes Chapter 2 img 5

Let us take B as the midpoint of the straight-line demand curve
Thus at middle point (suppose B) point elasticity = lower segment of the demand curve at midpoint (BC)/Upper segment of the demand curve above the given point(AB)
Point elasticity = BC/AC = 1

Question 7.
With an increase in the supply of the commodity, equilibrium price will not fall if
a. Demand also decreases
b. Demand also increases
c. Demand increases in the same proportion in which supply has increased.
d. Demand falls in the same proportion in which supply has increased.
Answer:
c. Demand increases in the same proportion in which supply has increased.
Hint
An increase in supply will create a surplus, which lowers the equilibrium price and increase the equilibrium quantity. But if an equilibrium is to be managed then demand has to increase in the same proportion. Thus equilibrium price will not fall if demand increases in the same proportion in which supply has increased.

Question 8.
Any change in demand will leave the equilibrium quantity unaffected if:
a. Supply increases
b. Supply decreases
c. The supply curve is perfectly elastic
d. The supply curve is perfectly inelastic
Answer:
d. Supply curve is perfectly inelastic
Hint
Perfectly inelastic means that quantity demanded or supplied is unaffected by any change in price. In such a case supply is completely nonresponsive to change in prices Here elasticity is equal to zero. Any change in demand will leave the equilibrium unaffected in the case of a perfectly inelastic supply curve.

Question 9.
If with an increase in the price of a commodity, quantity demanded of the commodity rises, it must be a-
a. Normal good
b. Abnormal good
c. Giffen good
d. Necessity
Answer:
c. Giffen good
Hint
Giffen goods: these are the goods which people keep on buying in spite of an increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). this is known as the Giffen paradox. There is a positive price .effect in the case of Giffen goods.

Question 10.
An indifference curve slopes downward because more of one commodity and less of another results in in-
a. Same satisfaction
b. Greater satisfaction
c. Maximum satisfaction
d. Decreasing expenditure
Answer:
a. Same satisfaction
Hint
An indifference curve slopes downward because more of one commodity and less of another results in the same satisfaction. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer.

Question 11.

Theory Of Demand And Supply – CS Foundation Economics Notes Chapter 2 img 3

New advances in technology result in more output of commodity Y from given outputs. Which one of the above figures is best describing the situation? The correct option is
a. Figure 1
b. Figure 2
c. Figure 3
d. Figure 4
Answer:
11. c
Figure 3

Question 12.
The concept of the indifference curve to explain consumer’s equilibrium was propounded among others by
a. Alfred Marshall
b. John R Hicks
c. Paul A Samuelson
d. Amartya Sen
Answer:
b. John R Hicks
Hint
An indifference curve was given by John R Hicks. This approach was developed to remove the drawbacks of Marshallian approach. This approach can be called the ordinal concept.

Question 13.
Total utility derived from the consumption of a commodity will begin to fall —
a. with every additional unit consumed
b. when total utility curve becomes flat
c. when marginal utility starts falling
d. when marginal utility becomes negative
Answer:
d. when marginal utility becomes negative
Hint
The law of diminishing marginal utility is directly linked for determining the price of the commodity. Observations for law df DMU

  • When TU rises at decreasing rate, MU diminishes
  • When TU is maximum, MU is zero
  • When TU decreases, MU becomes negative
  • TU increases so long as MU is positive

Question 14.
Match the following

Table

The correct option is —
a. X(iv); Y(iii); Z(ii); W(i)
b. X(iii); Y(ii); Z(i); W(iv)
c. X(ii); Y(i); Z(iii); W(iv)
d. None of the above.
Answer:
a. X(iv); Y(iii); Z(ii); W(i)
Hint
Expansion – If the price falls consumer moves downward on the demand curve and purchases more which is called expansion Inferior goods – in such a case when the income of the consumer increases he shifted his purchase from inferior goods to superior goods even if inferior goods price falls. Complimentary goods – Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of the other is immaterial Decrease in demand – when there is a fall in the quantity demanded due to falling in the price of substitute goods.

Question 15.
With a fall in the price of a commodity-X demand for commodity-Y also falls. This best represents—
a. An exception to the law of demand
b. Universal application of the law of supply
c. Relationship between two goods that are substitutes for each other
d. A market economy where pricing decisions are difficult to make.
Answer:
c. Relationship between two goods that are substitutes for each other
Hint
When a change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction.eg. tea and coffee is a substitute to each other. In the present case With a fall in the price of a commodity-X demand for commodity-Y also falls shows 1 that changes are in the same direction thus they are substitutes for each other.

Question 16.
A functional relationship is given as follows:
QN = f(PN)
Where QN stands for quantity demanded-of commodity-N and PN stands for the price of commodity-No The law of demand states that other variables remain constant, there is an inverse relationship between the price of a commodity and its quantity demanded. It means that if –
a. The price of a commodity goes up, quantity demanded of its substitute will fall.
b. The demand for a commodity1 goes up, its price will also go up
c. The price of a commodity falls, the quantity demanded will rise
d. None of the above.
Answer:
c. The price of a commodity falls, its quantity demanded will rise
Hint
The given statement is related to the Law of Demand. The law states that all else being equal, as the price of a product increases, a lower quantity will be demanded; likewise, as the price of a product decreases, a higher quantity will be demanded.

Question 17.
If consumption of each additional unit of a commodity is expected to give an increasing marginal utility, the total utility derived by the consumer will
a. Initially rise, but eventually, fall
b. Rise at an increasing rate as long as marginal utility keeps rising
c. Rise at an increasing rate as long as marginal utility is more than zero
d. Not reflect an increasing trend.
Answer:
b. Rise at an increasing rate as long as marginal utility keeps rising
hint
The law of diminishing marginal utility is directly linked to determining the price of the commodity. Observations for the law of DMU

  • When TU rises at a decreasing rate, MU diminishes
  • When TU is maximum, MU is zero
  • When TU decreases, MU becomes negative
  • TU increases so long as MU is positive

Question 18.
In the case of a commodity for which no price is to be paid, a consumer will reach equilibrium –
a. At any point on the vertical axis
b. At the point where the falling marginal utility curve cuts the horizontal axis
c. Only when the consumer is taken away from the table
d. Only when the marginal utility begins to fall.
Answer:
b. At the point where the falling marginal utility curve cuts the horizontal axis
Hint
In case of a commodity for which no price is to be paid, a consumer will reach equilibrium at the point where the falling marginal utility curve cuts the horizontal axis.

Question 19.
Which of the following is not correct? Normally, an indifference curve
a. Slopes downwards from left to right
b. Does not have a concave shape
c. Can touch any other indifference curve
d. Can cut through a budget line.
Answer:
c. Can touch any other indifference curve
Hint
No two indifference curve intersects each other.
Features of indifference curve

  • The indifference curves must slope down from left to right.
  • A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
  • Curve is moving from up to down between two commodities
  • Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
  • When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
  • When the amount of one good is increased the quantity of other good decreases so the curves are downward to the right

Question 20.

Theory Of Demand And Supply – CS Foundation Economics Notes Chapter 2 img 4

In the figure above, the highest desired level of satisfaction is being represented by –
a. Point A
b. Point B
c. Point C
d. Point D.
Answer:
c. Point C
Hint
This figure is related to the indifference curve. A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.

Question 21.
If the income elasticity coefficient for the demand of a Commodity-X is +0.5; with an increase in the consumer’s income; the share of income spent on this commodity will-
a. Rise
b. Remain the same
c. Fall
d. Not be determined.
Answer:
a. Rise
Hint
The income elasticity cl demand measures the responsiveness of demand for a good or service to changes in income. Thus If Income increases the spending on goods increases Thus In the case of positive elasticity with an increase in income spending on commodities will rise.

Question 22.
Cross elasticity of demand for Commodity-X and Commodity-Y is (-) 0.5.lt means that –
a. Commodity-X and Commodity-Yare, not related
b. An increase in the price of Commodity-Y results in a fall in the price of Commodity-X
c. Commodity-X and Commodity-Yare substitute goods
d. None of the above.
Answer:
d. None of the above.
Hint
Cross price elasticity is negative — when a change in the price of good ‘b ‘ causes the change in demand of good opposite direction e.g pen and Ink which are complementary to each other.

Question 23.
Which of these is not a property of the Indifference Curve (IC):
a. I.C. slopes downward to right.
b. I.C. is never convex to the origin
c. I.C. never intersects each other
d. I.C. represents a higher level of satisfaction.
Answer:
b. I.C. is never convex to the origin
Hint
Properties of the Indifference curve are

  • The indifference curves must slope down from left to right
  • A higher indifference curve that is above and to the right of another indifference curve represents e higher level of satisfaction and a combination on a lower indifference curve yields a lower satisfaction.
  • The cove is moving from up to down between two commodities
  • Between X and Y axis which represents two commodities, it shows various combinations which can be purchased by a consumer.
    When budget line and indifference curves are drawn together then the budget line will be tangent to only one curve.
  • When the amount of one good is increased the number of other goods decreases so the curves are downward to the right
  • IC never intersects each other
  • The relative nature of various goods is explained e.g. Inferior and superior

Question 24.
When ed > 1, it means: –
a. Perfectly inelastic demand
b. Perfectly elastic demand
c. Relatively elastic demand
d. Relatively inelastic demand
Answer:
c. Relatively elastic demand
Hint
Relatively elastic demand is a concept where a change in the price results in more than proportionate change in the quantity demanded

  • For CG Fall n the price of 3% leads to an increase in demand of 10%,
  • elasticity coefficient is always eater than 1.
  • Demand curve s flatter in shape

Question 25.
When ed < 1, it means: –
a. Perfectly inelastic demand
b. Perfectly elastic demand
c. Relatively elastic demand
d. Relatively inelastic demand
Answer:
d. Relatively inelastic demand
Hint
Relatively inelastic demand is a concept where a great change in price leads to a small change in quantity

  • Elasticity coefficient is less than 1
  • The demand curve is relatively steeper

Question 26.
If the price falls by 5%, the quantity supplied falls by the same 5%. Which type of elasticity is this?
a. Unitary Elasticity of Supply
b. Unitary Elasticity of Demand
c. Relatively Elasticity of Supply
d. Relatively Inelasticity of Supply
Answer:
a. Unitary Elasticity of Supply
Hint
Unitary elastic supply — here elasticity coefficient is equal to 1. Here the percentage of fall arid percentage of quantity supply fall are same. thus if the price falls by 10% supply also falls by 10%. A supply curve is a straight line through the origin.

Question 27.
In which type of approach, the utility is immeasurable?
a. Cardinal utility
b. Ordinal utility
c. Both (a) and (b)
d. None of these
Answer:
b. Ordinal utility
Hint
Ordinal approach The concept was first introduced by Hicks He said that utility can not be measured in numbers instead it can be depicted in a comparable manner. As per this approach, the utility can not be measured in units but it can be determined by preferences so whenever demand for a product Is being accessed then it can be determined on the basis of preferences macle by consumers. This is more realistic and better than cardinal utility

Question 28.
Which type of goods are related to the exceptions to the law of demand?
a. Giffen Goods
b. Substitute Goods
c. Complimentary Goods
d. Both (a) and (c)
Answer:
d. Both (a) and (c)
Hint
Exceptions to the law of demand

  • Prestige goods or conspicuous goods
  • Inferior goods.
  • Price expectations:
  • Ignorance of the consumer:
  • Giffen goods
  • Complimentary goods
  • Fashion dependent goods

Question 29.
When a consumer’s real income increases, the price of which type of good falls down?
a. Luxurious Goods
b. Giffen Goods
c. Normal Goods
d. Inferior Goods
Answer:
d. Inferior Goods
Hint
Inferior goods – in such a case when the income of the consumer increases he shifted his purchase from inferior goods to superior goods even if inferior goods price falls.

Question 30.
Inelasticity of demand, what does elasticity means?
a. Eagerness
b. Willingness
c. Responsiveness
d. Both (a) and (b)
Answer:
c. Responsiveness
Hint
Elasticity describes the responsiveness (in percentage terms) of the quantity demanded to changes in price.

Question 31.
The raw of diminishing marginal utility applies in:
a. Long Run
b. Short Run
c. Very Long Run
d. Very short Run
Answer:
b. Short Run
Hint
The Law of diminishing marginal utility states that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. This is possible only in the short run.

Question 32.
“Indifference curve never cuts each other”- This statement is
a. True
b. False
c. Partly True
d. Partly false
Answer:
a. True
Hint
The indifference curve never intersects each other because a higher curve will never show the same satisfaction level as the lower curve at any point.

Question 33.
What is the relationship between Demand and supply
a. Direct Relation
b. Inverse Relation
c. No relation
d. None of these
Answer:
c. No relation
Hint
Law of Demand and Law of supply are two different laws. There is no relation between the two.

Question 34.
The consumer is at equilibrium when the indifference curve is to the Budget line
a. Horizontal
b. Vertical
c. Tangent.
d. None
Answer:
c. Tangent.
Hint
When budget line and indifference curves are drawn together then the budget line will be tangent to curve at equilibrium.

Question 35.
When elasticity of demand is Zero, i.e. ed=0, it is ____________?
a. Perfectly Inelastic Demand
b. Unitary elastic Demand
c. Perfectly elastic Demand
d. Inelastic Demand
Answer:
a. Perfectly Inelastic Demand
Hint
Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

  • thus elasticity is zero.
  • Demand curve is parallel to Y-axis

Question 36.
If there is a utility of many combinations of A & B, then it is the case of-
a. Indifference curve
b. PPC
c. Budget line
d. None of these
Answer:
a. Indifference curve
Hint
The indifference curve theory of ordinal utility theory is an important concept in Economics, as it suggests a more realistic way to analyze consumer behavior. An indifference curve shows all the various combinations of two goods that, give an equal amount of satisfaction to a consumer. There is a utility of many combinations of A & B on the indifference curve.

Question 37.
If the demand for blankets increases from 4600 to 5700 and the price decreases ‘from 220 to 190. Find elasticity of demand
a. 2.25
b. 1.50
c. 1.75
d. 1.85
Answer:
c. 1.75
Hint
The income elasticity of demand measures the responsiveness of demand for a good or service to changes in income.
E= percentage change in the quantity of good ‘A’/percentage change in price
The above formulae show how the demand for goods changes as the income of consumers changes
Percentage change in the quantity of good = 5700-4600/4600 × 100
= 23.91%
Percentage change in price = 220-190/220 × 100
=13.64%
E = 23.91/13.64 = 1.75

Question 38.
The curve which neither touches X-axis nor is parallel to X-axis?
a. Indifference Curve
b. PPC
c. Both (a) & (c)
d. None of the above
Answer:
a. Indifference Curve
Hint
The indifference curve is convex to origin so it neither touches X-axis nor is parallel to Y-axis.

Question 39.
If the real income of the person rises, then demand of which type of goods increases-
a. Normal
b. Inferior
c. Conspicuous
d. none of the above
Answer:
a. Normal
Hint
As the price falls the demand for the product increases and as the price rises the demand decreases, x thus quantity demanded is inversely proportional to the price of a good. This happens in the case of normal goods.

Question 40.
On subsequent consumption of a product the utility increase at _________ rate.
a. Increasing
b. Decreasing
c. Variable
d. None of the above
Answer:
b. Decreasing
Hint
The Law of diminishing marginal utility states that as a person increases consumption of a product – while keeping consumption of other products constant – there is a decline in the marginal utility that person derives from consuming each additional unit of that product. Thus on subsequent consumption of a product, the utility increases at decreasing rate.

Question 41.
In the case of MNC. which goods are not beneficial
a. Demerit goods
b. Poor Goods
c. Normal Goods
d. None of the above
Answer:
b. Poor Goods
Hint
MNC will produce only normal goods.

Question 42.
____________ goods are the products which the people continue to buy even at high prices due to lack of substitute products-
a. Inferior goods
b. Normal goods
c. Giffen goods
d. Luxury goods
Answer:
c. Giffen goods
Hint
Giffen goods: these are the goods which people keep on buying in spite of an increase in price because they have no other substitute for them eg. basic goods, (potatoes, sugar, etc). this is known as the Giffen paradox. There is a positive price effect in the case of Giffen goods.

Question 43.
Which amongst the following is incorrect in relation to the assumption of DMU.
a. All the units are homogeneous
b. The units are of reasonable size
c. More than one commodity is used at a time
d. Consumption is continuous.
Answer:
c. More than one commodity is used at a time
Hint
Assumptions of Law of DMU

  • The marginal decision rule states that a good or service should be consumed at a quantity at which the marginal utility is equal to the marginal cost.
  • Constant marginal utility of money
  • Consumption to be continuous
  • The utility is cardinally measurable
  • The hypothesis of independent utilities
  • The taste and income of the consumer does not change
  • The units of the commodity are identical
  • There is no time gap between the consumptions
  • The standard unit of consumption

Question 44.
When the price of coffee falls, the demand for Tea will?
a. Rise
b. Fall
c. Remains unchanged
d. Any of the above
Answer:
b. Fall
Hint
In the case of substitution, the change in the price of good ‘b’ causes the change in demand of good ‘a’ in the same direction.eg. tea and coffee is a substitute to each other.
In the present case With a fall in the price of a commodity coffee demand for commodity tea also falls shows that changes are in the same direction

Question 45.
Inferior goods have ……………………… and luxury goods have ………………………..
a. Negative income elasticity, Income elasticity greater than 1
b. Income elasticity greater than income elasticity
c. Positive income elasticity, negative income elasticity
d. Can’t say.
Answer:
a. Negative income elasticity, Income elasticity greater than 1
Hint
Inferior goods have negative elasticity of demand. Luxury goods have income elasticity greater than 1.

Question 46.
Which of the following pair of goods is an example of substitutes?
a. Pen and Ink
b. Gas and Kerosene
c. Shirt and Trousers
d. Tea and Sugar
Answer:
b. Gas and Kerosene
Hint
Substitute or substitute good is a product or service that a consumer sees as the same or similar to another product.

Question 47.
Total utility is maximum when:
a. Marginal utility is equal to average utility
b. Marginal utility is zero
c. Marginal utility is at its highest point
d. The average utility is maximum
Answer:
b. Marginal utility is zero
Hint
Observations for the law of DMU

  • When TU rises at a decreasing rate, MU diminishes
  • When TU is maximum, MU is zero
  • When TU decreases, MU becomes negative
  • TU increases so long as MU is positive

Question 48.
On which of the following Law, Law of Demand is based?
a. Total utility
b. Diminishing marginal utility
c. Equi-marginal utility
d. Cardinal utility
Answer:
b. Diminishing marginal utility
Hint
This law of DMU forms the basis of the law of demand, the law of Equi-marginal utility, the elasticity of demand, etc.

Question 49.
The indifference curve approach does not assume:
a. Ordinal measurement of satisfaction
b. Consistent consumption pattern behavior of consumers
c. Rationality on the parts of consumers
d. Cardinal measurement of utility
Answer:
d. Cardinal measurement of utility
Hint
Assumptions of indifference curve approach

  • The consumer is rational and he is interested to maximize his total utility.
  • The utility can not be measured
  • The consumer can rank his various combination of goods according to the satisfaction or utility
  • The principle of diminishing marginal rate of substitution is assumed.
  • The consumer, it is assumed, is consistent in his behavior during a period of time.
  • The goods consumed by the consumer are substitutable.
  • There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
  • Consumers have full information about the relevant aspects of the economic environment
  • A combination of having more commodities is more satisfying than a combination of having fewer commodities

Question 50.
In which type of price elasticity of supply, a very insignificant change in price leads to an infinite change in quantity.
a. Relatively elastic
b. Perfectly inelastic
c. Relatively inelastic
d. Perfectly elastic
Answer:
a. Relatively elastic
Hint
Relative elastic supply – For a given rise in price, the rise in supply will be proportionately larger. Here elasticity is greater than 1.

Question 51.
How does the demand curve move in case of exception to Law of demand?
a. Upward
b. Downward
c. Positive
d. Negative
Answer:
c. Positive
Hint
The demand curve slopes downward from left to right. It has a negative slope showing that the two variables price and quantity work in opposite directions. In case of exception, the two variables don’t work in the opposite directions so the demand curve moves in a positive direction. For example, certain commodities like diamonds, sports cars, etc., are purchased as a mark of distinction in society, If the price of these goods rises, the demand for them may increase instead of falling.

Question 52.
In the Case, Good X and Good Yare substitute, what will be the impact on Good X for an increase in the price of Good Y?
a. Demand for good X will decrease
b. Demand for good X will increase
c. The market price of good X will decrease
b. Quantity demanded of goods X will increase.
Answer:
b. Demand for good X will increase
Hint
In the case of substitution, the change in the price of good ‘b’ causes the change in the demand of good ‘a’ in the same direction. eg. tea and coffee is a substitute to each other. In the present case With an increase, in the price of a commodity Y demand for commodity X also increases shows that changes are in the same direction

Question 53.
According to Marshall, the utility can be measured by which of the following approaches?
a. Both Cardinal and Ordinal Approach
b. Ordinal Approach
c. Cardinal Approach
d. Nominal Approach
Answer:
c. Cardinal Approach
Hint
Cardinal approach suggests that utility can be measured in imaginary cardinal numbers 1„3,10, etc. It argues that a consumer has the capacity to measure the level of satisfaction that person derives from the consumption of a given quantity of a commodity.

Question 54.
Which of the following is not an assumption of the difference curve approach of determining consumers?
a. Satisfaction is measured ordinarily
b. Consumer consumption behaviors is consistent
c. The utility is measured cardinally
d. Consumers are rational.
Answer:
c. Utility is measured cardinally
Hint
Assumptions of indifference curve approach

  • The consumer is rational and he is interested to maximize his total utility.
  • The utility can not be measured
  • The consumer can rank his various combination of goods according to the satisfaction or utility
  • The principle of diminishing marginal rate of substitution is assumed.
  • The consumer, it is assumed, is consistent in his behavior during a period of time.
  • The goods consumed by the consumer are substitutable.
  • There are many combinations of the, two commodities that are equally preferred by a consumer and he is indifferent as to which of the two he receives.
  • Consumers have full information about the relevant aspects of the economic environment
  • A combination of having more commodities is more satisfying than a combination of having fewer commodities

Question 55.
In the case of two complementary goods a rise in the price of one commodity will induce:
a. An upward shift in demand for the other commodity
b. A rise in the price of the other commodity
c. No shift in the demand for the other commodity
d. A downward shift in demand for the other commodity.
Answer:
d. A downward shift in demand for the other commodity.
Hint
Some goods are so complementary to each other that they can not be segregated thus even if there is a fall in the price of one product the increase in the price of another is immaterial. If goods A and B are complements, an increase in the price of A will result in a leftward movement along the demand curve of A and cause the demand curve for B to shift in; less of each goodwill be demanded. When two goods are complements, they experience joint demand. For example, the demand for razor blades may depend upon the number of razors in use

Question 56.
A manufacturer supplies goods in such a way that if the price rises by 10%, he is prepared to supply 10% more. This supply is best described as:
a. Inelastic
b. Unit-inelastic
c. Unit-elastic
d. Relatively elastic.
Answer:
c. Unit-elastic
Hint
Unitary elastic supply – here elasticity coefficient is equal to 1. A percentage in price will produce the exact same percentage change in quantity. Thus if the price rise by 10% supply also rises by 10%. The supply curve is a straight line through the origin.

Question 57.
If a 20% change in the price of a commodity does not result in any change in the quantity demanded, which type of price elasticity of demand will be in this case?
a. Unitary elastic
b. Relatively elastic
c. Perfectly elastic
d. Perfectly inelastic.
Answer:
d. Perfectly inelastic.
Hint
Perfectly inelastic demand is when there is no change in the demand of the product with the change in price.

  • thus elasticity is zero.
  • The demand curve is parallel to Y-axis.

Question 58.
Which of the following does not lead to an increase in an equilibrium price for a consumer?
a. An ‘increase in supply accompanied by a decrease in demand
b. A decrease in supply accompanied by an increase in demand
c. A decrease in supply without a change in demand
d. An increase in demand without a change in supply.
Answer:
d. An increase in demand without a change in supply.
Hint
An equilibrium price (also known as a “market-clearing” price) is one at which each producer can sell all he wants to produce and each consumer can buy all he demands. When the supply and demand curves intersect, the market is in equilibrium. This is where the quantity demanded and quantity supplied are equal. The corresponding price is the equilibrium price or market clearing price, the quantity is the equilibrium quantity. Thus a seller has to supply goods at a price that is acceptable to consumers. When there is an increase in the income of consumers then there is an increase in demand which in turn pressurizes the supplier to increase supply and that leads to an increase in price to reach equilibrium. An increase in demand without a change in supply does not lead to an increase in equilibrium price.

CS Foundation Business Economics Notes

Selected Areas Of Indian Economy – CS Foundation Economics Notes

Selected Areas Of Indian Economy – CS Foundation Economics Notes

The literal meaning of population is the whole number of people or inhabitants in a country or region. (Webster’s dictionary). India is projected to be the world’s most populous country by 2025, surpassing China. The demographics of India are inclusive of the second most populous country in the world, with over 1.21 billion people (2011 census), more than a sixth of the world’s population. When India gained independence sixty years ago, the country’s population was a mere 350 million. Since 1947, the population of India has more than tripled.

In 2000, the country established a new National Population Policy to stem the growth of the country’s population. One of the primary goals of the policy was to reduce the total fertility rate to 2.1 by 2010.

1. Reasons For Increase in Population
India currently faces approximately 33 births a minute, Unfortunately, the resources do not increase as the population increases. Instead, the resources keep decreasing, leading to making survival for a human being more and more competitive even for the basic necessities of life like food, clothing, and shelter.

Some of the factors responsible for the high birth rate are

  • Illiteracy
  • early marriage
  • traditional, superstitious and ignorant population.
  • our failure is the absence of an effective system for promoting small families.
  • Moreover, the decline in the death rate has also increased the overall population.
  • The Indian government had launched the Family Planning Programme in 1951. The program has resulted in significant declines in death rates and infant mortality but the birth rate was far more.
  • Active measures are required to be taken to control the population growth

2. Effect of population growth on economic development
The influence of population on the economy is seemingly straightforward. It is about having enough resources to meet the needs of the growing number of people. As the population rises, so will poverty. Being a developing country, the increasing growth rate is dragging India into a vicious cycle of population and poverty, which leads to a development trap. This further increases other problems like illiteracy, unemployment, and inflation

Following are the adverse effects of population growth on the Indian Economy:

  • Adverse effects on savings
  • Unproductive investment
  • Slow growth of Per Capita Income
  • Underutilization of labor
  • Growing pressure on land
  • Adverse effect on the quality of the population
  • Adverse social impact
  • The natural resources available to each person declines as the population increases.
  • Rapid population growth, industrialization, and urbanization in the country are adversely affecting the environment.
  • Increase in unemployment

3. India’s Population policy
There has been an enormous increase in the population of India. While the global population has increased only threefold during the last century, from 2 billion to 6 billion, India’s population has increased nearly five times. Although India was the first developing country to adopt a positive population policy in 1951-52 to stabilize the population at a level the national economy could absorb, yet its achievements in controlling its numbers have been far from satisfactory

The NPP 2000 provides a policy framework for advancing goals and prioritizing strategies during the next decade, to meet the reproductive and child health needs of the people of India, and to achieve net replacement levels (TFR) by 2010

Below mentioned are the National Socio-Demographic Goals to be achieved by 2010

  • Promote delayed marriage for girls, not earlier than age 18 and preferably after 20 years of age.
  • Make school education up to age 14 free and compulsory
  • Achieve universal immunization of children against all vaccine-preventable diseases.
  • Reduce infant mortality rate to below 30 per 1000 live births
  • Reduce maternal mortality ratio to below 100 per 100,000 live births
  • Prevent and control communicable diseases.
  • Achieve 100 percent registration of births, deaths, marriage, and Pregnancy
  • Promote vigorously the small family norm to achieve replacement levels of TFR

4. Poverty
Poverty is about not having enough money to meet basic needs including food, clothing, and shelter, poverty is a 1 complex societal issue. Poverty can be viewed as absolute poverty or relative poverty. Thus if people are not able to get the minimum basic requirement of food and nutrition they are called poor and this poverty comes under absolute poverty. When there is a large gap between the incomes amongst people then poverty is termed relative poverty. Relative poverty shows the unequal distribution of wealth. The biggest enemy of health in the developing world is poverty. Thus removal of poverty was a major issue for India. Since the 1950s, the Indian government and non-governmental organizations have initiated several programs to alleviate poverty, including subsidizing food and other necessities,

The causes of poverty are many. Some of them are

  • high population growth rate- On average 17 million people are added every year to its population which raises the demand for consumption goods considerably
  • A major cause of poverty among India’s rural people, both individuals, and communities is lack of access to
    productive assets and financial resources.
  • High levels of illiteracy, inadequate health care, and extremely limited access to social services. The rate of economic development in India has been below the required level. Therefore, there persists a gap between the level of availability and requirements of goods and services.
  • The existence of underemployment and disguised unemployment of human resources also leads to poverty. Diseases are one of the main causes of poverty in India.
  • The continuous and steep price rise in the price of essential commodities
  • The social setup is still backward. Laws of inheritance, caste system, traditions, and customs are putting hindrances in the way of faster development India has reduced its poverty level to less than 26 percent but the number of people below the poverty line is still a staggering

Major steps to remove poverty are

  • Accountability of government
  • Increasing access to bank finance to rural poor
  • Land reforms and the abolition of zamindari.
  • Increasing literacy level.
  • Relaxation of labor laws
  • Development of small scale industries and cottage industries to reduce urban poverty
  • Adequate employment opportunities.
  • Family planning or family welfare programmes should be effectively implemented
  • Poverty alleviation programs
  • Ensure higher credit flow to rural India

5. Poverty Alleviation Programmes
Poverty alleviation has been one of the guiding principles of the planning process in India. Various programs started are

1. Integrated Rural Development Programme/Swamajayanti Gram Swarozgar Yojana
This program was introduced in selected blocks in 1978-79 and universalized from 2 October 1980 has provided assistance to rural poor in the form of subsidy and bank credit for productive employment opportunities through successive plan periods. The IRDP and allied programs, were merged into a single program known as Swarnajayanti Gram Swarozgar Yojana

2. National rural employment program
The main objective was to generate employment in rural areas

3. Jawahar Rozgar Yojna
It was introduced for generating more employment in the country. lt was introduced in 1989-90

4. Training of Rural Youth for Self-Employment (TRYSEM)
The scheme – TRYSEM aimed at providing basic technical and entrepreneurial skills to the rural poor in the age group of 18-35 years. Out of the total beneficiaries, at least 50% should be women.

5. Desert Development Programme
(DDP) was started both in hot desert areas of Rajasthan, Gujarat, and Haryana and the cold deserts of Jammu & Kashmir and Himachal Pradesh in 1977-78. the main activity was water resources development by construction of channels

6. Minimum Needs Programme
Keeping in view “garibi hatao” notion this scheme was started.

7. Employment guarantee scheme
Under this scheme, unemployed are given financial assistance. It was launched in Maharashtra, Kerala etc

8. Prime Minister Rojgar Yojna
This yojna was implemented in 1993 to give employment to 10 lakh people by setting up seven lakh enterprises

9. Prime Minister’s Integrated Urban Eradication Programme (PMIUPEP)
This program was to provide employment to the urban poor.

10. Swaran Jayanti Rozgar Yojna
It began in 1997. Its aim was to provide employment to urban unemployed and underemployed persons

11. Jawahar Gram Samridhi Yojna
To improve the quality of the urban poor. It started in 1999.

6. Unemployment
Unemployment is the state of an individual looking for a paying job but not having one. Unemployment does not include full-time students, the retired, and children. In India, unemployment is in the form of underemployment, disguised unemployment in rural areas, and unemployment amongst the educated youth.

NSS made 3 estimates on unemployment

  • Principal Status unemployment: These are the people who remained unemployed for the major part of the year.
  • Weekly status unemployment: At the time of the survey people who did not get even an hour of work in a week come under this category.
  • Daily status unemployment: People who did not get work for a day or some days during the survey week The government has undertaken many special programs to remove unemployment. These are
  • Rural Works Program: This program aims at the construction of civil works of permanent nature in rural areas.
  • Integrated Dry Land Agricultural Development: Under this scheme, permanent works like soil conservation, development of land, and water harnessing are undertaken.
  • National Rural Employment Program: This program aims to create community assets for strengthening rural infrastructure, like drinking water wells, community irrigation wells, village tanks, minor irrigation works, rural roads, and schools.
  • The Rural Landless Employment Guarantee Program: It aims at generating gainful employment, creating productive assets in rural areas, and improving the overall quality of rural life. Skill Development: One of the major issues relating to unemployment is skill development. Change in the production methods has led to increasing in demand for skilled labor. A skilled laborer is one who has proper training and education to work in a particular field. Training and education increase the productivity of workers. Skill development means:
  • To educate and provide specialized training to the labor force in order to increase their productivity.
  • To ensure continuous employability of labor.
  • To be able to absorb the new technologies at the work.
  • To compete with the labor force of the other developed countries.

The eleventh plan identified various problems related to unemployment. Some of them are

  • Rise in the unemployment in agricultural laborers
  • Rate of unemployment has increased to 7.3%
  • There has been negligible growth in average real income in non-agriculture employment.
  • Rural male casual labor income increased
  • Despite GDP growth jobs in the organized sector declined.

7. Infrastructure
Infrastructure is a major sector that propels the overall development of the Indian economy. The Secretariat for Infrastructure in the Planning Commission is involved in initiating policies that would ensure the time-bound creation of world-class infrastructure in the country. This section focuses on power, bridges, dams, roads, and urban infrastructure development. Details of the projects, organizations, policies, timelines, schemes, spending on infrastructure are provided for the users. Besides India also provided free and transparent press so that foreign investors are attracted towards making investments in India.

8. Transportation
A well-known and coordinated system of transport plays an important role in the sustained economic growth of a country. The present transport system of India comprises several modes of transport including rail, road, coastal shipping, air transport, etc. Transportation in India has recorded substantial growth over the years both in the spread of networks and in the output of the system. The Ministry of Shipping, Road Transport, and Highways are responsible for the formation and implementation of policies and programs for the development of various modes of transport save the railways and civil aviation. The total length of roads in India is over 30 lakhs km including metalled and unmetalled.

9. Energy
For economic development energy is the basic requirement. Due to rapid economic expansion, India has one of the world’s fastest-growing energy needs. A large number of power projects (XI and XII five-year plans) are under construction to overcome the power shortages and meet the growing energy requirements in the country. Natural gas demand has increased a lot. The Solar Energy Centre (SEC), established in 1982, is a dedicated unit of the Ministry of New and Renewable Energy, Government of India for the development of solar energy

10. Communication
India’s telecommunication network is the third-largest in the world based on the total number of telephone users (both fixed and mobile phones). Telecommunication has supported the socioeconomic development of India and has played a significant role to narrow down the rural-urban digital divide to some extent.

Main initiatives taken for the growth of the Telecom Sector are

  • Telecom equipment manufacturing was delicensed in 1991 and value-added services were declared open to the private sector in 1992, thus the liberalization process was started.
  • In 1994, the Government announced the National Telecom Policy which defined certain important objectives, including the availability of telephone on demand, etc.
  • The Telecom Regulatory Authority of India (TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.
  • The most important milestone and instrument of telecom reforms in India are the New Telecom Policy 1999 (NTP 99). It opened the sector for the private sector

11. Health and education
The Census of India 2001 reveals that despite a host of schemes and programs, only 65.38 percent of the Indian people are literate (75.85 percent men and 54.16 percent women). A staggering number of children, close to 38.41 percent of boys and 51.88 percent of girls in the age group 6-14, are not attending school. Looking at the figure and the importance of education for the overall development of the country many schemes were launched by the government right from the time we got independence.

For the development of the country healthy population is a must. When we look at the data of the country we find that almost 67% of our population does not have access to medicines. In our country, people are undernourished and underfed which leads to unhealthy people. Although children and the mother mortality rate has reduced but not up to mark. More than 50% of the women are anemic. The sanitation facility is also not good. But the government has done a lot to improve health and has started many health schemes.

Selected Areas Of Indian Economy MCQ Questions

Question 1.
In the year 2012 India has almost world
population
a.1.22%
b. 1.154%
c.17.31%
d. 1.95%
Answer:
c.17.31%

Question 2.
Functional unemployment occurs when
a.there is a fall in aggregate demand
b. workers are voluntarily unemployed
c.workers are unemployed due to technology
d. none of these
Answer:
c.workers are unemployed due to technology

Question 3.
How did the population rise affect the scope of economic activity during the eighteenth century?
a.Increase in competition for resources depressed the economy.
b. Increase in demand for goods and services stimulated the economy
c. An increase in competition and increase in demand canceled each other, so there was the little net effect.
d. Europe’s surplus population immigrated to the colonies, making up the bulk of the labor force in them.
Answer:
b. Increase in demand for goods and services stimulated the economy

Question 4.
If a nation has an open economy it means that the nation:
a.Allows private ownership of capital
b. has flexible exchange rates
c.Has fixed exchange rates
d. Conducts trade with other countries
Answer:
d. Conducts trade with other countries

Question 5.
Indian telecommunication is the ________ largest system in world
a.Second
b.Fourth
c.Third
d.Fifth
Answer:
c.Third

Question 6.
NSSOis
a.National survey organization
b.National sample survey organization
c.National security survey organization
d.National unemployment survey organization
Answer:
b.National sample survey organization

Question 7.
Some of the renewable source of energy is
a.Photovoltaic
b.Solar thermal
c.Both a & b
d.Neither a nor b
Answer:
c.Both a & b

Question 8.
Out of the total rail route which is electrified is
a.13000 km
b.63000 km
c.23000 km
d.33000 km
Answer:
a.13000 km

Question 9.
National highway compromise _________% of total road network
a.40
b.2
c.15
d.30
Answer:
b.2

Question 10.
Consequences of the rapid increase in population are
a.Availability of clothes
b.Increase in food production
c.Slower increase in per capita income
d.None of the above
Answer:
c.Slower increase in per capita income

Question 11.
TRAI was established on
a.20th Feb 1997
b.20th Jan 1997
c.20th Mar 1997
d.20th Apr1997
Answer:
a.20th Feb 1997

Question 12.
TRAI is
a.Telecommunication reporting authority of India
b.Telecom regulatory authority of India
c.The telecom Regulations development authority of India
d.None of the above
Answer:
b.Telecom regulatory authority of India

Question 13.
The feature Not present in NTP 99 is
a.Strengthening of the regulator
b.DTP corporatized in 2000
c.National long-distance service to be kept exclusively with public sector
d.Private telecom operators licensed on revenue sharing basis
Answer:
c.National long-distance service to be kept exclusively with public sector

Question 14.
In India the state which has the worst mortality rate is
a.Madhya Pradesh
b.Uttar Pradesh
c.Himachal Pradesh
d.Bihar
Answer:
b.Uttar Pradesh

Question 15.
Invariably the ratio of the teacher is to a student in India is
a.1:40
b.2:40
c.1:50
d.1:80
Answer:
a.1:40

Question 16.
As on March 2010 India has _________ many telephone connections
a.600 million
b.621 million
c.721 million
d.None of the above
Answer:
b.621 million

Question 17.
Unemployment in India is the result of
a.Illiteracy
b.Growth in population
c.Less farming land
d.None of the above
Answer:
b.Growth in population

Question 18.
The death rate in the year 2009-10 showed that the death rate in India is
a.To the level of the death rate of advanced countries
b.To the level of death level of developing countries
c.More than the level of death rate of advanced countries
d.More than the level of death rate of underdeveloped countries
Answer:
a.To the level of the death rate of advanced countries

Question 19.
Major failures that led to the decline in birth rate are
a.Female mortality
b.Absence of social security
c.Low average age of women at the time of marriage
d.Both b & c
Answer:
d.Both b & c

Question 20.
Disguised unemployment in India is mainly related to:
a.agricultural sector
b.rural area
c.factory sector
d.urban area
Answer:
a.agricultural sector

Question 21.
Under milk development plans ______ people were provided employment
a.54 lakh people got employment
b.100 lakh people got employment
c.1 lakh people got employment
d.10 lakh people got employment
Answer:
a.54 lakh people got employment

Question 22.
The plans in Swaran Jayanti Rozgar, which began in Dec. 1997, were ‘
a.Urban wage employment program
b.Nehru Rozgar Yojna
c.Urban self-employment program
d.Both a & c
Answer:
d.Both a & c

Question 23.
As per the standard person year basis if a person is working for 8 hours a day and for _______ days in a year he is regarded as employed
a.280
b.365
c.273
d.None of the above
Answer:
c.273

Question 24.
For calculating an unemployment rate for any reference year generally
a.Open unemployment status is taken
b.Weekly status of unemployment
c.Daily status of unemployment
d.None of the above
Answer:
a.Open unemployment status is taken

Question 25.
The purpose of the employment assurance scheme was
a.To provide 100 days employment for an unskilled manual worker
b.To provide employment for skilled labor
c.To give basic food for people below the poverty line
d.To provide housing facilities for people below the poverty line
Answer:
a.To provide 100 days employment for an unskilled manual worker

Question 26.
The robust increase in employment in 1999¬2005 was of no use because
a.Growth was in the unorganized sector
b.It was mainly in low productivity self-employment
c.There was a decline in rural male agricultural labor
d.Both a & b
Answer:
d.Both a & b

Question 27.
The objective of economic and social development is to
a.Make people productive assets
b. Provide opportunities for people to grow
c. Improve the quality of life people live
d. All of the above
Answer:
d. All of the above

Question 28.
India is being considered a favorable place by foreign institutions for investment because
a.Free press
b. Proper judiciary system
c.Good infrastructure
d. All of the above
Answer:
d. All of the above

Question 29.
In the 5th five year plan for the nation “garibi hatao” program was started by
a.NREP
b. IRDP
c.Minimum needs program
d. Jawahar Yojna
Answer:
c.Minimum needs program

Question 30.
Absolute poverty means
a.Minimum calorie intake required for a person
b. Basic recommended nutritional requirement for a person
c.Difference between the living standard of people
d. Both a & b
Answer:
d. Both a & b

Question 31.
Relative poverty means
a.Minimum calorie intake required for a person
b. Basic requirement of a person
c.Difference between the living standard of people
d. None of the above
Answer:
c.Difference between the living standard of people

Question 32.
Lack of entrepreneurship is a cause of poverty
a.True
b. False
c.Partially true
d. Partially false
Answer:
a.True

Question 33.
Some of the land reforms are
a.Liberty regarding the total land a person can hold
b. Distribution of excessive land to farmers having big land is that the production be increased
c.Abolition of zamindari system
d. All of the above
Answer:
c.Abolition of zamindari system

Question 34.
For the development of cottage 7 small scale industries
a.Loans were provided
b.Some production items were specially reserved
c.Both a & b
d.Neither a nor b
Answer:
c.Both a & b

Question 35.
Rural development programme Scheme was started by Government to
a.Provide loans to rural people
b.To eliminate poverty in rural areas
c.To launch new productive units in rural areas
d.To establish social security in rural areas
Answer:
b.To eliminate poverty in rural areas

Question 36.
It is Uncommon in a zamindari system
a.For land to belong to tiller
b.For land not to belong to tiller
c.That all the cultivated land to belong to zamindar and uncultivated to tiller
d.None of the above
Answer:
a.For land to belong to tiller

Question 37.
Some of the programmes started by Government to eliminate poverty are
a.National family welfare programme
b.NPP
c.NREP
d.All of the above
Answer:
c.NREP

Question 38.
Main featured of India Economy is
a.Rural Poverty
b.Lack of capital
c.Traditional technique of Production
d.none of these
Answer:
d.none of these

Question 39.
In India the dependency force is of the people who are in the age group of
a.Below 14 years
b.Below 15 years
c.Above 14 years
d.15 years
Answer:
a.Below 14 years

Question 40.
Why urban areas not welcomed to be highly populated?
a.Additional demand for sewage system
b.Additional demand for road lighting
c.Additional roads
d.All of the above
Answer:
d.All of the above

Question 41.
In 2001 ___________% of working population was engaged in agriculture
a.37.6%
b.58.2%
c.34.4%
d.43.2%
Answer:
b.58.2%

Question 42.
Which of the following is Not the effect of growing population?
a.Higher per capita income
b.Energy crisis
c.Environmental degradation
d.Mass unemployment
Answer:
a.Higher per capita income

Question 43.
NPP is
a.National population practices
b.National population policy
c.National population priorities
d.None of the above
Answer:
b.National population policy

Question 44.
Which of the following type of employment is found in India?
a.Structural unemployment
b.quasi unemployment
c.disguised unemployment
d.all of these
Answer:
d.all of these

Question 45.
In 1952, India was the first country to
a.Launch the programmed to control death
b.To launch family planning for reducing birth rate
c.To launch family planning for reducing mortality for women
d.All of the above
Answer:
b.To launch family planning for reducing birth rate

Question 46.
IMR is
a.Infant monetary rate
b.Infant mortality rate
c.Indian monetary reserve
d.Indian monetary revenue
Answer:
b.Infant mortality rate

Question 47.
As National family welfare programs were introduced the total fertility rate has reduced from 60 (1951) to ________ 1997
a.3%
b.3.1%
c.3.2%
d.3.3%
Answer:
d.3.3%

Question 48.
Poverty means the incapability of a person to get
a.Food
b.Health
c.Education
d.All of the above
Answer:
d.All of the above

Question 49.
The largest proportion of workforce in India is engaged in the:-
a.External sector
b.Primary sector
c.Secondary sector
d.Tertiary sector
Answer:
b.Primary sector
Hint
The primary sector of the economy is the sector of an economy making direct use of natural resources. This includes agriculture, forestry, fishing, and mining.

Question 50.
In terms of total population, India is the
largest country in the world.
a.First
b.Second
c.Third
d.Not among the first ten
Answer:
b.Second
Hint
The demographics of India are inclusive of the second-most populous country in the world, with over 1.21 billion people (2011 census), more than a sixth of the world’s population.

Question 51.
The highest literacy rate in India is observed in the state of-
a.Punjab
b.Haryana
c.Kerala
d.Andhra Pradesh
Answer:
c.Kerala
Hint

Question 52.
A country experiences population explosion when it gets stuck for long in a stage of demographic transition in which:—
a.Birth rate is high and the death rate is high.
b.Birth rate is low and the death rate is low.
c.Death rate falls steeply but the birth rate continues to be high.
d.Both birth rate arid death rate falls steeply.
Answer:
c.Death rate falls steeply but the birth rate continues to be high.
Hint
Population explosion refers to the rapid and dramatic rise in world population that has occurred over the last few hundred years. A country experiences a population explosion when it gets stuck for long in a stage of demographic transition in which the death rate falls steeply but the birth rate continues to be high

Question 53.
A country is said to be ready to enjoy demographic dividends when
a. The proportion of youth in the total population increases fast
b. The death rate falls across all the age groups
c. The birth rate falls across all the age groups
d. The number of elder citizens rises very fast.
Answer:
a.The proportion of youth in total population increases fast

Question 54.
The primary aim of the Mahatma Gandhi National Rural Employment Guarantee Programme is not to-
a.Lift the household above the poverty
b.Provide, self equipment opportunities to households living below the line of poverty
c.Create and set up rural productive assets
d.Transform rural areas into urban areas
Answer:
d.Transform rural areas into urban areas

Question 55.
Disguised unemployment is a state in which
a.Marginal product of labor rises
b.Marginal product of labour is nil
c.The number of persons available for work is less than the input requirement
d.None of the above
Answer:
b.Marginal product of labour is nil
Hint
Disguised unemployment exists where part of the labor force is either left without work or is working in a redundant manner where worker productivity is essentially zero.

Question 56.
The poverty ratio in India has been falling. It implies that-
a.The number of persons living below poverty. line must have decreased
b. The unemployment ratio in the economy must have fallen
c. The inequality in income distribution must have come down
d. The number of persons living below the poverty line might have increased
Answer:
a.The number of persons living below poverty. line must have decreased
Hint
The national poverty headcount ratio is the percentage of the population living below the national poverty lines. India has reduced its poverty level to less than 26 percent but the number of people below the poverty line is still staggering.

Question 57.
Find the odd one out among the following employment generation programmes:-
a.Urban self-employment programme
b.Urban wage-employment programme
c.Training of rural youth for self-employment
d.Integrated rural development program
Answer:
d.Integrated rural development program
Hint
The government has undertaken many special programs to remove unemployment.These are

  • Rural Works Program
  • Integrated Dry Land Agricultural Development
  • National Rural Employment Program
  • The Rural Landless Employment Guarantee Program
  • Skill Development

Question 58.
One of the following is not a renewable source of energy-
a.Oil
b.Water
c.Wind
d.Solar Energy
Answer:
a.Oil
Hint
Renewable energy is energy generated from natural resources such as sunlight, wind, rain, tides and geothermal heat

Question 59.
The density of population is defined as the number of persons per square-
a.Kilometre
b.Centimetre
c.Millimetre
d.Decimetre
Answer:
a.Kilometre
Hint
Population density is midyear population divided by land area in square kilometers.

Question 60.
Land reforms program in India has aimed at-
a.Fragmentation of holdings
b.Subdivision of holdings
c.Consolidation of holdings
d.Collectivization of holdings.
Answer:
c.Consolidation of holdings
Hint
Land consolidation is a planned readjustment and rearrangement of land parcels and their ownership. Consolidation of fragmented agricultural land was an integral part of land reforms in India.

Question 61.
During the year 2013, the real gross domestic product of a country increased by 8% over the preceding year. During this year population of the country also got increased by 1 6%. In that particular country, the rate of growth of per capita income during 2013 would be:
a.6.4%
b.9.6%
c.5.0%
d.12.8%
Answer:
c.5.0%
Hint
Rate of growth per capita income = 8/1.6 = 5%

Question 62.
In India, at present 100 percent Foreign Direct Investment (FDI) is allowed in:
a.Defence
b.Drugs and Pharmaceuticals
c.Cable Networks
d.Insurance
Answer:
b.Drugs and Pharmaceuticals

Question 63.
In which state or union territory is the literacy rate highest in the country?
a.Delhi
b.Chandigarh
c.Karnataka
d.Kerala
Answer:
d.Kerala

Question 64.
Which one of the following is correct? Over the years the: –
a.Agricultural production has been falling
b.The.Industrial production has been falling
c. The share of the service sector and manufacturing sector in India’s GOP has been stagnant
d. The share of the agricultural sector in India’s GOP has been falling.
Answer:
d.The share of the agricultural sector in India’s GOP has been falling.
Hint
In 2006-07 contribution of the agricultural sector in GDP was 18.5% and in 2010-11 was 14.2%.

Question 65.
The fastest rate of growth in terms of income generated has been recorded in the past couple of decades, in the:
a.Agricultural sector
b.Industrial sector
c.Services sector
d.All of the above
Answer:
c.Services sector
Hint
In India, growth in services sector has been linked to the liberalisation and reforms of the 1990s.

Question 66.
Demographic dividend refers to a phenomenon in which:
a.Life expectancy improves and normally people begin to live longer life
b. The share of elderly persons in the total population rises
c. The proportion of working-age population rises and dominates the age-composition
d.The proportion of children in the total population rises.
Answer:
a.Life expectancy improves and normally people begin to live a longer life
Hint
Demographic dividend refers to a period usually 20 to 30 years when fertility rates fall due to significant reductions in child and infant mortality rates. As women and families realize that fewer children will die during infancy or childhood, they will begin to have fewer children to reach their desired number of offspring, further reducing the proportion of non-productive dependents. This fall is often accompanied by an extension in average life expectancy that increases the portion of the population that is in the working age group.

Question 67.
Which one of the following is the regulating authority for governing the Insurance companies in India?
a.TRAI
b.IRDA
c.PFRDA
d.SEBI
Answer:
c.PFRDA

Question 68.
In terms of contribution made to the GDP, the predominant sector in the Indian economy is –
a.Agricultural sector
b.Manufacturing sector
c.Industrial sector
d.Service sector
Answer:
d.Service sector
Hint
In India, growth in the services sector has been linked to the liberalization and reforms of the 1990s. Service Sector-of Indian Economy contributes to around 55 percent of India’s GDP during 2006-07. This sector plays a leading role in the economy of India.

Question 69.
A good measure of economic welfare in an economy is
a.An increase in normal GDP
b.An increase in real GDP
c.An increase in real per capita income
d.An increase in the supply of money and ATM cards
Answer:
c.An increase in real per capita income
Hint
Economic welfare is the level of prosperity and standard of living of either an individual dr a group of persons. Economic welfare is usually measured in terms of Real Income, real GDP.

Question 70.
Demographic dividend accrues to an economy due to a change in
a.Density of population
b.Sex composition of the population
c.Age composition of the population
d.Rural-urban distribution of population
Answer:
c.Age composition of the population
Hint
Demographic dividend refers to a period usually 20 to 30 years when fertility rates fall due to significant reductions in child and infant mortality rates. As women and families realize that fewer children will die during infancy or childhood, they will begin to have fewer children to reach their desired number of offspring, further reducing the proportion of non-productive dependents. This fall is often accompanied by an extension in average life expectancy that increases the portion of the population that is in the working age-group

Question 71.
The current account deficit of a country measures the excess of –
a.Monetary value of exports of merchandise over the monetary value of imports of merchandise
b.Monetary value of imports of goods over the monetary value of exports of goods during a year
c.Monetary value of imports of goods and services over the monetary value of exports of goods and services
d.Receipts of foreign capital over the withdrawal of foreign capital.
Answer:
b.Monetary value of imports of goods over the monetary value of exports of goods during a year
Hint
Current Account Deficit is a measurement of a country’s trade in which the value of goods and services it imports exceeds the value of goods and services it exports.

Question 72.
A distinguishing feature of unemployment in India is largely the presence of-
a.Disguised unemployment
b.Seasonal unemployment
c.Technological unemployment
d.Cyclical unemployment
Answer:
a.Disguised unemployment
Hint
In India, unemployment is in the form of underemployment, disguised unemployment in rural areas, and unemployment amongst the educated youth.

Question 73.
Which of the following is the regulator for the telecommunication sector in India?
a. TRAI
b. RBI
c. IRDA
d. PFRDA
Answer:
a. TRAI
Hint
The Telecom Regulatory Authority of India (TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.

Question 74.
Arrange the following poverty alleviation programs in the ascending order of the year of launch/implementation:
(I) Employment Assurance Scheme
(II) Prime Minister Rozgar Yojana (PMRY)
(III) Swaran Jayanti Rozgar Yojana
(IV) Jawahar Gram Sarpridhi Yojana
Correct option is
a. (a) (I), (II), (III), (IV)
b. (Ml), (IV), (I), (II)
c. (b) (II), (I), (III), (IV)
d. (IV), (III), (II), (I)
Answer:
b. (Ml), (IV), (I), (II)
Hint
Poverty alleviation has been one of the guiding principles of the planning process in India. Various programs started are

  1. Integrated Rural Development Programme/Swarnajayanti Gram Swarozgar Yojana
  2. National rural employment program
  3. Jawahar Rozgar Yojna -It was introduced in 1989-90
  4. Training of Rural Youth for Self-Employment (TRYSEM)
  5. Desert Development Programme- In 1977-78.
  6. Minimum Needs Programme
  7. Employment guarantee scheme -1994
  8. Prime Minister Rojgar Yojna-This yojna was implemented in 1993
  9. Prime Minister’s Integrated Urban Eradication Programme (PMIUPEP)
  10. Swaran Jayanti Rozgar Yojna -It began in 1997
  11. Jawahar Gram Samiridhi Yojna -1999

Question 75.
TRAI was established in-
a.1997
b.1999
c.1970-7-1
d.1stApril,1999
Answer:
a.1997
Hint
The Telecom Regulatory Authority of India (TRAI) was established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.

Question 76.
Which is the world’s most populous country?
a.India
b.China
c.Sri Lanka
d.USA
Answer:
b.China
Hint
India is projected to be the world’s most populous country by 2025, surpassing China. The demographics of India are inclusive of the second-most populous country in the world, with over 1.21 billion people (2011 census), more than a sixth of the world’s population. Presently China is the most populous country.

Question 77.
Disguised unemployment is found in which sector?
a.Telecommunication
b.Industrial
c.Agricultural
d.All of the above Questions from December 2014
Answer:
c.Agricultural
Hint
In India, unemployment is in the form of underemployment, disguised unemployment in rural areas and unemployment amongst the educated youth.

Question 78.
How was Telecom Regulatory Authority of India (TRAI) established?
a.By a resolution of Government of India
b.By Constitution of India
c.By an Act of Parliament
d.By Partnership Act
Answer:
c.By an Act of Parliament
Hint
The Telecom Regulatory Authority of India (TRAI) was established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services.

Question 79.
Unemployment means that:
a.People are not willing to work at the going wage rate.
b.There are some people who will not work at the going wage rate
c.At the going wage rate, there are people who want to work but cannot find work
d.There is excess demand in the labour market
Answer:
c.At the going wage rate, there are people who want to work but cannot find work
Hint
Unemployment is the state of an individual looking for a paying job but not having one. Unemployment does not include full-time students, the retired, children.

Question 80.
Which of the following means Relative Poverty?
a.The number of people living below a certain income threshold
b.The number of households unable to afford certain basic goods and services
c.The extend to which a household financial resources falls below an average income threshold for the economy
d.People given poverty certificates by government.
Answer:
c.The extend to which a household financial resources falls below an average income threshold for the economy
Hint
Relative poverty is the condition in which people lack the minimum amount of income needed in order to maintain the average standard of living in the society in which they live. When there is a large gap between the income amongst people then the poverty is termed as relative poverty . Relative poverty shows unequal distribution of wealth.

Question 81.
Unemployment in which some workers are temporarily out of work while changing their job is called:
a.Seasonal unemployment
b.Cyclical unemployment
c.Frictional unemployment
d.Voluntary unemployment
Answer:
c.Frictional unemployment
Hint
Frictional unemployment is the time period between jobs when a worker is searching for or transitioning from one job to another.

Question 82.
Before the establishment of TRAI, which of the following was responsible for the fixation of tariff for telecom?
a.State Government
b.Central Government
c.BSNL
d.Companies themselves
Answer:
b.Central Government
Hint
The Telecom Regulatory Authority of India (TRAI) was, thus, established with effect from 20th February 1997 by an Act of Parliament, called the Telecom Regulatory Authority of India Act, 1997, to regulate telecom services, including fixation/revision of tariffs for telecom services which were earlier vested in the Central Government.

CS Foundation Business Economics Notes

Nature and Scope of Economics – CS Foundation Economics Notes

Nature and Scope of Economics – CS Foundation Economics Notes

Economics is the social science studying the production, distribution, and consumption of goods and services. Economics is derived from the Greek word ‘oikonomikos’ which can be divided into two parts

Oikos – which means house
Nomos – which means management

At its most basic, however, economics considers how a society provides for its needs. Its most basic need is survival; which requires food, clothing, and shelter. For every society, it is required that its affairs are managed efficiently and for this, a person is required who can deal with these affairs. Here comes the requirement of an economist. Economists are the people who try to find out the way in which the wants of the people can be satisfied. The job of the economist is very difficult as he has to find out a way to satisfy the wants of people from the limited resources available to mankind.

Economics may appear to be the study of complicated tables and charts, statistics and numbers, but, more specifically, it is the study of what constitutes rational human behavior in the endeavor to fulfill needs and wants. Economics can also be defined as house management. The role of economists revolves around wants scarcity of resources and satisfaction of wants with the help of limited resources. Challenges for economists are

  • Study the ways to tackle unlimited wants of society
  • Resources in a society are always limited
  • Wants are always increasing and are more than resources
  • Alternate systems are required to allocate these resources between all the wants

As an individual, for example, you face the problem of having only limited resources with which to fulfill your wants and needs, as a result; you must make certain choices with your money. You’ll probably spend part of your money on rent, electricity, and food. Then you might use the rest to go to the movies and/or buy a new pair of jeans.

Economists are interested in the choices you make, and inquire into why, for instance, you might choose to spend your money on a new DVD player instead of replacing your old TV. They would want to know whether you would still buy a carton of cigarettes if prices increased by Rs. 2 per pack. The underlying essence of economics is trying to understand how both individuals and nations behave in response to certain material constraints.

Economics is pervasive in nature. It is used both for academics as well as for the formulation of policies by all sections of society. The reasons for use of economics for a business entity are multiple, some of them are

  • To earn profit
  • To grow in adverse conditions
  • Maximize control over the market
  • To increase their wealth
  • To survive when the market is not good
  • To become economically strong

Economics is scientific as it seeks to explain events that take place in the real world by way of observation, hypothesis, prediction, experimentation, and conclusion. The focus of economics is on human behavior makes it a social science

1. Study of Economics
Economics is a driving force of human interaction, thus studying economics helps us to understand why people and government are behaving in a particular way. People who study economics are called economists. These are the people who help in the rational use of resources. As we know wants are ever-changing and ever-increasing but resources but the resources to satisfy the wants of people, industry, and country are limited. Thus economists have to come out with plans ‘ so that these resources can be used in a way to get maximum benefit.

Economics is concerned with the production & consumption of resources in the most beneficial way In way economics can be said as a study of making choices. To understand it better we have to understand what are our resources. Resources can be anything raw material, any goods, and services, etc. Economics for an individual needs to decide between his needs like owning a car is more beneficial or owning a house out of his limited cash resources. Similarly, the company has to decide whether the production of product ‘A’ is more beneficial or product ‘B’. Similarly country has to decide whether giving tax benefits is more beneficial or giving infrastructure. A priority of the satisfaction of want is the most important work of economists.

Thus the economic system is made of two parts

Economic wants – Economic wants are ever-increasing wants. They include the consumption of goods and services.
Noneconomic wants – these are wants that are not related to the consumption of goods and services
eg. Economic want would be a home to live in while a non-economic want will be a happy living (peace of mind).

2. Definitions of Economics
Several definitions of Economics have been given. For the sake of convenience let us classify the various definitions into four groups:

  1. Science of wealth
  2. Science of material well-being
  3. Science of choice making
  4. Science of dynamic growth and development We shall examine each one of these briefly

3. Science of wealth (Adam Smith)
Adam Smith, considered to be the founding father of modem Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth. Features of his definition of economics are:

  • His definition considered economics as the science of wealth creation.
  • His view for the economy was to look for the ways in which the maximum wealth an individual or a country can get.
  • As per him a good economy needs to be production-based and has no place for non-tangible services like health, teaching, etc.
  • The economic policy of a country is to look out for ways in which wealth can be created
  • It highlighted an important problem faced by each and every nation of the world, namely the creation of wealth
  • The book in which his concepts of definition were given is ‘An inquiry into the nature & causes of the wealth of Nations’

Merits of Adam Smith definition

  • Since the problems of poverty, unemployment, etc. can be solved to a greater extent when wealth is produced and is distributed equitably which justifies the definition addresses the problems of economic growth and increase in the production of wealth.
  • can be considered as the first step towards the healthy economics

Demerits of Adam Smith’s definition

  • no emphasis on distribution of income amongst masses
  • ignoring the things which are incidental to the productive definition of economics such as health, education, etc.
  • Ricardo was another economist which did agree with the wealth definition but he emphasized the distribution of wealth

4. Science of material well-being (A. Marshall)
A. Marshall was the person who gave the theory emphasizing the material welfare of man. Characteristic features of his theory are

  • Economics is a study of mankind in the ordinary business of life
  • Basic principle was the creation of wealth and use of wealth
  • It examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of well-being
  • it is on one side a study of wealth and on the other and more important side a part of the study of the man
  • man gets precedence over wealth
  • He wrote the book “ Principles of Economy” which tells about his way of defining economics.

Merits of A. Marshall theory

  • His definition is better as compared to Adam Smith
  • In his definition importance is given to human life and society
  • He stresses individual and social welfare
  • Also discusses the unequal distribution of wealth

Demerits

  • It is not possible to define welfare
  • Nonmaterial services were ignored
  • Restricted the scope and subject matter of economics
  • There is no unanimity about the concept of welfare
  • Human welfare talked was related to material goods and services and not the political and social aspects of life.

“The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly
into relation with the measuring rod of money” by A.C. Pigou. His definition involved only welfare in contrast to A. Marshall which involved welfare as well as wealth creation. The book written by A.C. Pigou is “ The economics of welfare” which tells about his way of defining economics.

5. Science of choice-making – L. Robbins
Economics is the definition of scarcity as per L. Robbins. According to Robbins, “Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses”.
He wrote a book “ An essay on the nature and significance of economic science” which tells about his way of defining economics.

6. Characteristics of his definition

  • Emphasized points like scarcity of resources
  • Human wants are unlimited
  • Limited means to satisfy human wants
  • Alternative uses of scarce resources
  • Need for choice and optimization
  • Efficient use of scarce resources.
  • As per him, the role of economists is to investigate how the economy is trying to solve the problem of scarcity and report it.
  • Economist job is to study economics to see what is and not what it should be

Merits

  • Stressed on points like scarcity of resources, unlimited wants and different alternatives to be chosen for a resource
  • His theory gave away that for the satisfaction of wants there are various alternative ways to choose.
  • It is more realistic and practical.
  • the definition clearly identifies the existence of the economic problem in a most comprehensive manner.
  • Robbins brings into focus not only goods but also services required to satisfy human wants.

Demerits

  • Lacked the utilization of knowledge that an economist has. As per critics economists, knowledge is to be used for the betterment of the nation and not to sit and act just like an investigator
  • No importance has been given to services like education, law, etc. Which can not be provided by the market instead it is to be provided by authorities.
  • Made economics a pure science
  • Described economics only as a valuation theory
  • It ignores the macro aspect of economics

7. Science of dynamic growth and development (Paul Samuelson)
Economics is concerned with determining the pattern of employment of scarce resources to produce commodities over time. Thus, the dynamic problems of production have been brought within the purview of Economics. His definition was more inclusive definition.
Characteristic features

  • A large number of modem economists subscribe to this broad definition of Economics.
  • the modern definition of Economics is the most comprehensive of all the definitions
  • All the issues that were highlighted in the earlier definitions are included here
  • In addition, the issues of development of a backward economy, as well as those of growth in a mature capitalist economy, form part of this definition
  • Economics, as it stands today, is built on the basis of this comprehensive definition.

Merits

  • As per his definition economics is the study of the scarcity of resources and giving an efficient use to those resources.
  • This definition is practical in nature.
  • His definition is complete and advance.
  • Distribution of resources is to be done for economic development
  • Economics is a systematic use of resources
  • It recognizes the dynamic changes taking place, both in the means (resources) and ends (wants) with the passage of time.
  • His definition is growth-oriented
  • Economics analyses the costs and benefits of improving the pattern of resource allocation.

Economics -As science and as an art:
Often a question arises – whether Economics is a science or an art or both. Economics can be treated as science as it can be measured in monetary terms and has a separate way of studying it, it can forecast but still, it can not be truly considered as science because the results vary upon the economist who is analyzing it. Thus the study of economics is dependent on the thoughts of an economist who is studying it. For one subject of economics, the results vary as per each economist thus it can not be science because science gives the same result irrespective of the person who is studying it.

8. Economics is a science
Science is the systematized body of knowledge that creates a relationship between causes and their effects. In other words, every discipline has got certain theories, concepts,s, and laws showing the relationship between causes and their effects in science. Economics has got its own theories, concepts, and laws, so it is definitely a science though not an exact science, like Physics and Chemistry.
If we analyze Economics, we find that it has all the features of science.

  • studies the relationship between cause and effect.
  • It is capable of measurement.
  • It has its own methodological apparatus.
  • It should have the ability to forecast

9. Classification of science
A.Positive Science
B.Normative science
A.Positive science – It presents the real picture of facts without any comments and suggestions. Economics also deals with positive issues, so it is a positive science. By positive science, we mean that economics is concerned with the satisfaction of unlimited wants from limited resources. A community may use its limited resources for making guns rather than butter, but it is no concern of the economists to condemn or appreciate this policy. Professor Robbins emphasized the positive aspects of science but Marshall and Pigou have considered the ethical aspects of science which obviously are normative.

B.Normative Science – Normative science is concerned with human values. It is prescriptive in nature and described ‘what should be the things’. It promotes social and economic values. Economics is also normative science because it suggests ways and measures to be adopted for the economic betterment of the people. For example, the questions like what should be the level of national income, what should be the wage rate, – all fall within the scope of normative science.

10. Economics as an Art
Art is nothing but the practice of knowledge, economics is very complex, there are no easy overarching explanations like E=MC2. Science gives theories but linking theory to the real world is always going to be a very subjective experience. It depends on which sets of data you use, it depends on which assumptions to make, it depends on who makes the assumption. Unlike science which is theoretical, art is practical.

11. Major branches of economics
Economic analysis is concerned with how an economy works, the formulation of economic laws, the methods of economic inquiry, and the different approaches to economics. Economic theory, as it stands today, has several branches.

1. Microeconomics
“Micro” is derived from the Greek word “Mikros” meaning small. It is also described as price and value theory. This part of economics is concerned with individuals like one individual, one firm, etc. Micro-Economics is concerned with

  1. Product pricing;
  2. Consumer behavior
  3. Factor pricing;
  4. Economic conditions of a section of the people;
  5. Study of firms; and
  6. Location of an industry.

2. Macroeconomics
“Macro is derived from the Greek word “Makros” meaning large. Macroeconomics is that branch of economics that is concerned with the economic magnitudes relating to the economic system as a whole, rather than to the microeconomic units like individuals or firms. It is also called aggregate economics as it is the study of all the units together. It is more realistic.
Macroeconomics is concerned with

  1. National income and output;
  2. price level;
  3. Balance of trade and payments;
  4. The external value of money;
  5. Saving and investment;
  6. Government policy
  7. Employment and economic growth

3. International economics – International trade between countries has introduced one more branch of economics which deals with the trades between countries. International economics is the field of study that deals with trade between countries. Some of the topics considered in the field of international economics are differences in taxes, exchange rates, the role of regulations in different countries, etc.

4. Public Finance – It is also known as fiscal economics as it deals with the role of government in economics. It has ruled out the concept of laissez-faire (no role of Government in economy). It outcasts the earlier theories which overruled the role of government in economics.

5. Health economics- for human development it has been realized that health also plays an important role. Moreover, education economics is also emerging up.

6. Development economics – After Second World War many countries got freedom from colonial rule and a new field of economics emerged known as development economics.

7. Environmental Economics – Awareness regarding nature and its effect on mankind has emerged one major branch of economics called environmental economics. It is been found that environmental economics is required for sustainable development.

8. Urban and Rural economics – The role of location is very much important for economics. Urban economics is broadly the economic study of urban areas; as such, it involves using the tools of economics to analyze urban issues such as crime, education, etc. Rural economies is the study of rural economies such as farm and nonfarm industry, etc.

9. Managerial economics – It answers the five fundamental problems of decision-making. These problems are:

  • what should be the product mix
  • which is the least cost production technique and input mix
  • what should be the level of output and price of the product
  • how to take investment decisions.
  • how much should be the selling cost

12. Economic Problem
The main economic problems faced by every society are:

  1. Unlimited human wants,
  2. Limited availability of resources to satisfy those wants, and
  3. Fulfillment of unlimited wants with limited resources.

The first thing to be thought about is what to produce which means limited resources are to be given a route. It is to be decided out of these limited resources which unlimited want can be satisfied. The second thing is how to produce? Thus the product produced from this limited resource has to be cost-effective which means the cost of production is to be minimum but production has to be maximum. Now for this, we have to decide about the procedure which is most cost-effective.
The third thing is for whom we want to produce?
To answer these three things Samuelson used the production possibility curve. A production possibility curve tells what to produce in the most beneficial way.

13. Production Possibility Curve Features of PPC are

  • The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one to the production of the other.
  • The curve is used to describe a society’s choice between two different goods.
  • A production possibilities curve (PPC) represents the boundary or frontier of the economy’s production capabilities, hence it is also frequently termed a production possibilities frontier (PPF).
  • Asa frontier, it is the maximum production possible given existing (fixed) resources and technology.
  • Producing on the curve means resources are fully employed while producing inside the curve means resources are unemployed.
  • The law of increasing opportunity cost is what gives the curve its distinctive convex shape.
    Important things to notice about the definition of the production possibility curve are:
  • It indicates all possible combinations of the production of two goods or services.
  • It is assumed that all the resources of a society are used fully and efficiently.

Nature and Scope of Economics – CS Foundation Economics Notes Chapter 1 img 1

In the above picture, there is a PPC of two products butter and gun. Anything inside the curve that points to A indicates inefficient production while C which lies outside the graph shows that reaching this point is impossible.

Line on which point B lies in the production possibility curve so various combinations of production between butter and guns lie on this line.

Thus if we move little up from point B than more of guns will be produced and less butter from the available resources and if we move below point B than more butter and less guns will be produced Thus it is to be decided that which item is needed more because resources are limited. This is being described as opportunity cost. Opportunity cost is the value of what is foregone in order to have something else. This value is unique for each individual. You may, for instance, forgo guns in order to have extra butter. A higher production curve can be achieved with the improvement of technology from the same resources.

14. Different types of Economic System
The type of economic system present in the system is

  1. Capitalist Economy
  2. Socialist Economy
  3. Mixed Economy

1.Capitalist Economy – This economic system emphasizes the freedom of individuals as consumers and suppliers of resources, and allows market forces to determine the allocation of scarce resources through the mechanism called price. Features of such economy are

  • It is Based on market demand and supply, consumers are free to buy goods and services of their choice and
  • producers allocate their resources based on the demand.
  • Price plays an important role
  • Whole of the economy is in the hands of private enterprises
  • Role of Government is negligible
  • It is theoretical type of economic system cause there are certain fields where involvement of Government is must like defence, health etc.
  • Consumers choose the products they want and producers allocate their available resources to that product based on the demand for different products.
  • Even if the economy is capitalist some part of it is still in the hands of the Government
  • Unequal distribution of money
  • Monopolistic competitive
  • Policy of Laissez faire
  • More rewarding for right decisions and hard work
  • No place for human values
  • Because of competition, national resources are wasted as only profitable products are produced
  • Faster growth because of competitiveness
  • 2.Socialist Economy – In such kind of economy whole market is in the hands of Government and co-operatives. Socialism emphasizes equality rather than achievement, and values workers by the amount of time they put in rather than by the amount of value they produce. It also makes individuals dependent on the state for everything from food to health care. Characteristic features are
  • Removes the inequalities
  • socialism is based on bureaucratic central planning and collective ownership.
  • Socialism believes that it provides economic security
  • No competition as consumers have to choose from what has been produced
  • Not a consumer-driven economy.
  • Thus, all decisions, from the allocation of resources to the distribution of end products are taken care of by the government.
  • There is no place for private ownership
  • It is a classless society as no property is owned by private individuals
  • It eliminates the fluctuations of the economy
  • Slow growth as no competition
  • In this type of systems, efficient can be achieved only when demand are accurately estimated and resources allocated accordingly.
  • No incentives for hard work

3.Mixed economy – Mixed economy has features of both socialism as well as capitalism but there is no fixed proportion of capitalism and socialism. Mixed economies as an economic ideal are supported by people of various political persuasions. Characteristic features are

  • A mixed economy uses cost-benefit analysis to answer the fundamental questions discussed earlier – what, how, and for whom to produce.
  • The economic freedom side includes privately-owned industry for reasons including individual freedom, economic efficiency and the incentive to innovate provided by competition. The government regulation side addresses concerns that the private sector cannot be (or at least has never yet been) well equipped to address, such as environmental protection, maintenance of employment standards, etc.
  • here, government controls the price fluctuations to achieve certain objectives such as a high level of Employment and Low level of Inflation.
  • India practices mixed economy system.
  • In this system market mechanism is not totally abolished.
  • the success of the system depends on the knowledge, expectation, and application of government authorities.
  • A mixed economy is a mixture of freedom and control with no principle rules or theories to define it
  • In some areas of a mixed economy, the government may even have a monopoly.
  • Most of the developed countries of the world have a mixed economy.
  • The mixture of two different economic philosophies can imply a variety of consequences for a country, some of which are seen as beneficial, while others are neutral or detrimental.
  • Mixed economies are also known as dual economies.

15. Economic cycles
The natural fluctuation of the economy between periods of expansion (growth) and contraction (recession) is economic cycle Features of economic cycles are

  • Factors such as gross domestic product (GDP), interest rates, levels of employment and consumer spending can help to determine the current stage of the economic cycle.

16. Economic boom
In this demand for goods and services, both are increasing. Features of the Economic boom are

  • The period is marked by productivity increases, sales increases, wage increases and rising demand.
  • An economic boom may be accompanied by a period of inflation.
  • In the stock market, booms are associated with bull markets, Booms are generally followed by bust. The reason being the growth that takes place in a boom is rarely maintained and backed up by actual company profits

17. Economic slowdown
A situation in which GDP growth slows but does not decline. Features of an economic slowdown are

  • Output is still rising while demand has declined For example, if GDP goes from 5% growth to 3% growth, an economy is experiencing a slowdown. Most analysts do not consider a slowdown to be a recession, but unemployment may rise and productivity may. decline.

18. Economic recession
In economics, a recession is a business cycle contraction, a general slowdown in economic activity.
Feature is

  • There is a fall in output as well as demand
  • GDP, employment, investment spending, capacity utilization, household income, business profits, and inflation fall, while bankruptcies and the unemployment rate rise.

Nature and Scope of Economics MCQ Questions

Question 1.
a.To understand society economic description
b.To understand global affairs
c.To be an informed voter
d.All of the above
Answer:
d.All of the above

Question 2.
The word “oikes” means
a.Management
b.House
c.Economics
d.Demand
Answer:
b.House

Question 3.
The need for economics arises as
a.We all comprise a society
b.The resources are limited
c.It is the management of the house
d.None of the above
Answer:
b.The resources are limited

Question 4.
Capitalism, socialism is
a. Study of economics
b.Economic decisions
c.Alternate forms of an economy
d.Economic decisions
Answer:
a. Study of economics

Question 5.
A sharp fall in business profits is
a.Economic inflation
b.Economic slowdown
c.Economic recession
d.All of the above
Answer:
c.Economic recession

Question 6.
Study of economics does not include
a.Interrelationshipbetweendifferent economics
b.Alternate form of economy
c. Study of mixed economy
d.None of the above
Answer:
d.None of the above

Question 7.
It is not Uncommon in a socialist economy that
a.Private property is abolished
b.Economic activities are guided by market forces
c.There is the absence of state intervention
d.People acquire a motive for earning
Answer:
c.There is the absence of state intervention

Question 8.
A politician proposes reducing business taxes, a move she says will encourage risk-taking entrepreneurship. This proposed out in business taxes is intended to dilute the economy mainly through
a.an increase in aggregate supply
b.a decrease in aggregate supply.
c.a decrease in aggregate demand.
d.an increase in aggregate demand.
Answer:
a.an increase in aggregate supply

Question 9.
When you judge economic decisions as per your own values, which category of economics would you be applying?
a.Political economics
b.Normative economics
c.Economics theory
d.Positive economics
Answer:
b.Normative economics

Question 10.
This is not the benefit of Robbins style of economic description
a.Problem can be found at any place
b.It is the study of human behavior
c.More logical explanation of the economic problem
d.Concentrates more on the ordinary life of man
Answer:
d.Concentrates more on the ordinary life of man

Question 11.
If an the economy is operating at a point inside the production possibilities curve,
a.its resources are being wasted
b.the curve will begin to shift inward
c.the curve will begin to shift outward
d.this is a trick question because an economy cannot produce at a point inside the curve.
Answer:
a.its resources are being wasted

Question 12.
If a new motorway is built near to a company, thus reducing its costs, this is an example of:
a.financial economies of scale
b.managerial economies of scale
c.technical economies of scale
d.external economies of scale
Answer:
d.external economies of scale

Question 13.
It can be called technical economies of scale. Select out
a. Financial economies of scale.
b.Engineers rule.
c.Administrative economies of scale
d.External economies of scale
Answer:
b.Engineers rule.

Question 14.
Samuelson’s definition of economics takes care of _________
a.Scarcity
b.Efficiency
c.Economic science
d.Both a & b
Answer:
d.Both a & b

Question 15.
The principle that has to do with the growth of the firm is known as:
a.Returns of scale
b.internal economies and diseconomies of scale
c.external economies and diseconomies of scale
d Both A and B are correct
Answer:
b.internal economies and diseconomies of scale

Question 16.
The size of firms may be measured by:
a.The number of employees
b.the value of the capital owned by the firm
c.The value of the output of the firm
d.A, B, and C are all correct.
Answer:
c.The value of the output of the firm

Question 17.
It is Not Uncommon in a socialist economy
a.Private property is abolished
b.Economic activities are guided by market forces
c.No existence of classes
d.Both a & c
Answer:
d.Both a & c

Question 18.
The main sources of internal economies of scale are:
a.plant economies and industry economies
b.firm economies and industry economies
c.plant economies and firm economies
d.plant economies, firm economies, and industry economies
Answer:
b.firm economies and industry economies

Question 19.
Demerits in wealth definition of economics are
a.Wealth was taken as an end to human activities
b.Problem of income inequality was not the main concern when this theory was made
c.Economy at that time needed more production
d.None of the above
Answer:
a.Wealth was taken as an end to human activities

Question 20.
Production possibility curve is used for
a.Determining the production of the products in accordance with its resources
b.Determining the production, if technology is improved
c.Both a & b
d.None of the above
Answer:
c.Both a & b

Question 21.
A large firm is able to buy its material requirements in large quantities (bulk buying) and this enables it to obtain preferential terms in the form of bulk discounts. It is
a.marketing economies
b.financial economies
c.research and development economies
d.managerial economies
Answer:
a.marketing economies

Question 22.
It is common in a mixed economy
a.It fails to adjust itself with the changing circumstances
b.Its success depends on the experience of government
c.Market mechanism is not totally abolished
d.All of the above
Answer:
d.All of the above

Question 23.
The term Laissez – faire means
a.People acquire a motive for earning
b.Absence of state intervention
c.Economic activities are guided by market forces
d.People acquire a motive for earning
Answer:
b.Absence of state intervention

Question 24.
A firm has creditworthiness, which helps him to have funds at lower interest. This statement refers to
a.marketing economies
b.financial economies
c.research and development economies
d.managerial economies
Answer:
b.financial economies

Question 25.
What is true for economics?
a.Economics is based on noneconomic wants
b.Economic is based on human wants
c.Economics is the use of scarce resources
d.All of the above
Answer:
d.All of the above

Question 26.
a firm’s long-run average cost of production increases by 15 percent as a result of an 8 percent increase in production the firm is most likely experiencing
a.economies of scale
b.diseconomies of scale
c.constant returns to scale
d.none of the above
Answer:
b.diseconomies of scale

Question 27.
The major cause of internal diseconomies of scale is:
a.management problems
b.Diversification
c.specialization
d.any one of the above
Answer:
a.management problems

Question 28.
One country enjoys a comparative advantage over another in producing oil when
a.it has more oil than the other country
b.it can produce oil at a lower opportunity cost than the other country
c.it does not need to import oil
d.it wants to export as much oil as possible.
Answer:
b.it can produce oil at a lower opportunity cost than the other country

Question 29.
The types of economic systems are based upon
a.Per capita income
b.Scarcity of resources
c.Both a & b
d.None of the above
Answer:
c.Both a & b

Question 30.
It is Uncommon to find in a capitalist economy
a.Partial control of government
b.Economic decisions being government taken by the government
c.Inequality of wealth
d.All of the above
Answer:
b.Economic decisions being government taken by the government

Question 31.
Drought conditions create water shortages. Assuming that water consumption can be measured for each household, select the water policy below that is most likely to cause the greatest reduction in water use by urban households.
a.Give water to users with instructions to use it wisely
b.charge a flat constant fee of Rs. 50 per liter per household, irrespective of the amount of water used.
c.Raise the price of water from Rs. 2 to Rs. 50 per liter with the biggest water users (per capita) paying the highest price per liter
d.Charge Rs„ 20 per month and limit household consumption.
Answer:
c.Raise the price of water from Rs. 2 to Rs. 50 per litre with the biggest water users (per capita) paying the highest price per litre

Question 32.
The central problem for every economy is
a.Market
b.What to produce
c.Competition
d.None of the above
Answer:
b.What to produce

Question 33.
A system where private businesses make economic decisions regarding investment decisions, production decisions and distribution of output is
a.Socialistic Economy
b.Communism
c.Both a & b
d.Capitalistic economy
Answer:
b.Communism

Question 34.
Internal economies of scale occur when
a.the output increases for the industry
b.the output increase for the firm
c.the output decreases for the industry
d.none of the above
Answer:
b.the output increase for the firm

Question 35.
Diseconomies of scale are a sign that
a.the company is running at peak efficiency
b.the company can increase the level of production
c.the company should consider a reduction in production
d.the company should consider hiring more people
Answer:
c.the company should consider a reduction in production

Question 36.
A cooperative buying group is an example of
a.A factor leading to internal economies of scale
b.A factor leading to external economies of scale
c.both A and B
d.None of the above
Answer:
b.A factor leading to external economies of scale

Question 37.
Originally economics was originated as
a.Science
b.Arts
c.Political science
d.All of the above
Answer:
a.Science

Question 38.
_______ is considered as the father of modern economics
a.Bernard Shaw
b.Adam Smith
c.Marshall
d.None of the above
Answer:
b.Adam Smith

Question 39.
Adam Smith’s definition revolved around
a.Scarcity
b.Distribution of resources
c.Wealth creation
d.Both a & b
Answer:
c.Wealth creation

Question 40.
Characteristic features of a wealth-based economics definition given by Smith are
a.To look for the causes that can help in the creation of wealth
b.Accumulation of wealth is the economic development
c.Economic development should include the development of nontangible service
d.Both a & b
Answer:
d.Both a & b

Question 41.
Which of the following is an example of an external economy of scale?
a.bulk – buying;
b.administrative savings made by having only one office
c.courses relevant to your business at local colleges
d.costs fall for technical reasons as production rises
Answer:
c.courses relevant to your business at local colleges

Question 42.
If administration or communication becomes more difficult and costly in a large company, this is an example of:
a.internal economies of scale;
b.diseconomies of scale;
c.diseconomies of scale
d.increasing returns
Answer:
c.diseconomies of scale

Question 43.
If an industry is characterized by very large firms then it is likely to have
a.economies of scale and decreasing costs
b.diseconomies of scale and increasing costs
c.constant costs;
d.perfect competition;
Answer:
a.economies of scale and decreasing costs

Question 44.
Both households and societies face problems because
a.resources are scarce
b.populations may increase or decrease over time
c.wages for households and therefore society fluctuate with business cycles.
d.people by nature, tend to disagree
Answer:
a.resources are scarce

Question 45.
The branch of economics that deals with the sum total of economic activities dealing with the issues of growth, unemployment and inflation is
a.Microeconomics
b.Microeconomics study of aggregate economic behavior
c.Both a & b
d.Macroeconomics.
Answer:
c.Both a & b

Question 46.
Economics deals primarily with the concept of
a.scarcity
b.poverty
c.change
d.power
Answer:
a.scarcity

Question 47.
Households and economies have each of the following in common except both.
a.must allocate scarce resources.
b.face many decisions.
c.must allocate the goods and services they produce
d.must have a central decision-maker
Answer:
d.must have a central decision-maker

Question 48.
What do economists mean when they state that goods are scarce?
a.there is a shortage or insufficient supply of the good at the existing price.
b.it is impossible to expand the availability of the good.
c.people will want to buy more of the good regardless of price
d. the amount the good the people would like to have exceeds the supply that is freely available from nature
Answer:
d.the amount the good the people would like to have exceeds the supply that is freely available from nature

Question 49.
The basic difference between macroeconomics and microeconomics is that
a.macroeconomics looks at the aggregate markets, while microeconomics is concerned with the subcomponents.
b.macroeconomics is a concern with policy decisions, while microeconomics applies only to theory.
c.microeconomics is concerned with the aggregate markets, while macroeconomics is concerned with the components.
d.opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics.
Answer:
a.macroeconomics looks at the aggregate markets, while microeconomics is concerned with the subcomponents.

Question 50.
The economic analysis assumes that
a.for the most part, individuals act out of selfish motives, and it is realistic to assume this is always true.
b.although individuals are at times selfish and at times altruistic, only their selfish actions may be predicted.
c.people are basically humanitarian and their actions are therefore difficult to predict.
d.changes in the personal benefits and costs associated with an activity will exert a predictable influence on human behavior
Answer:
d.changes in the personal benefits and costs associated with an activity will exert a predictable influence on human behavior

Question 51.
The study of entire systems of economics is.
a.macroeconomics
b.microeconomics
c.Finance
d.All of the above
Answer:
a.macroeconomics

Question 52.
Economic theories:
a.are useless because they are not based upon laboratory experimentation.
b.that are true for individual economic units are never true for the economy as a whole
c.are generalizations based upon careful observation of facts.
d.are abstractions and therefore of no application to real situations.
Answer:
c.are generalizations based upon careful observation of facts.

Question 53.
The main field of social science of economics is
a.Microeconomics.
b.Macroeconomics.
c.Inflation.
d.None of the above.
Answer:
a.Microeconomics.

Question 54.
The production possibility frontier shows the _________ of production that can be obtained by an economy, given _________
a.minimum amounts; efficiency.
b.minimum amounts; technology and inputs to production.
c.maximum amounts; technology and inputs to production.
d.maximum amounts; efficiency
Answer:
c.maximum amounts; technology and inputs to production.

Question 55.
which of the following is most likely to benefit a debtor?
a.unanticipated deflation
b.anticipated deflation
c.unanticipated inflation
d.anticipated inflations
Answer:
b.anticipated deflation

Question 56.
which of the following is NOT included in the decisions that every society must make?
a.what goods will be produced
b.who will produce goods
c.what determines consumer preferences
d.who will consume the goods
Answer:
c.what determines consumer preferences

Question 57.
Only one statement is impeccable. Select
a.Theories involve models, and models involve variables.
b.models involve theories, and theories involve variables.
c.a theory is a model
d.none of the above
Answer:
a.Theories involve models, and models involve variables.

Question 58.
What will happen when the Reserve bank lowers the reserve requirement?
a.investors will purchase “ open market” bonds.
b.banks must hold fewer money
c.people will deposit more money
d.banks will create more money
Answer:
d.banks will create more money

Question 59.
With existing resources, the economy can be achieved to the fullest by
a.Productive efficiency
b.Allocative efficiency
c.Full employment
d.All of the above
Answer:
b.Allocative efficiency

Question 60.
GDP measures
a.expenditure on all final goods and services
b. total income of everyone in the economy
c.total value-added by all firms in the economy
d.all of the above
Answer:
d.all of the above

Question 61.
Economic choice and competitive behavior are the results of
a.basic human need.
b.poverty
c.private ownership of resources
d.scarcity
Answer:
d.scarcity

Question 62.
which one of the following states is a central element of the economic way of thinking?
a.scarce goods are priceless
b.Incentives matter if the personal cost of a choice increases, individuals will be less likely to choose it
c.the realism of the assumptions is the best test of an economic theory
d.when deciding how to allocate time, the concept of opportunity cost is meaningless.
Answer:
b.Incentives matter if the personal cost of a choice increases, individuals will be less likely to choose it

Question 63.
Adam Smith believed that if people were free to pursue their own interests, then
a. Greed and cheating would prevail in the market,
b.less would be produced than if altruism were our guiding principle.
c.they would generally be encouraged to produce goods and services that others valued highly (relative to their costs).
d.the public interest would best serve, but the interests of employers would be hurt.
Answer:
c.they would generally be encouraged to produce goods and services that others valued highly (relative to their costs).

Question 64.
“If economics was laid end to end, they would not reach a conclusion” This definition was given by
a.Adam smith
b.George Bernard Shaw
c.Marshall
d.None of the above
Answer:
b.George Bernard Shaw

Question 65.
Wants that are related to the consumption of goods and services is
a.Economic wants
b. Noneconomic wants
c.Economics
d.All of the above
Answer:
a.Economic wants

Question 66.
Economics is dynamic in nature so is its description because
a.Of the ever development of economics
b.Field of experience of the economist
c.The particular subject of economics that is being studied
d.All of the above
Answer:
d.All of the above

Question 67.
Three basic decisions must be made by all economies. What are they?
a.how much will be produced; when it will be produced; how much it will cost.
b.what the price of each goodwill be; who will produce each good; who will consume each good
c.what will be produced; who goods will be produced; for whom goods will be produced
d.how the opportunity cost principle will be applied; if and how the law of comparative advantage will be utilized; whether the production possibilities constraint will apply
Answer:
c.what will be produced; who goods will be produced; for whom goods will be produced

Question 68.
Economic profit is best defined as
a.a company’s net income as indicated by its accounting statement.
b.the difference between the price of a product and the monetary cost of the raw materials use to produce it.
c.the difference between the resources used to produce it.
d.income paid by a business to its owners.
Answer:
c.the difference between the resources used to produce it.

Question 69.
When a price floor is above the equilibrium price
a.quantity demanded will exceed quantity supplied.
b.quantity supplied will exceed quantity demanded
c.the market will be in equilibrium
d.this is a trick question because price floors generally exist below the equilibrium price.
Answer:
b.quantity supplied will exceed quantity demanded

Question 70.
A percent increase in the price of sugar reduces sugar consumption by about 5 percent. The increase causes households to
a.spend more on sugar.
b.spend less on sugar
c.spend the same amount on sugar
d.consume more goods like coffee and tea that are complements of sugar
Answer:
a.spend more on sugar.

Question 71.
When economists say the demand for a product has increased, they mean that the
a.demand curve for the product has shifted to the left.
b. price of the product has fallen, and consequently, consumers are buying more of the product.
c.cost of producing the product has increased
d.amount of the product that consumers are willing to purchase at various prices has increased.
Answer:
d.amount of the product that consumers are willing to purchase at various prices has increased.

Question 72.
There is no precise agreement regarding the set of rules for achieving goals. This was the concept given by
a.A. Marshall
b.Robbins
c.Ricardo
d.Smith
Answer:
b.Robbins

Question 73.
Which of the following are assumptions underlying the PPC?
a.Only two goods are produced
b. Technology, population, and capital are variable.
c.Prices determine the position on the PPC.
d.All the above.
Answer:
a.Only two goods are produced

Question 74.
Economics was originally developed as a science of ……………….
a.statecraft
b.business management
c.wealth management
d.resource management
Answer:
c.wealth management

Question 75.
An economy has a constant cost PPC. What do you know about the slope?
a.A straight line
b.Bowed in
c.Bowed out
d.Convex to the origin
Answer:
a.A straight line

Question 76.
The basic types of economics systems are
a.1
b.2
c.3
d.4
Answer:
c.3

Question 77.
The definition of Economics as a Science of development & growth with the twin objectives of scarcity and efficiency was given by:
a.Paul A Samuelson
b.AKSen
c.Lionel R. Robbins
d.Adam Smith
Answer:
a.Paul A Samuelson
Hint
The definition of Economics as a science of development and growth with the twin objective of scarcity and efficiency was given by Paul A Samuelson. Economics is concerned with determining the pattern of employment of scarce resources to produce commodities over time. Thus, the dynamic problems of production have been brought within the purview of Economics. His definition was more inclusive definition.

Question 78.
One of the following statements is not a positive statement
a. To check inflation, the RBI should raise the bank rate
b. Inflation has an impact on consumer price index
c. Unemployment is the major cause of widespread poverty
d. An increase in the income of the households results in a rightward shift in the demand curve.
Answer:
a.To check inflation, the RBI should raise the bank rate
Hint
To check inflation, the RBI should raise the bank rate” is not a positive science. The question is asking for a normative statement. Normative science is concerned with human values. It is prescriptive in nature and described ‘what should be the things’. It promotes social and economic values. Economics is also normative science because it suggests ways and measures to be adopted for the economic betterment of the people. For example, the questions like what should be the level of national income, what should be the wage rate, – all fair within the scope of normative science

Question 79.
Microeconomics does not study:-
a.The level of output that an individual firm produces during a period of time
b.The determination of wage rate by the automobile industry during a given period
c.The determination of causes that result in hyperinflation in an economy.
d.The determination of equilibrium output of an individual firm in a perfectly competitive market.
Answer:
c.The determination of causes that result in hyperinflation in an economy.
Hint
“Micro” is derived from the Greek word “Mikros” meaning small. lt is also described as price and value theory. This part of economics is concerned with individuals like one individual, one firm, etc. Micro-Economics is concerned with

  1. Product pricing;
  2. Consumer behavior
  3. Factor pricing
  4. Economic conditions of a section of the people;
  5. Study of firms; and
  6. Location of an industry

Thus microeconomics is not concerned with the economy in general. It is concerned only with the individual units.

Question 80.

Nature and Scope of Economics – CS Foundation Economics Notes Chapter 1 img 2

In the above figure, the point R represents-
a.The best level of output in the given situation
b. The equilibrium level of output in the given economy
c. The full utilization of resources in the economy
d. The under-utilization of resources in the economy.
Answer:
d. The under-utilization of resources in the economy.
Hint
A production possibility curve tells what to produce in the most beneficial way.
Important things to notice about the definition of the production possibility curve are:

  • It indicates all possible combinations of the production of two goods or services.
  • It is assumed that all the resources of a society are used fully and efficiently.
  • Anything inside the curve that is point R indicates inefficient production while anything which lies outside the graph shows that reaching this point is impossible.

Question 81.
Given the number of available resources in the economy as demonstrated in the figure above, if the technology to produce computer monitor improves, so that with the help of given resources more monitors can be produced, the production possibility curve ……………………
a.Will remain’ unchanged
b.Will shift to the left
c.Will shift to the right
d.Will form the intercept at point A, but the intercept at point B will shift to the right.
Answer:
d. Will form the intercept at point A, but the intercept at point B will shift to the right.
Hint
In the given picture there is a PPC of two products computer monitor and an LED.
The production possibility curve shows the various combinations of production between the computer monitor and LED lie on this line.
A higher production curve can be achieved with the improvement of technology from the same resources. Thus if the technology to produce computer monitor improves so that from the same given resources more monitors can be produced, the production possibility curve will form the intercept at point A, but the intercept at point B will shift to the right because more computers are being produced.

Question 82.
A capitalist economy is by and large
a.A closed economy
b.A free market economy
c.A centrally controlled economy
d.An economy in which a government neither collects any taxes nor incurs’ any expenditure.
Answer:
b.A free market economy
Hint
A capitalist economy is by and large a free market economy. This economic system emphasizes the freedom of individuals as consumers and suppliers of resources and allows market forces to determine the allocation of scarce resources through the mechanism called price.

Question 83.
Match the following:

Features Stage of Business Cycle
(i) Rising employment and real wages (A) Recession
(ii) Fall in the rate of growth (B) Boom
(iii) Fall in the level of real national output (C) Slowdown
(iv) Setting in of the rising trend of national outputs (D) Recovery

a.(i) (B), (ii) (C), (iii) (A), (iv) (0)
b.(i) (A), (ii) (B). (iii) (B), (iv) (0)
c.(i) (0), (ii) (C), (iii) (C). (iv) (A)
d.None of the above.
Answer:
a.(i) (B), (ii) (C), (iii) (A), (iv) (0)
Hint
Economic boom – In this demand for goods and services both are increasing.
Economic slowdown – A situation in which GDP growth slows but does not decline
Economic recession -In economics, a recession is a business cycle contraction, a general slowdown in
economic activity.
Economic recovery – It is the phase of the business cycle following a recession, during which an economy regains and exceeds peak employment and output levels achieved prior to the downturn.

Question 84.
After your Board Examination, you could have got a job that would pay you Rs. 10,000 per month. Instead, you go in for further studies spending Rs/8,000 per month on books, fees, etc. The opportunity cost of higher studies for you is
a.Rs. 8,000
b.Rs. 10,000
c.Rs. 2,000
d.Rs. 18,000
Answer:
d.Rs. 18,000
Hint
Opportunity cost is the value of what is foregone in order to have something else. The opportunity cost of higher studies for you is Rs 18,000.

Question 85.
A country discovered a huge stock of gold lying buried in the deep earth. It begins to mine out the gold and also finds a foreign buyer. Graphically, this position would be shown as
a.Downward shift of production possibility curve
b.Upward shift of production possibility curve
c.Downward movement on a given production possibility curve
d.Upward movement on a given production possibility curve.
Answer:
c.Downward movement on a given production possibility curve
Hint
A production possibility curve (PPC) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. A country discovered a huge stock of gold lying buried in the deep earth. It begins to mine out the gold and also finds a foreign buyer. Graphically this position would be shown as downward movement on a given possibility curve.

Question 86.
Macroeconomics came into the picture after the publication of the book The General Theory of Employment, Interest, and money’ which was written by
a.Alfred Marshall
b.Manmohan Singh
c.J.M. Keynes
d.Kaushik Basu
Answer:
c.J.M. Keynes
Hint
The General Theory of Employment, Interest, and Money was written by JM Keynes.

Question 87.
Match the following:

X. Growth oriented definition of Economics (i) Normative statement
Y. Government should reduce taxes to promote growth (ii) India
Z. Supply of a commodity is less than the quantity demanded at a zero price (iii) Paul Samuelson
W. Second largest populated country (iv) Scarcity

The correct option is:
a.X(iii);,Y(i); Z(iv); W(ii)
b.X(iv); Y(iii); Z(ii); W(i)
c.X(i); Y(ii); Z(iii); W(iv)
d.X(ii); Y(iii); Z(iv); W(i).
Answer:
a.X(iii);,Y(i); Z(iv); W(ii)
Hint
Normative science- It is concerned with human values. It is prescriptive in nature and described ‘what should be the things’. It promotes social and economic values. Economics is also normative science because it suggests ways and measures to be adopted for the economic betterment of the people.
India – India is a country with the second largest population in the world. China has the largest population.
Paul A Samuelson-The definition of Economics as a science of development and growth with the twin objective of scarcity and efficiency was given by Paul A Samuelson
Scarcity- Scarcity means that the supply of a commodity is less than the quantity demanded at zero price.

Question 88.
Laissez-faire refers to …………………… with no or little intervention by the government in economic activities. Which one of the following is the correct option to fill in the blank space?
a.Centrally planned economies
b.Controlled socialist economies
c.Free market economies
d.Mixed socialist economies.
Answer:
c.Free market economies
Hint
Features of the capitalist economy are

  • It is based on market demand and supply, consumers are free to buy goods and services of their choice and producers allocate their resources based on the demand.
  • Price plays an important role
  • The whole of the economy is in the hands of private enterprises
  • The role of Government is negligible
  • It is a theoretical type of economic system cause there are certain fields where the involvement of the Government is a must like defense, health, etc.
  • Consumers choose the products they want and producers allocate their available resources to that product based on the demand for different products.
  • Even if the economy is capitalist some part of it is still in the hands of the Government
  • Unequal distribution of money
  • Monopolistic competitive
  • Policy of Laissez faire
  • More rewarding for right decisions and hard work
  • No place for human values
  • Because of competition, national resources are wasted as only profitable products are produced
  • Faster growth because of competitiveness

Question 89.
Marshall’s views on the nature of economics were supported by:
a.Lionel Robbins
b.Adam Smith
c.A.C. Pigou
d.Paul Samuelson.
Answer:
c.A.C. Pigou
Hint
“The range of our inquiry becomes restricted to that part of social welfare that can be brought directly or indirectly into relation with the measuring rod of money” by A.C. Pigou. His definition involved only welfare in contrast to A. Marshall which involved welfare as well as wealth creation.
Thus, both Marshall’s and Pigou’s definitions of economics take into account the aspect of social welfare.

Question 90.
A mobile manufacturing company’s output increases due to improvements in technology. The PPC curve will
a.move inward
b.remains unchanged
c.move outward
d.none of the above
Answer:
c.move outward
Hint
A production possibility curve (PPC) shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently employed. If there was a change in technology while the other resources are the same, Output would increase, and the PPC would be pushed outwards.

Question 91.
Among the following, which of the statement is reflecting both positive and normative economics
a.If the general price level goes up, borrowers gain but lenders gain more.
b.Inflation hurts the poor more but they can find employment opportunities.
c.Inflation hurts the poor class more; therefore, the government should arrange to supply commodities at subsidized rates to this section of the society
d.If the government supplies luxurious, goods at cheaper rates, demand for such goods may fall.
Answer:
c.Inflation hurts the poor class more; therefore, the government should arrange to supply commodities at subsidized rates to this section of the society
Hint
Option a, b, d show positive economics – It presents the real picture of facts without any comments and suggestions. Economics also deals with positive issues, so it is a positive science. By positive science, we mean that economics is concerned with the satisfaction of unlimited wants from limited resources. A community may use its limited resources for making guns rather than butter, but it is no concern of the economists to condemn or appreciate this policy. Normative economics – Normative science is concerned with human values. It is prescriptive in nature and described ‘what should be the things’. It promotes social and economic values. Economics is also normative science because it suggests ways and measures to be adopted for the economic betterment of the people. Thus option c is both positive economics as well as normative economics as it tells both “what is?” Showing the real picture and “what should be?” showing the human values.

Question 92.
An economic problem arises primarily due to the scarcity of resources. Scarcity of resources is best reflected in the market supply of –
W. Wheat and rice
X. Sand at the seashore
Y.High-brand jewelry
Z.Free air.
Correct option is
a.WX
b.XZ
c.WY
d.YZ.
Answer:
c.WY
Hint
The problem of scarcity of resources arises when the resources are limited and the wants are unlimited.

Question 93.
Indian economy, at the present juncture, can be best represented as a
a.Mixed socialist economy
b.Mixed capitalist economy
c.Purely capitalist economy
d.Perfectly competitive market economy.
Answer:
a.Mixed socialist economy
Hint
A mixed economy has features of both socialism as well as capitalism but there is no fixed proportion of capitalism and socialism. India has a mixed socialist economy.

Question 94.
What is the effect of economic slowdown on the employment level?
a.Level of unemployment increases
b.Level of unemployment decreases
c.Employment opportunity is unaffected
d.None of the above
Answer:
c.Employment opportunity is unaffected
Hint
Economic slowdown A situation in which GDP growth slows but does not decline. Features of an economic slowdown are Output is still rising while demand has declined For example, if GDP goes from 5% growth to 3% growth, an economy is experiencing a slowdown. Most analysts do not consider a slowdown to be a recession, but unemployment may rise and productivity may decline.

Question 95.
Who is the writer of the book “The Economics of Welfare”?
a.Alfred Marshall
b.Lionell Robins
c.Paul A. Samuelson
d.Pigou
Answer:
d.Pigou
Hint
The book written by A.C. Pigou is “The economics of welfare” which tells about his way of defining economics.

Question 96.
In which direction PPC moves when technology improves:
a.Shift towards the right
b.Shift towards left
c.No movement
d.Shift upwards
Answer:
a.Shift towards the right
Hint
The most common reason a PPF would shift is because of a change in technology, or because of economic growth. With the change in technology, the graph will shift outwards towards the right. A higher production curve can be achieved with the improvement of technology from the same resources.

Question 97.
Consumer sovereignty is found in which type of economy?
a.Sociolistic Economy
b.Mixed Economy
c.Capitalistic Economy
d.None of these
Answer:
c.Capitalistic Economy
Hint
Capitalist Economy – This economic system emphasizes the freedom of individuals as consumers and suppliers of resources, and allows market forces to determine the allocation of scarce resources through the mechanism called price.

Question 98.
AC Pigou is related to the material welfare definition.
a.True
b.False
c.Partly True
d.Partly False
Answer:
a.True
Hint
A.C. Pigou definition involved only welfare.

Question 99.
Word ‘Oikonomikos’ is originated from which language?
a.Greek
b.Latin
c.German
d.French
Answer:
a.Greek
Hint
Economics is the social science studying the production, distribution, and consumption of goods and services. Economics is derived from the Greek word ‘oikonomikos’ which can be divided into two parts Oikos – which means house Nomos – which means management

Question 100.
“Principles of Economics” was given in which year?
a.1776
b.1890
c.1932
d.1948.
Answer:
b.1890
Hint
A.Marshall wrote the book “ Principles of Economy” which tells about his way of defining economics.

Question 101.
When national output falls down, what does it mean?
a.Economic Boom
b.Economic Slowdown
c.Economic Recession
d.Economic Recovery
Answer:
c.Economic Recession
Hint
Economic recession -In economics, a recession is a business cycle contraction, a general slowdown in economic activity.

Question 102.
Wealth definition is given by
a.Alfred Marshall
b.Paul Samuelson
c.Lionnel Robbinson
d.Adam Smith
Answer:
d.Adam Smith
Hint
Adam Smith identified wealth as welfare. Adam Smith, considered to be the founding father of modern Economics, defined Economics as the study of the nature and causes of nations’ wealth or simply as the study of wealth.

Question 103.
When any point lies outside the PPC curve it means a situation of
a.Overutilization
b.Underutilization
c.Both (a) & (b)
d.None of the above
Answer:
d.None of the above
Hint
A production possibility curve tells what to produce in the most beneficial way.
Important things to notice about the definition of the production possibility curve are:

  • It indicates all possible combinations of the production of two goods or services.
  • It is assumed that all the resources of a society are used fully and efficiently.
  • Anything inside the curve indicates inefficient production while anything which lies outside the graph shows that reaching this point is impossible.

Question 104.
If income and demand both has increased then it is an
a.Economic boom
b.Economic slowdown
c.Economic recovery
d.Economic recession
Answer:
a.Economic boom
Hint
Economic boom – In this demand for goods and services both are increasing.

Question 105.
Inequalities and income & wealth is in which type of economy?
a.Capitalist
b.Socialist
c.Mixed
d.None
Answer:
a.Capitalist
Hint
Capitalist Economy – This economic system emphasizes the freedom of individuals as consumers and suppliers of resources, and allows market forces to determine the allocation of scarce resources through the mechanism called price. Unequal distribution of money is one of the features of this economy.

Question 106.
……………………………… is the value of alternative forgone in order to have something else.
a.Opportunity Cost
b.Incremental Cost
c.Indifference Curve
d.None of these
Answer:
a.Opportunity Cost
Hint
Opportunity cost is the value of what is foregone in order to have something else.

Question 107.
According to Marshall, “wealth acted as only means to attain ends & the wealth should not be treated as an end in itself,
Here Marshall used the word end for:
a.Economic welfare concept
b.Welfare concept
c.Human welfare concept
d.Material welfare concept
Answer:
c.Human welfare concept
Hint
A.Marshall was the person who gave the theory emphasizing on the material welfare of man.

Question 108.
What is the nature of the concept of opportunity cost?
a.Subjective
b.Objective
c.Both a & b
d.Can’t say
Answer:
a.Subjective
Hint
Opportunity cost is the value of what is foregone in order to have something else. The evaluation of choices and opportunity costs is subjective.

Question 109.
Economics is considered a science because it studies the relationship between …………………………….. of
economic phenomena.
a.Price and Value
b.Cause and Effect
c.Profit and Loss
d.Export and Import
Answer:
b.Cause and Effect
Hint
If we analyze Economics, we find that it has all the features of science.

  • studies the relationship between cause and effect.
  • It is capable of measurement.
  • It has its own methodological apparatus
  • It should have the ability to forecast

Question 110.
Which of the following graph shows all the combinations of goods and services that can be produced if all of society’s resources are used efficiently?
a.Demand Supply curve
b.Production Possibility curve
c.Lorenz Curve
d.None of the above
Answer:
b.Production Possibility curve
Hint
A production possibility curve tells what to produce in the most beneficial way. The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one to the production of the other.

Question 111.
Which of the following is a characteristic of a capitalist economy?
a.Equality of wealth and income
b.Inequality of wealth and income
c.Equal opportunity of earning wealth & income
d.Can’t say
Answer:
b.Inequality of wealth and income
Hint
Features of the capitalist economy are

  • It is based on market demand and supply, consumers are free to buy goods and services of their choice and producers allocate their resources based on the demand.
  • Price plays an important role
  • The whole of the economy is in the hands of private enterprises
  • The role of the Government is negligible
  • It is a theoretical type of economic system cause there are certain fields where the involvement of the Government is a must like defense, health, etc.
  • Consumers choose the products they want and producers allocate their available resources to that product based on the demand for different products.
  • Even if the economy is capitalist some part of it is still in the hands of the Government
  • Unequal distribution of money
  • Monopolistic competitive
  • Policy of Laissez faire
  • More rewarding for right decisions and hard work
  • No place for human values
  • Because of competition, national resources are wasted as only profitable products are produced
  • Faster growth because of competitiveness

Question 112.
Who authored the famous book titled “The Economics of welfare” which was published in 1920?
a.David Ricardo
b.Alfred Marshall
c.J: B. Say
d.A.C. Pigou.
Answer:
d.A.C. Pigou.
Hint
The book written by A.C. Pigou is “ The economics of welfare” which tells about his way of defining economics.

Question 113.
In a Capitalist economy, who decides what to produce and for whom?
a.Government
b.Freely decided by Industry
c.Society
d.Can’t say
Answer:
b. Freely decided by Industry
Hint
Capitalist Economy – This economic system emphasizes the freedom of individuals as consumers and suppliers of resources, and allows market forces to determine the allocation of scarce resources through the mechanism called price.

Question 114.
Economics is considered a science because it studies the relationships between economic phenomena.
a.Cause and effect
b.Price and value
c.Profit and loss
d.Export and import
Answer:
a.Cause and effect
Hint
Economics has got its own theories, concepts, and laws, so it is definitely a science though not an exact science, like Physics and Chemistry. Economics is considered a science because it studies the relationship between cause and effect.

Question 115.
Which of the following graph shows all the combinations of goods and services that can be produced it all of the society’s resources are used efficiently:
a.Demand Supply Curve
b.Production Possibility Curve
c.Lorenz Curve
d.None of the above.
Answer:
b. Production Possibility Curve
Hint
A production possibility curve tells what to produce in the most beneficial way._The production possibility curve is a hypothetical representation of the amount of two different goods that can be obtained by shifting resources from the production of one to the production of the other.

Question 116.
In which of the following stage of the economic cycle both employment and output expand and the level of aggregate demand for goods and services is high?
a.Economic Recession
b.Economic Boom
c.Economic Recovery
d.Economic Slowdown.
Answer:
b.Economic Boom
Hint
Economic boom – In this demand for goods and services both are increasing.

CS Foundation Business Economics Notes