CA Foundation - MCQ's - 1

INDEX
MODULE 1
Chapter 1 - Nature and Scope of Business Economics 1.1 to 1.12
Chapter 2 - Theory of Demand and Supply 2.1 to 2.32
Chapter 3 - Theory of Production and Cost 3.1 to 3.20
Chapter 4 - Price Determination in Different Markets 4.1 to 4.24
Chapter 5 - Business Cycles 5.1 to 5.8
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CHAPTER 1 - NATURE
AND SCOPE OF BUSINESS
ECONOMICS
TEST YOUR KNOWLEDGE
Multiple Choice Questions

1. Economists regard decision making as important because:
(a) The resources required to satisfy our unlimited wants and needs are finite, or scarce.
(b) It is crucial to understand how we can best allocate our scarce resources to satisfy society’s
unlimited wants and needs.
(c) Resources have alternative uses.
(d) All the above.
2. Business Economics is -
(a) Abstract and applies the tools of Microeconomics.
(b) Involves practical application of economic theory in business decision making.
(c) Incorporates tools from multiple disciplines.
(d) (b) and (c) above.
3. In Economics, we use the term scarcity to mean -

(a) Absolute scarcity and lack of resources in less developed countries.
(b) Relative scarcity i.e. scarcity in relation to the wants of the society.
(c) Scarcity during times of business failure and natural calamities.
(d) Scarcity caused on account of excessive consumption by the rich.
4. What implication(s) does resource scarcity have for the satisfaction of wants?
(a) Not all wants can be satisfied.
(b) We will never be faced with the need to make choices.
(c) We must develop ways to decrease our individual wants.
(d) The discovery of new natural resources is necessary to increase our ability to satisfy wants.
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NATURE AND SCOPE OF BUSINESS ECONOMICS
5. Which of the following is a normative statement?
(a) Planned economies allocate resources via government departments.
(b) Most transitional economies have experienced problems of falling output and rising prices over
the past decade.
(c) There is a greater degree of consumer sovereignty in market economies than planned economies.
(d) Reducing inequality should be a major priority for mixed economies.
6. In every economic system, scarcity imposes limitations on

(a) households, business firms, governments, and the nation as a whole.
(b) households and business firms, but not the governments.
(c) local and state governments, but not the federal government.
(d) households and governments, but not business firms.
7. Macroeconomics is also called——— economics.

(a) applied
(b) aggregate
(c) experimental
(d) none of the above
8. An example of ‘positive’ economic analysis would be:

(a) an analysis of the relationship between the price of food and the quantity purchased.
(b) determining how much income each person should be guaranteed.
(c) determining the ‘fair’ price for food.
(d) deciding how to distribute the output of the economy.
9. A study of how increases in the corporate income tax rate will affect the national unemployment
rate is an example of -
(a) Macro-Economics.
(b) Descriptive Economics.
(c) Micro-economics.
(d) Normative economics.
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10. Which of the following does not suggest a macro approach for India?
(a) Determining the GNP of India.
(b) Finding the causes of failure of ABC Ltd.
(c) Identifying the causes of inflation in India.
(d) Analyse the causes of failure of industry in providing large scale employment
11. Ram: My corn harvest this year is poor.

Krishan: Don’t worry. Price increases will compensate for the fall in quantity supplied.
Vinod: Climate affects crop yields. Some years are bad, others are good.
Madhu: The Government ought to guarantee that our income will not fall.
In this conversation, the normative statement is made by -
(a) Ram
(b) Krishan
(c) Vinod
(d) Madhu
12. Consider the following and decide which, if any, economy is without scarcity:
(a) The pre-independent Indian economy, where most people were farmers.
(b) A mythical economy where everybody is a billionaire.
(c) Any economy where income is distributed equally among its people.
(d) None of the above.
13. Which of the following is not a subject matter of Micro-economies?

(a) The price of mangoes.
(b) The cost of producing a fire truck for the fire department of Delhi, India.
(c) The quantity of mangoes produced for the mangoes market.
(d) The national economy’s annual rate of growth.
14. The branch of economic theory that deals with the problem of allocation of resources is-
(a) Micro-Economic theory.
(b) Macro-economic theory.
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(c) Econometrics.
15. Which of the following is not the subject matter of Business Economics?
(a) Should our firm be in this business?
(b) How much should be produced and at price should be kept?
(c) How will the product be placed in the market?
(d) How should we decrease unemployment in the economy?
16. Which of the following is a normative economic statement?

(a) Unemployment rate decreases with industrialization
(b) Economics is a social science that studies human behaviour.
(c) The minimum wage should be raised to ` 200/- per day
(d) India spends a huge amount of money on national defence.
17. Which of the following would be considered a topic of study in Macroeconomics?

(a) The effect of increase in wages on the profitability of cotton industry
(b) The effect on steel prices when more steel is imported
(c) The effect of an increasing inflation rate on living standards of people in India
(d) The effect of an increase in the price of coffee on the quantity of tea consumed
18. The difference between positive and normative Economics is:

(a) Positive Economics explains the performance of the economy while normative Economics finds
out the reasons for poor performance.
(b) Positive Economics describes the facts of the economy while normative Economics involves
evaluating whether some of these are good or bad for the welfare of the people.
(c) Normative Economics describes the facts of the economy while positive Economics involves
evaluating whether some of these are good or bad for the welfare of the people.
(d) Positive Economics prescribes while normative Economics describes.
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19. Which of the following is not within the scope of Business Economics?
(a) Capital Budgeting
(b) Risk Analysis
(c) Business Cycles
(d) Accounting Standards
20. Which of the following statements is incorrect?

(a) Business economics is normative in nature.
(b) Business Economics has a close connection with statistics.
(c) Business Economist need not worry about macro variables.
(d) Business Economics is also called Managerial Economics.
21. Economic goods are considered scarce resources because they.

(a) cannot be increased in quantity.
(b) do not exist in adequate quantity to satisfy the requirements of the society.
(c) are of primary importance in satisfying social requirements.
(d) are limited to man made goods.
22. In a free market economy the allocation of resources is determined by

(a) voting done by consumers.
(b) a central planning authority.
(c) consumer preferences.
(d) the level of profits of firms.
23. A capitalist economy uses ____________________ as the principal means of allocating

resources.
(a) demand
(b) supply
(c) efficiency
(d) prices
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24. Which of the following is considered as a disadvantage of allocating resources using the
market system?
(a) Income will tend to be unevenly distributed.
(b) People do not get goods of their choice.
(c) Men of Initiative and enterprise are not rewarded.
(d) Profits will tend to be low.
25. Which of the following statements does not apply to a market economy?
(a) Firms decide whom to hire and what to produce.
(b) Firms aim at maximizing profits.
(c) Households decide which firms to work for and what to buy with their incomes.
(d) Government policies are the primary forces that guide the decisions of firms and households.
26. In a mixed economy -

(a) all economic decisions are taken by the central authority.
(b) all economic decisions are taken by private entrepreneurs.
(c) economic decisions are partly taken by the state and partly by the private entrepreneurs.
(d) none of the above.
27. The central problem in economics is that of

(a) comparing the success of command versus market economies.
(b) guaranteering that production occurs in the most efficient manner.
(c) guaranteering a minimum level of income for every citizen.
(d) allocating scarce resources in such a manner that society’s unlimited needs or wants are satisfied
in the best possible manner.
28. Capital intensive technique would get chosen in a

(a) labour surplus economy where the relative price of capital is lower.
(b) capital surplus economy where the relative price of capital is lower.
(c) developed economy where technology is better.
(d) developing economy where technology is poor.
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29. Which of the following is not one of the four central questions that the study of economics is
supposed to answer?
(a) Who produces what?
(b) When are goods produced?
(c) Who consumes what?
(d) How are goods produced?
30. Larger production of ____goods would lead to higher production in future.

(a) consumer goods
(b) capital goods
(c) agricultural goods
(d) public goods
31. The economic system in which all the means of production are owned and controlled by
private individuals for profit.
(a) Socialism
(b) Capitalism
(c) Mixed economy
(d) Communism
32. Macro Economics is the study of ________________________.

(a) all aspects of scarcity.
(b) the national economy and the global economy as a whole.
(c) big businesses.
(d) the decisions of individual businesses and people.
33. Freedom of choice is the advantage of -

(a) Socialism
(b) Capitalism
(c) Communism
(d) None of the above
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34. Exploitation and inequality are minimal under:

(a) Socialism
(b) Capitalism
(c) Mixed economy
35. Administered prices refer to:

(a) Prices determined by forces of demand and supply
(b) Prices determined by sellers in the market
(c) Prices determined by an external authority which is usually the government
36. In Economics, the central economic problem means:

(a) Output is restricted to the limited availability of resources
(b) Consumer do not have as much money as they would wish
(c) There will always be certain level of unemployment
(d) Resources are not always allocated in an optimum way
37. Scarcity definition of Economics is given by-

(a) Alfred Marshall
(b) Samuelson
(c) Robinson
(d) Adam Smith
38. The definition “Science which deals with wealth of Nation” was given by:
(a) Alfred Marshall
(b) A C Pigou
(c) Adam Smith
(d) J B Say
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39. Which of the following is not one of the features of capitalist economy?
(a) Right of private property
(b) Freedom of choice by the consumers
(c) No profit, No Loss motive
(d) Competition
40. There is need of economic study, because –

(a) The resources are limited
(b) The wants are unlimited
(c) The resources are unlimited
(d) Both a and b
41. The benefit of economic study is –

(a) It ensure that all problems will be appropriately tackled
(b) It helps in identifying problems
(c) It enable to examine a problem in its right perspective
(d) It gives exact solutions to every problem
42. The managerial economics –

(a) Is Applied Economics that fills the gap between economic theory and business practice
(b) Is just a theory concept
(c) Trains managers how to behave in recession
(d) Provides the tools which explain various concepts
43. Which of the following statements is correct?

(a) Micro economics is important for study of a particular household and a particular firm
(b) Macro economics is important for study of economic conditions of a country
(c) None of the above
(d) Both a and b
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44. Mr. Satish hired a business consultant to guide him for growth of his business. The consultant
visited his factory and suggested some changes with respect to staff appointment, loan availability
and so on. Which approach is that consultant using?
(a) Micro economics
(b) Macro economics
(c) None of the above
(d) Both a and b
45. Profit motive is a merit of

(a) Socialism
(b) Capitalism
(c) Mixed economy
46. _______ is also called as command economy

(a) Socialist
(b) Capitalist
(c) Mixed economy
47. Which of the following statements is/are correct regarding business economics?
(a) Business economics attempts to indicate how business policies are firmly rooted in economic
principles.
(b) Business economics uses micro economic analysis of the business unit and macro economic
analysis of business environment.
(c) Business economics takes a pragmatic approach towards facilitating an integration between
economic theory and business practices.
(d) All the above.
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48. Unlimited ends and limited means together present the problem of ________________.
(a) Scarcity of resources
(b) Choice
(c) Distribution
ANSWERS
1. (d) 2. (d) 3. (b) 4. (a) 5. (d) 6. (a) 7. (b) 8. (a) 9. (a) 10. (b) 11. (d) 12. (d)
13. (d) 14. (a) 15. (d) 16. (c) 17. (c) 18. (b) 19. (d) 20. (c) 21. (b) 22. (c) 23. (d) 24. (a)
25. (d) 26. (c) 27. (d) 28. (b) 29. (b) 30. (b) 31. (b) 32. (b) 33. (b) 34. (a) 35. (c) 36. (a)
37. (c) 38. (c) 39. (c) 40. (d) 41. (c) 42. (a) 43. (d) 44. (a) 45. (b) 46. (a) 47. (d) 48. (b)
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CHAPTER 2 - THEORY OF
DEMAND AND SUPPLY
TEST YOUR KNOWLEDGE

1. Demand for a commodity refers to:
(a) desire backed by ability to pay for the commodity.
(b) need for the commodity and willingness to pay for it
(c) the quantity demanded of that commodity at a certain price.
(d) the quantity of the commodity demanded at a certain price during any particular period of time.
2. Contraction of demand is the result of :

(a) decrease in the number of consumers.
(b) increase in the price of the good concerned.
(c) increase in the prices of other goods.
(d) decrease in the income of purchasers.
3. All but one of the following are assumed to remain the same while drawing an individual’s
demand curve for a commodity. Which one is it?
(a) The preference of the individual.
(b) His monetary income.
(c) Price of the commodity
(d) Price of related goods.
4. Which of the following pairs of goods is an example of substitutes?

(a) Tea and sugar.
(b) Tea and coffee.
(c) Pen and ink.
(d) Shirt and trousers.
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THEORY OF DEMAND AND SUPPLY
5. In the case of a straight line demand curve meeting the two axes, the price-elasticity of demand
at the mid-point of the line would be:
(a) 0
(b) 1
(c) 1.5
(d) 2
6. The Law of Demand, assuming other things to remain constant, establishes the relationship
between:
(a) income of the consumer and the quantity of a good demanded by him.
(b) price of a good and the quantity demanded.
(c) price of a good and the demand for its substitute.
(d) quantity demanded of a good and the relative prices of its complementary goods.
7. Identify the factor which generally keeps the price-elasticity of demand for a good low:
(a) Variety of uses for that good.
(b) Very low price of a commodity
(c) Close substitutes for that good.
(d) High proportion of the consumer’s income spent on it.
8. Identify the coefficient of price-elasticity of demand when the percentage increase in the
quantity of a good demanded is smaller than the percentage fall in its price:
(a) Equal to one.
(b) Greater than one.
(c) Less than one.
(d) Zero.
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9. In the case of an inferior good, the income elasticity of demand is:
(a) positive.
(b) Zero.
(c) Negative.
(d) infinite.
10. If the demand for a good is inelastic, an increase in its price will cause the total expenditure
of the consumers of the good to:
(a) Remain the same.
(b) Increase.
(c) Decrease.
(d) Any of these.
11. If regardless of changes in its price, the quantity demanded of a good remains unchanged,
then the demand curve for the good will be:
(a) horizontal.
(b) Vertical.
(c) positively sloped.
(d) negatively sloped.
12. Suppose the price of Pepsi increases, we will expect the demand curve of Coca Cola to:
(a) Shift towards left since these are substitutes
(b) Shift towards right since these are substitutes
(c) Remain at the same level
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13. All of the following are determinants of demand except:

(a) Tastes and preferences.
(b) Quantity supplied.
(c) Income of the consumer
(d) Price of related goods.
14. A movement along the demand curve for soft drinks is best described as:
(a) An increase in demand.
(b) A decrease in demand.
(c) A change in quantity demanded.
(d) A change in demand.
15. If the price of Pepsi decreases relative to the price of Coke and 7-UP, the demand for:
(a) Coke will decrease.
(b) 7-Up will decrease.
(c) Coke and 7-UP will increase.
(d) Coke and 7-Up will decrease.
16. If a good is a luxury, its income elasticity of demand is:

(a) Positive and less than 1.
(b) Negative but greater than -1.
(c) Positive and greater than 1.
(d) Zero.
17. The price of hot dogs increases by 22% and the quantity of hot dogs demanded falls by 25%.
This indicates that demand for hot dogs is:
(a) Elastic.
(b) Inelastic.
(c) Unitarily elastic.
(d) Perfectly elastic.
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18. If the quantity demanded of mutton increases by 5% when the price of chicken increases by
20%, the cross-price elasticity of demand between mutton and chicken is
(a) -0.25
(b) 0.25
(c) -4
(d) 4
19. Given the following four possibilities, which one results in an increase in total consumer
expenditure?
(a) Demand is unitary elastic and price falls.
(b) Demand is elastic and price rises.
(c) Demand is inelastic and price falls.
(d) Demand is inelastic and prices rises.
20. Which of the following statements about price elasticity of supply is correct?
(a) Price elasticity of supply is a measure of how much the quantity supplied of a good responds to a
change in the price of that good
(b) Price elasticity of supply is computed as the percentage change in quantity supplied divided by
the percentage change in price
(c) Price elasticity of supply in the long run would be different from that of the short run
(d) All the above
21. Which of the following is an incorrect statement?

(a) When goods are substitutes, a fall in the price of one (ceteris paribus) leads to a fall in the quantity
demanded of its substitutes.
(b) When commodities are complements, a fall in the price of one (other things being equal) will
cause the demand of the other to rise
(c) As the income of the consumer increases, the demand for the commodity increases always and
vice versa.
(d) When a commodity becomes fashionable people prefer to buy it and therefore its demand increases
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22. Suppose the price of movies seen at a theatre rises from ` 120 per person to ` 200 per person.
The theatre manager observes that the rise in price causes attendance at a given movie to fall
from 300 persons to 200 persons. What is the price elasticity of demand for movies? (Use Arc
Elasticity Method)
(a) .5
(b) .8
(c) 1.0
(d) 1.2
23. Suppose a department store has a sale on its silverware. If the price of a plate-setting is
reduced from ` 300 to ` 200 and the quantity demanded increases from 3,000 plate- ettings to
5,000 plate-settings, what is the price elasticity of demand for silverware? (Use Arc Elasticity
Method)
(a) .8
(b) 1.0
(c) 1.25
(d) 1.50
24. When the numerical value of cross elasticity between two goods is very high, it means
(a) The goods are perfect complements and therefore have to be used together
(b) The goods are perfect substitutes and can be used with ease in place of one another
(c) There is a high degree of substitutability between the two goods
(d) The goods are neutral and therefore cannot be considered as substitutes
25. If the local pizzeria raises the price of a medium pizza from ` 60 to ` 100 and quantity
demanded falls from 700 pizzas a night to 100 pizzas a night, the price elasticity of demand for
pizzas is :(Use Arc Elasticity Method)
(a) .67
(b) 1.5
(c) 2.0
(d) 3.0
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26. If electricity demand is inelastic, and electricity charges increase, which of the following is
likely to occur?
(a) Quantity demanded will fall by a relatively large amount.
(b) Quantity demanded will fall by a relatively small amount.
(c) Quantity demanded will rise in the short run, but fall in the long run.
(d) Quantity demanded will fall in the short run, but rise in the long run.
27. Suppose the demand for meals at a medium-priced restaurant is elastic. If the management
of the restaurant is considering raising prices, it can expect a relatively:
(a) Large fall in quantity demanded.
(b) Large fall in demand.
(c) Small fall in quantity demanded.
(d) Small fall in demand.
28. Point elasticity is useful for which of the following situations?

(a) The bookstore is considering doubling the price of notebooks.
(b) A restaurant is considering lowering the price of its most expensive dishes by 50 percent.
(c) An auto producer is interested in determining the response of consumers to the price of cars being
lowered by ` 100.
29. A decrease in price will result in an increase in total revenue if:

(a) The percentage change in quantity demanded in less than the percentage change in price.
(b) The percentage change in quantity demanded is greater than the percentage change in price.
(c) Demand is inelastic.
(d) The consumer is operating along a linear demand curve at a point at which the price is very low
and the quantity demanded is very high.
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30. An increase in price will result in an increase in total revenue if:
(a) The percentage change in quantity demanded is less than the percentage change in price.
(b) The percentage change in quantity demanded is greater than the percentage change in price.
(c) Demand is elastic.
(d) The consumer is operating along a linear demand curve at a point at which the price is very high
and the quantity demanded is very low.
31. Demand for a good will tend to be more elastic if it exhibits which of the following
characteristics?
(a) It represents a small part of the consumer’s income.
(b) The good has many substitutes available.
(c) It is a necessity (as opposed to a luxury).
(d) There is little time for the consumer to adjust to the price change.
32. Demand for a good will tend to be more inelastic if it exhibits which of the following
characteristics?
(a) The good has many substitutes.
(b) The good is a luxury (as opposed to a necessity).
(c) The good is a small part of the consumer’s income.
(d) There is a great deal of time for the consumer to adjust to the change in prices.
33. Suppose a consumer’s income increases from ` 30,000 to ` 36,000. As a result, the consumer
increases her purchases of compact discs (CDs) from 25 CDs to 30 CDs. What is the consumer’s
income elasticity of demand for CDs? (Use Arc Elasticity Method)
(a) 0.5
(b) 1.0
(c) 1.5
(d) 2.0
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34. Total utility is maximum when:
(a) Marginal utility is zero.
(b) Marginal utility is at its highest point.
(c) Marginal utility is negative
35. Which one is not an assumption of the theory of demand based on analysis of indifference
curves?
(a) Given scale of preferences as between different combinations of two goods.
(b) Diminishing marginal rate of substitution.
(c) Diminishing marginal utility of money
(d) Consumers would always prefer more of a particular good to less of it, other things remaining the same.
36. An indifference curve slopes down towards right since more of one commodity and less of
another result in:
(a) Same level of satisfaction.
(b) Greater satisfaction.
(c) Maximum satisfaction.
(d) Any of the above
37. Suppose that workers in a steel plant managed to force a significant increase in their wage
package. How would the new wage contract be likely to affect the market supply of steel, other
things remaining the same?
(a) Supply curve will shift to the left.
(b) Supply curve will shift to the right.
(c) Supply will not shift, but the quantity of cars produced per month will decrease.
(d) Supply will not shift, but the quantity of cars produced per month will increase.
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(a) An indifference curve must be downward-sloping to the right.
(b) Convexity of a curve implies that the slope of the curve diminishes as one moves from left to right.
(c) The income elasticity for inferior goods to a consumer is positive
(d) The total effect of a change in the price of a good on its quantity demanded is called the price effect.
39. The successive units of stamps collected by a little boy give him greater and greater
satisfaction. This is a clear case of
(a) Operation of the law of demand.
(b) Consumer surplus enjoyed in hobbies and rare collections
(c) Exception to the law of diminishing utility.
40. What will happen in the rice market if buyers are expecting higher rice prices in the near
future?
(a) The demand for rice will increase and the demand curve will shift to the right
(b) The demand for rice will decrease and the demand curve will shift to the left
(c) The demand for rice will be unaffected as it is a necessity
(d) The demand for wheat will increase and the demand curve will shift to the right
41. In the case of a Giffen good, the demand curve will usually be:
(a) horizontal.
(b) downward-sloping to the right.
(c) vertical.
(d) upward-sloping to the right.
42. By consumer surplus, economists mean

(a) The area inside the budget line above the price of the commodity
(b) The area between the average revenue and marginal revenue curves.
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(c) The difference between the maximum amount that a person is willing to pay for a good and its
market price.
(d) The difference between the market price and the supply curve
43. Which of the following is a property of an indifference curve?

(a) It is convex to the origin due to diminishing marginal rate of substitution
(b) The marginal rate of substitution is constant as you move along an indifference curve.
(c) Marginal utility is constant as you move along an indifference curve.
(d) Total utility is greatest where the budget line cuts the indifference curve.
44. When economists speak of the utility of a certain good, they are referring to
(a) The demand for the good.
(b) The usefulness of the good in consumption.
(c) The expected satisfaction derived from consuming the good.
(d) The rate at which consumers are willing to exchange one good for another.
45. A vertical supply curve parallel to Y axis implies that the elasticity of supply is:
(a) Zero
(b) Infinity
(c) Equal to one
(d) Greater than zero but less than infinity.
46. For a normal good with a downward sloping demand curve:

(a) The price elasticity of demand is negative; the income elasticity of demand is negative.
(b) The price elasticity of demand is positive; the income elasticity of demand is negative.
(c) The price elasticity of demand is positive; the income elasticity of demand is positive.
(d) The price elasticity of demand is negative; the income elasticity of demand is positive.
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47. An increase in the supply of a good is caused by :

(a) Improvements in its production technology
(b) Fall in the prices of other goods which can be produced using the same inputs.
(c) Fall in the prices of factors of production used in its production.
(d) all of the above.
48. Elasticity of supply refers to the degree of responsiveness of supply of a good to changes in
its:
(a) Demand.
(b) Price.
(c) Cost of production.
(d) State of technology.
49. A horizontal supply curve parallel to the quantity axis implies that the elasticity of supply is:
(a) Zero.
(b) Infinite.
(c) Equal to one.
(d) Greater than zero but less than one.
50. Contraction of supply is the result of:

(a) Decrease in the number of producers.
(b) Decrease in the price of the good concerned.
(c) Increase in the prices of other goods.
(d) Decrease in the outlay of sellers.
51. Conspicuous goods are also known as

(a) Prestige goods
(b) Snob goods
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(c) Veblen goods

(d) All of the above
52. The quantity purchased remains constant irrespective of the change in income. This is known as
(a) negative income elasticity of demand
(b) income elasticity of demand less than one
(c) zero income elasticity of demand
(d) income elasticity of demand is greater than one
53. As income increases, the consumer will go in for superior goods and consequently the demand
for inferior goods will fall. This means inferior goods have
(a) income elasticity of demand less than one
(b) negative income elasticity of demand
(d) unitary income elasticity of demand
54. When income increases the money spent on necessaries of life may not increase in the same
proportion. This means
(a) income elasticity of demand is zero
(b) income elasticity of demand is one
(c) income elasticity of demand is greater than one
(d) income elasticity of demand is less than one
55. The luxury goods like jewellery and fancy articles will have
(a) low income elasticity of demand
(b) high income elasticity of demand
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56. A good which cannot be consumed more than once is known as
(a) Durable good
(b) Non-durable good
(c) Producer good
57. A relative price is

(a) price expressed in terms of money
(b) what you get paid for babysitting your cousin
(c) the ratio of one money price to another
(d) equal to a money price
58. A point below the budget line of a consumer

(a) Represents a combination of goods which costs the whole of consumer’s income
(b) Represents a combination of goods which costs less than the consumer’s income
(c) Represents a combination of goods which is unattainable to the consumer given his/her money income
(d) Represents a combination of goods which costs more than the consumers’ income
59. Demand is the

(a) the desire for a commodity given its price and those of related commodities
(b) the entire relationship between the quantity demanded and the price of a good other things
remaining the same
(c) willingness to pay for a good if income is larger enough
(d) ability to pay for a good
60. Suppose potatoes have (-).0.4 as income elasticity. We can say from the data given that:
(a) Potatoes are superior goods.
(b) Potatoes are necessities.
(c) Potatoes are inferior goods.
(d) There is a need to increase the income of consumers so that they can purchase potatoes.
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61. The price of tomatoes increases and people buy tomato puree. You infer that tomato puree
and tomatoes are
(a) Normal goods
(b) Complements
(c) Substitutes
(d) Inferior goods
62. Chicken and fish are substitutes. If the price of chicken increases, the demand for fish will
(a) Increase or decrease but the demand curve for chicken will not change
(b) Increase and the demand curve for fish will shift rightwards.
(c) Not change but there will be a movement along the demand curve for fish.
(d) Decrease and the demand curve for fish will shift leftwards.
63. Potato chips and popcorn are substitutes. A rise in the price of potato chips will —————
the demand for popcorn and the quantity of popcorn sold will ———————
(a) increase; increase
(b) increase; decrease
(c) decrease; decrease
(d) decrease; increase
64. If the price of orange Juice increases, the demand for apple Juice will _____________.
(a) increase because they are substitutes
(b) decrease because they are substitutes
(c) remain the same because real income is increased
(d) decrease as real income decreases
65. An increase in the demand for computers, other things remaining same, will:
(a) Increase the number of computers bought.
(b) Decrease the price but increase the number of computers bought.
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(c) Increase the price of computers.

(d) Increase the price and number of computers bought.
66. When total demand for a commodity whose price has fallen increases, it is due to:
(a) Income effect.
(b) Substitution effect
(c) Complementary effect
(d) Price effect
67. With a fall in the price of a commodity:

(a) Consumer’s real income increases
(b) Consumer’s real income decreases
(c) There is no change in the real income of the consumer
68. With an increase in the price of diamond, the quantity demanded also increases. This is because
it is a:
(a) Substitute good
(b) Complementary good
(c) Conspicuous good
69. An example of goods that exhibit direct price-demand relationship is

(a) Giffen goods
(b) Complementary goods
(c) Substitute goods
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70. In Economics, when demand for a commodity increases with a fall in its price it is known as:
(a) Contraction of demand
(b) Expansion of demand
(c) No change in demand
71. The quantity supplied of a good or service is the amount that

(a) is actually bought during a given time period at a given price
(b) producers wish they could sell at a higher price
(c) producers plan to sell during a given time period at a given price
(d) people are willing to buy during a given time period at a given price
72. Supply is the

(a) limited resources that are available with the seller
(b) cost of producing a good
(c) entire relationship between the quantity supplied and the price of good.
(d) Willingness to produce a good if the technology to produce it becomes available
73. In the book market, the supply of books will decrease if any of the following occurs except
(a) a decrease in the number of book publishers
(b) a decrease in the price of the book
(c) an increase in the future expected price of the book
(d) an increase in the price of paper used.
74. If price of computers increases by 10% and supply increases by 25%. The elasticity of
supply is :
(a) 2.5
(b) 0.4
(c) (-) 2.5
(d) (-) 0.4
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75. An increase in the number of sellers of bikes will increase the
(a) The price of a bike
(b) Demand for bikes
(c) The supply of bikes
(d) Demand for helmets
76. If the supply of bottled water decreases, other things remaining the same, the equilibrium
price ——————————— and the equilibrium quantity ———————
(a) increases; decreases
(b) decreases; increases
(c) decreases; decreases
(d) increases; increases
77. A decrease in the demand for cameras, other things remaining the same will
(a) Increase the number of cameras bought
(b) Decrease the price but increase the number of cameras bought
(c) Decrease in quantity of camera demanded
(d) Decrease the price and decrease in the number of cameras bought.
78. Which of the following statements about inferior goods is/are false?
I. Inferior goods are those that we will never buy, no matter how cheap they are.
II. Inferior goods are those that we buy more of, if we become poorer.
III. Inferior goods are those that we buy more of, if we become richer.
(a) I and III only.
(b) I only
(c) III only.
(d) I, II, and III.
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79. Comforts lie between
(a) inferior goods and necessaries
(b) luxuries and inferior goods
(c) necessaries and luxuries
80. In a very short period, the supply

(a) can be changed
(b) can not be changed
(c) can be increased
81. When supply curve moves to the left, it means

(a) lesser quantity is supplied at a given price
(b) larger quantity is supplied at a given price
(c) prices have fallen and quantity is supplied at a lower price
82. When supply curve moves to right, it means

(a) supply increases and more quantity is supplied at a given price
(b) supply decreases and less quantity is supplied at a given price
(c) supply remains constant at a given price
83. The elasticity of supply is defined as the

(a) responsiveness of the quantity supplied of a good to a change in its price
(b) responsiveness of the quantity supplied of a good without change in its price
(c) responsiveness of the quantity demanded of a good to a change in its price
(d) responsiveness of the quantity demanded of a good without change in its price
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84. Elasticity of supply is measured by dividing the percentage change in quantity supplied of a
good by ——————————
(a) Percentage change in income
(b) Percentage change in quantity demanded of goods
(c) Percentage change in price
(d) Percentage change in taste and preference
85. Elasticity of supply is zero means

(a) perfectly inelastic supply
(b) perfectly elastic supply
(c) imperfectly elastic supply
86. Elasticity of supply is greater than one when

(a) Proportionate change in quantity supplied is more than the proportionate change in price.
(b) Proportionate change in price is greater than the proportionate change in quantity supplied.
(c) change in price and quantity supplied are equal
87. If the quantity supplied is exactly equal to the relative change in price then the elasticity of
supply is
(a) Less than one
(b) Greater than one
(c) One
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88. The price of a commodity decreases from ` 6 to ` 4 and the quantity demanded of the good
increases from 10 units to 15 units. Find the coefficient of price elasticity.
(a) 1.5
(b) 2.5
(c) -1.5
(d) 0.5
89. The supply function is given as Q= -100 + 10P. Find the elasticity using point method, when
price is ` 15.
(a) 4
(b) -3
(c) -5
(d) 3
90. The figure below shows the budget constraint of a consumer with an income of ` 900/- to
spend on two commodities, namely ice cream and chocolates.
The prices of these two commodities respectively are:

(a) ` 10 and ` 20
(b) ` 20 and ` 10
(c) ` 10 and ` 5
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91. ‘No matter what the price of coffee is, Arjun always spend a total of exactly 100 per week on
coffee.’ The statement implies that:
(a) Arjun is very fond of coffee and therefore he has an inelastic demand for coffee
(b) Arjun has elastic demand for coffee
(c) Arjun’s demand for coffee is relatively less elastic
(d) Arjun’s demand for coffee is unit elastic
92. A firm learns that the own price elasticity of a product it manufactures is 3.5. What would be
the correct action for this firm to take if it wishes to raise its total revenue?
(a) Lower the price because demand for the good is elastic.
(b) Raise the price because demand for the product is inelastic.
(c) Raise the price because demand is elastic.
(d) We need information in order to answer this question.
93. At higher prices people demand more of certain goods not for their worth but for their
prestige value – This is called
(a) Veblen effect
(b) Giffens paradox
(c) Speculative effect
94. If the price of air-conditioner increases from ` 30,000 to ` 30,010 and resultant change in
demand is negligible, we use the measure of __________ to measure elasticity.
(a) Point elasticity of demand since it is a small change
(b) Arc elasticity of demand since it is a small change
(c) Price elasticity based on average prices method
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95. Given the following four possibilities, which one will result in an increase in total expenditure
of the consumer?
(a) Demand is unit elastic and price rises
(b) Demand is elastic and price rises
(c) Demand is inelastic and price falls
(d) demand is inelastic and price rises
96. The supply curve shifts to the right because of———————

(a) improved technology
(b) increased price of factors of production
(c) increased excise duty
(d) all of the above

(a) When the price falls the quantity demanded falls
(b) Seasonal changes do not affect the supply of a commodity
(c) Taxes and subsidies do not influence the supply of the commodity
(d) With lower cost, it is profitable to supply more of the commodity.
98. If the demand is more than supply, then the pressure on price will be
(a) Upward
(b) Downward
(c) Constant
99. The supply curve for highly perishable commodities during very short period is generally
——
(a) Elastic
(b) Inelastic
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(c) Perfectly elastic

(d) Perfectly inelastic
100. Supply is a ___________ concept.

(a) Stock
(b) Flow and stock
(c) Flow
101. The cross elasticity between Rye bread and Whole Wheat bread is expected to be:
(a) Positive
(b) Negative
(c) Zero
(d) Can’t say
102. The cross elasticity between personal computers and soft wares is:
(a) Positive
(b) Zero
(c) Negative
(d) One
103. The cross elasticity between Bread and DVDs is:

(a) Positive
(b) Negative
(c) Zero
(d) One
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(a) With the help of statistical tools, the demand can be forecasted with perfect accuracy
(b) The more the number of substitutes of a commodity, the more elastic is the demand.
(c) Demand for butter is perfectly elastic.
(d) Gold jewellery will have negative income elasticity.
105. Suppose the income elasticity of education in private school in India is 3.6. What does this
indicate:
(a) Private school education is highly wanted by rich
(b) Private school education is a necessity.
(c) Private school education is a luxury.
(d) We should have more private schools.
106. If the organizers of an upcoming cricket match decide to increase the ticket price in order
to raise its revenues, what they have learned from past experience is;
(a) The percentage increase in ticket rates will be always equal the percentage decrease in tickets sold
(b) The percentage increase in ticket rates will be always greater than the percentage decrease in
tickets sold
(c) The percentage increase in ticket rates will be less than the percentage decrease in tickets sold
(d) (a) and (c) above are true
107. Data on production of vegetables for the past two years showed that, despite stable prices,
there is a substantial decline in output of cabbage leading to lower supply into the market.
Which of the following can possibly be the reason?
(a) An increase in the price of cauliflower which is equally preferred by consumers
(b) Announcement of a subsidy by government on vegetable production
(c) More farmers producing cabbage and the increasing competition among them
(d) A substantial decrease in the price of capsicum
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108. The following diagram shows the relationship between price of Good X and quantity
demanded of Good Y. What we infer from the diagram is;
(a) Good X and Good Y are perfect complements

(b) Good X and Good Y are perfect substitutes
(c) Good X and Good Y are remote substitutes
(d) Good X and Good Y are close substitutes
109. The diagram given below shows
(a) A change in demand which may be caused by a rise in income and the good is a normal good
(b) A shift of demand curve caused by a fall in the price of a complementary good
(c) A change in demand which is caused by a rise in income and the good is an inferior good
(d) A shift of demand curve caused by a rise in the price of a substitute and the good is a normal good.
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110. Which of the following alternatives would be true if the event presented in the following
diagram occurs?
(a) A fall in wage costs of the firm along with a fall in consumer incomes
(b) A shortage of raw materials and consequent increase in raw material price
(c) An increase in subsidy by the government and a reduction in taxes
(d) Decrease in the market price of the commodity in question
111. The demand curve of a normal good has shifted to the right. Which of the four events would
have caused the shift?
(a) A fall in the price of a substitute with the price of the good unchanged
(b) A fall in the nominal income of the consumer and a fall in the price of the normal good
(c) A fall in the price of a complementary good with the price of the normal good unchanged
(d) A fall in the price of the normal good, other things remaining the same
112. If roller- coaster ride is a function of amusement park visit, then, if the price of amusement
park entry falls
(a) The demand for roller- coaster rides will rise and the demand curve will shift to right
(b) The demand for roller coaster ride cannot be predicted as it depends on the tastes of consumers for
the ride
(c) There will be an expansion in the demand for roller coaster drive as it complementary
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113. If a short run supply curve is plotted for the following table which presents price and
quantity of fighter aircrafts, what will be its shape?
Price in millions of $ Number of Aircrafts

124 28
140 28
150 28
160 28
175 28
(a) Horizontal straight line parallel to the quantity axis

(b) Steeply rising with elasticity less than one
(c) Vertical straight line parallel to Y axis
(d) A perfectly elastic supply curve
114. The average income of residents of two cities A and B and the corresponding change in
demand for two goods is given in the following table. Which of the following statements is true?
%Increase In % change in % change in
City
Income demand for Good X demand for Good Y
A 12 6.5 - 2.3
B 9 5.6 1.6
(a) Both goods are normal goods in both cities A and B

(b) Good X is a normal good in both cities; good Y is an inferior good in city A
(c) Good X is a normal good in both cities; good Y is an inferior good in city B
(d) Need more information to make an accurate comment
Refer to the figure below. Answer questions 115 and 116

115. If this consumer is spending her entire income and consuming at point B, what advise will
you give her?
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(a) No advise needed, as she is maximizing her utility at B
(b) Consume more of Good X and less of Good Y
(c) Consume more of X and less of Y and reach point K
(d) Consume same quantity of Good Y and more of Good X
116. Which of the following statements is true about this consumer?

(a) The consumer is not maximizing her utility at point K
(b) The consumer is spending her entire income on both goods
(c) The consumer gets equal pleasure at points B and K
(d) All the above
Refer to the figure below. Answer questions 117 and 118

117. The effect on consumer surplus of a fall in price from E to F is
(a) A decrease in consumer surplus by EFGR

(b) A decrease in consumer surplus by AER
(c) A decrease in consumer surplus by EFCR
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118. When price rises from F to E, the increase in revenue earned by the seller is
(a) Equivalent to area EFGR
(b) Equivalent to area EFCR
(c) Equivalent to area AER
119. How would that budget line be affected if the price of both goods fell?
(a) The budget line would not shift.
(b) The new budget line must be parallel to the old budget line.
(c) The budget line must be shifting to the left
(d) The new budget line will have the same slope as the original so long as the prices of both goods
change in the same proportion.
120. During a recession, economies experience increased unemployment and a reduced level of
income. How would a recession likely to affect the market demand for new cars?
(a) Demand curve will shift to the right.
(b) Demand curve will shift to the left.
(c) Demand will not shift, but the quantity of cars sold per month will decrease.
(d) Demand will not shift, but the quantity of cars sold per month will increase.
ANSWERS
1. (d) 2. (b) 3. (c) 4. (b) 5. (b) 6. (b) 7. (b) 8. (c) 9. (c) 10. (b) 11. (b) 12. (b)
13. (b) 14. (c) 15. (d) 16. (c) 17. (a) 18. (b) 19. (d) 20. (d) 21. (c) 22. (b) 23. (c) 24. (c)
25. (d) 26. (b) 27. (a) 28. (c) 29. (b) 30. (a) 31. (b) 32. (c) 33. (b) 34. (a) 35. (c) 36. (a)
37. (a) 38. (c) 39. (c) 40. (a) 41. (d) 42. (c) 43. (a) 44. (c) 45. (a) 46. (d) 47. (d) 48. (b)
49. (b) 50. (b) 51. (d) 52. (c) 53. (b) 54. (d) 55. (b) 56. (b) 57. (c) 58. (b) 59. (b) 60. (c)
61. (c) 62. (b) 63. (a) 64. (a) 65. (d) 66. (d) 67. (a) 68. (c) 69. (a) 70. (b) 71. (c) 72. (c)
73. (b) 74. (a) 75. (c) 76. (a) 77. (c) 78. (a) 79. (c) 80. (b) 81. (a) 82. (a) 83. (a) 84. (c)
85. (a) 86. (a) 87. (c) 88. (a) 89. (d) 90. (b) 91. (d) 92. (a) 93. (a) 94. (a) 95. (d) 96 (a)
97. (d) 98. (a) 99. (d) 100. c) 101.(a) 102.(c) 103.(c) 104.(b) 105.(c) 106.(b) 107.(a) 108.(d)
109 (c) 110 (b) 111 (c) 112 (a) 113 (c) 114 (b) 115 (b) 116 (d) 117 (d) 118 (a) 119 (d) 120 (b)
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CHAPTER 3 - THEORY OF
PRODUCTION AND COST
TEST YOUR KNOWLEDGE

1. Which of the following is considered production in Economics?
(a) Tilling of soil.
(b) Singing a song before friends.
(c) Preventing a child from falling into a manhole on the road.
(d) Painting a picture for pleasure.
2. Identify the correct statement:

(a) The average product is at its maximum when marginal product is equal to average product.
(b) The law of increasing returns to scale relates to the effect of changes in factor proportions.
(c) Economies of scale arise only because of indivisibilities of factor proportions.
(d) Internal economies of scale can accrue when industry expands beyond optimum.
3. Which of the following is not a characteristic of land?

(a) Its supply for the economy is limited.
(b) It is immobile.
(c) Its usefulness depends on human efforts.
(d) It is produced by our forefathers.
4. Which of the following statements is true?

(a) Accumulation of capital depends solely on income of individuals.
(b) Savings can be influenced by government policies.
(c) External economies go with size and internal economies with location.
(d) The supply curve of labour is an upward slopping curve.
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THEORY OF PRODUCTION AND COST
5. In the production of wheat, all of the following are variable factors that are used by the
farmer except:
(a) the seed and fertilizer used when the crop is planted.
(b) the field that has been cleared of trees and in which the crop is planted.
(c) the tractor used by the farmer in planting and cultivating not only wheat but also corn and barley.
(d) the number of hours that the farmer spends in cultivating the wheat fields.
6. The marginal product of a variable input is best described as:

(a) total product divided by the number of units of variable input.
(b) the additional output resulting from a one unit increase in the variable input.
(c) the additional output resulting from a one unit increase in both the variable and fixed inputs.
(d) the ratio of the amount of the variable input that is being used to the amount of the fixed input that
is being used.
7. Diminishing marginal returns implies:

(a) decreasing average variable costs.
(b) decreasing marginal costs.
(c) increasing marginal costs.
(d) decreasing average fixed costs.
8. The short run, as economists use the phrase, is characterized by:

(a) at least one fixed factor of production and firms neither leaving nor entering the industry.
(b) generally a period which is shorter than one year.
(c) all factors of production are fixed and no variable inputs.
(d) all inputs are variable and production is done in less than one year.
9. The marginal, average, and total product curves encountered by the fi rm producing in the
short run exhibit all of the following relationships except:
(a) when total product is rising, average and marginal product may be either rising or falling.
(b) when marginal product is negative, total product and average product are falling.
(c) when average product is at a maximum, marginal product equals average product, and total product
is rising.
(d) when marginal product is at a maximum, average product equals marginal product, and total
product is rising.
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10. To economists, the main difference between the short run and the long run is that:
(a) In the short run all inputs are fixed, while in the long run all inputs are variable.
(b) In the short run the firm varies all of its inputs to find the least-cost combination of inputs.
(c) In the short run, at least one of the firm’s input levels is fixed.
(d) In the long run, the firm is making a constrained decision about how to use existing plant and
equipment efficiently.
11. Which of the following is the best definition of “production function”?

(a) The relationship between market price and quantity supplied.
(b) The relationship between the firm’s total revenue and the cost of production.
(c) The relationship between the quantities of inputs needed to produce a given level of output.
(d) The relationship between the quantity of inputs and the firm’s marginal cost of production.
12. The “law of diminishing returns” applies to:

(a) the short run, but not the long run.
(b) the long run, but not the short run.
(c) both the short run and the long run.
(d) neither the short run nor the long run.
13. Diminishing returns occur:

(a) when units of a variable input are added to a fixed input and total product falls.
(b) when units of a variable input are added to a fixed input and marginal product falls.
(c) when the size of the plant is increased in the long run.
(d) when the quantity of the fixed input is increased and returns to the variable input falls.
Use the following information to answer questions 14-16.
Hours of Labour Total Output Marginal Product
0 – –
1 100 100
2 – 80
3 240 –
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14. What is the total output when 2 hours of labour are employed?
(a) 80
(b) 100
(c) 180
(d) 200
15. What is the marginal product of the third hour of labour?

(a) 60
(b) 80
(c) 100
(d) 240
16. What is the average product of the first three hours of labour?
(a) 60
(b) 80
(c) 100
(d) 240
17. Which cost increases continuously with the increase in production?

(a) Average cost.
(b) Marginal cost.
(c) Fixed cost.
(d) Variable cost.
18. Which of the following cost curves is never ‘U’ shaped?

(a) Average cost curve.
(b) Marginal cost curve.
(c) Average variable cost curve.
(d) Average fixed cost curve.
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19. Total cost in the short run is classified into fixed costs and variable costs. Which one of the
following is a variable cost?
(a) Cost of raw materials.
(b) Cost of equipment.
(c) Interest payment on past borrowings.
(d) Payment of rent on building.
20. In the short run, when the output of a firm increases, its average fixed cost:
(a) increases.
(b) decreases.
(c) remains constant.
(d) first declines and then rises.
21. Which one of the following is also known as planning curve?

(a) Long run average cost curve.
(b) Short run average cost curve.
(c) Average variable cost curve.
(d) Average total cost curve.
22. If a firm moves from one point on a production isoquant to another, which of the following
will not happen.
(a) A change in the ratio in which the inputs are combined to produce output.
(b) A change in the ratio of marginal products of the inputs.
(c) A change in the marginal rate of technical substitution.
(d) A change in the level of output.
23. With which of the following is the concept of marginal cost closely related?
(a) Variable cost.
(b) Fixed cost.
(c) Opportunity cost.
(d) Economic cost.
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(a) When the average cost is rising, the marginal cost must also be rising.
(b) When the average cost is rising, the marginal cost must be falling.
(c) When the average cost is rising, the marginal cost is above the average cost.
(d) When the average cost is falling, the marginal cost must be rising.
25. Which of the following is an example of “explicit cost”?

(a) The wages a proprietor could have made by working as an employee of a large firm.
(b) The income that could have been earned in alternative uses by the resources owned by the firm.
(c) The payment of wages by the firm.
(d) The normal profit earned by a firm.
26. Which of the following is an example of an “implicit cost”?

(a) Interest that could have been earned on retained earnings used by the firm to finance expansion.
(b) The payment of rent by the firm for the building in which it is housed.
(c) The interest payment made by the firm for funds borrowed from a bank.
(d) The payment of wages by the firm.
Use the following data to answer questions 27-29.
Output (O) 0 1 2 3 4 5 6
Total Cost (TC) ` 240 ` 330 ` 410 ` 480 ` 540 ` 610 ` 690
27. The average fixed cost of 2 units of output is:

(a) ` 80
(b) ` 85
(c) ` 120
(d) ` 205
28. The marginal cost of the sixth unit of output is:

(a) ` 133
(b) ` 75
(c) ` 80
(d) ` 450
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29. Diminishing marginal returns start to occur between units:
(a) 2 and 3.
(b) 3 and 4.
(c) 4 and 5.
(d) 5 and 6.
30. Marginal cost is defined as:

(a) the change in total cost due to a one unit change in output.
(b) total cost divided by output.
(c) the change in output due to a one unit change in an input.
(d) total product divided by the quantity of input.
31. Which of the following is true of the relationship between the marginal cost function and the
average cost function?
(a) If MC is greater than ATC, then ATC is falling.
(b) The ATC curve intersects the MC curve at minimum MC.
(c) The MC curve intersects the ATC curve at minimum ATC.
(d) If MC is less than ATC, then ATC is increasing.
32. Which of the following statements is true of the relationship among the average cost functions?
(a) ATC = AFC – AVC.
(b) AVC = AFC + ATC.
(c) AFC = ATC + AVC.
(d) AFC = ATC – AVC.
33. Which of the following is not a determinant of the firm’s cost function?
(a) The production function.
(b) The price of labour.
(c) Taxes.
(d) The price of the firm’s output.
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34. Which of the following statements is correct concerning the relationships among the firm’s
cost functions?
(a) TC = TFC – TVC.
(b) TVC = TFC – TC.
(c) TFC = TC – TVC.
(d) TC = TVC – TFC.
35. Suppose output increases in the short run. Total cost will:
(a) increase due to an increase in fixed costs only.
(b) increase due to an increase in variable costs only.
(c) increase due to an increase in both fixed and variable costs.
(d) decrease if the firm is in the region of diminishing returns.
36. Which of the following statements concerning the long-run average cost curve is false?
(a) It represents the least-cost input combination for producing each level of output.
(b) It is derived from a series of short-run average cost curves.
(c) The short-run cost curve at the minimum point of the long-run average cost curve represents the
least–cost plant size for all levels of output.
(d) As output increases, the amount of capital employed by the firm increases along the curve.
37. The negatively-sloped (i.e. falling) part of the long-run average total cost curve is due to
which of the following?
(a) Diseconomies of scale.
(b) Diminishing returns.
(c) The difficulties encountered in coordinating the many activities of a large firm.
(d) The increase in productivity that results from specialization.
38. The positively sloped (i.e. rising) part of the long run average total cost curve is due to which
of the following?
(a) Diseconomies of scale.
(b) Increasing returns.
(c) The firm being able to take advantage of large-scale production techniques as it expands its output.
(d) The increase in productivity that results from specialization.
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39. A firm’s average total cost is ` 300 at 5 units of output and ` 320 at 6 units of output.
The marginal cost of producing the 6th unit is:
(a) ` 20
(b) ` 120
(c) ` 320
(d) ` 420
40. A firm producing 7 units of output has an average total cost of ` 150 and has to pay ` 350 to
its fixed factors of production whether it produces or not. How much of the average total cost is
made up of variable costs?
(a) ` 200
(b) ` 50
(c) ` 300
(d) ` 100
41. A firm has a variable cost of ` 1000 at 5 units of output. If fixed costs are ` 400, what will be
the average total cost at 5 units of output?
(a) ` 280
(b) ` 60
(c) ` 120
(d) ` 1400
42. A firm’s average fixed cost is ` 20 at 6 units of output. What will it be at 4 units of output?
(a) ` 60
(b) ` 30
(c) ` 40
(d) ` 20

(a) The services of a doctor are considered production.
(b) Man can create matter.
(c) The services of a housewife are considered production.
(d) When a man creates a table, he creates matter.
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44. Which of the following is a function of an entrepreneur?

(a) Initiating a business enterprise.
(b) Risk bearing.
(c) Innovating.
(d) All of the above.
45. In describing a given production technology, the short run is best described as lasting:
(a) up to six months from now.
(b) up to five years from now.
(c) as long as all inputs are fixed.
(d) as long as at least one input is fixed.
46. If decreasing returns to scale are present, then if all inputs are increased by 10% then:
(a) output will also decrease by 10%.
(b) output will increase by 10%.
(c) output will increase by less than 10%.
(d) output will increase by more than 10%.
47. The production function is a relationship between a given combination of inputs and:
(a) another combination that yields the same output.
(b) the highest resulting output.
(c) the increase in output generated by one-unit increase in one output.
(d) all levels of output that can be generated by those inputs.
48. If the marginal product of labour is below the average product of labour, it must be true
that:
(a) the marginal product of labour is negative.
(b) the marginal product of labour is zero.
(c) the average product of labour is falling.
(d) the average product of labour is negative.
49. The average product of labour is maximized when marginal product of labour:
(a) equals the average product of labour.
(b) equals zero.
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(c) is maximized.
50. The law of variable proportions is drawn under all of the assumptions mentioned below
except the assumption that:
(a) the technology is changing.
(b) there must be some inputs whose quantity is kept fixed.
(c) we consider only physical inputs and not economically profitability in monetary terms.
(d) the technology is given and stable.
51. What is a production function?

(a) Technical relationship between physical inputs and physical output.
(b) Relationship between fixed factors of production and variable factors of production.
(c) Relationship between a factor of production and the utility created by it.
(d) Relationship between quantity of output produced and time taken to produce the output.
52. Laws of production does not include ……

(a) returns to scale.
(b) law of diminishing returns to a factor.
(c) law of variable proportions.
(d) least cost combination of factors.
53. An iso quant shows

(a) All the alternative combinations of two inputs that can be produced by using a given set of output
fully and in the best possible way.
(b) All the alternative combinations of two products among which a producer is indifferent because
they yield the same profit.
(c) All the alternative combinations of two inputs that yield the same total product.
(d) Both (b) and (c).
54. Economies of scale exist because as a firm increases its size in the long run:
(a) Labour and management can specialize in their activities more.
(b) As a larger input buyer, the firm can get finance at lower cost and purchase inputs at a lower per
unit cost.
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(c) The firm can afford to employ more sophisticated technology in production.
(d) All of these.
55. The production function:

(a) is the relationship between the quantity of inputs used and the resulting quantity of a product.
(b) Tells us the maximum attainable output from a given combination of inputs.
(c) Expresses the technological relationship between inputs and output of a product.
(d) All the above.
56. The production process described below exhibits.
Number of Workers Output

0 0
1 23
2 40
3 50
(a) constant marginal product of labour.
(b) diminishing marginal product of labour.
(c) increasing return to scale.
(d) increasing marginal product of labour.
57. Which of the following is a variable cost in the short run?

(a) rent of the factory.
(b) wages paid to the factory labour.
(c) interest payments on borrowed financial capital.
(d) payment on the lease for factory equipment.
58. The efficient scale of production is the quantity of output that minimizes
(a) average fixed cost.
(b) average total cost.
(c) average variable cost.
(d) marginal cost.
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59. In the short run, the firm’s product curves show that
(a) Total product begins to decrease when average product begins to decrease but continues to increase
at a decreasing rate.
(b) When marginal product is equal to average product, average product is decreasing but at its
highest.
(c) When the marginal product curve cuts the average product curve from below, the average product
is equal to marginal product.
(d) In stage two, total product increases at a diminishing rate and reaches maximum at the end of this
stage.
60. A fixed input is defined as

(a) That input whose quantity can be quickly changed in the short run, in response to the desire of the
company to change its production.
(b) That input whose quantity cannot be quickly changed in the short run, in response to the desire of
the company to change its production.
(c) That input whose quantities can be easily changed in response to the desire to increase or reduce
the level of production.
(d) That input whose demand can be easily changed in response to the desire to increase or reduce the
level of production.
61. Average product is defined as

(a) total product divided by the total cost.
(b) total product divided by marginal product.
(c) total product divided by the number of units of variable input.
(d) marginal product divided by the number of units of variable input.

(a) After the inflection point of the production function, a greater use of the variable input induces a
reduction in the marginal product.
(b) Before reaching the inevitable point of decreasing marginal returns, the quantity of output obtained
can increase at an increasing rate.
(c) The first stage corresponds to the range in which the AP is increasing as a result of utilizing
increasing quantities of variable inputs.
(d) All the above.
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63. Marginal product, mathematically, is the slope of the

(a) total product curve.
(b) average product curve.
(c) marginal product curve.
(d) implicit product curve.
64. Suppose the first four units of a variable input generate corresponding total outputs of 200,
350, 450, 500. The marginal product of the third unit of input is:
(a) 50
(b) 100
(c) 150
(d) 200
65. Which of the following statements is false in respect of fixed cost of a firm?
(a) As the fixed inputs for a firm cannot be changed in the short run, the TFC are constant, except when
the prices of the fixed inputs change.
(b) TFC continue to exist even when production is stopped in the short run, but they exist in the long
run even when production is not stopped.
(c) Total Fixed Costs (TFC) can be defined as the total sum of the costs of all the fixed inputs associated
with production in the short run.
(d) In the short run, a firm’s fixed cost cannot be escaped even when production is stopped.
66. Diminishing marginal returns for the first four units of a variable input is exhibited by the
total product sequence:
(a) 50, 50, 50, 50
(b) 50, 110, 180, 260
(c) 50, 100, 150, 200
(d) 50, 90, 120, 140
67. Use the following diagram to answer the question

given below it
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The marginal physical product of the third unit of labour is _____, the MP of the _____ labour
is Negative
(a) Six; fourth
(b) Six; third
(c) Six; fifth
(d) Six; sixth
68. In the third of the three stages of production:

(a) the marginal product curve has a positive slope.
(b) the marginal product curve lies completely below the average product curve.
(c) total product increases.
(d) marginal product is positive.
69. When marginal costs are below average total costs,

(a) average fixed costs are rising.
(b) average total costs are falling.
(c) average total costs are rising.
(d) average total costs are minimized.
70. A firm’s long-run average total cost curve is

(a) Identical to its long-run marginal-cost curve.
(b) Also its long-run supply curve because it explains the relationship between price and quantity
supplied.
(c) In fact the average total cost curve of the optimal plant in the short run as it tries to produce at least
cost.
(d) Tangent to all the curves of short-run average total cost.
71. In the long run, if a very small factory were to expand its scale of operations, it is likely that
it would initially experience
(a) an increase in pollution level.
(b) diseconomies of scale.
(c) economies of scale.
(d) constant returns to scale.
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72. A firm’s long-run average total cost curve is.
(a) Identical to its long-run marginal-cost curve as all factors are variable.
(b) Also its long-run total cost curve because it explains the relationship cost and quantity supplied in
the long run.
(c) In fact the average total cost curve of the optimal plant in the short run as it tries to produce at least
cost.
(d) Tangent to all short-run average total cost the curves and represents the lowest average total cost
for producing each level of output.
73. Which of the following statements describes increasing returns to scale?

(a) Doubling of all inputs used leads to doubling of the output.
(b) Increasing the inputs by 50% leads to a 25% increase in output.
(c) Increasing inputs by 1/4 leads to an increase in output of 1/3.
74. The marginal cost for a firm of producing the 9th unit of output is ` 20. Average cost at the
same level of output is ` 15. Which of the following must be true?
(a) marginal cost and average cost are both falling
(b) marginal cost and average cost are both rising
(c) marginal cost is rising and average cost is falling
(d) it is impossible to tell if either of the curves are rising or falling
75. Implicit cost can be defined as

(a) Money payments made to the non-owners of the firm for the self-owned factors employed in the
business and therefore not entered into books of accounts.
(b) Money not paid out to the owners of the firm for the self-owned factors employed in a business
and therefore not entered into books of accounts.
(c) Money payments which the self-owned and employed resources could have earned in their next
best alternative employment and therefore entered into books of accounts.
(d) Money payments which the self-owned and employed resources earn in their best use and therefore
entered into book of accounts.
76. The most important function of an entrepreneur is to ____________.

(a) Innovate
(b) Bear the sense of responsibility
(c) Finance
(d) Earn profit
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77. Economic costs of production differ from accounting costs of production because
(a) Economic costs include expenditures for hired resources while accounting costs do not.
(b) Accounting costs include opportunity costs which are deducted later to find paid out costs.
(c) Accounting costs include expenditures for hired resources while economic costs do not.
(d) Economic costs add the opportunity cost of a firm which uses its own resources.
78. In figure below, possible reason why the average variable cost curve approaches the average
total cost curve as output rises is:
(a) Fixed costs are falling while total costs are rising at rising output.
(b) Total costs are rising and average costs are also rising.
(c) Marginal costs are above average variable costs as output rises.
(d) Average fixed costs are falling as output rises.
79. Marginal cost changes due to changes in —————

(a) Total cost
(b) Average cost
(c) Variable cost
(d) Quantity of output

(a) Fixed costs vary with change in output.
(b) If we add total variable cost and total fixed cost we get the average cost.
(c) Marginal cost is the result of total cost divided by number of units produced.
(d) Total cost is obtained by adding up the fixed cost and total variable cost.
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(a) The LAC curve is also called the planning curve of a firm.
(b) Total revenue = price per unit × number of units sold.
(c) Opportunity cost is also called alternative cost.
(d) If total revenue is divided by the number of units sold we get marginal revenue.
82. The vertical difference between TVC and TC is equal to-

(a) MC
(b) AVC
(c) TFC
83. The falling part of long run average cost curve is tangent to the ____________ of corresponding
short run average cost curve(s).
(a) falling part
(b) rising part
(c) minimum point
84. Which one of the following is an external economies of scale in long run?
(a) Risk bearing economies
(b) Financial economies
(c) Development of skill labour
ANSWERS
1. (a) 2. (a) 3. (d) 4. (b) 5. (b) 6. (b) 7. (c) 8. (a) 9. (d) 10. (c) 11. (c) 12. (a)
13. (b) 14. (c) 15. (a) 16. (b) 17. (d) 18. (d) 19. (a) 20. (b) 21. (a) 22. (d) 23. (a) 24. (c)
25. (c) 26. (a) 27. (c) 28. (c) 29. (c) 30. (a) 31. (c) 32. (d) 33. (d) 34. (c) 35. (b) 36. (c)
37. (d) 38. (a) 39. (d) 40. (d) 41. (a) 42. (b) 43. (a) 44. (d) 45. (d) 46. (c) 47. (b) 48. (c)
49. (a) 50. (a) 51. (a) 52. (d) 53. (c) 54. (d) 55. (d) 56. (b) 57. (b) 58. (b) 59. (d) 60. (b)
61. (c) 62. (d) 63. (a) 64. (b) 65. (b) 66. (d) 67. (d) 68. (b) 69. (b) 70. (d) 71. (c) 72. (d)
73. (c) 74. (b) 75. (b) 76. (a) 77. (d) 78. (d) 79. (c) 80. (d) 81. (d) 82. (c) 83. (a) 84 (c)
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CHAPTER 4 - PRICE
DETERMINATION IN
DIFFERENT MARKETS
TEST YOUR KNOWLEDGE

1. In the table below what will be equilibrium market price?
Price (`) Demand (tonnes per annum) Supply (tonnes per annum)
1 1000 400
2 900 500
3 800 600
4 700 700
5 600 800
6 500 900
7 400 1000
8 300 1100
(a) ` 2
(b) ` 3
(c) ` 4
(d) ` 5
2. Assume that when price is ` 20, the quantity demanded is 9 units, and when price is ` 19,
the quantity demanded is 10 units. Based on this information, what is the marginal revenue
resulting from an increase in output from 9 units to 10 units.
(a) ` 20
(b) ` 19
(c) ` 10
(d) ` 1
3. Assume that when price is ` 20, the quantity demanded is 15 units, and when price is ` 18,
the quantity demanded is 16 units. Based on this information, what is the marginal revenue
resulting from an increase in output from 15 units to 16 units?
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PRICE DETERMINATION IN DIFFERENT MARKETS
(a) ` 18
(b) ` 16
(c) −` 12
(d) ` 28
4. Suppose a firm is producing a level of output such that MR > MC, what should be firm do to
maximize its profits?
(a) The firm should do nothing.
(b) The firm should hire less labour.
(c) The firm should increase price.
(d) The firm should increase output.
5. Marginal Revenue is equal to:

(a) The change in price divided by the change in output.
(b) The change in quantity divided by the change in price.
(c) The change in P x Q due to a one unit change in output.
(d) Price, but only if the firm is a price searcher.
6. Suppose that a sole proprietorship is earning total revenues of ` 1,00,000 and is incurring
explicit costs of ` 75,000. If the owner could work for another company for ` 30,000 a year, we
would conclude that :
(a) The firm is incurring an economic loss.
(b) Implicit costs are ` 25,000.
(c) The total economic costs are ` 1,00,000.
(d) The individual is earning an economic profit of ` 25,000.
7. Which of the following is not an essential condition of pure competition?

(a) Large number of buyers and sellers
(b) Homogeneous product
(c) Freedom of entry
(d) Absence of transport cost
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8. What is the shape of the demand curve faced by a firm under perfect competition?
(a) Horizontal
(b) Vertical
(c) Positively sloped
(d) Negatively sloped
9. Which is the first order condition for the profit of a firm to be maximum?
(a) AC = MR
(b) MC = MR
(c) MR = AR
(d) AC = AR
10. Which of the following is not a characteristic of a “price-taker”?

(a) TR = P x Q
(b) AR = Price
(c) Negatively – sloped demand curve
(d) Marginal Revenue = Price
11. Which of the following statements is false?

(a) Economic costs include the opportunity costs of the resources owned by the firm.
(b) Accounting costs include only explicit costs.
(c) Economic profit will always be less than accounting profit if resources owned and used by the firm
have any opportunity costs.
(d) Accounting profit is equal to total revenue less implicit costs.
12. With a given supply curve, a decrease in demand causes

(a) an overall decrease in price but an increase in equilibrium quantity.
(b) an overall increase in price but a decrease in equilibrium quantity.
(c) an overall decrease in price and a decrease in equilibrium quantity.
(d) no change in overall price but a reduction in equilibrium quantity.
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13. It is assumed in economic theory that
(a) decision making within the firm is usually undertaken by managers, but never by the owners.
(b) the ultimate goal of the firm is to maximise profits, regardless of firm size or type of business
organisation.
(c) as the firm’s size increases, so do its goals.
(d) the basic decision making unit of any firm is its owners.
14. Assume that consumers’ incomes and the number of sellers in the market for good A both
decrease. Based upon this information, we can conclude, with certainty, that the equilibrium:
(a) price will increase.
(b) price will decrease.
(c) quantity will increase.
(d) quantity will decrease.
15. If supply increases in a greater proportion than demand

(a) The new equilibrium price and quantity will be greater than the original equilibrium price and
quantity.
(b) The new equilibrium price will be greater than the original equilibrium price but equilibrium
quantity will be higher.
(c) The new equilibrium price and quantity will be lower than the original equilibrium price and
quantity.
(d) The new equilibrium price will be lower than the original equilibrium and the new equilibrium
quantity will be higher.
16. Assume that in the market for good Z there is a simultaneous increase in demand and the
quantity supplied. The result will be:
(a) an increase in equilibrium price and quantity.
(b) a decrease in equilibrium price and quantity.
(c) an increase in equilibrium quantity and uncertain effect on equilibrium price.
(d) a decrease in equilibrium price and increase in equilibrium quantity.
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17. Suppose the technology for producing personal computers improves and, at the same time,
individuals discover new uses for personal computers so that there is greater utilisation of personal
computers. Which of the following will happen to equilibrium price and equilibrium quantity?
(a) Price will increase; quantity cannot be determined.
(b) Price will decrease; quantity cannot be determined.
(c) Quantity will increase; price cannot be determined.
(d) Quantity will decrease; price cannot be determined.
18. Which of the following is not a condition of perfect competition?

(a) A large number of firms.
(b) Perfect mobility of factors.
(c) Informative advertising to ensure that consumers have good information.
(d) Freedom of entry and exit into and out of the market.
19. Which of the following is not a characteristic of a perfectly competitive market?

(a) Large number of firms in the industry.
(b) Outputs of the firms are perfect substitutes for one another.
(c) Firms face downward-sloping demand curves.
(d) Resources are very mobile.
20. Which of the following is not a characteristic of monopolistic competition?

(a) Ease of entry into the industry.
(b) Product differentiation.
(c) A relatively large number of sellers.
(d) A homogeneous product.
21. Monopoly may arise in a product market because

(a) A significantly important resource for the production of the commodity is owned by a single firm.
(b) The government has given the firm patent right to produce the commodity.
(c) The costs of production and economies of scale makes production by a single producer more
efficient.
(d) All the above.
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22. Oligopolistic industries are characterized by:

(a) a few dominant firms and substantial barriers to entry.
(b) a few large firms and no entry barriers.
(c) a large number of small firms and no entry barriers.
(d) one dominant firm and low entry barriers.
23. Price-taking firms, i.e., firms that operate in a perfectly competitive market, are said to be
“small” relative to the market. Which of the following best describes this smallness?
(a) The individual firm must have fewer than 10 employees.
(b) The individual firm faces a downward-sloping demand curve.
(c) The individual firm has assets of less than ` 20 lakhs.
(d) The individual firm is unable to affect market price through its output decisions.
24. For a price-taking firm:

(a) marginal revenue is less than price.
(b) marginal revenue is equal to price.
(c) marginal revenue is greater than price.
(d) the relationship between marginal revenue and price is indeterminate.
25. 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, entry into the industry is blocked.
(d) in monopolistic competition, there are relatively few barriers to entry.
26. The long-run equilibrium outcomes in monopolistic competition and perfect competition are
similar, because in both market structures
(a) the efficient output level will be produced in the long run.
(b) firms will be producing at minimum average cost.
(c) firms will only earn a normal profit.
(d) firms realise all economies of scale.
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27. Which of the following is the distinguishing characteristic of oligopolies?

(a) A standardized product
(b) The goal of profit maximization
(c) The interdependence among firms
(d) Downward-sloping demand curves faced by firms.
28. In which form of the market structure is the degree of control over the price of its product
by a firm very large?
(a) Monopoly
(b) Imperfect Competition
(c) Oligopoly
(d) Perfect competition
29. Average revenue curve is also known as:

(a) Profit Curve
(b) Demand Curve
(c) Average Cost Curve
(d) Indifference Curve
30. Under which of the following forms of market structure does a firm have no control over the
price of its product?
(a) Monopoly
(b) Monopolistic competition
(c) Oligopoly
(d) Perfect competition
31. Discriminating monopoly implies that the monopolist charges different prices for his
commodity:
(a) from different groups of consumers
(b) for different uses
(c) at different places
(d) any of the above.
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32. Price discrimination will be profitable only if the elasticity of demand in different submarkets is:
(a) uniform
(b) different
(c) less
(d) zero
33. In the context of oligopoly, the kinked demand hypothesis is designed to explain
(a) Price and output determination
(b) Price rigidity
(c) Price leadership
(d) Collusion among rivals.
34. The firm in a perfectly competitive market is a price-taker. This designation as a pricetaker
is based on the assumption that -
(a) the firm has some, but not complete, control over its product price.
(b) there are so many buyers and sellers in the market that any individual firm cannot affect the market.
(c) each firm produces a homogeneous product.
(d) there is easy entry into or exit from the market place.
35. Suppose that the demand curve for the XYZ Co. slopes downward and to the right. We can
conclude that
(a) the firm operates in a perfectly competitive market.
(b) the firm can sell all that it wants to at the established market price.
(c) the XYZ Co. is not a price-taker in the market because it must lower price to sell additional units
of output.
(d) the XYZ Co. will not be able to maximise profits because price and revenue are subject to change.
36. If firms in the toothpaste industry have the following market shares, which market structure
would best describe the industry?
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Market share (% of market)

Toothpaste 18.7
Dentipaste 14.3
Shinibright 11.6
I can’t believe its not toothpaste 9.4
Brighter than white 8.8
Pastystuff 7.4
Others 29.8
(a) Perfect competition.
(b) Monopolistic competition.
(c) Oligopoly.
(d) Monopoly.
37. The kinked demand curve model of oligopoly assumes that

(a) the response (of consumers) to a price increase is less than the response to a rice decrease.
(b) the response (of consumers) to a price increase is more than the response to a price decrease.
(c) the elasticity of demand is constant regardless of whether price increases or decreases.
(d) the elasticity of demand is perfectly elastic if price increases and perfectly inelastic if price
decreases.
38. A firm encounters its “shutdown point” when:

(a) average total cost equals price at the profit-maximising level of output.
(b) average variable cost equals price at the profit-maximising level of output.
(c) average fixed cost equals price at the profit-maximising level of output.
(d) marginal cost equals price at the profit-maximising level of output.
39. Suppose that, at the profit-maximizing level of output, a firm finds that market price is
less than average total cost, but greater than average variable cost. Which of the following
statements is correct?
(a) The firm should shutdown in order to minimise its losses.
(b) The firm should raise its price enough to cover its losses.
(c) The firm should move its resources to another industry.
(d) The firm should continue to operate in the short run in order to minimize its losses.
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40. When price is less than average variable cost at the profit-maximising level of output, a firm
should:
(a) produce where marginal revenue equals marginal cost if it is operating in the short run.
(b) produce where marginal revenue equals marginal cost if it is operating is the long run.
(c) shut down, since it will lose nothing in that case.
(d) shut down, since it cannot even cover its variable costs if it stays in business.
41. A purely competitive firm’s supply schedule in the short run is determined by
(a) its average revenue.
(b) its marginal revenue.
(c) its marginal utility for money curve.
(d) its marginal cost curve.
42. One characteristic not typical of oligopolistic industry is

(a) horizontal demand curve.
(b) too much importance to non-price competition.
(c) price leadership.
(d) a small number of firms in the industry.
43. The structure of the toothpaste industry in India is best described as

(a) perfectly competitive.
(b) monopolistic.
(c) monopolistically competitive.
(d) oligopolistic.
44. The structure of the cold drink industry in India is best described as
(a) perfectly competitive.
(b) monopolistic.
(c) monopolistically competitive.
(d) oligopolistic.
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(a) Even a monopolistic firm can have losses.
(b) Firms in a perfectly competitive market are price takers.
(c) It is always beneficial for a firm in a perfectly competitive market to discriminate prices.
(d) Kinked demand curve is related to an oligopolistic market.
46. Under perfect competition, in the long run, there will be no ________________ .
(a) normal profits
(b) supernormal profits.
(c) production
(d) costs.
47. When ________________________________, we know that the firms are earning just normal
profits.
(a) AC = AR
(b) MC = MR
(c) MC = AC
(d) AR = MR
48. When ________________________________, we know that the firms under perfect

competition must be producing at the minimum point of the average cost curve and so there
will be productive efficiency.
(a) AC = AR
(b) MC = AC
(c) MC = MR
(d) AR = MR
49. When ______________________________, there will be allocative efficiency meaning thereby

that the cost of the last unit is exactly equal to the price consumers are willing to pay for it and
so that the right goods are being sold to the right people at the right price.
(a) MC = MR
(b) MC = AC
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(c) MC = AR
(d) AR = MR
50. Agricultural goods markets depict characteristics close to

(a) perfect competition.
(b) oligopoly.
(c) monopoly.
(d) monopolistic competition.
51. Which of the following is not a characteristic of a competitive market?

(a) There are many buyers and sellers in the market.
(b) The goods offered for sales are largely the same.
(c) Firms generate small but positive supernormal profits in the long run.
(d) Firms can freely enter or exit the market.
52. Which of the following markets would most closely satisfy the requirements for a perfectly
competitive market?
(a) Electricity
(b) Cable television
(c) Cola
(d) Milk
53. Which of the following statements is accurate regarding a perfectly competitive firm?
(a) Demand curve is downward sloping
(b) The demand curve always lies above the marginal revenue curve
(c) Average revenue need not be equal to price
(d) Price is given and is determined by the equilibrium in the entire market
54. The market for hand tools (such as hammers and screwdrivers) is dominated by Draper,
Stanley, and Craftsman. This market is best described as
(a) Monopolistically competitive
(b) a monopoly
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(c) an oligopoly
(d) perfectly competitive
55. A market structure in which many firms sell products that are similar but not identical is
known as
(a) monopolistic competition
(b) monopoly
(c) perfect competition
(d) oligopoly
56. When an oligopolist individually chooses its level of production to maximize its profits, it
charges a price that is
(a) more than the price charged by either monopoly or a competitive market
(b) less than the price charged by either monopoly or a competitive market
(c) more than the price charged by a monopoly and less than the price charged by a competitive market
(d) less than the price charged by a monopoly and more than the price charged by a competitive market.
57. In the long-run equilibrium of a competitive market, firms operate at

(a) the intersection of the marginal cost and marginal revenue
(b) their efficient scale
(c) zero economic profit
(d) all of these answers are correct
58. Which of the following is not a characteristic of a monopolistically competitive market?

(a) Free entry and exit
(b) Abnormal profits in the long run
(c) Many sellers
(d) Differentiated products
59. In a very short period market:

(a) the supply is fixed
(b) the demand is fixed
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(c) demand and supply are fixed

60. Time element was conceived by

(a) Adam Smith
(b) Alfred Marshall
(c) Pigou
(d) Lionel Robinson
61. Total revenue =

(a) price × quantity
(b) price × income
(c) income × quantity
62. Average revenue is the revenue earned

(a) per unit of input
(b) per unit of output
(c) different units of input
(d) different units of output
63. AR can be symbolically written as:

(a) MR / Q
(b) Price × quantity
(c) TR / Q
64. AR is also known as:

(a) price
(b) income
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(c) revenue
65. Marginal revenue can be defined as the change in total revenue resulting from the:
(a) purchase of an additional unit of a commodity
(b) sales of an additional unit of a commodity
(c) sale of subsequent units of a product
66. When e > 1 then MR is

(a) zero
(b) negative
(c) positive
(d) one
67. When e = 1 then MR is

(a) positive
(b) zero
(c) one
(d) negative
68. When e < 1 then MR is

(a) negative
(b) zero
(c) positive
(d) one
69. In Economics, the term ‘market’ refers to a:

(a) place where buyer and seller bargain a product or service for a price
(b) place where buyer does not bargain
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(c) place where seller does not bargain
70. Under perfect competition a firm is the ___________

(a) price-maker and not price-taker
(b) price-taker and not price-maker
(c) neither price-maker nor price-taker
71. A Monopolist is a
(a) price-maker
(b) price-taker
(c) price-adjuster
72. Price discrimination is one of the features of ___________

(a) monopolistic competition
(b) monopoly
(c) perfect competition
(d) oligopoly
73. Under monopoly, the degree of control over price is:

(a) none
(b) some
(c) very considerable
74. Generally, perishable goods like butter, eggs, milk, vegetables etc., will have
(a) regional market
(b) local market
(c) national market
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75. At price P1, the firm in the figure would produce
(a) Zero output

(b) Q3.
(c) Q5.
(d) Q6.
76. Secular period is also known as

(a) very short period
(b) short period
(c) very long period
(d) long period
77. Stock exchange market is an example of

(a) unregulated market
(b) regulated market
(c) spot market
78. The market for the ultimate consumers is known as

(a) whole sale market
(b) regulated market
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(c) unregulated market
(d) retail market
79. The condition for pure competition is

(a) large number of buyer and seller, free entry and exist
(b) homogeneous product
(c) both (a) and (b)
(d) large number of buyer and seller, homogeneous product, perfect knowledge about the product
80. Pure oligopoly is based on the ________________ products

(a) differentiated
(b) homogeneous
(c) unrelated
81. In oligopoly, when the industry is dominated by one large firm which is considered as leader
of the group, Then it is called:
(a) full oligopoly
(b) collusive oligopoly
(c) partial oligopoly
(d) syndicated oligopoly
82. When the products are sold through a centralized body, oligopoly is known as
(a) organized oligopoly
(b) partial oligopoly
(c) competitive oligopoly
(d) syndicated oligopoly
83. When the monopolist divides the consumers into separate sub markets and charges different
prices in different sub-markets it is known as
(a) first degree of price discrimination
(b) second degree of price discrimination
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(c) third degree of price discrimination
84. Under _________________ the monopolist will fix a price which will take away the entire
consumers’ surplus.
(a) second degree of price discrimination
(b) first degree of price discrimination
(c) third degree of price discrimination
85. Price discrimination is related to

(a) time
(b) size of the purchase
(c) income
(d) any of the above
86. The firm and the industry are one and the same in _______________
(a) Perfect competition
(b) Monopolistic competition
(c) Duopoly
(d) Monopoly
87. The demand curve of a monopoly firm will be __________________

(a) Upward sloping
(b) Downward sloping
(c) Horizontal
(d) Vertical
88. If the average cost is higher than the average revenue then the firm incurs __________
(a) Normal profit
(b) Abnormal profit
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(c) Loss
(d) No profit, no loss

(a) Price rigidity is an important feature of monopoly.
(b) Selling costs are possible under perfect competition.
(c) Under perfect competition factors of production do not move freely as there are legal restrictions.
(d) An industry consists of many firms.

(a) Under monopoly there is no difference between a firm and an industry.
(b) A monopolist may restrict the output and raise the price.
(c) Commodities offered for sale under a perfect competition will be heterogeneous.
(d) Product differentiation is peculiar to monopolistic competition.
91. For market the essential condition is –

(a) A particular geographical place
(b) Control of the government
(c) Close contact between buyers and sellers
(d) None of these
92. Assume that when Price is ` 10, the quantity demanded is 5 units and when Price is ` 12
the quantity demanded is 4 units. Based on this information, what is the Marginal Revenue
resulting from increase in output from 4 units to 5 units.
(a) ` 5
(b) ` 4
(c) ` 2
(d) ` 3
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93. Average revenue is equal to.
(a) The change in P & Q due to a one unit change in output.
(b) Nothing but price of one unit of output.
(c) The change in quantity divided by change in price.
(d) Graphically it denotes the firm’s supply curve.
94. Example of a commodity said to have an International Market.

(a) Perishable Goods.
(b) High Value and Small Bulk Commodities.
(c) Product whose trading is restricted by government.
(d) Bulky Articles.
95. Weekly market is example of ________ Market:

(a) Regulated Market
(b) Spot Market
(c) Forward Market
(d) Unregulated Market
96 Conditions for equilibrium of a firm are:

(a) MR = MC
(b) MC should cut MR from below.
(c) MR = AR and MC should cut MR from below.
(d) MR = MC and MC should have a positive slope.
97 Natural Monopoly arises when

(a) There is enormous goodwill enjoyed by a firm.
(b) There are stringent legal and regulatory requirement.
(c) There are very large Economies of Scale.
(d) There are Business Combinations and Cartels.
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98 Price Discrimination cannot persist under the following market form:

(a) Perfect Competition
(b) Monopoly
(c) Monopolistic
(d) Oligopoly
99. Sweezy’s Model explains the concept of price rigidity relating to following market form:
(a) Oligopoly Market
(b) Perfect Competition Market
(c) Monopoly Market
(d) Monopolistic Market
100. Combination of Monopoly Market and Monopsony Market is called as:

(a) Duopoly Market
(b) Oligopoly Market
(c) Bilateral Monopoly Market
(d) Monopolistic Market
101. Price varies by attributes such as location or by Customer Segment is __________ degree
of Price Discrimination.
(a) First
(b) Second
(c) Third
(d) Fourth
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ANSWERS
1. (c) 2. (c) 3. (c) 4. (d) 5. (c) 6. (a) 7. (d) 8. (a) 9. (b) 10. (c) 11. (d) 12. (c)
13. (b) 14. (d) 15. (d) 16. (c) 17. (c) 18. (c) 19. (c) 20. (d) 21. (d) 22. (a) 23. (d) 24. (b)
25. (a) 26. (c) 27. (c) 28. (a) 29. (b) 30. (d) 31. (d) 32. (b) 33. (b) 34. (b) 35. (c) 36. (c)
37. (b) 38. (b) 39. (d) 40. (d) 41. (d) 42. (a) 43. (c) 44. (d) 45. (c) 46. (b) 47. (a) 48. (b)
49. (c) 50. (a) 51. (c) 52. (d) 53. (d) 54. (c) 55. (a) 56. (d) 57. (d) 58. (b) 59. (a) 60. (b)
61. (a) 62. (b) 63. (c) 64. (a) 65. (b) 66. (c) 67. (b) 68. (a) 69. (a) 70. (b) 71. (a) 72. (b)
73. (c) 74. (b) 75. (a) 76. (c) 77. (b) 78. (d) 79. (c) 80. (b) 81. (c) 82. (d) 83. (c) 84. (b)
85. (d) 86. (d) 87. (b) 88. (c) 89. (d) 90. (c) 91. (c) 92. (c) 93. (b) 94. (b) 95. (d) 96. (d)
97. (c) 98. (a) 99. (a) 100. (c) 101. (c)
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CHAPTER 5
BUSINESS
CYCLES
TEST YOUR KNOWLEDGE

1. The term business cycle refers to
(a) the ups and downs in production of commodities
(b) the fluctuating levels of economic activity over a period of time
(c) decline in economic activities over prolonged period of time
(d) increasing unemployment rate and diminishing rate of savings
2. A significant decline in general economic activity extending over a period of time is

(a) business cycle
(b) contraction phase
(c) recession
(d) recovery
3. The trough of a business cycle occurs when _____ hits its lowest point.
(a) inflation in the economy
(b) the money supply
(c) aggregate economic activity
(d) the unemployment rate
4. The lowest point in the business cycle is referred to as the

(a) Expansion.
(b) Boom.
(c) Peak.
(d) Trough.
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BUSINESS CYCLES
5. A leading indicator is
(a) a variable that tends to move along with the level of economic activity
(b) a variable that tends to move in advance of aggregate economic activity
(c) a variable that tends to move consequent on the level of aggregate economic activity
6. A variable that tends to move later than aggregate economic activi ty is called
(a) a leading variable.
(b) a coincident variable.
(c) a lagging variable.
(d) a cyclical variable.
7. Industries that are extremely sensitive to the business cycle are the
(a) Durable goods and service sectors.
(b) Non-durable goods and service sectors.
(c) Capital goods and non-durable goods sectors.
(d) Capital goods and durable goods sectors.
8. A decrease in government spending would cause

(a) the aggregate demand curve to shift to the right.
(b) the aggregate demand curve to shift to the left.
(c) a movement down and to the right along the aggregate demand curve.
(d) a movement up and to the left along the aggregate demand curve.
9. Which of the following does not occur during an expansion?

(a) Consumer purchases of all types of goods tend to increase.
(b) Employment increases as demand for labour rises.
(c) Business profits and business confidence tend to increase
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BUSINESS CYCLES
10. Which of the following best describes a typical business cycle?

(a) Economic expansions are followed by economic contractions.
(b) Inflation is followed by rising income and unemployment.
(c) Economic expansions are followed by economic growth and development.
(d) Stagflation is followed by inflationary economic growth.
11. During recession, the unemployment rate ___________ and output ___________.
(a) Rises; falls
(b) Rises; rises
(c) Falls; rises
(d) Falls; falls
12. The four phases of the business cycle are

(a) expansion, peak, contraction and trough
(b) contraction, expansion, trough and boom
(c) expansion contraction, peak, and trough
(d) peak, depression, bust, and boom
13. Leading economic indicators

(a) are used to forecast probable shifts in economic policies
(b) are generally used to forecast economic fluctuations
(c) are indicators of stock prices existing in an economy
(d) are indicators of probable recession and depression
14. When aggregate economic activity is declining, the economy is said to be in

(a) Contraction.
(b) an expansion.
(c) a trough.
(d) a turning point.
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BUSINESS CYCLES
15. Peaks and troughs of the business cycle are known collectively as
(a) Volatility.
(b) Turning points.
(c) Equilibrium points.
(d) Real business cycle events.
16. The most probable outcome of an increase in the money supply is

(a) interest rates to rise, investment spending to rise, and aggregate demand to rise
(b) interest rates to rise, investment spending to fall, and aggregate demand to fall
(c) interest rates to fall, investment spending to rise, and aggregate demand to rise
(d) interest rates to fall, investment spending to fall, and aggregate demand to fall
17. Which of the following is not a characteristic of business cycles?

(a) Business cycles have serious consequences on the well-being of the society.
(b) Business cycles occur periodically, although they do not exhibit the same regularity.
(c) Business cycles have uniform characteristics and causes.
(d) Business cycles are contagious and unpredictable.
18. Economic recession shares all of these characteristics except.

(a) Fall in the levels of investment, employment
(b) Incomes of wage and interest earners gradually decline resulting in decreased demand for goods
and services
(c) Investor confidence is adversely affected and new investments may not be forthcoming
(d) Increase in the price of inputs due to increased demand for inputs
19. The different phases of a business cycle

(a) do not have the same length and severity
(b) expansion phase always last more than ten years
(c) last many years and are difficult to get over in short periods
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BUSINESS CYCLES
20. Which of the following is not an example of coincident indicator?

(a) Industrial production
(b) inflation
(c) Retail sales
(d) New orders for plant and equipment
21. According to ________________ trade cycles occur due to onset of innovations.

(a) Hawtrey
(b) Adam Smith
(c) J M Keynes
(d) Schumpeter
22. Economic indicators are –

(a) A one stroke solution to check the phase of economy
(b) Indicators showing the movement of economy
(c) Some activities which predict the direction of economy
(d) Just an illusion
23. Which economic indicator is required to predict the turning point of business cycle?
(a) Leading indicator
(b) Lagging indicator
(c) Coincident
24. Business cycle generally originates in free market economies, what is a free market economy?
(a) The economy where government is in possession of major assets
(b) The economy where private firms control major assets
(c) The economy where decisions of productions are taken by public sector undertakings
(d) The economy where price is controlled by government.
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BUSINESS CYCLES

(a) The business cycle largely affects the agricultural sector
(b) The business cycle largely affects small employees
(c) The business cycle generally affects all sectors of economy but business sector in particular.
(d) The business cycle affects low wages workers
26. According to Keynes, fluctuations in Economic activities are due to-.

(a) Fluctuation in aggregate effective demand.
(b) Innovations
(c) Changes in money supply
(d) Fluctuation in agricultural output
27. Which of the following is the cause of business cycles?

(a) Fluctuations in aggregate effective demand
(b) Fluctuations in investments
(c) Fluctuations in government spending
28. Economists use changes in a variety of activities to measure the business cycle and to predict
where the economy is headed towards which are called ______________________.
(a) Signals
(b) Indicators
(c) Barometer
(d) Clues
29. If the growth rate of population is higher than the rate of economic growth, there will be
_____ in the economy.
(a) more savings
(b) no effect on savings
(c) lesser savings
(d) none of these
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BUSINESS CYCLES
30. The cobweb theory was propounded by _________

(a) Hawtrey
(b) Adam Smith
(c) J M Keynes
(d) Nicholas Kaldor
ANSWERS
1. (b) 2. (b) 3. (c) 4. (d) 5. (b) 6. (c) 7. (d) 8. (b) 9. (d) 10. (a) 11. (a) 12. (a)
13. (b) 14. (a) 15. (b) 16. (c) 17. (c) 18. (d) 19. (a) 20. (d) 21. (d) 22. (c) 23. (d) 24. (b)
25. (c) 26. (a) 27. (d) 28. (b) 29. (c) 30. (d)
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BUSINESS CYCLES
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98812 92971

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INDEX

Chapter 1 - Nature and Scope of Business Economics 1.1 to 1.12

Chapter 2 - Theory of Demand and Supply 2.1 to 2.32

Chapter 3 - Theory of Production and Cost 3.1 to 3.20

Chapter 4 - Price Determination in Different Markets 4.1 to 4.24

Chapter 5 - Business Cycles 5.1 to 5.8

TEST YOUR KNOWLEDGE

Multiple Choice Questions

3. In Economics, we use the term scarcity to mean -

6. In every economic system, scarcity imposes limitations on

7. Macroeconomics is also called——— economics.

8. An example of ‘positive’ economic analysis would be:

11. Ram: My corn harvest this year is poor.

13. Which of the following is not a subject matter of Micro-economies?

16. Which of the following is a normative economic statement?

17. Which of the following would be considered a topic of study in Macroeconomics?

18. The difference between positive and normative Economics is:

20. Which of the following statements is incorrect?

21. Economic goods are considered scarce resources because they.

22. In a free market economy the allocation of resources is determined by

23. A capitalist economy uses ____________________ as the principal means of allocating

26. In a mixed economy -

27. The central problem in economics is that of

28. Capital intensive technique would get chosen in a

30. Larger production of ____goods would lead to higher production in future.

32. Macro Economics is the study of ________________________.

33. Freedom of choice is the advantage of -

34. Exploitation and inequality are minimal under:

35. Administered prices refer to:

36. In Economics, the central economic problem means:

37. Scarcity definition of Economics is given by-

40. There is need of economic study, because –

41. The benefit of economic study is –

42. The managerial economics –

43. Which of the following statements is correct?

45. Profit motive is a merit of

46. _______ is also called as command economy

TEST YOUR KNOWLEDGE

Multiple Choice Questions

2. Contraction of demand is the result of :

4. Which of the following pairs of goods is an example of substitutes?

13. All of the following are determinants of demand except:

16. If a good is a luxury, its income elasticity of demand is:

21. Which of the following is an incorrect statement?

28. Point elasticity is useful for which of the following situations?

29. A decrease in price will result in an increase in total revenue if:

42. By consumer surplus, economists mean

43. Which of the following is a property of an indifference curve?

46. For a normal good with a downward sloping demand curve:

47. An increase in the supply of a good is caused by :

50. Contraction of supply is the result of:

51. Conspicuous goods are also known as

(c) Veblen goods

57. A relative price is

58. A point below the budget line of a consumer

59. Demand is the

(c) Increase the price of computers.

67. With a fall in the price of a commodity:

69. An example of goods that exhibit direct price-demand relationship is