CA Foundation Book

INDEX
Regular
Name of the chapter Page No.
Section A - Business Economics
Chapter 1- Nature and Scope of Business Economics……………………………. 1.1 – 1.13
Chapter 2- Utility, Demand and Supply Analysis
Part A - Utility Analysis……………………………………………............. 2.1- 2.11
Part B- Demand Analysis…………………………………………….......... 2.12 - 2.32
Part C- Supply Analysis……………………………………………….......... 2.33 – 2.40
Chapter 3- Production, cost and Revenue Concepts
Part A Production Analysis…………………………………………………. 3.1—3.11
Part B Revenue and Cost Concepts…………………………….......... 3.12—3.20
Chapter 4 - Market and Its Types………………………………………………………….. 4.1 – 4. 16
Chapter 5 - Business Cycle……………………………………………………………………. 5.1 - 5.5
Fast Track & Marathon

Section A- Business Economics
Chapter 1- Nature and Scope of Business Economics……………………………. 12.1 –12.4
Chapter 2- Utility, Demand and Supply Analysis
Part A - Utility Analysis……………………………………………............. 13.1 –13.5
Part B- Demand Analysis…………………………………………….......... 13.6—13.13
Part C- Supply Analysis……………………………………………….......... 13.14—13.16
Chapter 3- Production, cost and Revenue Concepts
Part A Production Analysis…………………………………………………. 14.1—14.7
Part B Revenue and Cost Concepts…………………………….......... 14.8—14.15
Chapter 4 - Market and Its Types………………………………………………………….. 15.1—15.7
Chapter 5 - Business Cycle……………………………………………………………………. 16.1—16.3
Summary 1-Formula Summary……………………………………………………………. 17.1—17.2

Summary 2-Economists Summary……………………………………………………….. 18.1—18.2
INDEX
MICRO ECONOMICS -MCQ
Name of the chapter Page No.
Section B - Business Economics M

Chapter 1- Nature and Scope of Business Economics…………………………
Additional MCQ – Basics ……………………………………… 6.1—6.9
Past Year Questions…………………………………………………………… 6.10 – 6.15
Chapter 2- Utility, Demand and Supply Analysis ………………………………..

Additional MCQ – Part A – Utility Analysis ………………………… 7.1—7.11
Additional MCQ – Part B – Demand Analysis ……………………… 7.12—7.31
Additional MCQ – Part C – Supply Analysis ………………………… 7.32—7.39
Past Year Questions…………………………………………………………… 7.40—7.41
Chapter 3- Production, cost and Revenue Concepts ………………………….

Additional MCQ - Part A Production Analysis……………………… 8.1—8.26
Additional MCQ - Part BCost and Revenue Concepts………. 8.27—8.52
Past Year Questions………………………………………………………… 8.53—8.66
Chapter 4 - Market and Its Types……………………………………………………….

Additional MCQ …………………………………………………………………. 9.1—9.22
Chapter 5 - Business Cycle………………………………………………………………….

Additional MCQ …………………………………………………………………. 10.1—10.3
Section C- Additional
Additional Question Set from ICAI 1 ………………………………………..……….. 11.1—11.5
Nature & Scope of Business Economics
Chapter 1- Nature and Scope of Business Economics
Unit 1: Introduction
Definition:
1. The word ‘Economics’ originates from the Greek work ‘'Oikonomia’

a) ‘Oiko’, which means ‘House’, and
b) ‘Nomia’, which means ‘Management’.
c) Thus, Economics means ‘House Management’.
2. Till 19th century, Economics was also known as ‘Political Economy’
3. The book named ‘An Inquiry into the Nature and Causes of the Wealth
of Nations’ (1776), by Adam Smith is considered as the first modern work
of Economics. – Also Known as Wealth of the Nation
Wants Vs Needs
Want- Something that is desired. want is simply something

that a person would like to have.
Need- Something that is necessary for survival (such as

food and shelter)
Fundamentals of Economics
1. Fundamentals of Economics
a) Human beings have unlimited wants, and
b) The means to satisfy these wants are relatively
scarce. This Scarcity is faced by household, Business
and Government/ Nation.
c) Further, how the available resources shall be
allocated to their highest valued uses.
CA Aditya Sharma 1.1

2. Economics also studies,
a) of how individual and society transform the scarce resources into goods and services
b) how we distribute these goods and services among ourselves.
c) processes by which productive capacity of these resources is increased.
3. The study of Economics cannot ensure that all problems will be appropriately tackled;
but it would enable us to examine a problem in its right perspective and to deal with the
same.
Meaning and role of decision making in Economics
Case study:- Imagine you are Managing Director of a company,

Aditya Limited, an existing profit making FMCG company. You
want to set new product line of footwear. You want to discuss it
with the other members of board. What points you will consider
before acceptance or rejection of a project. (Investment
amount, Competitor, other options for investment)
1. Decision making- refers to the process of selecting an appropriate alternative that will
provide the most efficient means of attaining a desired end, from two or more alternative
courses of action’.
2. Thus decision making arises only if there is choice available.
3. In other words, the question of choice arises because our productive resources such as
land, labour, capital, and management are limited and can be employed in alternative uses.
4. Decision making is not simple and straightforward as the economic environment is highly
complex and dynamic.
5. Also because decisions are to be taken under conditions of imperfect knowledge and
uncertainty.
Examples of business decisions- Continue or shut down decision, New Product, Make or buy,
Marketing etc.
Conclusion –
1) Resources having single use – No Decision making
2) Unlimited Resources – No Decision Making
3) Limited Resources + Alternatives = Decision making

Business Economics
1. Economic theories are hypothetical and simplistic in character as they are based on
economic models built on simplifying assumptions.
2. The economic world is extremely complex as there is a lot of interdependence among the
decisions and activities of economic entities.
3. There is a gap between the propositions of

economic theory and happenings in the real
economic world.
4. Business Economics bridge the gap between
theory and practice, Thus also known as
Applied Economics
5. Economic theories provide the tools which

explain various concepts such as demand, supply, costs, price, competition etc.
6. Business Economics applies these tools in the process of business decision making.
7. Business Economics is also known as Managerial Economics because it generally refers to
the integration of economic theory with business practice.
8. Business Economics is not only valuable to business decision makers, but also useful for
managers of ‘not-for-profit’ organisations.
9. Business Economics may be defined as the use of economic analysis to make business
decisions involving the best use of an organization’s scarce resources.- Joel Dean

Micro and Macro Economics
Difference between
Micro and Macro Economics
Micro Economics Macro Economics

The term is derived from Greek work The term is derived from Greek work
‘Mikros’ which means ‘Small’ “Makros’ which means ‘large’
“Micro Economics is the study of particular “Macro Economics examines the Forest and
firm, particular household, individual price, not the Trees. Thus, it analyses and
wages, income, individual industries, establish the functional relationship
particular commodities”- Prof. Boulding between large aggregates”-
Prof.Mc.Connel
It is the study of economic behavior of It is the study of overall economic
individual firm or industry in national phenomena as a whole rather than its parts
economy
It is also called as ‘Price Theory’ as it It is also called as ‘Income Theory’ as it
explains the composition of total explains level of total production, total
production. consumption, total savings and total
investment and the rice or fall in these
levels
Examples:- Examples-
a) Product pricing; a) National Income and National Output
b) Factor pricing, b) The level of employment and rate of
c) Location of industry. economic growth.
d) Consumer behavior, c) The general price level and interest
e) Behavior of firms. rates;
f) The economic conditions of a section d) Balance of trade and balance of
of society, etc. payments,
g) Lock out in TELCO e) External value of currency and
h) Finding the causes of failure of X & f) The overall level of savings and
co. investment;
g) Per capita income of India.
h) Inflation in India.
i) The national economy's annual rate of
growth
j) Increase in the corporate income tax
rate will affect the national
unemployment.

Nature of Business Economics
1. Business Economics is a Science- as it explains cause and effect

relationships. It follows scientific methods and empirically tests
the validity of the results.
2. Business Economics is an art as it involves practical application of rules

and principles for the attainment of set objectives.
3. Micro Economics based- Since Business Economics is concerned more

with the decision making problems of individual establishments.
4. Macro Analysis based-Business unit is affected by its external

environment such as, the general price level, income and employment level,
taxation, wages and regulation etc.
5. Analysis from Private Enterprises Economy viewpoint-Business

Economics uses the theory of markets and private enterprise. It
uses the theory of the firm and resource allocation in the backdrop
of a private enterprise economy.
6. Inter-Disciplinary- Business Economics is interdisciplinary in

nature as it incorporates tools from other disciplines such as
Mathematics, Operations Research, Management Theory,
accounting, marketing, Finance, Statistics and Econometrics.
7. Pragmatic Approach- While Micro-Economics is abstract and

purely theoretical and analyses economic phenomena under
unrealistic assumptions, Business Economics is pragmatic in its approach as it tackles
practical problems which the firms face in the real world.

8. Normative and positive – Business Economics focus more on Normative compared to

positive
Points Positive Economics or Pure Normative Economics

economics
Meaning It is based on facts and there is no It tells us about how the things
point of ambiguity or second view should be.
Tells us Descriptive in nature and It states Prescriptive in nature and
about- 'what is' describes ‘what ought to be’.
Explains It explains cause & effect It passes value judgments
relationship and there will be no value /suggestions and offers advice.
judgments/suggestions.
Based on It is based on past data and can be Cannot be verified because it is
checked with data opinion based and not fact based
Debatable No Matter of debate Matter of Debate
Suggested According to Robbins, Economics is It is based on welfare economics
by neutral between ends. - (Marshall &Pigou)
Complete neutrality between ends

is, however, neither feasible nor
desirable.
Nature descriptive in nature Prescriptive in nature
Example 1. India has population of 140 crore 1. India is a secular country.
as per latest census. 2. Eating Non-veg food is bad for
2. Apple is good for health. health
3. Planned economies allocate 3. Reducing inequality should be
resources via government major priority for mixed
departments. economy.
4. Most transitional economies have 4. Changing the level of interest

experienced problems of falling rates is a better way of
output and rising prices. managing the economy than
5. There is a greater degree of using taxation and government
consumer sovereignty in the expenditure.
market. 5. Govt. ought to guarantee that
6. Faster economic growth should farmer's income will not fall if
result if an economy has a higher harvest is poor.
level of investment.
7. Higher levels of unemployment will
lead to higher levels of inflation.
8. The average level of growth in the
economy was faster in the 1990s
than the 1980s.
9. Analysis of the relationship
between the price and quantity
demanded. (Law of demand).
Scope of Business Economics

The scope of Business Economics may be discussed under the two heads
1. Microeconomics applied to operational or internal

Issues- Operational issues include all those issues that
arise within the organization and fall within the purview and
control of the management. These issues are internal in
nature.
a) Demand Analysis- analysing demand due to change in the determinants of demand such
as, price, income, etc.
b) Demand Forecasting- to forecast adequate demand to support production and sale
c) Cost analysis- Cost analysis enables the firm to recognize the behavior of costs ,so as
to maximize profits
d) Production analysis- Production theory explains the relationship between inputs and
output.
e) Inventory Management- To help the firm in maintain optimum stock of inventories.
f) Market Structure and Pricing Policies- Analysis of the structure of the market,
nature and extent of competition ,degree of market power, prices are determined
under different kinds of market conditions and assists the firm in framing suitable
price policies.

g) Resource Allocation- best course of action for optimum utilisation of available
resources.
h) Profit analysis- measurement and management of profits under conditions of
uncertainty.
i) Risk & Uncertainty Analysis-Analysis of risks & uncertainties for formulating plans on
the basis of past data, current information & future prediction.
j) Theory of Capital and Investment Decisions- evaluate its investment decisions and
allocation of scarce capital among competing uses of funds.
2. Macroeconomics applied to environmental or external Issues- These factors are

beyond the control of an organization
1) The type of economic system.

2) Stage of business cycle.
3) Working of financial sector and capital market.
4) The general trends in national income, employment, prices,
saving and investment.
5) Government’s economic policies like industrial policy,
competition policy, monetary and fiscal policy, price policy,
foreign trade policy and globalization policies.
6) Socio-economic organizations like trade unions, producer and
consumer unions and cooperatives.
7) Social and political environment.

Unit 2: BASIC PROBLEMS OF AN ECONOMY AND ROLE OF PRICE MECHANISM
Central Economic Problems:
1. All countries, without exceptions, face the problem of scarcity

because their resources are limited and these resources have
alternative uses.
2. If the resources were unlimited, people would be able to satisfy all
their wants and there would be no economic problem.
3. Alternatively, if a resource has only a single use, then also the
economic problem would not arise.
4. The central economic problem is further divided into four basic economic problems.
The 4 Central Economic Problems:
a) What to produce?
1) Society has to decide which goods and services should be produced
2) Every Society has also to decide in what quantities each of these
goods would be produced.
b) How to Produce?
1) The society has to decide the method of production, i.e. whether to
use labour- intensive techniques or capital - intensive techniques.
2) Obviously, the choice would depend on the availability of different
factors of production (i.e. labour and capital) and their relative
prices.
c) For whom to produce?

1) Society has to decide on how the goods (and services) should be
distributed among the members of the society.
2) In other words, it has to decide about the shares of different people
in the national product.

d) What provisions (if any) are to be made for economic
growth?
A society has to decide how much saving and investment (i.e. how
much sacrifice of current consumption) should be made for future
progress. Otherwise it will become static and lead to decline in
standards of living.
The Capitalist Economy:- Command Economy / Centrally Planned Economy
1. Capitalist economy is also known as free market economy or laissez-faire economy.

2. Here all means of production are owned and
controlled by private individuals for profit.
3. In short, private property is the mainstay of
capitalism and profit motive is its driving force.
4. Decisions of consumers and businesses
determine economic activity with limited role of
government in the management.
Solution to central Economic problems under Capitalist Economy
Capitalist economy uses the impersonal forces of

market demand and supply or the price mechanism to
solve its central problems.
1. What to produce? -
a) Decided by consumers who show their preferences by
spending on the goods which they want. And decides What
to produce
b) Consumer is the King under capitalism.
2. How to produce? –
a) An entrepreneur will produce goods and services choosing that technique of production
which renders his cost of production minimum.
b) If labour is relatively cheap, he will use labour- intensive method and if labour is
relatively costlier he will use capital-intensive method.

3. For Whom to produce?-
a) Goods and services in a capitalist economy will be produced for those who have buying
capacity.
b) Buying capacity of an individual depends upon his income and property he owns.
4. What provisions are to be made for economic growth?-

a) Savings are done by consumers and investments are done by entrepreneurs.
b) Consumers’ savings, are governed by the rate of interest prevailing in the market
c) Investment decisions depend upon the rate of return on capital.
Socialist Economy
1. The concept of socialist economy was propounded by Karl

Marx and Frederic Engels in their work ‘The Communist
Manifesto’ published in 1848.
2. Socialist economy is characterized by collective
ownership by state
Mixed Economy
1. The mixed economic system depends on both markets and

governments for allocation of resources.
2. In a mixed economy, the aim is to develop a system which
tries to include the best features of both the controlled
economy and the market economy while excluding the
demerits of both.
3. In mixed economy there are three sectors of industries-

1) Private Sector-Production and distribution in this sector are managed and controlled
by private individuals and groups However, private enterprise may be regulated by the
government directly and/or indirectly by a number of policy instruments.
2) Public Sector-Industries in this sector are not primarily profit-oriented, but are set
up by the State for the welfare of the community.
3) Joint Sector- A sector in which both the government and the private enterprises
have equal access, and join hands to produce commodities and services, leading to the
establishment of joint sectors.

Characteristic of All three types of economy
Capitalist economy Socialist economy Mixed Economy

a. Right to private a. Collective Ownership of means of Government itself
property production by state however, small must run important
farms, workshops & trading firms and selected
b. Freedom of which may remain in private hands. industries and
enterprise eliminate the free
b. Profit- motive and self- interest play of profit
c. Freedom of economic are not the driving forces motive and self-
choice interest.
c. The resources are used to achieve
d. Profit Motive certain socio-economic objectives.
e. Consumer Sovereignty d. Centrally planned economy
f. Competition e. Absence of Consumer Choice-
g. Absence of f. Relatively Equal Income

Government Distribution-
Interference
g. Minimum role of Price Mechanism
or Market forces-
h. Absence of Competition
Merits of All three types of economy

a) Self-regulating through a) Equitable distribution a) Economic freedom and
price mechanism. of wealth and income existence of private
b) Rewards efficiency and b) Rapid and balanced property
punishes inefficiency. economic development b) Price mechanism
c) Faster economic growth c) Planned Economy- c) Consumer sovereignty
d) Optimum allocation of d) Minimum Wastage and and freedom of choice.
resources optimum utislisation of d) Appropriate incentives
e) Operative efficiency. resource- e) Encourages enterprise

f) Lower cost of production e) Unemployment is and risk taking.
g) Better standard of living minimized, f) Advantages of
of consumers f) Absence of profit economic planning
h) Incentive for innovation motive g) Comparatively greater
and Technological economic and social
progress. g) Right to work and equality and freedom
i) Right to private Property minimum standard of h) No cut throat
j) No costs for collecting and living competition
processing of information h) High Social security
De-Merits of All three types of economy

a) Precedence of property 1. Inefficiency and delays, 1. Excessive
rights over human rights. corruption, red-tapism, controls the
b) Inequality and social favoritism, private sector.
injustice 2. All material means of 2. Poor
c) Wide differences in production are under the implementation
economic opportunities. control and direction of state. 3. Undue delays
d) Does not represent the real 3. Takes away right of private
needs of the society. property.
e) Exploitation of labour 4. No incentive for hard work
f) Consumer sovereignty is a 5. Administered prices
myth 6. State monopolies become
g) Misallocation of resources uncontrollable
h) Less of merit goods 7. Consumers have no freedom
i) Unplanned production. of choice.
j) Waste of productive 8. No importance to personal
resources efficiency and productivity.
k) Formation of monopolies 9. The extreme form of
l) Environmental degradation. socialism is not at all
practicable

Chapter 2 Part A - Utility Analysis and Consumer Behavior
Chapter 2A – UTILITY ANALYSIS
1. Utility:
1. Utility is Power of a commodity to satisfy human wants. In Other words, want

satisfying power of a commodity is called as utility.
2. Utility is subjective term and differs from person to person
3. Utility does not mean usefulness. Therefore even the items like cigarettes, liquor,
etc may be said to have utility from economic point of view
4. In Economics the concept of utility is ethically neutral.

5. Utility theories seek to explain how a consumer spends his income on different
goods and services so as to attain maximum satisfaction.
Lets understand something new today

Necessaries:
1) Necessaries are those which are essential for living.
2) Necessaries are further sub-divided into necessaries for life

or existence, necessaries for efficiency and conventional
necessaries.
3) Necessaries for life are things necessary to meet the minimum physiological needs for
the maintenance of life such as minimum amount of food, clothing and shelter.
4) Man requires something more than the necessities of life to maintain longevity, energy and
efficiency of work, such as nourishing food, adequate clothing, clean water, comfortable
dwelling, education, recreation etc. These are necessaries for efficiency.
5) Conventional necessaries arise either due to pressure of habit or due to compelling social
customs and conventions.
CA Aditya Sharma – Economics and BCK 2.1

Comforts:
While necessaries make life possible comforts make life

comfortable and satisfying. Comforts are less urgent than
necessaries. Tasty and wholesome food, good house, clothes that
suit different occasions, audio-visual and labour saving
equipments etc .make life more comfortable.
Luxuries:
Luxuries are those wants which are superfluous and expensive.

They are not essential for living. Items such as expensive
clothing, exclusive vintage cars, classy furniture and goods used
for vanity etc. fall under this category.
2. Difference between Cardinal and Ordinal Approach to utility
Cardinal Approach Ordinal Approach

Assumptions Utility is measurable and Utility cannot be expressed in
quantifiable aspect and can be terms of money, i.e. Utility is not
expressed in numbers quantifiable
Rationale Human satisfaction can be Human Satisfaction is

expressed in monetary terms, and psychological phenomenon and
price of a commodity in the market cannot be measured
indicates the level of consumer quantitatively
satisfaction
Economists Alfred Marshall Hicks and Allen
Measurement Utils Only ranking

Approach • Marginal Utility Approach Indifference curve approach
and Theories • Law of diminishing marginal (This Approach is superior than
utility. Cardinal Approach)
• Law of Equi-Marginal utility

3. Cardinal Approach
Example: Mr. Rasna likes to eat Oranges. The first Orange he eats gives him lots of satisfaction.
The second Orange he eats gives him lesser satisfaction than the earlier one and so on. If he eats 9
Oranges in a row continuously, he may lose interest in oranges. In other words utility goes on
reducing and reaches zero and further negative. Let the price be 40
Quantity of Oranges Total utility Marginal Utility Price Consumer’s
consumed per day Surplus in Rs.
0 0 0 0 0
1 60 60 40 20
2 110 50 40 10
3 150 40 40 0
4 180 30 40 -10
5 200 20 40 -20
6 210 10 40 -30
7 210 0 40 -40
8 200 -10 40 -50
9 180 -20 40 -60
3.1 Total utility and Marginal utility
The Cardinal Approach to utility is given by Aflred

1. Total Utility- The sum total of utility derived from different units of commodity
consumed by a consumer is called as total utility.
2. Marginal Utility-It is the additional utility derived from additional unit of a

commodity. It is the Slope of Total Utility
3. Marginal Utility can also be defined as change in the total utility resulting from one-
unit change (tun-tu(n-1)) in consumption of commodity, per unit of time.
3.2 Assumptions under Marginal utility analysis and cardinal approach
1. Cardinal Measurability of Utility- means that the utility is measurable and

quantifiable. A person can express the satisfaction derived from consumption of a
commodity in quantitative terms.
2. Comparability of Utility across the goods- The Satisfaction derived by a person
from different commodities can be compared.
3. Independence of Utilities- Utilities derived from different commodities are
independent of one another and does not affects one another.
4. Constant Marginal Utility of Money- It is assumed that marginal utility of money is
constant.
The amount of money a person is prepared to pay for a unit of good rather than go
without it, is the measure of utility which he derived from the goods.

3.3 Law of diminishing Marginal utility
Law:
a) The Law of Diminishing Marginal
Utility states that all else equal as
consumption increases the marginal
utility derived from each additional unit
declines.
b) As a consumer consumes more of stock,
the extra satisfaction that he derives from
an extra unit, declines with the increase in
consumption of that item.
Explanation:
a) Human beings have virtually unlimited wants, However each single want is satiable
(capable of being satisfied)
b) Since each want is satiable, as a consumer consumes more and more of an item, the
satisfaction derived from addition unit goes on decreasing. In other words the
intensity of his want goes on decreasing, and at a particular point of time he no
longer wants it.
c) After a point of time after continuous consumption the consumer reaches the ‘point
of Satiation’ and gets no extra Satisfaction
d) Beyond a particular point instead of Utility consumer faces negative Utility or
Disutility
e) Further, Goods are imperfect substitute of each other. If same goods have capacity
to satisfy other wants then their marginal utility would not have decreased.
Assumptions to Law of Marginal utility:

1. Standard Units- The law will hold good when units are of suitable size.
2. Homogeneous units- Different units consumed should be identical in all respect
3. Constant Income- The law will hold good when income of the person is constant.
4. Constant Taste/ fashion- The Fashion, habit or taste of the consumer must remain
constant. If the liking of the person increases on additional consumption the law will
not hold good.
5. Continuous consumption- There should be no time gap between consumption of one
unit and another unit. Therefore Consumption of one Orange per day for 9 days will
not have diminishing marginal utility, but 9 Oranges in one day will be covered by
this law.
6. Cardinal approach- Law applies only if cardinal approach to measurement of utility
is assumed.
Exception to Law of Marginal utility

1. Personal Aspects- law of Diminishing Marginal utility does not apply to music,
hobbies, etc where personal preference is dominant.
2. Money is excluded- law of Diminishing Marginal utility does not apply money and
items like gold, etc. where a greater quantity may increase the lust for it.
3. Other possessions- Utility may be affected by presence or absence of articles which
are substitute or complimentary. Example- utility of coffee may be affected by
availability sugar.

Conclusion: Most IMP

1. Total Utility increases at diminishing rate.
2. Marginal Utility is Downward Sloping curve,
moving from left to right
3. Marginal utility is negatively sloped curve.
4. Where Marginal Utility is negative, Total
utility decreases.
5. Marginal utility goes on decreasing and
becomes negative beyond a certain point of
time.
6. Marginal utility varies inversely with the
supply. If the supply is greater, its MU will be
less.
7. MU of the goods increases as the quantity of
complementary goods with the consumer increases- Example, Tea and sugar are
complementary goods. If more tea is acquired MU of sugar also increases.
8. MU of the goods decreases as the quantity of substitute goods with the consumer
increases. Example, tea and coffee are substitute goods. If Consumer purchases more
coffee, MU of tea decreases.
3.4 Law of Equi- marginal utility
As per the law of Equi- marginal utility, If marginal utility of money spent on
commodity X is greater than marginal utility of money spent on commodity Y, then the
consumer will withdraw some money from purchase of Product Y and will spent on
purchase of X, till MU of money in two cases becomes equal.
And
The consumer will attain maximum satisfaction, and will be in equilibrium when
MU of money spent on various goods that he buys, are equal.

3.5 Consumer surplus and Consumer Equilibrium
Consumer Surplus:
1. Consumer surplus means, what a consumer is ready to pay – what he actually pays.
2. The consumer continues to buy a commodity till MU = Price of the commodity
3. For all the earlier units purchased, MU > price paid. This difference is called as
consumer’s surplus
4. Amount which a person is ready to pay is nothing but Marginal Utility
5. Therefore, Consumer surplus = MU - Price
3.6 Application of Consumer Surplus
a) It is a measure of the welfare that people gain from consuming G&S.

b) It is very important to a business firm to reflect on the amount of consumer
surplus enjoyed by customers
c) Helps business managers make better decisions about setting prices and able to
pay higher prices for the same products, then firms can profitably use price
discrimination.
d) Large scale investment decisions involve cost benefit analysis which takes into
account the extent of consumer surplus which the projects may fetch.
e) Consumer surplus usually acts as a guide to finance ministers when they decide on
the products on which taxes have to be imposed and the extent to which a commodity
tax has to be raised.
3.7 Consumer’s Equilibrium:

f) As per the law of diminishing marginal utility, the additional consumption of item
leads to decreasing MU.
g) The consumer will be willing to buy a commodity, as long as the MU( additional
satisfaction) derived is equal to price of the commodity. In other words, consumer will
not buy a commodity if the price he pays is more that the additional satisfaction he
derives.
h) Thus the consumer is in equilibrium when price of the commodity = Marginal
utility.
i) Similarly for more than two products, consumer will be in equilibrium if-
MU X = MU Y = MU Z
Price X Price Y Price Z
j) The consumer will attain maximum satisfaction, and will be in equilibrium when MU
of money spent on various goods that he buys, are equal.
Conclusions: refer schedule above

a) Consumer is in equilibrium at 3 units, where price = MU.
b) Consumer surplus is INR 20 and INR 10 at consumption level of 1 Orange and 2
oranges respectively.

3.8 Limitations to Consumer surplus
1. The concept of Consumer’s surplus is relevant only if cardinal approach to

measurement of utility is assumed.
2. Consumer’s surplus cannot be measured precisely, since it is difficult to measure

the MU of different units of commodity consumed by a person.
3. Consumer’s surplus derived is affected by availability of substitutes.
4. In case of necessaries, consumer’s surplus is infinite since the MU

of first few units are infinitely large.
5. Concept of consumer’s surplus does not apply in case of

prestigious items such as Diamond, gold.
6. It is assumed that MU of the money is constant, which is

unrealistic. As more purchases are made and consumer’s stock of
money diminishes, MU of money also changes
3.9 Graphical Presentation

4. Ordinal Approach:
The Ordinal approach to utility analysis was given by Hicks and Allen and hence it is
also called as Hicks and Allen Approach.
This Approach is called as Ordinal Approach because here we can order the
Commodities
4.1 Indifference curve analysis- Assumptions
1. Ordinal Approach to utility-

a) This means that UTILITY is not measurable in monetary terms.
b) A person can express satisfaction derived from consumption of commodity, in
relative or comparative term.
2. Consistency in ranking-
c) As per ordinal approach it is assumed that the consumer has consistent
consumption pattern. Thus Consumer choice are assumed to be Transitive
a) If a consumer prefers X to Y and Y to Z , this automatically means that he must
prefer X to Z.
3. Rational Consumer- It is assumed that the consumer is rational and possesses full
information about all the relevant aspects of economic environment in which he lives.
4. Ranking and preferences-

a) The consumer is capable of ranking all combination of goods according to
satisfaction they yield.
b) If a consumer prefers A to B then he cannot tell quantitatively how much he
prefers A over B.
5. Number of Goods-
a) If combination A has more quantity than combination B, then A must be
preferred over B. This is because the customer prefers more to less, and tries
to maximize his satisfaction.

4.2 Indifference curve analysis
Indifference Curve is also called as Iso-Utility Curve or Equal Utility Curve
1. An Indifference curve is a curve which represents all those combination of goods
which gives same satisfaction to the consumer.
2. In Indifference curve analysis, customer’s preference is arranged/ranked in order of
his preference, rather than measuring them in terms of money.
3. Since all the combinations on IC curve give him equal/ same satisfaction, he prefers
them equally and does not mind which combination he gets. He remains indifferent
among those combinations.
4. General assumption in consumer behavior under Indifference curve analysis is
that more goods are preferred to less of them.
Example
Combination Roses Lilies Marginal Rate of substitution ( MRS)
A 15 1 -
B 11 2 4 Roses per lily
C 8 3 3 Roses per lily
D 6 4 2 Roses per lily
E 5 5 1 Roses per lily
1. MRS Shows diminishing Trend.

This is due to Reducing
Quantity of commodity and thus
reducing trend.
2. Had the goods being perfect
substitute IC Curve will be
straight line curve
4.3 Indifference Map
1. A set of indifference curves is called as

Indifference Map.
2. An indifference map depicts complete
picture of customer’s taste and preferences.
3. The consumer is indifferent for any
combination lying on same IC.
4. However he prefers combination on
Higher IC to combinations on lower IC,
as the combinations of higher IC give more
satisfaction. So IC4 > IC3>IC2>IC1.
5. Farther the IC from the origin, higher is
the satisfaction level.

4.4 Marginal rate of Substitutions
1. Marginal rate of substitutions (MRS) indicates how much of one commodity is

substituted for how much of another commodity.
2. MRS is indicated by Slope of IC curve at a particular point. Thus, MRS indicates
movement along an IC.
3. MRS show decreasing trend similar to concept of diminishing marginal utility.
4.5 Property of indifference curve
1. Downward sloping to right-

a) IC curve is negatively sloped. This is because when the quantity of one
commodity is increased, the quantity of other commodity is reduced.
2. Convex to the origin-
a) IC is L- shaped to origin, with a bent instead of right angle.
b) This is due to diminishing nature of MRS.
3. All point on an IC gives same satisfaction-
a) All the combination on an IC gives same satisfaction to the consumer.
b) Hence the consumer is indifferent among different point on IC.
4. Higher level of satisfaction-
a) In an indifference map, every higher IC gives higher satisfaction to the consumer.
b) Combination lying on higher IC contains more of either on one or both goods and
more goods are preferred to less of them.
5. Non Intersecting
a) No two IC will cut/ intersect/touch each other
b) Since every higher IC gives higher satisfaction, the same level of satisfaction
cannot lie on two ICs. And if they intersect it will show that two different levels are
equal, which is not possible.
4.6 Budget line
1. A Budget line shows all those combinations of two goods which a consumer can buy
spending his given money income on two goods at their given prices.
2. Budget line is also called as Price line, Price opportunity line, Price- income line,
Budget constraint line.
3. Every point
a) on Budget line represents full spending by
the consumer.
b) below budget line represents under
spending by the consumer (Point U),
c) above the budget line will be beyond the
reach of consumer (Point O)

4.7 Consumer Equilibrium under indifference curve approach
1. In the given diagram Pl is the Budget line

and A,B,C are the point on price/budget
line. Every point on budget line costs same
to the consumer.
2. In order to maximize his satisfaction the
consumer will try to reach to farthest IC,
but will be forced to remain on price line.
3. Point B gives maximum satisfaction to the
consumer since it lies on farthest IC, and
also lies on budget line.
4. The point B constitutes consumer’s
equilibrium and at that point consumer
will buy QX and Qy quantities of goods X and Y.
5. Consumer will not be able to reach IC3 and IC4 with his current budget, and Point A
and C will not be preferred as they lie on lower IC.
Assumptions:
1. The consumer has fixed money income which he hast to spend wholly on goods X
and goods Y.
2. Prices of goods X and Goods Y are given and are constant.
3. The consumer has given an indifference map which shows his scale of preferences
for various combinations of two goods X and Y.
4.8 Relationship of MRS and price at equilibrium,
1. At equilibrium, slope of price line is equal to slope of Indifference curve.

2. At equilibrium price line is tangential to farthest IC.
3. At equilibrium, slope of price line is equal to slope of Indifference curve IC2
4. Slope of the line is PX/PY.
5. Slope of indifference curve indicates Marginal rate of substitution of X for Y.
MRSXY=MUX/MUY.
6. Hence at equilibrium MRSXY=MUX/MUY= PX/PY, alternatively, MUX/ PX = MUY/PY.
4.9 The indifference curve analysis is superior to utility analysis:
(i) It dispenses with the assumption of measurability of utility
(ii) It studies more than one commodity at a time
(iii) It does not assume constancy of marginal utility of money
(iv) It segregates income effect from substitution effect.

Chapter 2 Part B - Demand Analysis
Chapter 2B - Demand Analysis
Part A. - Basics
1. Meaning
1. Demand’ refers to the quantity of a good or service that

consumers are willing and able to purchase at various
prices during a given period of time.
2. Effective demand of any goods or services depends on the

following factors
(a) Willingness means Desire for a specific commodity,
(b) Ability means Resources or purchasing power
(c) willingness to use those means for that purchase, and
(d) Availability of commodity at certain, (i) Price (ii) place or (iii) time.
3. Two things are to be noted about the quantity demanded.

(a) The quantity demanded is always expressed at a given price.
(b) The quantity demanded is a flow. And not a single isolated purchase. Hence we express
demand as ‘so much quantity per period of time’.
2. Types of Demand
1. Individual Demand/ Firm Demand.-

a) DD of a particular consumer at various prices.
b) It is a sub-system of total demand.
2. Market Demand/ Industry Demand.

(a) Market demand is the demand of whole market at various prices of
the commodity.
(b) It is the sum total demand of all individual demand in the market.
3. Price Demand -It refers to quantity of goods or services which will be purchase by the
consumer at various prices

4. Income demand
(a) It refers to quantity of goods or services which will be
purchase by the consumer at various income level
(b) Accordingly as the income level increases, superior goods have greater demand and
as the level of income lowers, inferior goods have higher demand.
5. Cross demand
(a) It refers to quantity of goods or services which will be purchase by the consumer
based on the change in price of related commodities.
(b) Example Substitute goods or complementary goods.
6. Short run demand- changes immediately due to change in Price. If the rate of electricity
are reduced, the existing users will make greater use of electrical appliances
7. Long run demand- change takes place after long time due to change in price. For
example, if electricity rates are reduced, in the short run, the existing users will make
greater use of electric appliances. In the long-run, more and more people will be induced
to use electric appliances.
8. Derived demand-The demand for a commodity that arises because of the

demand for some other commodity called ‘parent product’, ‘is called
derived demand. For example, the demand for cement is derived demand,
being directly related to building activity.
9. Autonomous demand- If the demand for a product is independent of the

demand for other goods, then it is called autonomous demand. It arises on its
own out of an innate desire of the consumer to consume or to possess the
commodity.
10. Producers goods are used for the production of other goods - either
consumer goods or producer goods themselves. Examples of such goods are
machines, plant and equipment.
11. Consumer goods are used for final consumption. Eg readymade clothes, prepared food.
It may be subdivided into-
a) Durable goods are those which can be consumed more than once. Eg.
cars, refrigerators and mobile phones
b) Non durable goods are those which cannot be consumer more than once.
It meets only current demand. Eg: Bread, milk, etc.

3. Factors of Demand
1. Price of the commodity:

(a) Other things being equal, the demand for a commodity is
inversely related to its price.
(b) This means that a rise in the price of a commodity brings about
a fall in the quantity purchased and vice-versa.
(c) This happens because of income effect and substitution
effect.
2. Price of related commodities-Related commodities are of two types: (a) complementary

goods and (b) competing goods or substitutes.
(a) Complementary goods-

i. Complementary goods are those goods which are consumed
together or simultaneously.
ii. When two commodities are complements, a fall in the price of
one (other things being equal) will cause the demand for the
other to rise.
iii. For example; tea and sugar, automobile and petrol and pen and ink.
(b) Substitute goods-

i. Two commodities are called competing goods or substitutes
when they satisfy the same want and can be used with ease in
place of one another.
ii. When goods are substitutes, a fall in the price of one (ceteris
paribus) leads to a fall in the quantity demanded of its
substitutes.
iii. Demand of a commodity is directly related with price of substitute goods.
iv. For example, tea and coffee, ink pen and ball pen, are substitutes for each other
and can be used in place of one another easily.
3. Income of the consumer

(a) In most cases, the larger the income, larger is the quantity
demanded.
(b) But, the change in quantity demanded and the change in income
need not be of same proportion.
(c) As the level of income rises, increase in demand of necessities is
proportionally less than increase in income.

(d) As the income level increase and people become richer, there is a relative decline in
the importance of food and other non durable goods in the overall consumption basket
and a rise in the importance of durable goods such as a TV, car, house etc.
(e) However, there are some commodities for which the quantity demanded decreases
with an increase in money income beyond this level. These goods are called inferior
goods.[ Also called as Giffen goods]
4. Tastes and preferences of consumers-

(a) Goods which are in fashion are demanded more than goods which
are of out of fashion.
(b) Tastes and preferences of consumers are also influence by
‘Demonstration effect’ or ‘bandwagon effect’, i.e. by seeing
another person use a particular product/ commodity.
(c) Also sometimes, when a product becomes common among all,
some people decrease or altogether stop its consumption.
(d) On the other hand, if the goods which are common among the
rich, though high priced is consumed as a symbol of status. E.g.
Some people develop habit of drinking wine as they believe its attachment with status.
This is called ‘snob effect’. Highly priced goods are consumed by status seeking rich
people to satisfy their need for conspicuous consumption. This is called ‘Veblen
effect’
5. Population aspect-
(a) Size of the population-directly related to Demand
(b) Composition of population: If the population consists of more of
children, demand for toys, baby foods, toffees, etc. will be more
(c) The level of National Income and its Distribution:
i. If the national income is unevenly distributed, less income,
and less demand
ii. If the national income is evenly distributed, more income,
and more demand
(d) Consumer-credit facility and interest rates: Availability of credit facilities induces
people to purchase more than what their current incomes permit them. Also, Low rates
of interest encourage people to borrow and therefore demand will be more.
6. There are many other factors which influences the demand

Part B- Theory of Demand

1. Law of Demand:
(a) Other things being equal, if the price of a commodity falls, the quantity demanded of
it will rise and if the price of a commodity rises, its quantity demanded will decline.
(b) There is an inverse relationship between price and quantity demanded, other things
being equal.
If these factors which
determine demand also
Other Factors remaining constant- undergo a change, then
The other things which are assumed to be equal or constant are:- the inverse price-demand
(a) Prices of related commodities (complementary goods or relationship may not hold
good. Thus, the constancy
substitute goods)
of these other factors is an
(b) Income of consumers important assumption of
(c) Tastes and preferences of consumers, and the law of demand.
(d) Such other factors which influence demand.
1. Illustration:
Price Quantity demanded
5 10
4 15
3 20
2 35
1 60
2. Features of the Demand Curve

1. Demand curve slopes downwards from left to right
2. Demand curve is negatively sloped
3. Demand curve may sometimes be a straight-line or sometimes a free hand curve
4. Demand curve is also called Average Revenue curve (ARC). Since the price paid for each
unit by the consumer is revenue per unit for the seller.[ CH 4]
5. The Market Demand curve is a lateral summation of individual Demand curve, and also
slopes downwards from left to right. [ CH 4]

2. Rationale of the Law of Demand – reasons why law of Demand exhibits inverse
relationship
1. Law of diminishing marginal utility

(a) Consumer will buy more quantity at lower price because they want to equalise the
marginal utility of the commodity and price.
(b) The Diminishing Marginal utility and equalising price is the cause of downward sloping
of demand curve
2. Substitution effect: Given by Hicks and Allen

(a) When the price of a commodity falls, it becomes relatively cheaper than other
commodities.
(b) So, consumers now substitute the commodity whose price has fallen for other
commodities which have now become relatively expensive.
(c) Therefore total demand for the commodity whose price has fallen increases
3. Income effect:
(a) When the price of a commodity falls, the consumer can buy the same quantity of the
commodity with lesser money.
(b) In other words, as a result of fall in the price of the commodity, consumer’s real
income or purchasing power increases.
(c) This increase in the real income induces him to buy more of that commodity.
Note: Income Effect and Substitution effect is together called as Price effect
4. Arrival of new consumer:

(a) When the price of a commodity falls, more consumers start buying it
because some of those who could not afford to buy it earlier may
now be able to buy it.
(b) This raises the number of consumers of a commodity at a lower
price and hence the demand increases.
5. Different uses:
(a) Certain commodities have multiple uses. If their prices fall, they will be used for
varied purposes and therefore their demand for such commodities will increase
(b) On the other hand, when the price of such commodities are high (or rises) they will be
put to limited uses only.

3. Exceptions to the Law of Demand
1. Conspicuous goods:
(a) Articles of prestige value or snob appeal or articles of
conspicuous consumption are demanded only by the rich people
and these articles become more attractive if their prices go
up.
(b) This was found out by Veblen in his doctrine of “Conspicuous
Consumption” and hence this effect is called Veblen effect or
prestige goods effect.
(c) Example- Higher the price of diamonds, higher is the prestige value attached to them
and hence higher is the demand for them.
2. Giffen goods:
(a) Those goods which are inferior, with no close substitutes easily
available and which occupy a substantial place in consumer’s
budget are called ‘Giffen goods’
(b) Such goods exhibit direct price-demand relationship.
(c) Examples of Giffen goods are- Bajra, low quality rice and wheat etc
3. Conspicuous necessities:
(a) The demand for certain goods is affected by the
demonstration effect of the consumption pattern of a
social group to which an individual belongs.
(b) Due to their constant usage these goods have become necessities of life.
(c) For example, TVs, refrigerators, coolers, cooking gas etc.
4. Future expectations about prices:

(a) When the prices show increasing trend, consumers tend to buy
larger quantities of such commodities, expecting that the prices
in the future will be still higher
(b) For example, when there is wide-spread drought, people expect
that prices of food grains would rise in future. They demand
greater quantities of food grains even at the higher price.
5. Irrational consumer- It is assumed that consumers are rational

and knowledgeable about market-conditions. However, at times,
consumers tend to be irrational and make impulsive purchases
without any rational calculations about the price and usefulness of
the product.

6. Demand for necessaries
(a) Irrespective of price changes, people have to consume the minimum quantities of
necessary commodities. Example- cooking gas, Petrol.
7. Ignorant consumer: A household may demand larger quantity of a commodity even at a

higher price because it may be ignorant of the ruling price of the commodity.
8. Speculative goods: In the speculative market, more will be

demanded when the prices are rising and less will be demanded
when prices decline. Example stocks and shares showing increasing
trend.
4. Demand and Quantity demanded
➢ Change in demand means change in demand due to the factors of demand other than price
whereas
➢ Change in quantity demanded means change in the quantity purchased due to change in the
price of a product
5. Expansion/Extension and contraction in Demand
Meaning- Expansion and contraction in demand takes

place as a result of change in price, while the other
factors influencing demand remains constant.
Movement along the curve- The position of Demand

curve remains the same. The consumer merely moves
upwards or downwards on the Same Demand Curve
Example-
(a) The present price is P and the quantity demanded
at Price P is M.
(b) Expansion- Downward movement along the same Demand curve is called as Expansion of
demand. (P to P’’)
(c) Contraction- Upward movement along the same Demand curve is called as Contraction of
demand. (P to P’’)
Term Meaning Effect

Expansion/ Extension Quantity demanded Increases, Downward movement along
of Demand due to decrease in price same Demand curve
Contraction of Demand Quantity demanded decreases, Upward movement along same
due to increase in price Demand curve

6. Increase in Demand
Meaning- Increase or decrease in demand as a result of

changes in factors other than price, while price remains
constant.
Shift of Demand Curve- Increase or decrease in demand

indicate rightward/leftward shift of the Demand curve
respectively.
Example
✓ Current level of demand is depicted by demand curve D0
✓ Increase in Demand-When the curve shifts rightward from D0 to D3, it is called as
increase in demand.
✓ Decrease in Demand- When the curve shifts leftward from D0 to D2, it is called as
decrease in demand.
7. ‘‘Movement along’’ vs ‘‘shift of’’ Demand
Movement along Demand curve Shift of Demand curve

1 Demand curve remains the same There is shift in Demand curve itself
2 This happens due to price change while This happens due to changes in factors
the other factors remains constant other than price, price remaining constant
3 It may be Expansion or contraction It may be Increase or Decrease in Demand
4 Expansion=Downward movement Increase= Rightward shift
Contraction= Upward movement Decrease= Leftward shift

Part C-Elasticity of Demand
1. Elasticity of Demand
Meaning
(a) Elasticity of demand is defined as the responsiveness of the quantity demanded of a
good to changes in one of the variables on which demand depends.
(b) the percentage change in quantity demanded divided by the percentage change in one of
the variables on which demand depends
Factors affecting demand and name of their elasticity

Factors Name of Elasticity Denoted by
Price of the commodity Price Elasticity EP

Income of the consumer Income Elasticity EI
Price of the related product Cross Elasticity EC
2. Price Elasticity of Demand
Meaning:
(a) Price Elasticity of Demand (EP) measure the responsiveness of quantity demanded of a
commodity, to a change in Price, assuming all the other factors as constant.
(b) In other words, it is measured as the percentage change in quantity demanded divided by
the percentage change in price, other things remaining equal.
A. Percentage/ proportionate Method

Formula:
Price Elasticity of Demand = (EP) = % change in quantity demanded
% change in Price
= (Change in quantity/Original quantity) x 100

(Change in price/ Original Price) x 100
= (Δ q/ q) x (p/ Δ p)
= (Δ q / Δ p) x ( p/ q)

Here q= quantity, p= price, Δq = change in quantity, Δp=change in price
Negative sign -since price and quantity are inversely related (with a few exceptions), price
elasticity is negative. But, for the sake of convenience, we ignore the negative sign and
consider only the numerical value of the elasticity.
Example
Quantity Price % change in quantity demanded= (3500-5000) ÷ 5000= 30%
5000 100 % change in price =(150-100) ÷ 100
3500 150 Therefore EP= 30% ÷ 50%= 0.6
B. Point Elasticity – method of Derivative
Meaning
a) In point elasticity, we measure elasticity at a given point on a demand curve.
b) The concept of point elasticity is used for measuring price elasticity where the change in
price is infinitesimal (very small)
c) Point elasticity makes use of derivative rather than finite changes in price and quantity.
Formula :Ep = -dq p ÷ dp q
C. Point Elasticity – Geometric method
a) This method is applicable only for Straight- line

Demand curve touching both the axes.
b) Under Graphical method Elasticity is calculate using
the following formula-
EP - Lower segment
Upper segment
Example: Consider the following graph and find the
Elasticity using Graphical method and state the reason for the same.
Point EP Reason
Y PT/PP = ∞ tT is a line while tt is appoint, hence tt =0
S ST/PS >1 Length of ST> tS
R RT/PR = 1 Length of tR= RT
L LT/LP<1 Length LT<Lt
X TT/PT =0 TT is a point while tT is a line

D. Arc Elasticity of Demand
1. Arc Elasticity is a measure of average responsiveness to

Price change exhibited by a Demand curve over some defined
arc of Demand curve
2. Arc Elasticity measures elasticity in case of large change in
prices and quantities (i.e. over an arc) on the Demand curve
rather than a point
3. Since point elasticity differs at various points on Demand curve, Arc elasticity takes
average of two prices and quantities to measure Elasticity
4. EP= q1-q2 x p1+p2
q1+q2 p1-p2
E. Total Outlay Method
Meaning:
a. In Total Outlay method, Elasticity is calculated by analysisng the change in Total
expenditure or Outlay of the household.
b. we can only say whether the demand for a good is elastic or inelastic; we cannot find
out the exact coefficient of price elasticity.
Elasticity Situation Effect Example

EP < 1 • Price and Expenditure moves in same Demand is Situation E, F, G
direction. said to be (Refer example
• As the price of a commodity decreases, total less below)
expenditure on that commodity decreases. elastic, or
• As the price of a commodity increases, total inelastic
expenditure on that commodity increases.
• In both the above cases, % change in quantity
demanded is less than % change in price.
EP = 1 • Total Expenditure remains Unchanged. Demand is Situation C, D, E
• Due to change in price, Total expenditure on said to be (Refer example
that commodity remains unchanged. unit below
• Increase in price is exactly balanced by a elastic
proportional reduction in quantity purchased.
EP > 1 • Price & Expenditure moves in opposite direction. Demand is Situation A, B,
• As the price of a commodity decreases, total said to be C
expenditure on that commodity increases. elastic (Refer example
• As the price of a commodity increases, total below
expenditure on that commodity decreases.
• In both the above cases, % change in quantity
demanded is more than % change in price.

The Relationship between Price elasticity and Total Revenue (TR)
Elastic Unitary Elastic Inelastic
Price Increase TR Decreases TR remains same TR Increases
Price decrease TR Increases TR remains same TR Decreases
Moves in opposite direction Remains same Moves in same direction
Situation Quantity Demanded (In units) Price Total Outlay

A 1000 50 50000
B 1500 40 60000
C 2000 37.5 75000
D 2500 30 75000
E 3000 25 75000
F 3500 20 70000
G 4000 15 60000
3. Interpretation of the numerical values of elasticity of demand
Description Numerical Interpretation Nature of

value Curve
Perfectly EP =0 Qty. demanded Vertical line
inelastic does not changes Parallel to Y
as price changes axis
Inelastic or 0<EP <1 Qty demanded Relatively

less elastic changes by smaller steeper
percentage than Demand curve
price
Unit Elastic EP =1 Qty demanded 45 degree

changes exactly by straight line
same % as price Or rectangular
hyperbola

Elastic 1<EP <∞ Quantity Relatively
demanded changes flatter demand
by larger curve
percentage than
price
Perfectly EP =∞ Small change in Parallel to X

elastic price will bring axis
infinite change in
quantity demanded
4. Determinants of price Elasticity

1. Availability of substitutes:
➢ Goods having close or perfect substitutes have highly elastic
demand curves.
➢ Goods which do not have close substitute or few substitutes
have less elastic demand curve.
2. Position of a commodity in a consumer’s budget:

➢ Goods having higher proportion of consumers’ spending are more elastic to demand. Eg.
Clothing, provisions and groceries, milk etc.
➢ Goods having lower proportion of consumers’ spending
are less elastic to demand. Eg. Matches, button, salt.
3. Number of uses to which a commodity can be put:

➢ Commodity having possible multiple uses, have more
elasticity to demand. Eg. Milk.
➢ Goods which have specified or particular use have
inelasticity to demand, since they can and should be used
only for that purpose.

4. Time period:
➢ The long run demand for a commodity is more elastic. This is because consumer has a
longer run to adjust his consumption pattern accordingly.
➢ The short run demand for a commodity is less elastic to change in price.
5. Consumer habits:
➢ If the consumer is not habitual to a commodity, demand for that particular commodity
is more elastic and vice-versa.
6. Tied demand:
➢ Goods which have autonomous demand on their own are more elastic
➢ Goods having tied or joint demand are less elastic. Eg. Modular kitchen and oven.
7. Nature of the need that a commodity satisfies:

➢ Luxury goods are price elastic while
➢ necessities are price inelastic or less elastic to price change.
8. Price range:
➢ Goods which are in medium range of price level are more elastic to price change.
➢ Goods which are in very high price range or in very low price range have inelastic
demand.

5. Income Elasticity of Demand
Meaning: Income elasticity of demand is the degree of responsiveness of quantity

demanded of a good to changes in the income of consumers, while the other factors are
constant. It is denoted by Ei.
It refers to amount of change in demand for a commodity due to change in income. It is

the degree of responsiveness of demand to a change in income
Ey = Percentage or proportionate change in Demand = % Q

Percentage or proportionate change in Income % Y
Note-Income effect is positive, so Income Elasticity of demand is also positive. However

there may be negative Income Elasticity in case of inferior goods
Type of Relation Example Formula Curve

Income between
Elastic income &
demand
Positive Positive Normal and Ey = 1
Income Luxury Ey > 1
Elasticity goods Ey < 1
Negative Inverse Inferior Ey < 0

Income goods
Elasticity
Zero Constant Necessaries E = 0

Income (No goods
Elasticity change in
demand
though
there is
change in
income)

5. Cross Elasticity of Demand
• It refers to amount of change in demand for one good due to change in price of other
good.
• Thus cross elasticity of demand is degree of responsiveness of demand for one good to a
change in price of other good.
• It is defined as a ratio between percentage or proportionate change in demand for one

commodity and % or proportionate change in price of other commodity i.e.
Where x & y = Substitute/complimentary goods
Type of Relation between Example Formula Curve

Cross price of one product
Elasticity & demand for other
product
Positive Direct or Positive Tea & CED = 1
Cross relation Coffee, CED > 1
Elasticity (Goods must be CED < 1
substitute)
Negative Inverse relation Car & CED < 0

Cross (Goods must be Petrol
Elasticity complementary goods)
Zero Constant Cloth & CED = 0

Cross (No change in salt
Elasticity demand of one
product though
there is change in
price of other
product)
goods must be
unrelated

Examples for Practice
• Factors affecting Elasticity of Demand or Determinants of
Elasticity of Demand:
Factors Explanation Type of

Elasticity of
demand
Nature of the Necessities. Inelastic
commodity
Luxurious goods. Elastic
Level of income Goods demanded by high income group. Inelastic
Goods demanded by low income group. Elastic
Custom and Goods purchase under influence of Custom and habit. Inelastic
habit
Proportion of Commodity on which Proportion of expenditure is low. Inelastic
expenditure
Commodity on which Proportion of expenditure is large. Elastic
Level of price When price level of a commodity is too high and change Inelastic
and change in in price is smaller.
price
If price level is low and change in price is large. Elastic
Number of Commodity which has limited uses. Inelastic
uses
Commodity which used to satisfy several wants. Elastic
Substitutes Commodity which have less substitutes. Inelastic
Commodity having several substitutes. Elastic
Urgency Commodity which is required urgently. Inelastic
Commodity which is not required urgently. Elastic
The Period Demand for commodity is inelastic in long run. Elastic
Demand for commodity is elastic in short period. Inelastic
Tied demand or Demand for those goods, which are tied to others. Inelastic
Joint demand
Demand for those goods, which are demanded Elastic
independently.
Consumer Demand for commodity used by habitual consumer. Inelastic
habits

6. Advertisement Elasticity
1. Advertisement elasticity of sales or promotional elasticity of demand is the

responsiveness of a good’s demand to changes in the firm’s spending on advertising.
2. The advertising elasticity of demand measures the percentage change in demand that
occurs given a one percent change in advertising expenditure.
3. Advertising elasticity measures the effectiveness of an advertisement campaign in
bringing about new sales.
4. Advertising elasticity of demand is typically positive. Higher the value of advertising
elasticity greater will be the responsiveness of demand to change in advertisement.
Advertisement elasticity varies between zero and infinity.
5. It is measured by using the formula;
Ea = % Change in Demanded / % Change in Spending on advertisement
Elasticity Interpretation
Ea = 0 Demand does not respond at all to increase in advertisement expenditure
Ea >0 but < 1 Increase in demand is less than proportionate to the increase in advertisement
expenditure
Ea = 1 Demand increase in the same proportion in which advertisement expenditure increase
Ea> 1 Demand increase at a higher rate than increase in advertisement expenditure
Part D
Methods of demand Forecasting
Demand Forecasting is Science and Arts.

It is Important for Planning and decision making
Demand forecasting is not fool-proof and correct
It can be done at National as well as International Level
1. Survey of Buyers’ Intentions:

This method involves direct interview of potential customers by asking them what they are
planning to buy during the forthcoming time period, usually a year.
The survey may be conducted by any of the following methods:

a) Complete enumeration method where nearly all potential customers
are interviewed.
b) Sample survey method under which only a scientifically chosen
sample of potential customers are interviewed
c) End–use method, especially used in forecasting demand for inputs,
involves identification of all final users, fixing suitable technical norms of consumption
of the product under study.

Merits/Demerits
a) Burden of forecasting is put on the customers.
b) A number of biases may creep into the surveys.
c) The customers may themselves misjudge their requirements.
d) Their plans may alter due to various factors which are not identified at the time of
the survey.
2. Collective opinion method/ sales force opinion method/ grass roots approach.
a) Firms having a wide network of sales personnel to forecast future demand in their
respective territories.
b) These estimates of salesmen are consolidated to find out the
total estimated sales.
a) These estimates are reviewed to eliminate the bias of
optimism on the part of some salesmen and further examined
with proposed changes
b) Although this method is simple, it is subjective as personal
opinions can possibly influence the forecast.
c) Moreover salesmen may be unaware of the broader economic changes.
3. Expert Opinion method: Delphi Technique

a) The Delphi technique was developed by Olaf Helmer at the Rand Corporation of the
USA.
b) Under this method, firms solicit the opinion of experts
through series questionnaires.
c) Experts are asked to provide forecasts and reasons.
Experts are provided with information and opinion
feedbacks of others at different rounds without
revealing the identity of the opinion provider.
d) These opinions are then exchanged among the various experts and the process goes
on until convergence of opinions is arrived at. This method is best suited in
circumstances where intractable changes are occurring and the relevant knowledge is
distributed among experts.
e) It also has the advantages of speed and cheapness.
4. Statistical methods:
It is considered superior methods because it is more scientific,
reliable & free from subjectivity.
a. Trend Projection method: This method is also known classical

method. Past data pertaining to long period, when arranged
chronologically, yield a ‘time series’ which represent graph.

i. Graphical method
ii. Fitting trend equation or least square method.(sum of the squared differences
between the calculated and observed value is minimized.)
b. Regression analysis: Under this method, a relationship is established between the

quantity demanded (dependent variable) and the independent variables (explanatory
variables) such as income, price of the good, prices of related goods etc. Once the
relationship is established, we derive regression equation assuming the relationship to be
linear. The equation will be of the form Y = a + bX.
5. Controlled Experiments:
a) Under this method, future demand is estimated by
conducting market studies and experiments on consumer
behaviour under actual, though controlled market
conditions.
b) This method is also known as market experiment method.
c) ‘controlled laboratory experiments’ or ‘consumer clinics’
under which consumers are given a specified sum of money
and asked to spend in a store on goods with varying prices,
packages, displays etc. The responses of the consumers are studied and used for
demand forecasting.
6. Barometric method of forecasting:

a) For this purpose, an index of relevant economic indicators is
constructed.
b) Movements in these indicators are used as basis for
forecasting the likely economic environment in the near future.
There are leading indicators, coincidental indicators and
lagging indicators. The leading indicators move up or down
ahead of some other series.
c) For example, impact of Corona Virus indicated fall in demand of Luxurious goods

Chapter 2 Part C- Theory of Supply
Chapter 2C- Supply Analysis
1. Meaning of supply
• Supply refers to amount of a commodity seller is able to sell and willing to
sell in the market at a certain price per unit of time.
• Ability to sell of a seller depends upon stock of a commodity;

• willingness to sell depends upon price of a commodity.
Factors affecting Explanation

individual supply
Cost of Production This factor primarily affects the ability to supply
High cost of production- Less supply
Low cost of production -More supply
Price Higher Price – More supply
Less price – Less Supply
Stock Higher stock – More supply
Less stock – Less Supply
Time Short time period – Less Supply
Long time period – More supply.
Other Factors ✓ Improved Techniques of Production
✓ Infrastructure
✓ Weather conditions
✓ Taxation policy
✓ Monetary Policy
✓ Trade policy
✓ Natural Resources
If the above factors are favorable, supply will increase.
But if the factors are not favorable, supply will decrease
Nature of ✓ More Under Competitive Market
Competition ✓ Less under Monopoly
Prices of related If the prices of other goods rise, they become relatively more
goods profitable to the firm to produce and sell than the good in question.
When a seller can get a higher price for a good, producing and selling
it becomes more profitable. Producers will allocate more resources
towards its production even by drawing resources from other goods
they produce.

2. Law of Supply
• The law of supply is explained by Dr. Alfred Marshall.
• under given conditions supply rises with the rise in price and falls with the fall in price.
• Law of supply states that “other things being equal” there is a direct relationship
between price and supply.
• Stock is Prospective Supply.
Law of supply is explained by following Table & Curve

Explanation of schedule
• When the price is low at Rs. 5. 10 units supplied by Price Supply
seller 1 10
• When price starts increasing, a seller supplies 2 20
more units. 3 30
• It shows direct relationship between price of 4 40
commodity and quantity supplied. 5 50
Features of Supply curve
• The sloping of the Supply Curve explains the Law of

Supply, which describes a direct Price—Demand
relationship.
• Supply Curve slopes upwards from left to the right.
• Supply Curve is positively sloped.
• Supply Curve may be sometimes a straight—line or

sometimes a free hand curve.
• The Market Supply Curve is a lateral summation

(totaling) of Individual Supply Curves of all Producing
Firms, and also slopes upwards from left to the right.
3. Assumptions of Law of Supply
✓ No change in cost of production

✓ No change in technology
✓ No change in infrastructural facilities
✓ No change in amount of Natural Resources
✓ No change in Taxation policy
✓ No change in monetary and trade policy
✓ Normal weather conditions

4. Exceptions to law of Supply
1. Labour supply
a) We notice that initially with the increase in
wage rate labour supply increases but when
wages increase beyond a certain limit labour
supply will decrease.
b) This is represented by backward bending labour
supply curve.
Labour Supply Schedule
Wage Labour Total income

rate supply
Rs.100/hr 12 hr. 1200/day
Rs.250/hr. 15 hr. 3750/day
Rs.700/hr. 10 hr. 7000/day
2. Need for cash - If a seller is going to supply his

product because he needs certain amount of cash, then at
a lower price he will supply more and at a higher price he
will supply less.
3. Savings -If a person wants a fixed amount of income in the
form of interest then, he will save more at a lower rate of
interest and save less at a higher rate of interest.
4. Future Expectations - With a small rise in price, if seller expects

a further rise in future he will decrease the supply.
Similarly, with little fall in price if seller expects a further fall in
future he will increase the supply.

5. Expansion and Contraction in Quantity supplied
1. Meaning: Expansion and Contraction in the quantity

supplied takes place as a result of changes in price, while all
other factors influencing Supply remain constant.
2. Movement on the Supply Curve: Change in quantity

supplied refers to downward or upward movement by the
Producer Firm, on same Supply Curve. The position of the
Supply Curve remains the same.
3. Example:
a) Present price is P and quantity supplied is Q units.
b) When price falls, the quantity supplied ________, on the same supply curve.
c) Similarly, when price rises from P to Pi, the quantity supplied ______________, on the same
supply curve.
d) Upward Movement along the same SS curve is_______________
e) Downward Movement along the same SS curve is_______________
6. Increase and Decrease in Supply
1. Meaning: Increase & Decrease in Supply take place as a result of changes in factors other than
price, while price remains constant.
2. Shift of Supply Curve: Increase / Decrease in Supply
indicates rightward / leftward shift of the Supply curve
respectively.
A. Increase in Supply: When Supply Curve shifts

____________ from So to S2, it is called
___________in Supply.
B. Decrease in Supply: When Supply Curve shifts ____________ from So to Si, it is called
____________in Supply.
7. Price elasticity of supply

• Elasticity of Supply refers to amount of change in supply due to change in price of a
commodity.
• Elasticity of Supply refers to degree of responsiveness of supply to change in its
price.
• Elasticity of Supply refers to the ratio between percentage or proportionate change in
supply and percentage or proportionate change in price

Types Curve Equations
Perfectly Elastic Supply
Supply of a commodity continuously

changes with very minute change in Es =
price.
supply curve will be

horizontal
More Elastic Supply
Percentage change in supply of a

commodity is higher than percentage Es> 1
change in price.
Supply Curve will be Flatter
Unitary Elastic Supply

Percentage change in demand of a
commodity is equal to percentage
change in price.
Supply curve will be 45o Line Es = 1
Inelastic Supply
When percentage change in supply of
a commodity is less than percentage
change in price. Es< 1
Supply curve will be Steeper
Perfectly Inelastic Supply

When demand for a commodity is
fixed and it does not change for any
change in price it is described as
perfectly inelastic supply. Es = 0
In Perfectly Inelastic supply, the

demand curve will be Vertical

8. Methods of measurement of Elasticity of supply
1. Percentage / Proportionate Method: According to this method elasticity of supply
is calculated by dividing a % or proportionate change in supply with the % or
proportionate change in price. As explained above
% Change in supply S1-S2 X 100
% Change in Price S1
P1-P2 X100
P1
2. Point Method: This method is used to find out elasticity at a point on supply curve.
The elasticity at a point on the supply curve can be measured with the help of following
formula.
ES =dq p
dp q
3 Arc Elasticity: when the price change is somewhat larger and we have to measure
elasticity over an arc rather than at a specific point on it, in such cases, the concept of
arc elasticity is used. In arc elasticity we use the average of the two prices and
quantities (Original & new)
ES = Where P1and Q1 are original price and quantity
respectively and P1 and P2 are new price and quantity
respectively.
9. Determinants of Elasticity of Supply
More Elastic Less Elastic

The longer the period of time Increase in production causes
substantial increase in costs
large number of producers
Products that involve more complex
there is high degree of competition
production processes
fewer barriers of entry
Require relatively longer time to
Supply will be elastic if firms are not produce
working to full capacity /Spare capacity
shorter time period
If key raw materials and inputs are easily
If a production process involves use
and cheaply available
of materials which are in short
If firms have adequate stocks supply
The ease with which factor substitution can those that take longer delivery
be made. period
If both capital and labour are occupationally which are highly specialized
mobile

10. EQUILIBRIUM PRICE
AND EFFECT OF INCREASE / DECREASE IN DEMAND & SUPPLY
Price Determination
The interaction between Demand and Supply
leads to the determination of Price and
Quantity. It is the level at which both
Buyers and Sellers are ready to buy / sell
the product.
It is also Known as Market Clearance point

Determination of Market Price is the centreal theme of Micro economics hence it is
also called as Price theory
11. You are required to determine the impact of following changes & draw new Graph
Original Demand denoted by ‘ D ’ and Original Supply denoted by ‘ S ’ ; P= Price and Q=

Quantity at current level
1) Original Demand Increased from D to D1 while Supply remains constant
2) Original Demand decreased from D to D2 while Supply remains constant
3) Original Demand Remains constant while Supply increased from S to S1
4) Original Demand Remains constant while Supply decreased from S to S2
5) Both DD and SS increases but increase in DD is greater than SS
6) Both DD and SS increases but increase in DD is less than SS
7) Both DD and SS decreases but decrease in DD is more than SS
8) Both DD and SS decreases but decrease in DD is less than SS
9) DD increased and SS decreases
10) SS increased and DD decreases
12. Concept of Producer Surplus
Market Equilibrium and Social Efficiency
Social efficiency represents the net gains to

society from all exchanges that are made in a
particular market.
It consists of two components:
i. consumer surplus and
ii. producer surplus.

a. We have already learned that consumer surplus is a measure of consumer welfare.
b. There is welfare gain to producers as well when they participate in the market, namely
producer surplus. Producer surplus is the benefit derived by producers from the sale of a
unit above and beyond their cost of producing that unit.
c. This occurs when the price they receive in the market is more than the minimum price at
which they would be prepared to supply.
d. It is represented by the area above the supply curve and below the price line For all
quantities below OQ, we find that there is a difference between the price that producers
are willing to accept for supplying the good and the price that prevails in the market
(P).Producer surplus disappears when market price is at equilibrium i.e the price at which
sellers are willing to offer for sale is equal to the price that they receive.
e. From figure 35, we find that at price P, when the market is in equilibrium, social
efficiency is achieved with both producers and consumers enjoying maximum p ossible
surplus.

Chapter 3- Part A- THEORY OF PRODUCTION
PART A- Production Concept
1. Meaning:
1. According to James Bates and J.R. Parkinson

“Production is the organized activity of transforming
resources in to finished products in the form of goods
and services and the objective of production is to satisfy
the demand of such Transformed Resources".
2. Man Cannot Create Matter
3. Production = Creation of Utility and it also includes Addition of Utility.
2. Methods of Creation of Utility
Form Utility- Place Utility - Time Utility- Personal Utility-

Conversion of Raw Changing place of Making available Making use of
material into Finished resources this can material at times personal skills in the
goods. be obtained from when they are not form of services.
extraction & normally available.
transferring goods
from one place to
another
Conversion of wooden Removal of gold, coal Frozen eatable Skill as organizer,

into furniture from earth & sand products. dancer, painter
from sea.
Take example of woolen cloths – Wool made into woolen cloth is Form utility. Transported
from Manufacturer to Retailer is Place utility. Stored throughout the year and made
available in winter is time utility. The salesman show cast his skill to sell the product is
Personal Utility

3. Factors of Production
A. LAND
1. Every free gift of nature on Surface of the earth + below
the surface of the earth+ above the surface of the earth
2. No Social Cost: Since no sacrifice is made in creation of land.
3. Permanent factor and Indestructible (Ricardo)
4. Passive factor:
5. Heterogeneous factor and site value differs from place to
place
6. Mobility: Geographically land is ___________ but occupationally it is ____________.
7. Subject to diminishing returns:
8. Supply: Supply of level is perfectly _______________.
B. Labour –
1. Mental or physical exertion to produce G&S, for economic
reward.
2. Perishable Nature- Labourer cannot store his Labour
3. Labour is Active factor of Production
4. Labour is said to have no reserve price
5. Weak bargaining power.
6. Self- Source- Labour is inseparable from the Labourer himself.
7. Variations in skill and productivity
8. Productivity differs from person to person
9. Supply of labour cannot be Changed rapidly
10. Peculiar relationship between labour supply and Wage rate- Backward bending
Supply curve
a) Direct Relationship: Generally
b) Reverse Relationship at Higher Prices
c) Reverse Relationship at Lower Prices
Labour Not a Labour
Services of Maid Servant. Services of Housewife.
Singing against payment of a fee. Singing in the company of friends for the sake of

C. Capital-
1. Part of wealth which is used for further production of
wealth, or which yields an income.
2. Capital is a stock concept
3. Capital refers to only that part of wealth, that is used
for further production.
4. Not all wealth is capital but all capital is wealth
5. Produced means of Production
6. Man—made means / factor
7. Capital is Mobile
8. Perishable factorthat’s why we charge depreciation
9. It is Secondary Factor of production
1. Types of Capital:
a) Fixed Capital: Those types of capital goods that are used again and again for
production such as machinery.
b) Working Capital/ circulating capital: They refer to those types of capital that are
used up at once. Such as raw materials
c) Sunk Capital: Those types of capital that have specific use hence no occupational
mobility e.g. sewing machine.
d) Floating Capital: Capital goods which have various alternative uses and occupational
mobility. E.g. A computer.
e) Money Capital: Money funds used in production is known as money capital.
f) Real Capital: It refers to real productive asset, lime Plant &Machinery.
g) Human Capital- Refers to ability and skills of Individual
h) Tangible Capital – Can be perceived by sense.
i) Individual Capital – is personal property owned by individual
j) Social Capital – Belongs to society as whole
Note: Land and labour are primary or original factors of production, but capital is not a
primary or original factor; it is a produced factor of production.
2. Stages in capital Formation –
Capital Formation is also Known as Investment
a) Savings: Ability to save depends upon the income capacity of individual.
b)Mobilization of Savings: network of banking and other financial institutions
c) Investments: It is done by business sector

D. Entrepreneur
i. Meaning:
a. A Person, who combines the various factors of production in
the right proportions, initiates the process of production and
bears the risk involved in it.
b. Also Called as Organizer, Manager or the Risk—Taker.
c. Without the Entrepreneur, the other factors of production would remain unutilized or
idle.
d. Holds final responsibility of the business.
e. Entrepreneurship gets its reward (i.e. Profit), only after all other factors of
production have been rewarded, i.e. after Rent, Wages and Interest.
ii. Functions of an Entrepreneur

1. Initiating and Running the business:
2. Risk—Bearing: important function of an entrepreneur
3. Innovations:
iii. Enterprise Objective

1. Organic Objectives – Survival then Growth and Expansion
2. Economic Objectives- Profit Maximizing Objective
3. Social Objectives: Avoid anti—social practices, opportunities for gainful employment ,
continuous and sufficient supply of unadulterated goods ,does not cause any type of
pollution.
4. Human Objectives: All the objectives towards its employees
5. National Objectives:
iv. Constrains in achieving the objectives

a) Lack of Information
b) Infrastructure
c) Factors of Production
d) Economic Aspects
v. Enterprise's Problems
a) Objective
b) Location of Plant
c) Size of Plant:
d) Physical Facilities
e) Finance:
f) Organisation Structure:
g) Legal Compliance:
h) Industrial Relations:

PART B – PRODUCTION FUNCTION

A. Meaning:
1. Production Function is the technological relationship

between physical inputs and physical outputs
2. It States maximum amount of output that can be

produced with given quantities of inputs, in the existing
state of technology.
3. Production Function gives the minimum quantities of

various inputs that are required to yield a given quantity of output.
B. Cobb-Douglas Production Function
1. Paul H. Douglas and C.W. Cobb of U.S.A studied production function of American
Manufacturing Industries.
2. Output is manufacturing production and inputs used are Labour and Capital.
3. Cobb-Douglas Production Function is Q=KLaC(1-a),

Where, Q is output, L is Quantity of Labour and C the quantity of Capital. K and a are Positive
Constants.
4. Labour contributed about 3/4w and Capital about1/4th of the increase in the
Manufacturing Production.
C. Short run and long run production function
Short Run Long Run

Meaning It is the period of time which is It is the period of time in which all the
too short for a Firm to install factors production are variable. So, the
New Machineries / Capital Firm will
Equipments to increase production. be able to install new machineries /
Equipments, apart from increasing the
units of Labour, Materials, etc.
Fixed Only one Factor of Production is There is no Fixed Factor of Production in
Factor kept constant or fixed. the long—run.
Proportion Proportion between factors Quantity of Factors changes, i.e. more

between changes, i.e. more use of the use Factors, keeping the proportion as
Factors Variable Factor, keeping Fixed constant.
Factor as constant.
Theory Law of Variable Proportions is Law of Returns to Scale is applicable
. applicable in the short—run. in the long—run.

D. Assumptions:
• It is related to a particular unit of time.
• The technical knowledge during that period of time remains constant.
• The factors of production are divisible into most viable units.
• The producer is using the best technique available.
Refer schedule below and consider the example-
Terms Involved:
Total TP is the total output resulting from the efforts of all the factors of
Production production combined together at any time.
Average Average product or average physical product (APP) may be defined as
Production total product per unit employment of the variable input. Thus
AP = TP/Units of variable input (labour)
Marginal MP is the change in TP due to change in the quantity of variable
Production factor i.e. labour. In other words, it is the additional TP due to an
(MP) additional unit of input. MP = Change TP I change in Labors OR
Mp = MP = TPn – TPn-1 or Change in Output/ Change in Input
Schedule Labour TP AP MP Analysis
1 2 2 2
MP &AP both increases; MP>AP; TP
2 5 2.5 3
also increases
3 9 3 4
4 12 3 3 MP=AP, AP = maximum
5 14 2.8 2
MP &AP both decreases, MP<AP; TP
6 15 2.5 1
increases MP = 0,
7 15 2.1 0
TP=maximum
8 14 1.7 -1
AP > MP both decreases TP decreases
9 12 1.3 -2
Relationship between Total Product and Marginal Product I
Note: The point on the TP Curve when MP is maximum, is called Point of Inflexion

Relationship between Average Product and Marginal Product
a. When AP rises, MP >AP.
b. When AP is maximum, MP =AP.
c. MP declines slightly earlier than AP
d. MP Curve cuts AP Curve from above when AP is maximum.
e. When AP decreases, MP <AP.
f. MP Curve declines steeply than AP.
g. MP may become zero and negative later, but AP continues to remain positive
LAW OF VARIABLEPROPORTION
1. The Law of Variable Proportions analyses the production function with one factor as
variable, keeping quantities of other factors fixed.
2. So, the Law refers to input—output relationship, when the output is increased by varying
the quantity of one input.
3. This Law operates only in the short—run, i.e. when all factors of production can not be
increased or decreased simultaneously.
4. This Law is also called — (i) Law of Proportionality, (ii) Law of Diminishing Returns, (iii) Law
of Diminishing Marginal Physical Productivity.
Explanations to Various Stages
1. Explanation to Stage 1
a) Full Use of Fixed Indivisible Factors- Fixed Factors are more intensively and
effectively utilized. This causes the production to increase at a rapid rate.
b) Efficiency of Variable Factors- Through Specialization
c) No Scarcity of Variable factor
d) Reaching the right combination
2. Explanation to Stage 2-
a) Inadequacy of Fixed Factor
b) Less efficiency of Variable Factor
c) Imperfect Substitutes
d) Wrong combinations
Note: Stage II is called Law of Diminishing Returns since MP and AP both show
decreasing trend. However, both MP and AP remain positive
3. Explanation to Stage 3
a) Variable Factor becomes too excessive, Due to this, the total output falls
instead of rising.
Note: Stage III is called Law of Negative Marginal Returns

Since the second stage is the most important, So stage II will be stage of operation
and because of that in practice we normally refer to the law of variable proportion
as the law of diminishing returns.
Stage 1 and stage 3 are called as stage of Economics Nonsense or Economic

Absurdity
Law of Return to scales – Long Run
LAW OF RETURNS TO SCALE

Law In the long run, all factor inputs in the production function can be changed.
The behavior of output consequent to change in the quantities of all
factor inputs in the same proportion(i.e. keeping, the factor proportions
unaltered) is known as 'returns to scale'.
Types of • Increasing Returns to Scale:
returns to • Constant Returns to Scale:
scale • Diminishing Returns to scale:
Increasing 1. Increasing returns to scale occur when
Returns to a simultaneous increase in all the
Scale inputs in the same given proportion
result in a more than proportionate
increase in the output.
2. For example, if input is increased by
100% but the output increases by 125%
Constant 1. Returns to scale are said to be constant

Returns to when a proportionate increase in all
Scale: the inputs results in proportionate
increase in output. For example if
input is increased by 100% but the
output also increases by 100%.
2. Constant return to scale is also called
'Linear Homogeneous Production
Function'.
Diminishing 1. Diminishing returns to scale occur when a
Returns to simultaneous increase in all inputs in the
scale: same given proportion result in a less than
proportionate increase in the output.
2. For example, if Input is increased by
100% but the output increases only by
75%

Cobb-Douglas Production Function exhibits returns to scale in production:
Increasing returns to scale. Output increased more than proportionate to use

a+b>1
of factors (labour and capital)
a+b =1 Constant returns to scale. Output increased in same proportion with all
factors.
Decreasing returns to scale. Output decreased more than proportionate to use
a+b<1
of factors (labour and capital)
Original equation = 1X+1Y =1Z

After simultaneous Increase in all inputs by 2 times Nature
2X +2Y = 2Z Constant Return
2X +2Y = 3Z Increasing Return
2X +2Y = 1.5Z Decreasing Return
2X +2Y = 0.5Z Negative Return
Causes of the application of the law returns to scale
• Internal and external economics of scale.

• Internal and external diseconomies of scale.
1. Internal Economies and Diseconomies to Scale

Use of greater degree of division of Labour and specialised machinery at higher levels of
output are generally termed as Internal Economies.
Technical Managerial Commercial Risk— bearing Financial
All these factors are within the control of an organization and thus are internal Factors. These
factors initially acts Economies but after a pint becomes diseconomies
2. External Economies are explained below —

Cheaper Raw Technological Development Growth of Better
Materials and development for of Skilled ancillary transportation
Capital Equipment entire industry Labour industries and marketing
for entire industry
3. External Diseconomies:
Rise in Factor Prices: Higher Costs: Government Restrictions:

Production Optimisation
Isoquant Curve/ Equal—Product Curves/ Production Indifference Curves/ Isoproduct Curves
1. Isoquant Curve:
1. "Iso" means equal and "quant" means quantity. Hence, an
Isoquant represents a constant quantity of output.
2. An Isoquant is a Curve that shows all the combinations of
inputs that yield the same level of output.
3. So, the Producer is indifferent as to which combination
he chooses.
4. Thus, Isoquants are similar to Indifference Curves in the Theory of Consumer Behaviour.
2. Illustration: Consider two Factor Inputs (Labour and Capital) required for producing 100 units of a
Product. Different combinations in which the same output of 100 units of Product can be achieved are
given below.
Combination Units of Labour Units of Capital Product Output MRTS (See Note)
A 5
(x) 9
(y) 100 units
B 10 6 100 units (9- 6)/(10-5) = 0.6
C 15 4 100 units (6 – 4)/( 15 -10) = 0.4
D 20 3 100 units (4-3)/(20-15)= 0.2
MRTS always shows diminishing trend.
MRTS=Marginal Rate of Technical Substitution
MRTS= Change in units of capital/ change in units of labour
Features of Isoquants:
1. Isoquants are convex to the origin, due to diminishing trend of MRTS
2. Isoquants are negatively sloped, i.e. downwards from left to right.
3. Isoquant do not touch either axis, since it indicates that Output can be producing by using
only one factor, which is not considered under the study of Isoquants.
4. An Isoquant lying above and to the right of another Isoquant represents a higher level of output.
5. Two Isoquants cannot cut each other, i.e. Isoquants are non—intersecting.
6. Isoquants need not be parallel.

ISOCOST LINES/ Equal—Cost Lines or Budget Line or the Budget Constraint Line
Isocost Lines:
1. Isocost Line shows the various alternative combinations of two Factor Inputs, which a Firm can buy
with given amount of money.
2. All points on a Budget Line would cost the Firm the same amount. Whatever the combination of
Factor Inputs the Firm chooses; the Total Cost to the Firm remains the same.
3. Whenever there is a parallel shifting of the Isocost Line due to a change in Total Expenditure, then
the slope of the Isocost Line would remain the same.
Meaning:
1. A Firm may try to minimise its cost for producing a given level of output, or it may try to
maximise the output for a given cost or outlay.
2. A Profit Maximising Firm is interested to know what combination of factors of production (or
inputs) would minimise its Cost of Production for a given output, and also the optimum level of
output.
3. This is obtained by combining the Firm's Production and Cost Functions, namely Isoquants and
Isocost Lines respectively.
4. Isoquants represent the technical conditions of production for a product, and Isocost Lines
represent various "levels of cost"(given the prices of two factors). Together, these can help the
Firm to optimize its production.
Difference Between ISO Quant and Indifference Curve

a. ISO Quant Curve – Level of Production and thus Quantifiable
b. Indifference Curve – Level of Satisfaction which cannot be Quantified
Definitions of this chapter on page no 22.1 and 22.2

Chapter 3 Part B THEORY OF COST AND REVENUE
PART A – COST CONCEPT
Chapter 3 – Part B – Unit A- Cost Concepts
Meaning
1. Business decisions are generally based on cost of production i.e.

the money value of inputs and output is considered.
2. In other words, cost analysis is concerned with the financial
aspects of production.
Types of cost
Name Explanation
• Explicit cost 1. Costs which involve cash payment towards factors
• Out-of-Pocket of production.
Costs 2. Recorded in books of accounts.
• Outlay Costs. 3. Rent, Wages & Salaries, Interest on Loans borrowed
• Accounting for business, etc.
Costs
• Implicit cost 1. Costs do not involve any cash payment to

• Notional cost outsiders. It is used for Decision Making
• Imputed cost 2. It is the monetary reward for all factor of
• Opportunity production owned by entrepreneur himself
Costs. 3. Not recorded in books of account.
4. Interest on own Capital, Rent of own premises,
Salary to Entrepreneur, etc.
Economic Costs Explicit Costs + Implicit Costs.
Opportunity Cost 1. It refers to the value of sacrifice made, or benefit of opportunity
foregone in accepting a next best alternative course of action.
2. Opportunity Cost arises only when alternatives are available. If a
resource can be put only to a particular use, there are no
Opportunity Costs.
3. Opportunity Costs do not involve any cash payment as such.
4. It is considered only for decision—making and analytical purposes.
5. Examples: A person quits his job and enters into business. Here, the
Salary foregone from employment constitutes Opportunity Cost.

• Direct cost 1. Direct costs are those which have direct
• Traceable cost relationship with a component of operation
like manufacturing a product, organizing a
process or an activity etc.
2. They are charged directly to product
3. They can be generally quantified and
expressed per unit of output, e.g. 5 kg of Raw
Materials per unit of product, etc.
• Indirect cost 1. Indirect costs are those which are not easily and definitely
• Non-traceable identifiable in relation to a plant, product, process or department.
2. Therefore, such costs are not visibly traceable to specific goods,
services, operations, etc.; but are nevertheless charged to
different jobs or products in standard accounting practice and
Apportioned on suitable basis.
3. Factory Rent, Electric Power, and other Common Costs incurred for
general operation of business benefiting all products jointly.
cost
Committed Fixed Also known as "Unavoidable" Fixed Costs. These costs cannot be
Costs controlled. Unavoidable even in shut down
Discretionary Also known as "Avoidable" Fixed Costs. These costs can be controlled.
Fixed Costs Avoidable in shut down
Historical cost / Historical cost refers to the cost incurred in the past on the
Sunk Cost acquisition of a productive asset such as machinery, building etc.
Replacement cost is the money expenditure that has to be incurred for
Replacement cost
replacing an old asset.
Incremental cost Incremental cost refers to the additional cost incurred by a firm.
Results from VC and FC both. In short run affected by VC only.
Marginal Cost Only VC. Subset of Incremental cost
Private cost
Private costs are costs actually incurred or provided for by firms and
are either explicit or implicit.
Social Cost
1. Social cost =private cost + external cost.
2. It includes the cost of resources for which the firm is not

required to pay price such as atmosphere, rivers, roadways etc.
and the cost in terms of dis-utility created such as air, water and
environment pollution.
1. Revenue – Accounting cost = Accounting profit
2. Accounting profit – opportunity cost = economic profit

Strike the incorrect
1. Rent is paid to the Landlord, Salary/ wages paid to employee/ workers, Interest on Capital is
borrowed and used in business is Explicit / Implicit cost.
2. Land is owned by the Entrepreneur, Own people are employed in the firm, Entrepreneur
employs his own funds as Capital is Explicit / Implicit cost.
3. Entrepreneur himself manages the business is Explicit / Implicit cost.
Difference Between Normal profit, Supernormal Profit and Economics Loss
Explicit Cost + Implicit cost = Revenue Normal profit
Explicit Cost + Implicit cost < Revenue Super Normal profit
Explicit Cost + Implicit cost > Revenue Economics Loss
Important types of cost
Output Total Total Total Average Average Average Marginal

fixed
(Unit) variable cost fixed cost variables Total Cost Cost Rs.
cost
TFC TVC TC AFC AVC AC MC
0 10 - 10 - - - -
1 10 10 20 10 10 20 10
2 10 18 28 5 9 14 8
3 10 24 34 3.33 8 11.3 6
4 10 28 38 2.5 7 9.5 4
5 10 32 42 2 6.4 8.4 4
6 10 38 48 1.67 6.33 8 6
7 10 46 56 1.43 6.57 8 8
8 10 56 66 1.25 7 8.25 10
9 10 68 78 1.11 7.55 8.67 12
Type Nature
1. Fixed Costs are costs that do not vary with output.
2. They are period—related.
3. They are taken as a function of time and not of output.
Fixed
4. They are incurred even at zero level of output.
Costs
5. Fixed Cost per unit of output decreases with increase
in output, and vice—versa.
6. Rent, Insurance, Interest on Loans, Depreciation, etc. are Fixed Costs.
1. Variable Costs are costs that vary, based on the level of output.
2. They are product—related.
3. They are taken as a function of output and not of time.
Variable 4. They are incurred only when production commences.
Costs 5. Variable Costs are avoidable costs.
6. Variable Cost per unit of output generally remains constant, if Total Variable
Costs vary proportionately with output.
7. Cost of Raw Materials and Wages are Variable Costs.

Marginal 1. Marginal Cost is the addition made to the total cost by production of an additional unit
Costs of output.
2. Marginal Costs per unit = Difference in Total Cost (TC) between two output levels
Difference in Output Quantity at those levels
3. TCn- TCn-1
4. Marginal Cost (MC) Curve of a Firm declines first,
reaches its minimum and then rises. Hence, Marginal
Cost Curve of a Firm is U—shaped.
Cost 3. Mathematical relationship between cost of a product and the various

Function determinants of cost.
4. In cost function Total cost and Cost per unit are dependent cost
Short Run 1. Period in which some factors are fixed and some factors are variable.
Fixed factor have fixed cost and variable factor have variable cost.
2. So, law of variable proportion applies here. In short-run, output can be
increased or decreased by changing variable factors only but fixed factors
cannot be varied
Total TFC is parallel to X-axis. In the figure given

Fixed below, even at zero output-fixed cost remain
cost the same in the short run. e.g. rent and
insurance
(Short
run)
Total Variable Costs are those costs that change with

Variable changes in level of output. It has inverse’s'
cost shape and start from origin. Figure given below
(TVC) shows that as output is zero cost is also zero
and as output increases cost increases. e.g. raw
material, power etc.
Semi- There are some costs which are neither perfectly variable, nor absolutely fixed
variable in relation to the changes in the size of output.
And Semi Example: Elasticity charges include both a fixed charge and a charge based
Fixed on consumption.
Cost

Short run 1. It can be noticed that TFC is constant
Total cost at all levels of output.
behaviour 2. TVC increases with the increase in
output but rate of increase is
changing.
3. Initially TVC increases at decreasing
rate but after some time it increases
at increasing rate.
4. Behaviour of TVC is determined by law of variable proportion.
5. TC increases with increase in output. Changes in TC are determined by
TVC.
6. TFC curve is a horizontal line starting from y–axis.
7. TVC curve is upward slopping. Initially it is fatter and later on steeper.
8. TC curve is upward sloping starting from y-axis.

Short Run Average Cost
Average 1. Average fixed cost is the total fixed cost divided by the output.
Fixed Cost 2. TFC/Q.
(AFC) 3. The general shape of the AFC curve is downward sloping it does not touch the
X-axis as AFC cannot be zero.
4. It is not 'U' shape. This curve is also called Rectangular Hyperbola.
Average 1. Average variable cost is the total variable cost divided by the output.
Variable Cost 2. TVC/Q.
(AVC) 3. The average cost curve will first fall, then reach a minimum and then rise again.
4. It has 'U' shape.
Average 1. Average total cost is total cost divided by the output.

Total Cost 2. TC/Q or AFC+AVC.
(ATC) 3. The ATC curve first falls, reaches it’s minimum and then rises.
4. The ATC curve is 'U' shape due to law of variable proportions.
Marginal 1. Marginal cost is the change in total cost due to change in the output.
Cost (MC) 2. MC= Change in Total Cost / Change in Qty. produced
3. MC = Change Total Variable Cost / Change Qty. produced.
4. The MC curve is also 'U' shape
Behavior of AFC goes on diminishing with the increase in

Average – output but it never becomes zero.
costs in AVC initially declines but later on goes on
Short - Run increasing.
ATC initially decreases, constant for a while &
finally goes on increasing.
MC initially decreases & finally increases.
The point at which ATC is minimum. It is equal to MC.
AFC curve is a ‘rectangular hyperbola’ because
AFC x Q is always constant.
Relationship between Average Cost and Marginal Cost Curves
1. When AC falls as a result of an increase in output, MC is less than AC.

2. When AC is minimum, MC = AC. So, MC Curve cuts the AC Curve at its minimum.
3. When AC increases due to increase in output, MC is greater than AC.
Relationship between ATC and MC
✓ Initially ATC & MC both decline with increase in output. In this situation ATC > MC.
✓ When ATC is minimum ATC = MC.
✓ When ATC & MC both are increasing MC > ATC.
✓ When AC is decreasing, MC may be decreasing or increasing.
✓ When AC is increasing MC must be increasing.

Long run average cost curve
1. LAC Curve: A Long Run Average Cost Curve (denoted as LAC Curve) depicts the functional
relationship between output and the long—run cost of production.
2. No distinction of Fixed - Variable: All factors of
production are variable in long—run.
3. AC cannot be higher in the long—run, than in the short—run.
Thus, LAC is the least—cost combination, for any particular
output level.
4. Planning Curve: LAC Curve is called Planning Curve.
5. SAC (Short—Term Average Cost) Curves are called Plant Curves.
6. LAC derived from SAC: LAC Curve is derived as an envelop / tangent of all SAC Curves. Further,
the
7. LAC Curve is a U—Shaped Curve, due to the operation of Law of Returns to Scale.
8. Selecting the suitable SAC Curve at different output levels:
9. Note: The Firm should select the SAC, not the lowest point of that SAC.
10. Deriving LAC Curve in case of numerous / infinite SAC Curves:
11. In the diagram, the LAC Curve is drawn as a smooth curve, so as to be tangent to each of the SAC
Curves.
12. Note: LAC Curve is tangent to each of the SAC Curves, not the minimum points of the SAC Curves.
So
When LAC Curve is — LAC will be tangent to Principle
The falling—portions of the Returns to Scale will first increase, due to
Declining SAC Curves. internal and external economies. So, LAC
will decline.
The rising portions of the Returns to Scale will decrease later, due to
Rising SAC Curves. internal and external diseconomies. So, LAC
will rise.
Thus, as a result of initial fall and subsequent increase in LAC, it will be a U—shaped Curve.
Note that The Modern LAC Curves are ‘L shaped’

REVENUE CONCEPT
Qty Price pu TR = MR Space for Diagram

(Q) (AR=P) PxQ
1 22 22 22
2 20 40 18
3 18 54 14
4 16 64 10
5 14 70 6
6 12 72 2
7 10 70 -2
8 8 64 -6
9 6 54 -10
10 4 40 -14
Meaning 1. Revenue refers to money received by a seller by selling his product
in the market.
2. Hence, revenue is sales receipts or sales proceeds.
Total 1. It is the total money received from the sale of all units of the product.
Revenue 2. Total Revenue = Price x Quantity (P x Q)
Average 1. Average Revenue = Total Revenue/Quantity (TR/Q)

Revenue (AR) 2. Average Revenue is always equal to Price
Marginal 1. MR is the change in TR resulting from the sale of an additional unit of a
Revenue commodity.
(MR) 2. Marginal Revenue = Change in TR/ Change in Qty.
3. Marginal Revenue= TRn – TRn-1
MR, AR, TR Marginal Revenue = Average Revenue (E – 1/E)
and Elasticity Where E = Price elasticity of demand
of Demand 1. If E = 1, Then MR = 0
2. If E > 1, Then MR will be Positive
3. If E < 1, Then MR will be Negative
Behaviour of 1. A firm should produce at all if Total Revenue(TR) from its product is
TR, AR & MR equal to or exceeds its Total Variable Cost (TVC) or say TR > TVC (Price
> AVC).
2. If TR = TVC, firm's maximum loss will be equal to its Fixed Cost. As we
know P x Q = TR and AVC x Q = TVC
3. It will be profitable for the firm to increase output whenever MR > MC
and decrease output whenever MR < MC and the firm should continue
production till
4. MR = MC and MC curve should cut to MR from below.

Summary of Relationships:
▪ If TR increases, MR will be positive.

TR and ▪ When TR is maximum, MR = 0.
MR ▪ If TR decreases, MR will be negative.
▪ MR and AR both decline, but MR falls rapidly than AR
MR and ▪ AR Curve is flatter than MR.
AR ▪ MR can be zero and even negative, while AR will never cross below the X axis.
▪ At the point where MR = 0, Elasticity of Demand on AR Curve will be 1.
E qui libr ium Poi nt of the Fi rm
1. It will be profitable for the Firm to expand its output Y

whenever Marginal Revenue (MR) is greater than
Marginal Cost (MC), and to keep on increasing output
until MR = MC.
2. If any unit of production adds more to Revenue than to
Cost, production and sale of that unit will increase
profits. Similarly, if it adds more to Cost than to
Revenue, it will decrease profits.
3. Profits will be maximum at the point where Additional Revenue (MR) from a unit equals its
Additional Cost (MC). So, MC = MR.
4. Further, the MC Curve should cut the MR Curve from below (and not from above). This is
so because, upto this point MR > MC, hence there is an incentive for further production.
Beyond this point, MC > MR.
5. This position (i.e. where MC = MR, and MC cuts MR from below) is called Equilibrium position
for the Firm.
6. Thus, Note: For achieving Equilibrium Position, the conditions to be satisfied are —MC = MR,
and MC Curve should cut MR Curve from below, i.e. MC should have +ve slope.
7. Merely being in Equilibrium position does not mean that the Firm is making profits. The actual
position of profits can be known only on the basis of AR and AC Curves

Chapter 4- Meaning and types of Market
Chapter 4 – Meaning and Types of Market
A. Market basics
Meaning:
1) Market is a place where Buyers and Sellers meet and bargain over a commodity for a
price.
2) Also, market can be defined simply as all those buyers and sellers of a good or service who
influence price.
Elements of a Market: The elements of a Market are-
1) Buyers and Sellers,
2) Product or Service,
3) Bargaining for a Price,
4) Knowledge about market conditions, and
5) One Price for a Product or Service at a given time.
B. Types of Market
The Market Structures analysed in Economics are --

Perfect Monopoly: Monopolistic Oligopoly Monopsony-
Competition Competition
Many Sellers Single Seller Many Sellers A Few Sellers Single Buyer of a
selling identical producing offering selling competing product or
products to many differentiated differentiated products to many service.
Buyers. products for products to many Buyers.
many Buyers. Buyers.
Other forms of the market are

1. Duopoly- Duopoly is a market situation in which there are only two Firms in the market.
It is a sub—set of Oligopoly.
2. Oligopsony- Oligopsony is a market characterized by a small number of large buyers.
3. Bilateral Monopoly- 1It is a market structure in which there is only a Single Buyer and a
Single Seller. Thus, it is a combination of Monopoly Market and a Monopsony Market

Classification of Market:
Markets are generally classified into-
a. Product markets- markets for goods and services in which households buy the goods and
services they want from firms. Product markets allocate goods to consumers,
b. Factor markets- those in which firms buy the resources they need – land, labour, capital
and entrepreneurship- to produce goods and services. Factor markets allocate
productive resources to producers. The prices in factor markets are known as factor
prices.
Area Time Nature of Regulation Volume of Types of

Transaction Business Competition
Local market Very Short period- Spot Regulated Wholesale Perfectly
Also Known as Market Market market competitive
MARKET PERIOD
Perishable and Market for Flower,
Bulky Goods fish etc.
Supply is Fixed
Regional Short period Future Unregulat Retail Imperfectly
Market Market ed Market Market Competitive
Kolhapuri
Chappal
National Long Period
Market
Hindi books
International Very long/ Secular
Market Period
High Value
Small Bulk
Alfred Marshall conceived the ‘Time’ element in markets and on the basis of this,
markets are classified into
Do You Know??
Difference between ‘value in use’ and ‘value in exchange’.
Value in use refers to usefulness or utility i.e the attribute which a thing may have to
satisfy human needs.
Value in exchange or economic value is the amount of goods and services which we may
obtained in the market in exchange of a particular thing. It is measured by the amount
someone is willing to give up in other goods and services in order to obtain a good or service.
In Economics, we are only concerned with exchange value. Considerations such as
sentimental value mean little in a market economy

C. Perfect Competition
Features of Perfect Competition

1. Large number of Buyers & Sellers
2. Sellers offer Homogeneous/ identical Products
3. No individual Buyer or Seller will be in a position to influence the demand or supply in the
market.
4. Firm is free to enter the market or to go out of market.
5. There is a perfect knowledge, on the part of Buyers and Sellers.
6. There are adequate facilities for the movement of goods from one center to another
7. All Firms individually are Price Takers. Because-
If he lowers the price
_____________________________________________________________________
_____________________________________________________________________
_______________________________ and if he increases the price
_____________________________________________________________________
_____________________________________________________________________
______________________________.
8. The goods are dealt on at a uniform price throughout the market
9. Buyers have no preference as between different Sellers
10. Sellers are indifferent as to whom they sell
11. There is perfect mobility of factors of production.
Why?_________________________.
12. Perfect Competition is a MYTH
How Demand Curve is determined
1. In Perfect competition there is Uniform Market Price

2. All the firms are Price Taker and same price prevails in the market.
3. Price Elasticity of Demand is infinity.
4. Hence, the Equilibrium Price determined by Market Demand and Supply forces, constitutes
the Demand Curve for the Firm. This Price is also the Average Revenue (AR).
5. and Marginal Revenue (MR) for the Firm, since the price is uniform in the market. So,
in Perfect Competition, D = AR = MR = Price

Quick Recap
Draw MC Draw
curve demand/Average
Revenue/
Marginal revenue
curve
Draw Draw short run

Average equilibrium price
cost curve curve in Market
Short Run price determination, Optimum output/Equilibrium and profit Determination
For achieving Equilibrium, the conditions to be satisfied are —

1. MC = MR, and
2. MC Curve should cut MR Curve from below, i.e. MC should have positive slope.
For Profit determination

1. Merely being in Equilibrium position does not mean that the Firm is making profits.
The actual position of profits can be known only on the basis of AR and AC Curves.
2. In the short run, a firm may earn supernormal profits, normal profits or losses
depending upon its cost conditions.

Super profits/ Economic Profits/ abnormal
profits and super normal profits:
• When a firm earn super normal profits its

Average revenue are more than average
total cost or,
• AR > ATC.
Normal profits:
• When the firm just meets its average total
cost, it earns normal profits
• Normal profit is normal rate of return on
capital and the remuneration for the risk
bearing function of the entrepreneur.
• Here AR = ATC.
• It is also called B.E.P (Break-even-Point)
means No Loss No Profit.
• It is called Marginal Firm.
Losses:
• A firm may incur losses if AR < ATC.
• At losses the firm shall cover at least its
variable cost. IF variable cost is covered Max
loss will be = FC or part of it
• If firm is unable to meet its variable cost, it
will be better for it to shut down.
Shut Down point:

• A Firm will shut down, if AR < AVC, at a point
where MC = MR (MC cutting from below).
In perfect competition firm, MC curve above AVC is considered the supply curve

Long – run Equilibrium of a firm under Perfect Competition.
In the Long run the firms will be earning just NORMAL PROFITS.
In the above figure industry has decided the price 'P' and firm has taken over the same
price at the same time firm is earning just normal profits.
In the long run, following conditions are satisfied: The Firm is called as Optimal Firm
• The output is produced at the minimum feasible cost or minimum LAC
• Consumers pay the minimum possible price which just covers Marginal cost = MC=AR=P
• Full utilization of plants is possible, MC = AC
• There is no wastage of resources. optimal allocation
• Firms earn only normal profits i.e. AC = AR.
• Firms maximize profits i.e. MC = MR, but level of profits will be normal.
• There are Optimum Number of firm in Industry
• In the long run LMC = LMR = P = LAR = LAC = SMC = SAC
• When LAC falls LAC> LMC and when LAC raises LMC > LAC.
Long Run Equilibrium in the Industry

The Industry is said to have attained long—run equilibrium when —
1. All the Firms are earning normal profits only, i.e. all the Firms are in long—run equilibrium,
and
2. There is no further entry or exit of Firms to / from the market.

Question 1: What can be the profit/ loss condition in long run in Perfect competition?
Answer:_______________________________________________________________
_______________
Question 2: Why not Super- Normal profit?

Answer- Super profit will attract new firms>>>> Supply will increase>>>>>>>> Market Price will
fall>>>>>>> upward shift of Cost Curves>>>>>> super profit will be wiped out
Question 3: Why Not Losses?

Answer- Existing Firms will leave the industry >>>>>>reduction in supply>>>>>> increase in
Market Price>>>>>Cost Curves may fall>>>>>>>>>loss will be recovered
Relationship between AR, MR, TR and Price Elasticity of Demand
It is to be noted that marginal revenue, average revenue and price elasticity of demand are
uniquely related to one another through the formula:
MR= AR (e-1)/e
e= elasticity
Thus when
i. e>1, MR is positive
ii. e=1, MR = 0
iii. e<1, MR is Negative
Behavioral Principal
1. Principle 1- A firm should not produce at all if its total variable costs are not met.
2. Principle 2 - The firm will be making maximum profits by expanding output to the level
where marginal revenue is equal to marginal cost.

D. Monopoly
i. Features of Monopoly
a) Single Seller
b) Firm = Industry
c) Entry Restrictions- (i) economic, (ii) institutional, (iii)
legal, or (iv) artificial.
d) No substitutes. - Cross Elasticity of Demand for the
Monopolist's Product and any other product is __________________
e) Elasticity of demand- Price Elasticity of Demand for Monopolist's Product is less than
one.
f) Monopolist is a Price—Maker, not a Price—Taker.
g) Imperfect Mobility due to fewer substitutes.
h) May or May not be optimal Firm
ii. Why Monopoly exists?

Monopoly is caused by "barrier to entry". Some reasons for occurrence of Monopoly are -
1. Strategic Control over scarce resources
2. Control over a unique product.
3. Patents and Copyrights g
4. Governments granting exclusive rights
5. Substantial Goodwill
6. Natural Monopoly e.g. Natural Gas Supply, Electrical Power Distribution, etc.
7. Stringent Legal and Regulatory Requirements
8. Very high initial start—up costs
9. Use of Anti—Competitive Practices or Predatory Tactics.
10. Business Combinations or Cartels
iii. Note:
In the practical world, Monopolies are either regulated or fully prohibited. Hence, Pure
Monopolies are not common. However, a single Producer may dominate the supply of a good or
group of goods. In Public Utilities, e.g. Transport, Water, Electricity Generation, etc.
Monopolistic Markets existed earlier in India, so as to reap the benefits of large scale
production. But these markets have now been deregulated and opened to competition. In
India, Indian Railways has monopoly in Rail Transportation. Government has monopoly in
Nuclear Power production.

iv. Negative Effects of Monopoly-
1. Higher Prices for Consumers,
2. Loss of Consumer Surplus,
3. Inability of Consumers to substitute the goods or services, with a more reasonably
priced alternative,
4. Transfer of Income from Consumers to Monopolists,
5. Restriction of Consumer Sovereignty and reduction in opportunities for Consumers to
consume goods they desire,
6. Payment of lower prices by Monopolies to their Suppliers (of goods and services), i.e.
lower Factor Payments,
7. Lower levels of Output, that what would be produced in a competitive environment,
8. Ability of Monopolist to influence political process and thereby obtain a favourable
legislation,
9. Lack of Innovation,
10. Higher Costs of Output, the burden of which will be shifted to Consumers
11. Lack of Productive and Allocative Efficiency,
12. Possibility of misuse of scarce resources,
13. Earning of Economic Profits (above Normal Profits) in the long run, which is unjustifiable,
14. Use of Monopoly Power to create barriers to entry by undue means,
15. Scope for X—Inefficiency, i.e. the difference between efficient behaviour of businesses
assumed or implied by economic theory and their observed behavior in practice caused by
a lack of competitive pressure, etc.
v. Determination of Demand/ Revenue curve
Qty Price TR = AR = MR Diagram

(Q) PxQ TR/Q
1 22 22 22 22
2 20 40 20 18
3 18 54 18 14
4 16 64 16 10
5 14 70 14 6
6 12 72 12 2
7 10 70 10 -2
8 8 64 8 -6
9 6 54 6 -10
10 4 40 4 -14

1. It shall be noted that price elasticity of DD was infinite in Perfect competition thus
the DD curve was parallel to Quantity axis.
2. In Monopoly, the monopolist in order to increase his sale may lower the price. Thus the
elasticity exists. However since there is no Close substitute, the DD curve is Flatter as
compared to that in Monopolistic competition
3. Firm's Demand Curve = Average Revenue (AR).
4. Relationship between AR & MR under Monopoly:
a) Both AR and MR are negatively sloped (downward sloping) curves.
b) MR Curve lies half—way between the AR Curve and the Y—axis, i.e. it cuts the
horizontal line between Y axis and AR into two equal parts.
c) In other words, Slope of MR is twice of AR
d) AR cannot be zero, but MR can be zero or even negative.
vi. Short Run price determination, Optimum output and profit Determination
a. For achieving Equilibrium, the conditions to be

satisfied are-
1. MC = MR, and
2. MC Curve should cut MR Curve from below, i.e. MC
should have positive slope.
b. For Profit determination

1. Merely being in Equilibrium position does not mean that the Firm is making profits.
The actual position of profits can be known only on the basis of AR and AC Curves.
2. In the short run, a firm may earn supernormal profits, normal profits or losses
depending upon its cost conditions.
Short Run Positions Long Run Positions
Super profits: Losses: Only Super profit
• Here, AR >ATC. • Here, AR <ATC. (LAR > LAC):
• Here area PABC • The Shaded area
denotes super profit. PBAC denotes Loss • Monopoly firm in the long run
gets abnormal profits
because, the new firms are
not allowed to enter the
market..
• Under long-run a monopoly
firm can produce at optimal
or sub-optimal level.
• In other words it can

produce at minimum LAC
curve and also he can
produce before or after the
minimum LAC curve.
Price Discrimination
1. Meaning:
a) Price Discrimination occurs when a Producer sells a commodity to different Buyers, at
different prices, for reasons not related to differences in cost.
2. Objectives:
a) To earn Maximum Profit
b) To Dispose of Surplus stock
c) To enjoy Economies of Scale
d) To capture foreign markets
e) To secure equity thorough pricing.
3. Examples:
a) Doctors may charge more from a rich patient than from a poor patient, for the same
treatment.
b) Electricity Rates for home consumption are less than that for industrial use.
c) Export Prices of Products are cheaper than the domestic market selling price.
d) Railways charge different rates from different type of passengers e.g. AC, Non—AC,
Tatkal, etc.
4. Conditions for Price discrimination

1. Full control over supply of commodity
2. Division of market into two or more sub-markets: A seller can practice price
discrimination only when he is able to divide the markets into two or more sub-markets.
3. Different price elasticity under different markets: Monopolist charge higher price
from that market whose price elasticity is less than one and can charge lower price
from that market whose price elasticity is greater than one.
4. No possibility to resale: It should not be possible for the buyers of low-priced
market to resell the product to the buyers of the high priced market

Degrees of price Discrimination
Prof. Pigou classified three degrees of price discrimination.
a. First degree price discrimination, the monopolist separates the market into each
individual consumer and charges them the price they are willing and able to pay
and thereby extract the entire consumer surplus.
Eg. Doctors, lawyers, consultants etc., charging different fees, prices decided
under ‘bid and offer’ system, auctions, and through negotiations are examples of first
degree price discrimination.
b. Second degree price discrimination- different prices are charged for different
quantities of sold. The monopolist will take away only a part of the consumers’ surplus.
The two possibilities are: a) Different consumers pay different price if they buy
different quantity. b) Each consumer pays different price for consecutive purchases.
c. Third degree price discrimination - price varies by attributes such as location or

by customer segment. Here the monopolist will divide the consumers into separate
sub-markets and charge different prices in different sub-markets. Examples:
Dumping, charging different prices for domestic and commercial uses, lower prices in
railways for senior citizens, etc.
Equilibrium under price discrimination
a. Under simple monopoly, a single price is charged for the whole output; but under price
discrimination the monopolist will charge different prices in different sub-markets.
b. First of all, the monopolist has to divide his total market into various sub-markets on
the basis of differences in elasticity of demand.
In order to reach the equilibrium position, the discriminating monopolist has to make three
decisions:
i. How much total output should he produce?
ii. How the total output should be distributed between the two sub-markets? And
iii. What prices he should charge in the two sub-markets?

E. Monopolistic Competition
1. Imperfect competition is found in the industry where there are a large numbers of
small sellers, selling differentiated but close
substitutes products. E.g. LUX, HAMAM, LIRIL etc.
This market contains features of both competitive and
monopoly markets.
2. Large number of sellers and buyers
3. Free entry and exit of firms.
4. Product differentiation:
5. Non price competition:
6. Every firm is price maker and price taker of his own product
7. Imperfect mobility:
8. AR and MR: In monopolistic competition AR/MR will be more elastic than monopoly
market.
Determine Condition for Equilibrium
1. _____________________________________________________
2. _____________________________________________________
Short Run Equilibrium
Super profits-
• To earn super profits AR >ATC.
• Normal profit is equal to the area PABC.
Losses:
• But if the AR < AC then firm will incur losses.
• In the figure given Shaded area PABC
denotes loss.

Long Run Equilibrium
Normal profit (LAR = LAC/ TAC)
1. In long Run the firm will earn normal profits,

because there is free entry and exit of firms.
2. The AR curve in the long-run is not tangent to

the ATC curve at the lowest point.
3. This shows each firm produces at before the
lowest TAC/LAC or produces less than the
optimum output and Charges from the customers
a price higher than the competitive price.
4. A firm under monopolistic petition has always
excess capacity and thus is never an optimum
firm, but perfect competition never has excess
capacity and monopoly mayor may not be
F. OLIGOPOLY MARKET
Meaning- An oligopoly is a market in which there are few producers (two to ten) of a
product.
✓ Oligopoly is an important form of imperfect competition.
✓ Sellers sell homogeneous or differentiated but close
substitutes products
✓ Example- cold drinks industry or automobile industry.
✓ It shows the concept of group behaviour
✓ There is large entry barrier
Types of Oligopoly
1. Pure / Perfect oligopoly - deals in homogeneous products- Aluminum industry
2. Differentiated / imperfect oligopoly - deals in product differentiated.
3. Open oligopoly - New firms can enter the market and compete with existing firms
4. Closed oligopoly - new entry is restricted.
5. Collusive oligopoly - common understanding or collusion in fixing price and output
6. Competitive oligopoly - Lack of understanding and compete with each other.
7. Partial oligopoly - when industry is dominated by one large firm i.e. price leader
8. Full oligopoly - absences of price leadership.
9. Syndicated oligopoly- Firms sells their products through centralized syndicate/ channel
10. Organized oligopoly: Firms organize into a central association for fixing price, output
etc.

Features
• Few sellers
• Interdependence: In oligopoly, firm must consider the market demand and the reactions
of the firms in the industry to any major decision it takes.
• Advertising and selling costs (Non price competition): There is a great importance
advertising and selling costs in an oligopoly market. They avoid price cutting and try to
compete on non-price basis
• There is no generally accepted theory of group behaviour. In oligopoly, the members
of a group agree to pull together in promotion of common interest or they fight to
promote their individual interests.
• Substantial barriers to entry: In oligopoly there is no free entry and no blocked entry,
we can say that there is substantial barriers to the entry.
Kinked demand curve / Indeterminateness of demand curve-
1. Because interdependence of the firms in oligopoly and

because of inability of a particular firm to pre the
behaviour, the demand curve facing an oligopolist may have a
'kink' at the level of the prevailing suggesting stickiness in
the price level.
2. The kink is formed at the prevailing price level at because
the segment of the demand curve above the 'K' is highly
elastic and the below the 'K' is inelastic.
3. Price rigidity:
a) When an oligopolist lowers the price- its competitors will feel that, if they do not
follow the price cut their customers will run away and buy from the firm, which has
lowered the price. Thus in order to maintain their customers they will also lower their
prices. Thus the upper portion of the demand curve is price elastic.
b) When firm increases the price- there will be a substantial reduction in its sales
because as a result of the rise in its price, its customers will withdraw from it and go
to its competitors, which will welcome the customers and will gain in sales. These happy
competitors will have, therefore, no motivation to match the price rise.

Summary of Different Market
Perfect Monopolistic
Aspect Monopoly Oligopoly
Competition Competition
Number of
Very large Only One Large A Few
Sellers
Highly Slightly Nature of

Homogeneous /
Nature of differentiated differentiated / Differentiation
Identical Product.
Product / specialized specialized varies.
No differentiation.
product. product.
Product None Extreme Slight None to

differentiation substantial
Ease of Entry / Only One Only Few
Free Entry / Exit. Free Entry / Exit.
Exit Seller. Sellers.
Each Firm is a
Total
Control over Price-Maker for
Nil Reasonable.
Price its own
product.
Elasticity of Kink
Infinity. Less Elastic. More Elastic.
Demand
Horizontal Negatively Negatively
Demand Curve Kinked Curve.
Line. Sloped Sloped.
Foodgrains, Railways, Cars, Soaps, Pharma, Cold
Examples Vegetables, etc. Electricity Toothpaste, etc. Drinks, etc.
Supply.
Profit in Long— Normal Profits Super—Normal Normal Profits —
Run Only. Profits Only.
Optimality in Each Firm is an Can operate at Idle Capacity. Not —
Long— Optimal Firm. sub-optimal an
Run level also. Optimal Firm.

Chapter 5- Business Cycle
Chapter 5 – Business Cycle
A. Meaning, Phases of Business cycle
Fluctuations in aggregate economic activity that an economy experiences over a period

of time, i.e. periods of prosperity alternating with periods of economic downturns, are
called Business Cycles or Trade Cycles.
Business Cycles refer to alternate expansion and contraction of overall business
activity as reflected in fluctuations in measures of aggregate economic activity, like
Gross National Product, Employment and Income.
Phases: The four distinct phases of the Business Cycle are-

a) Expansion / Boom / Upswing),
b) Peak / Prosperity,
c) Contraction / Downswing / Recession), and
d) Trough / Depression).
A Trade Cycle is composed of periods of

a) Good trade characterized by rising prices and low
unemployment levels.
b) Bad trade characterized by falling prices and high unemployment levels.
B. Features of Business cycle
a) Business cycles occur periodically

b) Do not exhibit the same regularity.
c) The duration of these cycles vary.
d) The intensity of fluctuations also varies.
e) The length of each phase is also not definite.
f) Business cycles are exceedingly complex phenomena;
g) Business cycles generally originate in free market economies*****.
h) They are pervasive as well. Disturbances in one or more sectors get easily transmitted to all
other sectors.
i) Although all sectors are adversely affected by business cycles, some sectors such as
capital goods industries, durable consumer goods industry etc, are disproportionately
affected.
j) Moreover, compared to agricultural sector, the industrials sector is more prone to the
adverse effects of trade cycles.
k) It is difficult to make an accurate prediction of trade cycles before their occurrence.
l) Repercussions of business cycles get simultaneously felt on nearly all economic variables
m) Business cycles have serious consequences on the well-being of the society.
n) Business cycles are contagious and are international in character.
C. Phases of Business cycle
1. Expansion: Features
a) Increase in national output, employment, aggregate
demand, capital and consumer expenditure, sales, profits,
rising stock prices and bank credit.
b) This state continues till there is full employment of
resources and production is at its maximum possible level
using the available productive resources.
c) Involuntary unemployment is almost zero and whatever
unemployment is there is either frictional or structural Prices
and costs also tend to rise faster. Good amounts of net
investment occur.
d) Increasing prosperity and people enjoy high standard of living due to high levels of consumer
spending, business confidence, production, factor incomes, profits and investment.
e) The growth rate eventually slows down and reaches its peak.
2. Peak:
a) Peak refers to the top or the highest point of the business cycle.
b) Output prices also rise rapidly leading to increased cost of living
and greater strain on fixed income earners.
c) Actual demand stagnates.
3. Contraction:
a) During contraction, there is fall in the levels of investment and
employment.
b) Supply far exceeds demand. Initially, this happens only in few
sectors and at a slow pace, but rapidly spreads to all sectors.
c) Producers holds back future investment plans, cancellation and
stoppage of orders for equipment and all types of inputs including
labour.
d) Decrease in input demand pulls input prices down; incomes of wage and interest earners

gradually decline resulting in decreased demand for goods and services.
e) The process of recession is complete and economy into the phase of depression.
4. Trough and Depression:

a) Depression is the severe form of recession and is characterized by extremely sluggish
economic activities.
b) During this phase of the business cycle, growth rate becomes negative
c) National income and expenditure declines rapidly.
d) Demand for products and services decreases, prices are at their lowest
and decline rapidly forcing firms to shutdown several production
facilities.
e) A typical feature of depression is the fall in the interest rate.
f) Large number of bankruptcies and liquidation significantly reduce the magnitude of
trade and commerce.
g) Greatest depression occurred in 1929- 1933 – Reason lower aggregate Expenditure
D. Question: How does the economy recover?
The economy cannot continue to contract endlessly. Economic activity

reaches Trough and then starts recovering >>>>> marks the end of
pessimism and the beginning of optimism>>>>> Reversal is first felt in the
Labour Market >>>>> workers accepts wages lower than the prevailing
rates. >>>>> Business Confidence slowly increases, >>>>> spurring of
investment causes recovery of the economy. >>>>> Banking System now
slowly starts expanding credit, matching with the business confidence.
>>>>> Employment, Factor Payments, Disposable Incomes, Consumer Spending, Aggregate Demand,
etc. all rises
E. Indicators- 3 Indicators ( Leading, Lagging, concurrent)
Leading Indicators:
It is a measurable economic factor that changes before the economy
starts to follow a particular pattern or trend. Variables that change
before the Real Output changes
However, Indicators are not always accurate and Experts disagree on
the timing of these Leading Indicators.
Eg. –Change in stock price, profit Margin, Indices, housing interest rate, prices,
value of new orders of plant and machinery/ consumer goods, building permits of
private house

Lagging Indicators:
Changes in these indicators are observable only after an economic
trend or pattern has already occurred. variables that change after
the Real Output changes
E.g. – Unemployment, corporate profit, labour cost per unit, interest
rate, Consumer price index, Commercial Lending
Coincident or Concurrent Indicators:

It coincides or occurs simultaneously with the business—cycle
movements.
It gives information about the rate of change of the expansion or
contraction of an economy more or less at the same point of time it
happens.
It describes current state of Economy
E.g. – GDP, Industrial productions, Inflation, personal Income, Retail Sales, Stock
Market prices
F. Role/ Importance of Business cycle in Business Decision making
1. Demand Impact: Business Cycles affect demand of the products.

2. Decision regarding Expansion of business.
3. Policies: Knowledge of Business Cycles and their inherent characteristics is important for
a Business Firm to frame appropriate policies.
4. Production Aspects: Businesses have to properly respond to the need to alter production
levels relative to demand.
5. Market Entry / Product Launch: The phase of the Business Cycle is important for a new
business to decide on entry into the market.
6. Cyclical Businesses:
❖ Some businesses are more vulnerable to changes in the Business Cycle than others.
❖ Businesses whose fortunes are closely linked to the rate of economic growth are called
"Cyclical" Businesses. Examples: House—Builders, Construction, Infrastructure,
Restaurants, Advertising, Overseas Tour Operators, Fashion Retailers, etc.
❖ During a boom, such businesses see a strong demand for their products but during a
slump, they usually suffer a sharp drop in demand.
❖ Some Businesses may actually benefit from an economic downturn, e.g. when their
products are perceived by Customers as representing good value for money, or a
cheaper alternative compared to more expensive products.

G. Causes of Business Cycle
H. Internal causes- Endogenous factor I. External Causes- Exogenous factor

Internal causes of Business Cycle are those External causes of Business Cycle are those
cause which are generated within the cause which are generated out of the
NATION itself and are not international in NATION and are international in character
character
Fluctuations in Effective Demand Wars
Fluctuations in Investment- According to Post War Reconstruction
some economists this the primary cause
of Business Cycle
Variations in government spending Technology shocks
Macroeconomic policies Natural Factors
Money Supply Population Growth
Psychological factors
5. Some important Points for MCQ
a) According to Pigou, modern business activities are based on the anticipations of

business community and are affected by waves of optimism or pessimism.
b) According to Schumpeter’s innovation theory, trade cycles occur as a result of

innovations which take place in the system from time to time.
c) The cobweb theory propounded by Nicholas Kaldor holds that business cycles result
from the fact that present prices substantially influence the production at some
future date.
d) According to Hawtrey, trade cycle is purely Monetary Phenomenon

Chapter – 1 Nature _ Scope of Q 10. Which of the following is not an economic
Business Economics activity?
(a) Housewife doing household duties
Basics of Business Economics (b) Manufacturing of garments at subsidized rate.
(c) Medical facility rendered by charitable trust
Q 1. The word ‘Economics’ originates from the word (d) A CA doing his own practice.
………………
(a) Oikomnomikos (b) Oikonomia Q 11. Which of the following is an economic activity?
(c) Eikonomikos (d) Ekconomics (a) Housewife doing household duties
(b) Listening to music on radio
Q 2. The word ‘Economics’ originates from the ………… (c) Medical facility rendered by charitable trust
world ‘Oikonomia’ (d) Teaching one’s own son at home
(a) Roman (b) French
(c) Greek (d) European Q 12. The law of Scarcity-
(a) Does not apply to developed and rich countries
Q 3. Till 19th century Economics was known as (b) Applies only to less developed countries
(a) Political Economy (b) Social Economy (c) Implies that the consumers’ want will be satisfied in a
(c) Both (a) and (b) (d) Neither (a) nor (b) socialist economy
(d) Implies that consumers’ want will never be completely
Q 4. The meaning of Greek word ‘oikonomia’ is ……. satisfied.
(a) Wealth Management (b) House Management
(c) Business Economics (d) Business Management Q 13. What does the scarcity of resource implies…
(a) We must develop way to decrease our individual
Q 5. Human wants are…... and means to satisfy these wants
wants are…... (b) Not all wants can be satisfied
(a) Limited, scarce (b) Unlimited, unlimited (c) Resources can not satisfy any want
(c) Unlimited, scarce (d) Limited, Unlimited (d) Resources are very scarce and shall not be used at all
Q 6. The meaning of the word ‘Economic’ is closely Q 14. Rational decision making requires-
connected with the word- (a) One’s choice never vary
(a) Scarce (b) Unlimited (b) One’s choice be consistent with one’s goal
(c) Restricted (d) Both (a) and (b) (c) One makes choices that do not involve trade-offs
(d) One must be graduate to make decision
Q 7. In Business economics ‘ends’ refers to-
Q 15.
(a) Human wants (b) Resources …….. DefinedBusiness Economics in terms of the
(c) Both (a) and (b) (d) Neither (a) nor (b) use of economic analysis in the formulation of business
policies?
Q 8. In Business economics ‘Means’ refers to- (a) J.B Say
(a) Human wants (b) Resources (b) Alfred Marshall
(c) Both (a) and (b) (d) Neither (a) nor (b) (c) Walker
(d) Joel Dean
Q 9. Which of the following is an economic activity?
(a) Boy helping his friend to solve puzzle. Q 16. Business Economics is also known as…………
(b) Teams playing friendly football match (a) Managerial Economics
(c) A teacher teaching to class (b) Social Economics
(d) Watching Television (c) Environmental Economics
6.1 | Page
(d) Money Market Economics (d) Which production method should be used for
manufacturing of goods?
Q 17.
Which of the following statement is not correct?
(a) Business Economics refers to the integration of Q 23. Pragmatic approach means -
economic theory with business practice (a) Realistic (b) Practical.
(b) Business Economics is not only valuable to business (c) Both (a) and (b) (c) Neither (a) nor (b)
decision makers, but also useful for managers of ‘not-
Q 24.
for-profit’ organisations Positive Science explains-
(c) theories of Economics provide the tools which explain (a) “What is” (b) “What was”
various concepts such as demand, supply, costs, price, (c) “What ought to be” (d) “What will”
competition etc
(d)Business Economics is concerned only with Micro Q 25. Normative Science explains-
Economics (a) “What is” (b) “What ought to be”.
(c) “What will” (d) Both (a) and (b)
Q 18.
Economic theories are….…
(a) Simplistic (b) Hypothetical Q 26. Positive science is-
(c) Old (d) Both (a) and (b) (a) Descriptive (b) Prescriptive
(c) Explanatory (d) Imaginary
Q 19. Consider the following and decide, which economy
Q 27.
(if any) is without scarcity Normative science is-
(a) American economy (a) Descriptive (b) Prescriptive
(b) Indian economy between 1947-2000 (c) Explanatory (d) Imaginary
(c) Pre independent Indian economy
Q 28.
(d) None of the above The study of economic behavior of an individual
firm or industry in national economy is called as ……
Q 20. ………..refers to the process of selecting an (a) Micro Economics (b) Macro Economics
appropriate alternative that will provide the most (c) Business Economics (d) Behavioral Economics
efficient means of attaining a desired end, from two or
Q 29.
more alternative courses of action? Macro Economics deals with
(a) Problem solving (a) External value of money
(b) Problem analyzing (b) Employment and economic growth
(c) Managerial expertise (c) General price level
(d) Decision making (d) All of above
Q 21. Which of the following involves Business decision Q 30.

We mainly study the following in Micro-
making? Economics: ………………
(a) Continue or shut down decision (a) General price level
(b) Launching of new product (b) National income and output
(c) Proper debt and equity mix (c) Location of industry
(d) All of the above (d) Employment and economic growth
Q 22. Which of the following does not involve Business Q 31. We mainly study the following in Macro-
decision making? Economics: ………………
(a) Lease or purchase of an asset (a) External value of money
(b) Deciding which movie to watch on weekend (b) Product pricing
(c) In-house production or outsource (c) National income and output
(d) (a) and (c)
6.2 | Page
(a) Positive or pure science
Q 32. Micro and macro are not two independent (b) Normative science
approaches to economic analysis but they are (c) None of the above
complementary to each other. (d) All of above
(a) False (b) True
Q 41.
(c) Partly true (d) Partly false ……….evaluates and pass value judgment
(a) Positive science (b) Pure science
Q 33.
Inventory does not includes (c) Social Science (d) Normative Science
(a) Raw Material (b) Work in progress
(c) Finished goods (d) None of the above Q 42. Business economics is not affected by external
factors
Q 34.
The study of behavior of consumers in the market (a) True (b) False
and the effect of changes in the determinants of demand (c) Partially true (d) Cannot be commented
is called as
Q 43.
(a) Demand analysis (b) Demand forecasting State which of the following statement is not true
(c) Cost analysis (d) Market analysis (a) Business economics is inter-disciplinary
(b) There are three types of economy- Socialist Economy,
Q 35. ………. is the technique of predicting future demand Capitalist Economy and Mixed Economy
of goods and services on the basis of past behavior of (c) Business Economics used the theory of Market and
factor. Private Enterprises
(a) Demand analysis (b) Demand Forecasting (d) The term Micro-Economics is Derived from Greek
(c) Market analysis (d) Price analysis work ‘Makros’
Q 36. …………explains the relationship between input and Q 44.

……enables the firm to recognise the behaviour of
output costs when variables such as output, time period and size
(a) Cost theory (b) Supply theory of plant changes.
(c) Demand theory (d) Production theory (a) Cost analysis (b) Accounting cost
(c) Production analysis (d) Demand analysis
Q 37.
Degree of market power is determined by-
(a) Demand analysis Q 45. Economics is a …………
(b) Cost analysis (a) Science (b) Art
(c) Market structure analysis (c) Both (a) and (b) (d) Neither (a) nor (b)
(d) All of the above
Q 46. What is the “fundamental premise of the
Q 38. ……..also called as ‘Price Theory’ as it explains the economics?”
composition of total production. (a) Natural Resources will always be scarce
(a) Micro economics (b) Macro Economics (b) Individuals are capable of establishing goals and
(c) Demand theory (d) Supply theory acting in manner consistent with achievement of
those goals
Q 39. …….also called as ‘Income Theory’ as it explains (c) Individuals chose alternative for which they believe
level of total production, total consumption, total savings the net gain to be the greatest.
and total investment and the rice or fall in these levels. (d) No matter what the circumstance, individual choice
(a) Micro economics (b) Macro economics always involves a trade- off
(c) Demand Theory (d) Supply theory
Q 47.
Wants can be satisfied by consumpotion
Q 40. ……..analyses cause and effect relationship but of………../ are economic wants
does not pass any value judgment. (a) Goods (b) Services
6.3 | Page
(c) Goods and services (d) None of the above (c) All countries, without exception, face problem of
scarcity.
Q 48. In Mixed economy, private sector- (d) Developed countries do not face Central Economic
(a) Are absolutely free to make any type of decisions Problems
(b) Works only for social objectives
(c) Are regulated directly and / or indirectly by Q 54. Which of the following is not a central economic
government problem?
(d) Does not exists at all (a) What to produce? (b) When to produce?
(c) How to produce? (d) For whom to produce?
Q 49. ……….. systematized the concept in the form the
Q 55.
book which was entitled as, ‘‘An Enquiry intothe Nature Central Problems arises in case of-
and Cause of the Wealth of Nations’’ (a) Capitalist Economy (b) Socialist Economy
(a) George Bernard Shaw (c) Mixed Economy (d) All of the above
(b) Adam Smith.
Q 56.
(c) Alfred Marshall If there is adequate recourse in an economy, then
(d) A. C. Pigou there is no economy problem at all. This statement is-
(a) False
Q 50. Adam smith published his masterpiece “An enquiry (b) True
into the nature and causes of wealth of nation” in the (c) Partially True
year …………. (d) Cannot be commented at all
(a) 1776 (b) 1786
(c) 1756 (d) 1766 Q 57. The Problem of ‘What to Produce’ covers the
issue relating to-
B. Central Economic Problem (a) What goods are to be produced?
(b) What quantities of goods are to be produced?
Q 51. The Central Economic problem is that of- (c) Both (a) and (b)
(a) Allocating the scarce recourse in such a manner that (d) Neither (a) nor (b)
society’s unlimited wants are satisfied as far as
Q 58.
possible The economy which uses all its recourses on
(b) Giving jobs to poor and backward. production of …… goods only, con not provide for future
(c) Guaranteeing that the production occurs in most growth prospect.
efficient manner (a) Consumer goods only (b) Capital goods only
(d) All of above (c) Both (a) and (b) (d) Neither (a) nor (b)
Q 52. Which of the following is the cause of central Q 59. Productive efficiency means -
economic problem? (a) Recourses are employed in their most valued uses
(a) Scarcity of recourses (b) Total number of goods produced is more
(b) Unlimited wants (c) Goods and services are produced at least cost without
(c) Alternative use wastage
(d) All of the above (d) Best recourse are employed
Q 53. State which of the following statement is not true Q 60. In deciding ‘ how to produce’ the economy should
(a) If the recourses were unlimited, people would be able decide on-
to satisfy their wants. (a) Types to goods to be produced
(b) If recourse has only single use, then also economic (b) Consumer goods or capital goods
problem would not arise. (c) Method of production
(d) Quantity of goods to be produced
6.4 | Page
(a) Share of different people in total output of goods and
Q 61. While solving the question of ’ how to produce’ the services
economy should consider- (b) How to distribute and share the national product.
(a) Labour intensive technique (c) Both (a) and (b)
(b) Capital intensive technique (d) Neither (a) nor (b)
(c) Both (a) and (b)
(d) Neither (a) nor (b) Q 68. An economy can spend on all its recourses on
current consumption without making provision for
Q 62.
While solving the question of ’ how to produce’ the economic growth
choice of appropriate method of production depends (a) True (b) False
upon- (c) Partially true (d) Cannot be commented at all
(a) Availability of factor of production
Q 69.
(b) Price of different factor of production In the context of capitalist economy, which of the
(c) Both (a) and (b) following statement if false- {Omit this question}
(d) Neither (a) nor (b) (a) Private property is the mainstay of capitalism
(b) Profit is the driving force in capitalist economy
Q 63. Which of the following statement is not true- (c) Decision of customers and businesses determines
(a) There are various alternative techniques of producing economic activity.
a commodity. (d) None of above
(b) A society cannot satisfy each and every want of
society. Q 70. Laissez-faire economy is another term used for
(c) If society uses all the resources for current (a) Mixed economy (b) Capitalist economy
consumption and no provision is made for future (c) Socialist economy (d) None of the above
production, the society’s production capacity would
not increase.. Q 71. Which of the following is not the feature of
(d) None of above capitalist economy:
(a) Right to private property.
Q 64.
Capital intensive technique would get chosen in (b) Freedom of economic choice.
(a) Capital surplus economy (c) Collective ownership
(b) Labour surplus economy (d) Consumer Sovereignty
(c) Developed economy
(d) Developing economy Q 72. Consumer Sovereignty means-
(a) that buyers ultimately determine which goods and
Q 65.
Labour intensive technique would get chosen in services will be produced and in what quantities.
(a) Capital surplus economy (b) consumer will pay only how much he can.
(b) Labour surplus economy (c) consumer will help the producer in manufacture of
(c) Developed economy goods or rendering of services
(d) Developing economy (d) consumer have unlimited purchasing power.
Q 66. Q 73.
Distribution and sharing of national product .…… determines which goods and services will be
relates to the problem of produced and in what quantity
(a) How to provide for economic growth (a) Buyer (b) Seller
(b) What to produce (c) Government (d) All of the above
(c) How to produce
(d) For whom to produce Q 74. Capitalist economy uses……… to solve economic
problem
Q 67.
The problem of ‘ for whom to produce’ deals with (a) impersonal forces of market demand and supply.
6.5 | Page
(b) price mechanism. Q 81. Free market economy driving force is-
(c) external reports (a) Welfare of the people
(d) economic theories. (b) Profit motive
(c) Rising income and level of living
Q 75.
An entrepreneur will produce goods and services (d) None of the above
choosing that technique of production which renders his
cost of production…… Q 82. Under………..economy, government has no
(a) Minimum. control over price fluctuations
(b) Maximum. (a) Mixed economy (b) Free Market
(c) Exactly similar to other competitors. (c) Socialist economy (d) None of the above
(d) Higher compared to other competitor
Q 83. Which type of economy gives rise to most
Q 76. Which of the following statement is true in context efficient allocation of recourse and capital in the
with economic problem of ‘ for whom to produce’ standard Micro-Economic framework?
(a) Higher the income, higher will be the buying capacity (a) Free market economy
and higher will be his demand for goods in general. (b) Mixed economy
(b) Higher the income, lower will be the buying capacity (c) Controlled market economy
and higher will be his demand for goods in general (d) None of the above
(c) Goods will be produced for those who do not have
Q 84.
buying capacity Under capitalist economies, the answer to the
(d) income one will be able to make depends only on the fundamental questions-what, how and for whom to
amount of work he does produce are obtained by–
(a) Market forces of demand and supply.
Q 77.
For analysing ownership and utilisation of (b) Government regulation
recourses, economies are classified into- (c) Cost benefit analysis
(a) Mixed economy (b) Capitalist economy (d) All of the above.
(c) Socialist economy (d) All of the above
Q 85.
In a free market economy the allocation of
Q 78. Capitalist economy is characterised by- resources is determined by –
(a) Profit motive (a) Votes taken by consumers
(b) Competition among buyers and sellers (b) A central planning authority
(c) Inequality of income. (c) Consumer preference
(d) All of the above (d) The level of profits of firms
Q 79. An economic system in which all means of Q 86. The concept of “competition” in a capitalist
production are owned and controlled by private economy refers to-
individuals for profit is called as…………… economy (a) Competition among sellers to sell goods.
(a) Capital (b) Social (b) Competition among buyers to obtain the goods to
(c) Mixed (d) None of the above satisfy their wants
Q 80. Which of the following is not a feature of capitalist (d) Neither (a) nor (b)
economy-
Q 87.
(a) Right to private property Discounts, price cutting, Advertisements, etc in
(b) Profit motive capitalist economy are-
(c) Freedom of enterprise (a) Types of government regulation
(d) Equal distribution of income (b) Effects of consumer sovereignty.
(c) Method of handling competition.
6.6 | Page
(d) None of the above. (c) Central planning authority
(d) Consumer forum,
Q 88. Inequalities of income refers to?
(a) All workers do not get equal wages Q 95. National income is more often evenly distributed
(b) Gap between rich and poor in-
(c) All companies do not earn same profit (a) Mixed economy
(d) All of the above (b) Command economy
Q 89. Socialist economy is also known as- (d) Neither (a) nor (b)
(a) Free market economy (b) Mixed economy
(c) Traditional economy (d) Command economy Q 96. In Socialist economy, the concept of consumer
sovereignty is-
Q 90.
Under Socialist economy………… takes decision for (a) Restricted (b) Unrestricted
allocation of recourses (c) Recognised. (d) None of the above
(a) Central planned authority
(b) Seller Q 97. Pure form of socialist economy does not exist in
(c) Buyer present days
(d) Foreign diplomats (a) False
(b) True
Q 91.
Which of the following not the feature of socialist (c) Partially true
economy- (d) Cannot be commented at all
(a) Collective ownership
(b) Profit Motive Q 98. Identify the correct statement-
(c) Absence of economic choice (a) In capitalist economy, people are not free to spend
(d) Relatively equal income distribution their income as they like
(b) In socialist economy right to work is guaranteed but
Q 92.
Socialist economy is characterised by- the choice of occupation gets restricted.
(a) Selective production of goods (c) In Socialist economy, a relative inequality in income is
(b) Relative equality of income an important feature
(c) Secondary role of price mechanism (d) In Socialist economy, people are not allowed to
(d) All of the above choose between available range of choice
Q 93. Which of the following applies to socialist Q 99. Which of the following is not a micro economic
economy- subject matter?
(a) Balance between social objective and economic (a) The price of mangoes
activity (b) The cost of producing a fire truck for the fire
(b) Private ownership of all recourses and factor of department of Delhi, India.
productions (c) The quantity of mangoes produced for the mangoes
(c) Total absence of government regulation market.
(d) Market mechanism to solve central economic (d) The national economy’s annual rate of growth.
problem
Q 100. In Mixed economy there are ….. sectors of
Q 94.
Under command economy, all the decision from industries
allocation of recourse to distribution of end product, is (a) One (b) Two
taken care by (c) Three (d) Four
(a) Producers
(b) Cartels
Q 101.
6.7 | Page
In mixed economy, industries are found in…… A Mixed economy focuses on ensuring
(a) Joint Sector (b) Private sector (a) Productive efficiency of capitalism
(c) Public sector (d) All of the above (b) Distributive justice of Socialism
Q 102.
In Mixed economy, industries in private sectors (d) Neither (a) nor (b)
have…. as their objective and driving force, while public
sector have……..as their objective and driving force ?
(a) profit motive, community welfare
(b) community welfare, profit motive
(c) community welfare, own profit
(d) None of the above
Q 103.
In India areas like atomic energy, defence, etc are
in the hands of….
(a) Public sector (b) Private sector
(c) Joint sector (d) All of the above
Q 104. ……….. is the demerit of capitalist economy

(a) Low cost of production
(b) High regulation of government
(c) No incentive for hard work
(d) Inequality of income
Q 105.
Indian economy is an example of………
(a) Mixed economy (b) Socialist economy
(c) Capitalist economy (d) None of the above
Q 106.
6.8 | Page
Que Ans Que Ans Que Ans Que Ans Que Ans
1. B 23. C 45. C 67. C 89. D
2. C 24. A 46 C 68. B 90. A
3. A 25. B 47. C 69. D 91. B
4. B 26. A 48. C 70. B 92. D
5. C 27 B 49. B 71. C 93. A
6. A 28. A 50. A 72. A 94. C
7. A 29. D 51. A 73. A 95. B
8. B 30. C 52. D 74. D 96. A
9. C 31. D 53. D 75. A 97. B
10. A 32. B 54. B 76. A 98. B
11. C 33. D 55. D 77. D 99. D
12. D 34. A 56. A 78. D 100. C
13. B 35. B 57. C 79. A 101. D
14. B 36. D 58. A 80. D 102 A
15. D 37. C 59. A 81. B 103. C
16. A 38. A 60. C 82. A 104 D
17. D 39. B 61. C 83. A 105 A
18. D 40. A 62. C 84. A 106. C
19. D 41 D 63. D 85. C
20. D 42. B 64. A 86. C
21. D 43 D 65. B 87. C
22. B 44. B 66. D 88. B
6.9 | Page
Chapter 1- Nature and Scope of Q.8. In a free-market economy, when consumers
increase their purchase of a goods and the level of
Business Economics exceeds then prices tend to rise :
Past Year & Most Frequent MCQ (a) demand, supply (b) supply, demand
(c) prices, demand (d) profits, supply
Q.1. 'Economics is the study of mankind in the ordinary
business of life was given by Q.9. According to Robbins, 'means' are:
(a) Adam Smith (b) Lord Robbins (a) Scarce (b) Unlimited
(c) Alfred Marshall (d) Samuelson (c) Undefined (d) All of these
Q.2. The branch of economic theory that deals with the Q.10. Economics is the study of
problem of allocation of resources is (a) How society manages its unlimited resources
(a) Micro economics (b) Macroeconomics (b) How to reduce our wants until we are satisfied
(c) Econometrics (d) None of these (c) How society manages its scarce resources
(d) How to fully satisfy our unlimited wants
Q.3. Capitalistic Economy uses __ as principal means of
allocating Resources Q.11. A mixed economy means :
(a) demand (b) supply (a) Co-existence of small and large industries
(c) price (d) all of the above (b) Promoting both agriculture and industries in the
economy
Q.4. A study of how an increase in the corporate income (c) Co-existence of rich and poor
tax rate will affect the natural unemployment rate is an (d) Co-existence of public and private sectors
example of:
(a) Macroeconomics Q.12. Who defines Economics in terms of Dynamic
(b) Descriptive Economics Growth and Development?
(c) Microeconomics (a) Robbins (b) Paul A Samuelson
(d) Normative Economics (c) Adam Smith (d) None
Q.5. In which type of economy do consumers and Q.13. A Free Market economy, solves its Central
producers make their choices based on the market Problems through
forces demand and supply? (a) planning authority
(a) Open Economy (b) Controlled Economy (b) market mechanism
(c) Command Economy (d) Market Economy (c) both
(d) none
Q.6. Under a free economy, prices are:
(a) Regulated Q.14. Normative aspect of Economics is given by :
(b) Determined through a free interplay of demand and (a) Marshall (b) Robbins
supply (c) Adam Smith (d) Samuelson
(c) Partly regulated
(d) None of these Q.15. Which one is not the characteristic of a
capitalistic economy?
Q.7. Which of the following falls under microeconomics? (a) Profit motive (b) Income inequality
(a) National income (c) Free employment (d) Collective ownership
(b) General price level
(c) Factor pricing Q.16. Mixed economy means
(d) National saving and investment (a) All economic decisions are taken by the Central
Authority
Page | 6.10
(b) All economic decisions are taken by private Q.25. Which of these is an example of macroeconomics:
entrepreneurs (a) The problem of unemployment in India
(c) Economic decisions are partly taken by the state and (b) The rising price level in the country
partly by private entrepreneurs (c) Increase in disparities of income
(d) None of these (d) All of the above
Q.17. Economic Problem arises when : Q.26. In a capitalist economy the allocation of resources
(a) Wants are unlimited is performed by:
(b) Resources are limited (a) Producers (b) Government
(c) Alternative uses of resources (c) Planners (d) Price mechanism
Q.27. Which of the following statements is incorrect?
Q.18. Micro economics is also known as (a) Alfred Marshall propagated the wealth definition of
(a) public economics (b) price theory Economics
(c) income theory (d) demand theory (b) L. Robbins introduced the 'Scarcity' definition of
Economics
Q.19. A developed economy uses technique in (c) Samuelson emphasized upon the "growth" aspect of
production Economics
(a) labour intensive (b) capital intensive (d) A.C Pigou believed in the 'welfare' aspect of
(c) home-based (d) traditional Economics
Q.20. Which one is the feature of Marshall's definition? Q.28. Inequalities of income do not perpetuate in
(a) Limited ends (a) socialism (b) mixed economy
(b) Scarce means (c) capitalism (d) none
(c) Study of wealth as well as study of man
(d) Study of allocation of resources Q.29. Which of the following are the features of a mixed
economy?
Q.21. Which one in the following is not correct : (a) Planned economy
(a) There are limited wants (b) Dual system of pricing exists
(b) Means are scarce (C) Balanced regional development
(c) Resources have alternative uses (d) All of the above.
(d) Economics is science
Q.30. Normative Economics is based on:
Q.22. Micro Economics is concerned with: (a) Ethical Considerations
(a) Consumer Behaviour (b) Product pricing (b) Facts and Generalization
(c) Factor Pricing (d) All of the above (c) What is?
Q.23. Who gave the positive aspect of science?
(a) Alfred Marshall (b) A.C. Pigou Q.31. The dual system of pricing exists in:
(c) Adam Smith (d) Robbins (a) Free market economy
(b) Socialistic economy
Q.24. Which of these is a part of microeconomics? (c) Mixed economy
(a) Factor pricing (b) National Income (d) None of the above
(c) Balance of payment (d) None
Q.32. A Capitalist Economy follows the policy of:
(a) Laissez-faire
(b) Regulated markets
Page | 6.11
(c) Promoting public sector Q.40. Economics which is concerned with welfare
(d) None of the above. propositions is called
(a) Socialistic economics
Q.33. "Economics is the science of choice-making' (b) Capitalistic economics
implies:- (c) Positive economics
(a) No choice is to be made (d) Normative economics
(b) The choice to be made between alternative uses
(c) The choice to be made between means and ends Q.41. In which among the following systems the right to
(d) None of the above property' exists
(a) Mixed economy (b) Capitalist economy
Q.34. Which of the following is a part of the subject (c) Socialist economy (d) Traditional economy
matter of macro economics?
(a) Study of firms Q.42. Positive science only explains
(b) Aggregate profits of a firm (a) What is?
(c) Market demand for a product (b) What ought to be?
(d) Net national product. (c) What is right or wrong
Q.35. A capitalist economy is by and large
(a) a closed economy Q.43. Socialist Economy is also known as
(b) a free market economy (a) Mixed Economy (b) Planned Economy
(c) a centrally controlled economy (c) Capitalist Economy (d) None of the above
(d) an economy in which a government neither collects
any taxes nor incurs any expenditure Q.44. Who has defined economics as "Science which
deals with wealth"?
Q.36. A free-market economy's driving force is: (a) Adam Smith (b) Canon
(a) Profit motive (c) J.B. Say (d) A.C. Pigou
(b) Welfare of the people
(c) Rising income and levels of living Q.45. Which of the following is not a feature of a
(d) None of the above capitalist economy?
(a) Right to private property
Q.37. "Economics is neutral between ends". The (b) Restrictions on consumers right to choose
statement is given by: (c) Profit motive
(a) L. Robbins (b) Mrs. Joan (d) Freedom of enterprise
(c) Alfred Marshall (d) A.C. Pigou
Q.46. The most important function of an entrepreneur is
Q.38. A system of economy in which all the means of to
production are owned and controlled by the private a) innovate
individuals for the purpose of profit is called (b) bear the sense of responsibility
(a) Socialist Economy (b) Capitalist Economy (c) finance
(c) Mixed Economy (d) All of the above (d) earn profit
Q.39. Where does the price mechanism exist? Q.47. The meaning of time element in economics is:
(a) Capitalist Economy (a) Calendar time
(b) Socialist Economy (b) Clock time
(c) Both types of economies (c) Operational time in which supply adjusts with the
(d) None of the above market demand
Page | 6.12
(d) To provide job to every job seeker.
Q.48. All wants of an individual are not of:
(a) Equal importance Q.55. Socialist Economy was propounded by:
(b) Immediate importance (a) Karl Marx & Fredut Angles
(c) Fixed importance (b) Samuelson
(d) All of the above (c) A.C. Pigou
(d) Adam Smith
Q.49. Micro economics does not study
(a) Consumer behavior (b) Factor pricing Q.56. Concept of Business Economics was given by:
(c) General price level (d) Firms equilibrium. (a) Joel Dean (b) Alfred Marshall
(c) Adam Smith (d) L. Robbins
Q.50. Find out the correct statement
(a) Higher the prices, lower the quality demanded of a Q.57. A business economy involves the theory of
product is a normative statement Business economics with
(b) Micro and macro-economics are interdependent (a) Normative Economics (b) Business practices
(c) In a capitalist economy, the economic problems are (c) Micro Economics (d) Macro Economics
solved by planning commission
(d) In deductive method logic proceeds from particular Q.58. Which is not included in Economics?
to the general (a) Family Structure
(b) Managerial Economics
Q.51. Microeconomics is the study of: (c) Micro Economics
(a) Individual parts of the economy (d) Macro Economics
(b) The economy as a whole
(c) Choice making Q.59. In which economy market and government both
(d) Development of the economy play an important role?
(a) Mixed economy (b) Socialistic economy
Q.52. The definition of economics given by Robbins does (c) Capitalistic economy (d) Business economy
not deal with one of the following aspects. Indicate that
aspect. Q.60. Which factor is included in business Economics?
(a) Scarce means (b) Limited ends (a) Business Economics is an art
(c) Alternative uses d) Economics is a science (b) Interdisciplinary in nature
(c) Normative in nature
Q.53. Which Economic System is described by (d) All of the above
Schumpeter as 'capitalism in the oxygen tent?
(a) Laissez-Faire Economy Q.61. Which out of these are the features of capitalism?
(b) Command Economy (i) Profit motive
(c) Mixed Economy (ii) Human welfare
(d) Agrarian Economy (iii) Work through price mechanism
(a) (i) and (ii)
Q.54. The Central problem in every economic society is: (b) (ii) and (iii)
(a) To ensure a minimum level of income for every (c) (i) and (iii)
individual. (d) All of these
(b) To allocate scarce resources in such a manner that
society, unlimited wants are satisfied in the best Q.62. Socialism ensures
possible manner. (a) Rapid growth and balanced development
(c) To ensure that production occurs in the most efficient (b) Right to work
manner. (c) Incentives for efficient economic decisions
Page | 6.13
(d) Both (a) and (b) (d) Primary importance in satisfying social requirements
(1 mark)
Q.63. Macroeconomics includes
(a) Product pricing Q.69. Due to recession, employment rate and output
(b) Consumer behavior (a) Rises ; rises (b) Falls, falls
c) External value of money (c) Rises falls (d) Falls; rises
(d) Location of industry
Q.70. ______refers to the work area where surplus
Q.64. Exploitation and inequality will be more in manpower is employed out of which some individuals
(a) Socialism (b) Capitalism have zero or almost zero marginal productivity, such
(c) Mixed (d) All of the above that if they are removed the total level of output
remains unchanged.
Q.65. Shyam: This year due to heavy rainfall my anion (a) Voluntary (b) Disguised
crop was damaged Krishna : Climates affect crop yields. (c) Structural (d) Technological
Some years are bad, others are good
Q.71. Socialist economy is
Hari: Don't worry - Price increase will compensate for (a) Self-regulation
the fall in quantity supplied (b) Profit Oriented
(c) Command economy
Radhe: The Government ought to guarantee that our (d) Allocation of resources as per market requirements
income will not fall. (1 mark)
In this conversation, the normative statement is made
by Q.72. In a market economy all assets are held by:
(a) Shyam (b) Krishna (a) Investors (b) Privately
(c) Hari (d) Radhe (c) Government (d) Jointly by government
Q.66. A capitalist economy consists of Q.73. The branch of economic theory that deals with
(a) Central planning authority problem of allocating resources
(b) A mechanism to decide as to what, how and for (a) Micro economics (b) Marc economics
whom to produce (c) Econometrics (d) None
(d) None of the above Q.74. Larger production of goods would lead to higher
production in future.
Q.67. Applied economics includes (a) consumer goods (b) capital goods
(a) Regression analysis and mathematical linear (c) agricultural goods (d) public goods
programming
(b) Capital budgeting Q.75.Which of the following is not within the scope of
(c) Both (a) and (b) business economics?
(d) None (a) Capital budgeting (b) Risk analysis
(c) Business cycle (d) Accounting Standards
Q.68. Economic goods are considered as scarce
resources because Q.76. Which type of scarcity is referred to in economics
(a) Inadequate quantity to satisfy the needs of the (a) Relative scarcity (b) Absolute scarcity
society (c) Both (a) and (b) (d) None
(b) Not possible to increase the quantity
(c) Limited hands to make goods
Page | 6.14
Q.77. Cons
umer sovereignty is which of the following characteristics?
(a) Capitalist economy (b) Mixed economy
(c) Socialist economy (d) Democracy
Qn. no Ans Qn. no Ans Qn. no Ans Qn. no Ans

1 C 21 A 41 B 61 C
2 A 22 D 42 A 62 D
3 C 23 A 43 B 63 C
4 A 24 A 44 A 64 B
5 D 25 D 45 B 65 D
6 B 26 D 46 A 66 B
7 C 27 A 47 C 67 C
8 A 28 A 48 B 68 A
9 A 29 D 49 C 69 B
10 C 30 A 50 B 70 B
11 D 31 C 51 A 71 C
12 B 32 A 52 C 72 B
13 B 33 B 53 D 73 A
14 A 34 D 54 B 74 B
15 D 35 B 55 A 75 D
16 C 36 A 56 A 76 A
17 D 37 A 57 B 77 A
18 B 38 B 58 A
19 B 39 A 59 A
20 C 40 A 60 D
Page | 6.15
Chapter 2 - Part A - Utility Analysis Q 8. Which of the following is not a consumption
(a) Burning of crackers in diwali
Q 1. ………… is the power of a commodity to satisfy a (b) Eating ice cream
human want (c) Burning gas when cooking food
(a) Utility (b) Money (d) Burning of bike in an accident of fire
(c) Price (d) None of the above.
Q 9. As per the cardinal approach-utility
Q 2. Utility - is………aspect.
(a) Differs from person to person (a) psychological (b) non quantifiable
(b) Differs from time to time (c) quantifiable (d) irrelevant
(c) Differs from product to product
Q 10.
(d) All of the above All wants of an individuals are not of:
(a) Immediate importance
Q 3.
Utility is applicable - (b) Fixed importance
(a) Only for socially desirable goods (c) Equal importance
(b) Only for harmful goods like liquor, cigarettes etc (d) All of the above
(d) Neither (a) nor (b) Cardinal Approach- Basics
Q 4. Q 11.
Utility is a……….. aspect and differs from person to State whether the given statement is true or
person false in context of cardinal approach to utility ‘Human
(a) Absolute (b) Subjective satisfaction can be expressed in monetary terms, and
(c) Objective (d) Irrelevant price of a commodity in the market indicates the level of
consumer satisfaction’
Q 5.
State whether the given statement is true or false-‘ (a) True
Utility means usefulness (b) False
(a) True (c) Partially true
(b) False (d) Cannot be commented at all
(c) Partially true
(d) Cannot be commented at all Q 12. Marginal utility approach to demand was given
by
Q 6.
The concept of utility is ethically neutral- this (a) Hicks and Allen (b) J.B say
statement is (c) Alfred Marshall (d) Dean Joel
(a) True
(b) False Q 13. Which of the following statement is not correct
(c) Partially true (a) Cardinal approach provides basis for law of demand
(d) Cannot be commented at all (b) Cardinal approach assumes money measurement
concept
Q 7. Utility theories seek to explain how a consumer (c) Cardinal approach to utility explains the
spends his income on different goods and services so as relationship between demand, supply and price.
to ………. (d) Cardinal approach to utility do not assume
(a) Become wealthy consistency of money
(b) survive
(c) Match standard of living Q 14. Utility can be measure and quantified under-
(d) Attain maximum satisfaction (a) Cardinal Approach (b) Ordinal approach
(c) Both (a) and (b) (d) Neither (a) nor (b)
7.1 | Page
Q 15. Q 23. The cardinal approach of utility analysis assumes
Under marginal utility analysis, utility is assumed
to be a- that utility is measurable and quantifiable. This means-
(a) Cardinal concept (b) Ordinal concept (a) Utility can be expressed in numbers
(c) Infinite concept (d) Modern concept (b) Utility can be ranked across the products
(c) Utility schedule is derived by the consumer
Q 16.
Marshallian utility analysis is known as ……………. (d) All of the above
analysis
(a) Ordinal (b) cardinal Q 24. Cardinal approach to utility assumes Marginal
(c) Classic (d) Modern utility of money is-.
(a) Zero (b) Constant
Q 17.
According to Marginal utility analysis, utility can (c) Increasing (d) Decreasing
be measured in
(a) Ranks (b) Nominal value Total utility and Marginal utility
(c) Cardinal numbers (d) All of the above
Q 25. ……… is derived from different units of
Q 18. Which of the theories are applicable under commodity consumed by a consumer.
cardinal approach to utility? (a) Total utility (b) Marginal utility
(a) Law of diminishing marginal utility (c) Average utility (d) Ordinal utility
(b) Law of Equi-Marginal utility
(c) Consumer surplus theory Q 26.……… is the additional utility derived from
(d) All of the above additional unit of a commodity
(a) Marginal utility (b) Total utility
Q 19. Which of the following is not a necessary (c) Ordinal utility (d) Average utility
assumption to cardinal utility theory?
(a) Rationality of the consumer Q 27. Marginal utility can be stated as-
(b) Constant marginal utility of money (a) TUn-TUn-1
(c) Additively of utility (b) Additional utility derived from additional unit of a
(d) Perfect competitive market commodity.
(c) Change in total utility / change in quantity
Q 20. Cardinal approach to utility analyses-. (d) All of the above
(a) One commodity at a time
(b) Two commodities at a time Q 28. Marginal utility-
(c) Many commodities at a time (a) Will always be positive
(d) Does not analyse any commodity at a time (b) Will always be negative
(c) Can be positive or negative but not zero
Q 21. Under Cardinal approach to utility, …….. is the (d) Can be positive or negative or zero
measuring rod of utility
(a) Money (b) Time Q 29. Total utility-
(c) Customer satisfaction (d) All of the above (a) Will always be positive
(b) Will always be negative
Q 22.
Which of the following is not an assumption (c) Can be positive or negative but not zero
under cardinal approach of utility analysis (d) Can be positive or negative or zero
(a) Utility is goods are independent of one another
(b) Marginal utility of money is constant. Q 30. Total utility is maximum when-
(c) Utility is comparable across the goods (a) Marginal utility is zero
(d) Utility cannot be measured, but only ranked (b) MU is at its highest point
7.2 | Page
(c) MU is equal to average utility
(d) Average utility is maximum Q 40. When the economists speak of utility of a
certain product, they are referring to-
Q 31. When total utility increases at diminishing rate, the (a) Demand of the product
marginal utility is……… (b) Usefulness of the product
(e) Diminishing (f) Zero (c) Satisfaction derived from the product
(g) Maximum (h) One (d) Price of the commodity
Q 32. Marginal utility will always show- Practical problems with hints
(a) Increasing trend (b) Decreasing trend.
(c) Both (a) and (b) (d) Neither (a) nor (b) Q 41. Total utility derived by Miss Katrina by
consuming 10 Mangoes is 99, where the total utility on
Q 33. The Law of Diminishing Marginal Utility states that consumption of 11 Mangoes is 95. What is the marginal
all else equal as consumption increases the marginal utility of 11th Mango?
utility derived from each additional unit…….. (a) -4 (b) 4
(a) declines (b) increases (c) 194 (d) -194
(c) goes up to zero (d) remains constant
Q 42. Total utility that Mr. Khan derives from
Q 34. Each want is ………. consumption of 10 Frooti is 250. MU of 11th frooti is -
(a) Non satiable (b) Limited 60. What will be the total utility of 11 frooti?
(c) unlimited (d) Satiable (a) -60 (b) 250
(c) 190 (d) 310
Q 35. Total utility increases at a………
(a) Increasing rate (b) Decreasing rate Q 43. Total utility that Mr. Rowdy derives from
(c) Constant rate (d) None of the above consumption of 6 Apple is 300. MU of 7th Apple is 30.
What will be the total utility of 7 Apple?
Q 36. Marginal utility curve is………. (a) 330 (b) 270
(a) Downward sloping (c) 300 (d) 30
(b) Slopes from left to right
(c) Negatively sloped No. of units Total Utility Marginal utility
(d) All of the above 0 0 ?
1 900 A
Q 37. Marginal utility varies………. With the supply. 2 B 800
(a) directly (b) inversely 3 2400 C
(c) simultaneously (d) None of the above 4 D 600
5 3500 E
Q 38. 6 F 400
Marginal utility of goods increases as the
quantity …………. Goods with the consumer increases. 7 4200 G
(a) Complementary (b) Substitute 8 4400 H
(c) Giffen (d) All of the above 9 I 100
10 J
Q 39. 11 4400 K
MU of the goods decreases as the quantity of
………. goods with the consumer increases. 12 L -300
(a) complementary (b) Substitute
(c) Both (a) and (b) (d) None of the above Use the given table and solve next 13 questions
7.3 | Page
Q 44. What is the value of “?” in the above table?
(a) 0 (b) 1 Q 52. Marginal utility of a commodity depends on its
(c) -1 (d) 900 quantity and is-
(a) Inversely proportional to its quantity
Q 45. What is the value of “A” in the above table? (b) Not proportional to it quantity
(a) 0 (b) 1 (c) Independent of its quantity
(c) 900 (d) Cannot be determined (d) None of the above
Q 46. What is the value of “B” in the above table? Q 53. Which of the following is not an assumption of
(a) 2 (b) 1700 law of Diminishing Marginal Utility?
(c) 800 (d) Cannot be determined (a) Different units consumed should be identical in all
respect
Q 47. What is the value of “C” in the above table? (b) There should be no time gap between consumption
(a) 3 (b) 2400 of one unit and another unit.
(c) 700 (d) Cannot be determined (c) Different unit consumed must be standard unit.
Q 48. What is the value of “D” in the above table?
(a) 3000 (b) 4 Q 54. Law of diminishing marginal utility, continuous
(c) 600 (d) Cannot be determined consumption means there should be…………… between
consumption of one unit and another unit.
Q 49. What is the value of “E” in the above table? (a) Equal time gap (b) No time gap
(c) Long time gap (d) Any of the above
(a) 3500 (b) 5
(c) 500 (d) Cannot be determined Q 55. Law of diminishing marginal utility will not hold
good income of the consumer-
Law of diminishing Marginal utility (a) Increases (b) Decreases
(c) Remains constant (d) Both (a) and (b)
Q 50. Which law states that the more a consumer
consumes a product, he derive lesser Utility from Q 56. As per assumption to Law of diminishing
additional consumption marginal utility, in case of Money, gold, etc. greater
(a) Law of Equi-marginal utility quantity may-
(b) Law of diminishing marginal utility (a) Increases the lust and utility thereof
(c) Law of cardinal utility (b) decreases the lust and utility thereof
(d) Law of Demand (c) No effect on utility at all
(d) Nothing can be said
Q 51. After reaching a saturation point, consumption Q 57. Law of diminishing marginal utility is based on
of additional units of commodity causes- the assumption that the habits and tastes of the
(a) Total utility & Marginal utility both to increases consumer-
(b) Total Utility to fall and Marginal utility to increase (a) Must remain constant
(c) Total utility to fall & Marginal utility to become (b) Must change
negative (c) Both (a) and (b)
(d) Total utility to become negative & Marginal utility (d) Neither (a) nor (b)
to fall
Q 58. Utility may be affected by presence of?
(a) Complementary goods
7.4 | Page
(b) Substitute goods (c) One’s choices never vary
(c) Both (a) and (b) (d) One’s choice be consistent with one’s goals
(d) Neither (a) nor (b)
Q 65.
Buyer’s willingness to pay is that buyer’s-
Q 59. Law of diminishing marginal utility applies only (a) Minimum amount he is willing to pay for a product
if………..measurement to utility is assumed. (b) Producer’s surplus
(a) Cardinal (b) Ordinal (c) Maximum amount he is willing to pay for a product
(c) Both (a) and (b) (d) Neither (a) nor (b) (d) Consumer’s surplus
Q 66.
Law of Equi-Marginal utility As per which principle-‘The consumer will be
willing to buy a commodity, as long as the MU
Q 60. As per which law, ‘If marginal utility of money (additional satisfaction) derived is equal to price of
spent on commodity X is greater than marginal utility of the commodity’?
money spent on commodity Y, then the consumer will (a) Consumers Equilibrium
withdraw some money from purchase of Product Y and (b) Consumer’s surplus
will spent on purchase of X, till MU of money in two (c) Consumer advantage
cases becomes equal’? (d) Consumer exploitation
(a) Law of demand
(b) Law of supply Q 67. If the price paid by the consumer is more than
(c) Law of Equi-marginal utility the additional satisfaction derived from that item, the
(d) Law of diminishing marginal utility consumer will-
(a) Stop buying the item
Q 61. The consumer will attain maximum satisfaction, (b) Start selling the item
and will be in equilibrium when MU of money spent on (c) Start buying the item
various goods that he buys are- (d) Nothing can be said
(a) Equal (b) Decreasing
(c) Zero (d) Increasing Q 68. Consumer surplus means-
(a) The area between average revenue and marginal
Q 62. Law of Equi-marginal utility applies because- revenue curves
(a) Consumer will try to maximize his satisfaction (b) The area inside budget line
(b) There may be substitute available for each product (c) Difference between the maximum amount a person
in the market. is willing to pay for a good and its market price.
(c) The consumer will substitute one item for the other (d) Both (b) and (c)
such that his MU>Price
(d) All of the above Q 69. Law of consumer surplus is based on-
(a) Law of diminishing marginal utility
Consumer Equilibrium and Consumer Surplus (b) Reveled preference theory
(c) Law of substitution
Q 63.
Rational person does not act unless- (d) All of the above
(a) The action makes money for the person
(b) The action is ethical Q 70. Consumer surplus arises because-
(c) Marginal benefits exceeds marginal cost (a) MU is initially higher than the price
(d) Marginal cost exceeds marginal benefits (b) MU is always equal to price
(c) MU is always equal to zero
Q 64. Rational decision means- (d) MU is initially lower than the price
(a) Error-free decision
(b) One’s choice that do not involve trade-off
7.5 | Page
Q 71. MUx is the marginal utility of product X and Px is Q 78. Consumer surplus is higher in case of-
the price of the product, a rational consumer will (a) Luxuries (b) Comfort
consume Product X until- (c) necessities (d) All of the above
(a) MUx> Px (b) Mux< Px
(c) MUx=0 (d) MUx= Px Q 79. A monopolist will try to take maximum
advantage of consumer surplus by adopting-
Q 72. “The excess of the price which he would be (a) Price Equilibrium (b) Price Exploitation
willing to pay rather than go without the thing over that (c) Price rigidity (d) Price discrimination
which he actually does pay in economic measure of his
surplus satisfaction” is given by Q 80. Which of the following statements regarding
(a) Alfred Marshall (b) Lionel Ribbins consumer surplus is not true?
(c) J.R. Hicks (d) Edge Worth. (a) It is useful for designing government policies and
implementing welfare programs
Q 73. Consumer surplus is the area- (b) It helps in monopolist to fix the price of a
(a) Below demand curve and above price line commodity
(b) Above supply cure and below price line (c) On the basis of consumer surplus only domestic
(c) Above Demand curve and below price line trade can be advocated and international trade
(d) Any of the above should be avoided
(d) It can also be used to measure health of the
Q 74. The concept of Consumer surplus arises because - economy
(a) MU increases but price remains constant
(b) MU declines but price remains constant Q 81. ………. Consumer surplus indicates higher level of
(c) MU increases but price decreases efficiency in economy.
(d) MU decreases but price increases (a) Higher (b) Lower
(c) Balanced (d) Negative
Q 75.
At the point of consumer’s equilibrium
(a) Consumer’s surplus is maximum Q 82. ……………... is useful for designing government
(b) Consumer’s surplus is negative policies and implementing welfare programs.
(c) Consumer’s surplus is zero (a) Law of diminishing return
(d) All of the above (b) Consumer surplus
(c) Law of Equi-marginal utility
Q 76. In the concept of consumer Equilibrium and (d) Income and substitution effect
consumer surplus, for the quantity purchased at
equilibrium level marginal utility is- Q 83. Under which of the following market type
(a) Positive (b) Negative consumer surplus will be generally maximum?
(c) Equal to price (d) Zero (a) Perfect competition
(b) Monopolistic competition
Q 77. Consumer surplus arise in respect of- (c) Monopoly
(a) All quantities purchased up to consumer’s (d) All of the above
equilibrium level
(b) All quantities purchased beyond `consumer’s Q 84. If MUx/Px> MUy/Py then the consumer will-
equilibrium level (a) Increase consumption of X and reduce consumption
(c) Quantities purchased at equilibrium level only of Y
(d) None of the above (b) Increase consumption of Y and reduce consumption
of X
7.6 | Page
(c) Will increase consumption of both the products X Q 90. Consumer consumed three products. MU
and Y derived from consumption of first two units is INR 400,
(d) Will decrease consumption of both the products X INR 350. If the price of the product is INR 300 and the
and Y consumer is in equilibrium at 3 units, the MU of 3rd unit
is-
Q 85.
In case of necessaries, the Marginal utility for (a) 100 (b) 200
first few items will be- (c) 300 (d) 400
(a) Zero (b) High
Q 91.
(c) Infinite (d) None of the above If the prices of ice-cream and chocolate are 40
and 30 respectively and MU of chocolate is 150, what is
Q 86. Which of the following statement/s is true - MU of ice cream assuming consumer is in equilibrium?
i. The consumer surplus derived from a product is (a) 112.5 (b) 125
affect by availability of substitute (c) 200 (d) 225
ii. The consumer surplus derived from a product is
affect by availability of complementary items Q 92. Suppose the price of new phone is 5000 and Mr.
iii. The concept of consumer surplus fails in case of Ranveer values new phone at 7000. What will be the
articles which are used for their prestigious value. consumer surplus if Mr. Ranveer buys the phone?
Example diamond. (a) 2000 (b) 3000
iv. If we make assumption that utility cannot be (c) 12000 (d) 5000
expressed in monetary terms, the concept of
consumer surplus will still apply Q 93. Suppose the price of new bike is 15000 and Mr.
(a) i,ii,iv (b) i,ii,iii,iv M.S values new bike at 14000. What will be the
(c) i,ii,iii (d) Only iv consumer surplus if Mr. Dhoni buys the bike?
(a) 29000 (b) -1000
Q 87. The concept of consumer surplus is based on the (c) 0 (d) Nothing can be said
assumption that Marginal utility of the money is-
(a) Zero (b) Infinite Q 94. Suppose there are three computes available to
(c) Negative (d) Constant be purchased. Mr Shyam is willing to pay 25000, Mr
Raju is willing to pay 20000 and Mr. Babubhai is ready
Q 88. Which of the following is the drawback of to pay 15000. If the price of the computer is 20000,
consumer surplus- what is the consumer surplus in this market and how
(a) It cannot be measured in terms of money as the many units will be sold?
marginal utility of money of money changes (a) Consumer surplus is 5000 and 2 units will be sold.
(b) It is highly hypothetical concept (b) Consumer surplus is 60,000 and 2 units will be sold.
(c) It ignores interdependency of the goods (c) No consumer surplus and 2 units will be sold
(d) All of the above (d) Consumer surplus is 5000 and 3 units will be sold.
Use the following diagram to solve the next 5 questions-
Practical problems on Consumer equilibrium and Y M
consumer surplus
Q 89. Consumer consumed three products. MU derived

from consumption of three products is INR 400, INR 350,
and INR 300. If price of the product is 300, what is the
consumer surplus? M’
(a) 0 (b) 100 0 Q MU
(c) 150 (d) 50 C X
7.7 | Page
(a) Cardinal (b) Ordinal
Quantity of commodity along X axis (c) Both (a) and (b) (d) Neither (a) nor (b)
Price and Marginal utility along Y axis
Q 103. Ordinal approach to utility analyses-
Q 95. In the above diagram, market price at consumer (a) One commodity at a time.
equilibrium is given by- (b) Two commodities at a time
(a) OA (b) OC (c) Many commodities at a time
(c) MM’ (d) None of the above (d) Does not analyses any commodity at all
Q 96. Q 104.
In the above diagram, consumers total utility is Ordinal utility approach is also called as-
given by- (a) Indifference curve approach
(a) Area under OMBC (b) Area under OABC (b) Hicks and Allen approach
(c) Area under AMB (d) None of the above (c) Both (a) and (b)
Q 97. In the above diagram, price paid by the consumer
is given by- Q 105. Which of the approaches dispense with money
(a) Area under OMBC (b) Area under OABC measurement concept of utility?
(c) Area under AMB (d) None of the above (a) Cardinal approach (b) Ordinal approach
Q 98. In the above diagram, consumer surplus is given
by- Q 106. Which of the approaches helps to explain the
(a) Area under OMBC (b) Area under OABC Law of Demand?
(c) Area under AMB (d) None of the above (A) Cardinal (B) Ordinal
(C) Both (a) and (b) (D) Neither (a) nor (b)
Q 99. In the above diagram, consumer attains
equilibrium by consuming……. units Q 107. ………… shows various combinations of two
(a) OA (b) OC goods that give same amount of satisfaction.
(c) MM’ (d) None of the above (a) Isoquants (b) Isocost curve
(c) Marginal utility curve (d) Indifference curve
4. Ordinal Approach.
Q 108. Indifference curve shows various combinations
Q 100. As per the ordinal approach- Measurement of of two goods that give…… amount of satisfaction –
utility us not possible through n=money (a) Lower (B) Higher
(a) Measurement of utility is possible but cannot be (C) Same/ equal (D) Constant
ranked
(b) Measurement of utility is not possible in cardinal Q 109. All point in indifference curve represents-
number but can be ranked (a) Same satisfaction (b) Equal satisfaction
(c) None of the above (c) Similar satisfaction (d) All of the above
Q 101. Which of the following Economists are not Q 110. Consumer is said to be …….. among different
concerned with ordinal approach to utility points on IC–
(a) Hicks (b) Allen (a) Intelligent (b) Irrational
(c) Marshall (d) All of the above (c) Indifferent (d) Intersecting
Q 102. As per………… approach to utility ‘Human Q 111. Indifference curve slopes-

Satisfaction is psychological phenomenon and cannot be (a) Downward to the right
measured quantitatively? (b) Upward to the right
7.8 | Page
(c) Downward to the left (B) The elasticity of substitution between two goods to
(d) Upward to the left a consumer is zero.
(C) Convexity of the curve is due to diminishing nature
Q 112. Indifference curve is convex to the origin, the of MRS
reason is- (D) Total effect of a change in price of a product on its
(a) Increasing marginal rate of substitution quantity demanded is called as price effect.
(b) Constant marginal rate of substitution
(c) Diminishing Marginal rate of substitution Q 119. If an indifference curve is L shaped, then two
(d) None of the above goods will be-
(A) Perfect Substitute goods
Q 113. The reason for downward sloping Indifference (B) Perfect Complementary goods
curve is- (C) Substitute goods
(a) Diminishing MRS (b) Increasing MRS (D) Complementary goods
(c) Constant MRS (d) None
Q 120. ………… depicts complete picture of customer’s
Q 114. Indifference curve – taste and preferences
(a) Is downward sloping (a) Supply curve
(b) Had negative slope (b) Budget line
(c) Slopes downwards towards right (c) Indifference map
(d) All of the above (d) Demand curve
Q 115. Indifference curve slopes down towards right, Q 121. The farther the IC is from the Origin, then-
this is because more of one commodity and less of (A) The lower is the satisfaction level
another gives - (B) The higher is the satisfaction level
(a) Same satisfaction (C) Same satisfaction level will be obtained
(b) Less satisfaction (D) Nothing can be said
(c) Maximum satisfaction
(d) Infinite satisfaction Q 122. A set of indifference curves is called as ………….
(a) Price map
Q 116. If two goods are perfect substitute of each (b) Consumer preference
other, then Indifference curve relating to two goods will (c) Budget line
be- (d) Indifference map
(a) Concave (b) Curvilinear
(c) Parallel to X axis (d) Linear Q 123. Combination lying on higher Indifference curve
contains more of-
Q 117. If two goods are perfect substitute of each (A) One commodity only
other, then Indifference curve relating to two goods (B) More of both commodity
will be- (C) Either (a) or (b)
(A) Convex with constant MRS (D) Neither (a) nor (b)
(B) Straight line with constant MRS.
(C) Straight line parallel to Y axis Q 124. ……………..indicates how much of one commodity
(D) Concave to the origin is substituted for how much of another commodity
(A) Marginal utility
Q 118.
Which of the following is not a feature of (B) Marginal income
Indifference curve- (C) Marginal rate of substitutions
(A) IC must be downward sloping to the right (D) Marginal cost
7.9 | Page
(C) L shaped
Q 125.
Marginal rate of substitution is indicated by- (D) None of the above
(A) Slope of Indifference curve at a particular point.
(B) Angle between IC and X axis. Q 132. Budget line/ price line of a consumer is-
(C) Angle between IC and Y axis (A) Parallel to X axis
(D) None of the above (B) Parallel to Y axis
(C) Straight line join ing two axis
Q 126. Marginal rate of substitution indicates (D) None of the above
movement-
(A) From higher IC to Lower IC Q 133. If a combination is below price line, it indicates
(B) From Lower IC to Higher IC that there is-
(C) Along the Same IC (A) Over utilisation of resources
(D) Any of the above (B) Underutilisation of resources
(C) Optimum utilisation of resources
Q 127. General assumption in consumer behavior under (D) None of the above
Indifference curve analysis is that more goods are
preferred to less of them. This statement is Q 134. If a combination is above price line, it indicates
(a) True that there is
(b) False (A) Over utilisation of resources
(c) Partially true (B) Optimum utilisation of resources
(d) Cannot be commented at all (C) Under-utilisation of resources
(D) None of the above
Q 128. ………….. Shows all those combinations of two
goods which a consumer can buy spending his given Q 135. Budget line shows all the combination of…….
money income on two goods at their given prices. products
(A) Budget line (A) Two (B) Three
(B) Indifference curve (C) Many (D) None of the above
(C) Demand curve
(D) Supply curve Q 136. As the consumer’s income and spending
increase, the price/ budget line
Q 129.
Every point on Budget line represents ….. (A) Remains at the same level
spending by the consumer (B) Shifts towards the origin
(A) Over (B) Under (C) Shifts away from the origin
(C) Full (D) Any of the above (D) None of the above
Q 130. In order to get maximum satisfaction, the Q 137. As per Indifference curve analysis, in order to
consumer as to work under some constrains. These maximise satisfaction, a consumer will try to-
constrains are explained by- (a) Reach to higher IC possible
(A) Price line (b) Reach to lowest IC possible
(B) Budget line (c) Will remain on same IC
(C) Price opportunity line (d) IC has no relation with consumer’s satisfaction
(D) All of the above
Q 138. The consumer is in equilibrium at a point where
Q 131. If Marginal rate of substitution is increasing the Budget line-
then shape of Indifference curve is- (A) Cut an indifference curve
(A) Concave to the origin (B) Is tangential to an indifference curve
(B) Convex to the origin (C) Is below Indifference curve
7.10 | Page
(D) Is above the Indifference curve Q Ans Q Ans Q Ans Q Ans Q Ans
1 A 31 A 61 A 91 C 121 B
Q 139. The consumer is in equilibrium when - 2 D 32 B 62 D 92 A 122 D
(A) He save at least one-third of his income 3 C 33 B 63 C 93 B 123 C
(B) EMI is less than Salary of consumer 4 B 34 D 64 D 94 A 124 C
(C) Slope of price line is equal to slope of Indifference 5 B 35 B 65 C 95 A 125 A
curve 6 A 36 D 66 A 96 A 126 C
(D) Any of the above 7 D 37 B 67 A 97 B 127 A
, 8 D 38 A 68 C 98 C 128 A
Q 140. When the consumer is at equilibrium point on 9 C 39 B 69 A 99 B 129 C
Indifference curve, which of the following equation is 10 D 40 C 70 A 100 B 130 D
satisfied 11 A 41 A 71 D 101 C 131 A
(A) MRSXY=MUX/MUY= PX/PY 12 C 42 C 72 A 102 B 132 C
(B) MUX/PX= MUY/PY 13 D 43 A 73 A 103 B 133 B
(C) Both A&B 14 A 44 A 74 B 104 C 134 A
(D) None of the above 15 A 45 C 75 C 105 B 135 A
16 B 46 B 76 C 106 C 136 C
Q 141. Under Income effect, the consumer will- 17 C 47 C 77 A 107 D 137 A
(A) Moves along original Indifference curve 18 D 48 A 78 C 108 C 138 B
(B) Moves to higher or lower Indifference curve 19 D 49 C 79 D 109 D 139 C
(C) Always purchase higher quantity of both the 20 D 50 B 80 C 110 C 140 C
commodities 21 A 51 C 81 C 111 A 141 B
(D) None of the above 22 D 52 A 82 B 112 C 142 B
23 A 53 D 83 A 113 A 143 C
Q 142. In consumer Equilibrium analysis under 24 B 54 B 84 B 114 D
Indifference curve approach, the consumer is assumed 25 A 55 D 85 C 115 A
to spend his income............. on two goods 26 A 56 A 86 C 116 D
(a) Keeping 20 % Margin 27 D 57 A 87 D 117 B
(b) Wholly 28 D 58 C 88 D 118 B
(c) Partially 29 A 59 A 89 C 119 B
(d) Either (b) or (c) 30 A 60 C 90 C 120 C
Q 143. MUx of X is 100 and MUy is 300. If the price of Y

is 6000, what will be the price of X at Equilibrium?
(a) 6000 (b) 9000
(c) 2000 (d) 4000
7.11 | Page
z`
Chapter 2B Q 7. Demand arises in respect of

Demand Basics (a) Socially desirable goods, e.g. food, clothing
(b) Harmful goods, e.g. liquor
Q 1. _______refers to refers to the quantity of goods (c) Both A & B
or services those Consumers are willing and able to (d) Neither A nor B
purchase / buy in a given market, at various prices, in a
Q 8.
given period of time. In the context of Demand, the availability of
(a) Supply (b) D em nd money with the Consumer, in order to purchase the
(c) Utility (d) Surplus Commodity is called —
(a) Consumer Surplus (b) Purchasing Power
Q 2. Demand for a commodity refers to — (c) Cost of living (d) Standard of living
(a) Desire for the commodity
Q 9.
(b) Need for the commodity Purchasing Power refers to —
(c) Quantity demanded of that commodity (a) Desire to buy the product
(d) Quantity of the commodity demanded at a certain (b) Necessity to buy the product
price during any particular period of time (c) Ability to buy the product
(d) Utility of the product
Q 3. On which of the following the Effective Demand for
Q 10.
a thing depends? Purchasing power of money fall when
(a) Desire (a) Price level increases
(b) Means to purchase (Ability to Buy) (b) Price level decreases
(c) Willingness to use those means (c) Income level increases
(d) All of these (d) Money supply falls
Q 4. For want to become an Effective Demand, it must Q 11. Unless Demand is backed by purchasing power
be backed by the — or ability to pay, it does not constitute Deman(d)
(a) Ability to buy the product This statement is —
(b) Necessity to buy the product (a) True (b) False
(c) Desire to buy the product (c) Partially True (d) Nothing can be said
(d) Utility of the product
Q 12. Demand arises in respect of —
(a) Capital Goods only
Q 5.
Which of the following is an important aspect in (b) Consumer Goods only
demand? (c) Both (a) and (b)
(a) Ability to buy the product (d) Neither (a) nor (b)
(b) Willingness to spend
Q 13.
(c) Availability of the product in the market Demand for Final Consumption arises in —
(d) All of the above (a) Household Sector only
(b) Government Sector only
Q 6.
For Demand to be effective, the Commodity (c) Both Household and Government Sectors
should be available — (d) Neither Household nor Government Sector
(a) At a certain price
(b) At a certain place Q 14. Demand for Intermediate Consumption arises in
(c) At a certain time Q 43.
(a) Household Consumers
(d) All of the above (b) Government Enterprises only
(c) Corporate Enterprises only
7.12 | Page
z`
(d) All Producing Sectors of the economy (a) There is only one Producer
(b) There is only one Consumer
Q 15.
Demand for Resources and Factors of Production (c) Both (a) and (b)
is – (d) Neither (a) nor (b)
(a) Direct Demand
Q 23.
(b) Derived Demand A relative price is
(c) Irrelevant in Economics (a) Price expressed in terms of
(d) Not a Demand at all money
(b) What you get paid for baby-
INDIVIDUAL AND MARKET DEMAND sitting your cousin
(c) The ratio of one money price
Q 16. Individual Demand is also called — to another
(a) Industrial Demand (b) Market Demand (d) Equal to a money price
(c) Household Demand (d) All of the above
Q 17. Q 24.
Individual Demand shows the quantities of Which of the following influence most the price
demand for a commodity at various prices by — level in the very short—run period?
(a) A particular consumer (a) Demand (b) Supply
(b) The entire market (c) Cost (d) Production
(d) Neither (a) nor (b) Q 25. Which of the following is not a determinant of
Demand?
Q 18. Industry Demand is also called - (a) Price of the Commodity
(a) Household Demand (b) Market Demand (b) Price of Related Commodities
(c) Individual Demand (d) All of the above (c) Level of Consumers' Income
(d) None of these
Q 19. Market Demand shows the quantities of demand
for a commodity at various prices by — Q 26. All of the following are determinants of demand
(a) a particular consumer except
(b) the entire market (a) Tastes and Preferences
(c) Both (a) and (b) (b) Quantity supplied
(d) Neither (a) nor (b) (c) Income
(d) Price of related goods
Q 20.
Market Demand is the sum total of —
(a) All quantities that Producers can produce Q 27. Which of the following is a determinant of
(b) All quantities actually sold in the market Individual demand?
(c) All quantities demanded by individual households (a) Cost of Production
and consumers (b) Nature of Product, i.e. socially desirable vs other
(d) All of the above goods
(c) Tastes and Preferences of Consumers
Q 21.
If A = Household Demand and B = Market (d) Economic Policies of the Government
Demand, then —
(a) A > B (b) A < B Q 28. When a Consumer prefers a commodity due to
(c) A = B = 0 (d) None of the above prestige attached to it, it is known as
Q 43.
(a) Substitution Effect (b) Demonstration Effect
Q 22. If Household Demand and Market Demand are (c) Income Effect (d) All of the above
equal in a situation, it means that —
Q 29.
7.13 | Page
z`
When a Consumer wants a product by seeing In case of Complementary Goods, increase in
another person use that product, it is called — price of a product will —
(a) Disturbance Effect (b) Comparison Effect (a) Decrease the demand for the other product
(c) Demonstration Effect (d) Marshallian Effect (b) Increase the price of the other product
(c) Increase the demand for the other product
(d) Not affect the demand for the other product
Q 30. Demonstration Effect is generally found in
Q 37.
respect of If X and Y are Complementary Goods, the price
(a) Necessary Goods of X and the Demand of Y are —
(b) Luxury and Quasi—Luxury Goods (a) directly related
(c) Both (a) and (b) (b) inversely related
(d) Neither (a) nor (b) (c) proportionally related
(d) any of the above
Q 31.
Goods covered by Demonstration Effect can be
Q 38.
best described as - If X and Y are Complementary Goods, if there is
(a) Necessities of Life an increase in Price of X, then —
(b) Conspicuous Necessities (a) Demand of X will decrease and Demand of Y will
(c) Absolute Luxuries increase.
(d) All of the above (b) Demand of X will increase and Demand of Y will
decrease.
Q 32. In which of the following will the Demonstration (c) Demand of X and Y will increase.
Effect be high? (d) Demand of X and Y will decrease.
(a) Water (b) Rice
Q 39.
(c) Cellphone (d) Plant and Machinery _______are goods which are consumed in place
of one another.
Q 33. _______are goods which are consumed together (a) Inferior Goods
or simultaneously. (b) Normal Goods
(a) Inferior Goods (c) Complementary Goods
(b) Normal Goods (d) Substitute Goods
(c) Complementary Goods
Q 40.
(d) Substitute Goods In case of Substitute Goods, increase in price of
a product will —
Q 34. If an increase in the price of Blue Jeans leads to an (a) Decrease the demand for the other product
increase in the demand for Tennis Shoes, then Blue (b) Increase the price of the other product
Jeans and Tennis Shoes are (c) Increase the demand for the other product
(a) Complements (b) Inferior Goods (d) Not affect the demand for the other product
(c) Normal Goods (d) Substitutes
Q 41. If X and Y are Substitute Goods, the price of X
Q 35. If two goods are Complements, it means that a and the Demand of Y are —
rise in the price of one commodity will lead to — (a) Directly related
(a) Upward Shift in demand for the other commodity (b) Inversely related
(b) Rise in the price of the other commodity (c) Proportionally related
(c) Downward Shift in demand for the other (d) Any of the above
commodity
Q
Q 42.
43. If the Price of Product A increases relative to the
(d) No shift in the demand for the other commodity
Price of Substitute B & C, the demand for —
Q 36.
(a) B will increase (b) C will increase
7.14 | Page
z`
(c) B and C will increase (d) B and C will decrease (b) More than proportionate
(c) Proportionate
If Tea and Coffee are Substitutes, a fall in the (d) Nothing can be said
Prices of Tea leads to —
(i) Rise in the demand for Tea
(ii) Fall in the supply of Coffee
(iii) Fall in the demand for Coffee
Q
Q 49.
49. If Income Levels increase, and the demand for
(iv) Rise in the supply of Tea
(a) Both (ii) and (iv) above goods increase by less than proportionate extent, such
(b) Both (i) and (iii) above goods will be —
(c) Both (ii) and (iii) above (a) Inferior Goods (b) Necessary Goods
(d) Both (iii) and (iv) (c) Luxury Goods (d) Nothing can be said
Q 44. Which of the following Statements is not true Q 50. If Income Levels increase, and the demand for
about Individual Demand? goods increase by more than proportionate extent, such
(a) The decision to purchase is always influenced by the goods will be —
Income Constraint. (a) Inferior Goods (b) Necessary Goods
(b) Selection of products and services are based on the (c) Luxury Goods (d) Nothing can be said
Opportunity Cost.
Q 51.
(c) Consumers measure their Opportunity Cost in terms As Income Levels increase beyond a certain
of the price they pay for the products and services extent, the propensity to consume —
they forego. (a) Reduces (b) Increases
(d) Decision to purchase is never influenced or (c) Remains constant (d) Becomes zero
concerned with the Income Constraint.
Q 52. Generally, larger size of population of a country
Q 45. What effect does an increase in the price of a or a region implies for all commodities as such.
product have on the Purchasing Power of the (a) Higher demand (b) Lower demand
Consumer? (c) No demand (d) Ineffective demand
(a) Increases
(b) Decreases Q 53. In case of unequal distribution of income in the
(c) No effect country, the propensity to consume will be ...., and
(d) Decreases initially, but increases demand for Consumer Goods will be
(a) Higher, lower (b) Higher, higher
Q 46. If demand decreases with an increase in money (c) Lower, higher (d) Lower, lower
income of Consumers, such goods are called —
(a) Normal Goods (b) Inferior Goods Q 54. If the Consumers expect a decrease in prices of
(c) Luxury Goods (d) All of the above the product in the future, its current demand will be —
(a) higher (b) lower
Q 47. The Giffen Effect in respect of Inferior Goods was (c) Nil (d) Nothing can be said
observed in the case of —
(a) Rice and Wheat (b) Wheat and Meat Q 55. Demand is affected by weather conditions and
(c) Bread and Meat (d) Bread and Rice seasonal aspects also. This statement is —
(a) Tr ue (b) False
Q 48. As income levels increase, the demand for goods (c) Partially True (d) Nothing can be said
satisfying Necessities of life, will be to the increase in Q 43.
income. DEMAND CURVE
(a) Less than proportionate
Q 56.
7.15 | Page
z`
Demand Schedule shows the relation between — (c) Infinity Slope
(a) Price and Quantity supplied
Q 63.
(b) Price and Quantity demanded Demand Curve—
(c) Income and Quantity supplied (a) Will be a Straight Line
(d) Income and Quantity demanded (b) Will be a Curve
(c) Either (a) or (b)
Q 57. Indicates the changes in Consumers' purchasing
Q 64.
habits, depending on the price variation of a particular All but one of the following are assumed to
product. remain the same while drawing an individual's Demand
(a) Total Utility Curve Curve for a product. Which one is it?
(b) Demand Schedule (a) Preference of the individual
(c) Production Possibility Curve (b) His monetary income
(d) Purchasing Power Parity (c) Price
Q 58. A Demand Curve shows —
Q 65.
(a) Quantity demanded of a product at various levels of What is the other name given to the Demand
income of the Consumer. Curve?
(b) Quantity demanded of a product, at various levels (a) Profit Curve (b) Average Revenue Curve
of price of the product (c) Average Cost Curve (d) Indifference Curve
(c) Amount of money spent by a Consumer on a
product at various levels of price Q 66. Why is the Demand Curve otherwise known as
(d) Quantity supplied of a product at various levels of the Average Revenue Curve?
price of the product (a) Price paid for each unit by the Consumer, is the
Average Revenue per unit for the Seller
Q 59. A Demand Curve deals with — (b) Price paid for each unit by the Consumer, is the
(a) One product at a time Total Revenue for the Seller
(b) Two products at a time (c) Price paid by Consumer is equal to the Seller's
(c) Many products at a time willingness to sell the product.
(d) None of the above (d) All of the above
Q 60. While drawing the Demand Curve, the change Q 67.

The Total Area under the Demand Curve of a
takes place in which of the following factors? product measures —
(a) Supply of the product (a) Marginal Utility (b) Total Utility
(b) Quality of the product (c) Consumer's Surplus (d) Producers' Surplus
(c) Price of the product
(d) Technology used in offering the product Q 68. If Marginal Utility of .a product remains
constant, the Demand Curve will be —
Q 61. Demand Curve in most cases slopes— (a) Convex (b) Concave
(a) Upward towards left (c) Straight line (d) None of the above
(b) Vertical and parallel to Y—axis
Q 69.
(c) Downward towards right In a Demand Curve, the Horizontal Axis will be—
(d) Horizontal and parallel to X—axis (a) Quantity Demanded
(b) Price of the Product
Q 62. Demand Curve in most cases has a — Q 43.
(c) Income Levels of Consumer
(a) Positive Slope (d) Any of the above
(b) Negative Slope Zero Slope
Q 70.
7.16 | Page
z`
In a Demand Curve, the Vertical Axis will be — (a) Substitution Effect + Price Effect
(a) Quantity Demanded (b) Substitution Effect + Income Effect
(b) Price of the Product (c) Substitution Effect + Demonstration Effect
(c) Income Levels of Consumer (d) Substitution Effect minus Income Effect Q 84
(d) Any of the above
Q 79. When we say that the Demand for a commodity
depends upon the money income of the Consumer, we
Q 71.
The Law of Demand is explained by — are referring to —
(a) Cardinal Approach (b) Ordinal Approach (a) Income Effect
(c) Both (a) and (b) (d) Neither (a) nor (b) (b) Substitution Effect
(c) Demonstration Effect
Q 72. The Law of Demand is — (d) Utility Effect
(a) A quantitative statement
(b) A qualitative statement Q 80. As a result of a fall in prices of the commodity,
(c) Both (a) and (b) the Consumer's increases.
(d) Neither (a) nor (b) (a) Real Income (b) Purchasing Power
Q 73.
The Law of Demand is a —
Q 81.
(a) Positive Statement When increase in his Real Income induces a
(b) Normative Statement Consumer to buy more of a Commodity whose prices
(c) Both (a) and (b) has fallen, it is called —
(d) Neither (a) nor (b) (a) Inducement Effect
(b) Substitution Effect
Q 74.
The and is a principle relating to— (c) Income Effect
(a) Micro—Economics (b) Macro—Economics (d) Utility Effect
Q 82.
Which of the following statements best
Q 75. The term "Ceteris Paribus" in the Law of Demand describes the Income Effect?
denotes — (a) It is the change in quantity demanded as a result of
(a) All factors remaining constant the changes in the income, keeping other things
(b) All factors except one remaining constant constant
(c) All factors being variable (b) It is the change in quantity demanded of substitute
(d) All of the above goods, as a result of change in the price of a
product, keeping the income constant
Q 76.
Which of these is a variable factor in the Law of (c) It is the change in quantity demanded of a product,
Demand? as a result of change in the real income because of
(a) Consumers' Income Level change the price of the product
(b) Economic Conditions of Boom / Recession (d) It is the change in the price of a good because of a
(c) Quality of the Product rise or fail in the real income of the consumer
(d) Price of the Product
Q 83.
When the price of a Commodity falls, the
Q 77.
Why does the Law of Demand operate? Consumer
(a) Income Effect (b) Substitution Effect (a) Can buy the same quantity of the commodity with
(c) Both (a) and (b) (d) Neither (a) nor (b) lesser money
Q 43.
(b) Can buy more of the same commodity with the
Q 78.
The total effect of a price change of a commodity same money
is (c) Both (a) and (b)
7.17 | Page
z`
Q 90.
When the price of a product falls, its Demand
When the price of a Reynolds pen falls, ceteris increases because —
paribus, Buyers substitute Reynolds Pen for other pens (a) New Consumers start buying the product
that are now relatively more expensive. This is called — (b) Existing Consumers buy more quantities of the
(a) Price Effect (b) Substitution Effect product
(c) Income Effect (d) Veblen Effect (c) Both (a) and (b)
Q 85.
The 'Substitution Effect' takes place due to change
in Q 91. The Law of Demand is explained by —
(a) Income of the Consumer (a) Law of Diminishing Marginal Utility
(b) Prices of the Commodity (b) Law of Indifference Curves
(c) Relative Prices of the commodities (c) Both (a) and (b)
(d) All of the above (d) Neither (a) nor (b)
Q 86. Q 92.
Refers to the Consumer's Reaction to a change in Under the Law of Diminishing Marginal Utility,
the relative prices of two products, keeping the Total Consumers continue buying till Price equals Marginal
Utility constant. Utility. Hence at lower prices —
(a) Consumer Surplus (a) Higher quantities will be demanded
(b) Income Effect (b) Lower quantities will be demanded
(c) Substitution Effect (c) No quantities will be demanded
(d) Law of Diminishing Marginal Utility (d) All of the above
Q 87. Q 93.
Which of the following statement best describes Under the Indifference Curve approach, if the
the Substitution Effect? price of a product is lower, the Consumer will attain
(a) When the price of a product rises, Consumers stop equilibrium —
consuming the product. (a) At a higher Indifference Curve
(b) When the price of a product rises, Consumers tend (b) At a lower Indifference Curve
to substitute it with a relatively expensive product (c) At the origin point
(c) When the price of a product rises, Consumers tend (d) At infinity
to substitute it with a relatively inexpensive product
(d) When the price of a product fails, consumers tend EXCEPTIONS TO THE LAW
to substitute in with a more expensive product
Q 94.
Conspicuous Goods are also called —
Q 88.
In normal circumstances, if the Government (a) Necessary Goods (b) Prestige Goods
increases the tax on any product, the demand for the (c) Giffen Goods (d) Basic Goods
product in the short run
Q 95.
(a) Increases Conspicuous goods are also called as:
(b) Decreases (a) Veblen (b) Snob
(c) Remain unchanged (c) Prestigious (d) All of the above
(d) Tax has nothing to do with the demand for any
product Q 96. Conspicuous Goods —
(a) Are an exception the Law of Demand
Q 89. The segregation between Income Effect and (b) Follow the Law of Demand
Substitution Effect is adequately explained by — Q 43.
(a) Cardinal Approach (b) Ordinal Approach (d) Neither (a) nor (b)
Q 97.
7.18 | Page
z`
When Consumers feel that if the commodity is (a) Conspicuous Goods
expensive, that it has got more utility, we are referring (b) Normal Goods
to — (c) Conspicuous Necessities
(a) Inferior Goods (b) Normal Goods (d) Giffen Goods
(c) Conspicuous Goods (d) Giffen Goods
Q 106.
Under which of the following situations the Law
Q 98. Which of the following is an example of of Demand will not operate?
Conspicuous Goods? (a) Conspicuous Goods (b) Giffen Goods
(a) Diamonds (b) Cooking Gas (c) Absolute Necessities (d) All of the above
(c) Petrol (d) Rice
Q 107. Under which of the following situations the Law
Q 99. If the demand for Petrol remains the same even of Demand will not operate?
after the increase in petrol prices, it means Petrol is a — (a) Price Change expected by Consumer
(a) Normal Good (b) Necessity (b) Consumer's lack of knowledge about prices
(c) Luxury Good (d) Inferior Good (c) Irrational purchasing pattern by Consumer
Q 100.
Giffen Goods are those goods —
Q 108.
(a) For which Demand increases as Price increases In case of Contraction of Demand, there is a
(b) Which have a high income elasticity of demand —
(c) Which are in short supply (a) Inward shift of the Demand Curve
(d) None of these (b) Outward shift of the Demand Curve
(c) Upward movement on the same Curve
Q 101.
An Inferior Commodity is one which is consumed (d) Downward movement on the same Curve
in smaller quantities when the income of consumer —
(a) Becomes nil (b) Remains the same INCREASE OR DECREASE IN DEMAND
(c) Falls (d) Rises
Q 109. Change in Demand as a result of the factors
Q 102. Giffen Goods are goods which — other than Price is known as —
(a) Are considered inferior by Consumers (a) Shift in Demand
(b) Occupy a substantial place in the Consumer's (b) Increases and Decrease in demand
budget (c) Change in Demand
(c) Both (a) and (b) (d) All of these
Q 110. Increase in Demand leads to —
Q 103. Giffen Goods are — (a) Inward shift of the Demand Curve
(a) Conspicuous Goods (b) Outward shift of the Demand Curve
(b) Normal Goods (c) Upward movement on the same Curve
(c) Conspicuous Necessities (d) Downward movement on the same Curve
(d) Inferior Goods
Q 111. Which of the following results in a shifting of the
Q 104. When people buy more of a product when its Demand Curve?
price goes up, the product will be — (a) Increase in the tax on cigarettes leading to their fall
(a) Conspicuous Goods (b) Normal Goods in demand
(c) Inferior Goods (d) Luxury Goods (b) Slashing of ad rates by a television channel
Q 43.
resulting in a rise in the number of ads
Q 105. When due to their constant usage, certain goods (c) Rise in the electricity harges leading to lesser
have become necessities of life, they are referred to as_ consumption
7.19 | Page
z`
(d) All of these (d) There is an increase in the demand for apples and
an increase in the quantity Supplied
Q 117. Fall in the price of Substitute Goods leads to —

Q 112. In which of the following cases, does a shift in (a) Increase in Demand
demand take place?{Omit this question} (b) Decrease in Demand
(a) Fall in demand for cigarettes, as a result of (c) Expansion of Demand
increased taxes (d) Contraction of Demand
(b) Rise in the demand for two wheelers due to
decrease in the sales tax Q 118. Which of the factors does not cause Increase in
(c) Decline in electric power consumption due to rise in Demand?
the power charges (a) Rise in the price of Substitute Goods
(d) Decline in the sales of Diwali crackers due to sudden (b) Fall in price of this product
rains and floods (c) Increase in population
(d) Increase in Income Levels of Buyers
Q 113.
Shift in demand does not take place due to —
(a) Change in the price of the product Q 119. Increase in Demand is caused by —
(b) Change in the tastes and preferences (a) Change in Buyer Preferences and Tastes in favour of
(c) Change in consumer habits this commodity
(d) Change in population (b) Re—distribution of income to Consumers who
favour this commodity
Q 114. An Increase in Demand can result from — (c) Increase in population
(a) Decline in Market Price (d) All the above
(b) Increase in Income
(c) Reduction in the Price of Substitutes
(d) Increase in the Price of Complements (C) ELASTICITY OF DEMAND — MCQs ELASTICITY BASICS
Q 115. A drought in India leads to unusually low level of Q 120. The concept of Elasticity of Demand was
wheat production. This would lead to a rise in the price developed by —
of wheat and fall in the quantity of wheat demanded (a) Alfred Marshall (b) Edwin Cannon
due to (c) Paul Samuelson (d) Fredric Bonham
(a) Excess Demand at the original price
(b) Excess Supply at the original price Q 121. Two important factors which make difference in
(c) Supply Curve shifting to the right the Elasticity of Demand for different commodities are
(d) Demand Curve shifting to the left (a) Preferences and Income
(b) Income and Expenditure
Q 116.
Suppose consumer tastes shift toward the (c) Quantity and Price of the Commodity
consumption of apples. Which of the following (d) Tax Rates and Level of Income
statements is an accurate description of the impact of
this event on the market for apples? Q 122. Elasticity of Demand refers to —
(a) There is an increase in quantity demanded of apples (a) The responsiveness of the quantity demanded of a
and in supply of apples. commodity, to changes in one of the variables on
(b) There is an increase in the demand and supply of which demand depends.
apples. (b) The percentage change in quantity demanded,
(c) There is an increase in the demand for apples and a Q 43.
divided by the percentage change in one of the
decrease in supply of apples. factors on which demand depends.
7.20 | Page
z`
(d) Neither (a) nor (b) (d) Decrease in the quantity demanded of the product
when its price falls by 1%
Q 123. Elasticity of Demand is attributed to —
Q 129.
(a) Changes in Prices (b) Changes in Incomes Usually, the demand for Necessities is —
(c) Both (a) and (b) (d) Neither (a) nor (b) (a) Highly Elastic (b) Highly Inelastic
(c) Slightly Elastic (d) Slightly Inelastic
Q 124. Elasticity of Demand is measured in case of —
(a) Changes in Price of the Commodity Q 130. Demand for which of the following products
(b) Changes in Incomes of the Consumers is/are relatively inelastic?
(c) Changes in Prices of related commodities (a) Water (b)
(d) All of the above Electricity
(c) Movie Tickets (d)
Q 125.
Which of the following statements regarding Both (a) and (b)
Elasticity of Demand is true?
(a) Elasticity can be positive or negative Q 131. Which of the following products has highly
(b) Elasticity always has a negative value inelastic demand?
(c) Elasticity always has a positive value (a) Jewellery (b) Imported sofa set
(d) Elasticity can never be zero (c) Sa l t (d) Sports car
Q 126. Q 132.
Which of the following statements is true with Amongst the following which item has highest
regard to the elasticity of demand? Price Elasticity?
(a) The elasticity of demand remains same, both in (a) Sal t (b) Petrol
short run and in long run (c) Indian Oil's Petrol (d) Rice
(b) Demand is more elastic in the short run than in long
Q 133.
run Goods which have more close or perfect
(c) Demand is more inelastic in the long run than in substitutes are
short run (a) Less Elastic (b) Unit Elastic
(d) Demand is more elastic in the long run than in short (c) More Elastic (d) Zero Elastic
run
Q 134.
Goods which have fewer substitutes are —
Q 127.
Price Elasticity of Demand is defined as — (a) Less Elastic (b) Unit Elastic
(e) Change in quantity demanded ÷ Change in price (c) More Elastic (d) Zero Elastic
(a) Proportionate change in quantity demanded ÷
Change in Price Q 135. Goods having higher proportion of the
(b) Change in quantity demanded ÷ Proportionate Consumers' spending are —
change in Price (a) Less Elastic (b) Unit Elastic
(c) Proportionate change in quantity demanded (c) More Elastic (d) Zero Elastic
Proportionate change in price
Q 136. Goods having lower share in the Consumers'
Q 128. Price Elasticity of Demand for a product is — Budget are —
(a) Change in the quantity demanded of the product (a) Less Elastic (b) Unit Elastic
when price increases by 30% (c) More Elastic (d) Zero Elastic
(b) Percentage increase in the quantity demanded of
Q 137.
the product when the price falls by 1% Luxury Goods are considered Necessity Goods.
(c) Increase in the demand for the product when its Q 43.
(a) Less Elastic (b) Unit Elastic
price falls by 10% (c) More Elastic (d) Zero Elastic
Q 138.
7.21 | Page
z`
Goods which can be put to multiple uses are — (c) Perfectly elastic (d) Relatively elastic
Q 147.
(c) More Elastic (d) Zero Elastic If a product has perfectly inelastic demand, and
there is a change in its price, which of the following is
Q 139. Goods which have a specified and particular use correct?
are (a) Percent Change in Quantity demanded will be
greater than Percent Change in Price
(a) Less Elastic (b) Unit Elastic (b) Percent Change in Quantity demanded will be lesser
(c) More Elastic (d) Zero Elastic than Percent Change in Price
(c) Percent Change in Quantity demanded will be equal
Q 140.
Demand for electricity is elastic because — to Percent Change in Price
(a) It is very expensive. (d) Quantity demanded will not change at all
(b) It has a number of close substitutes.
(c) It has alternative uses. LESS ELASTIC
(d) None of the above.
Q 148. Identify the factor which generally keeps the
Q 141.
Goods in respect of which the Consumers have Price—Elasticity of Demand for a product low.
more time to adjust or modify their consumption (a) Variety of Uses for that product
pattern are — (b) Its Low Price
(a) Less Elastic (b) Unit Elastic (c) Close Substitutes for that product
(c) More Elastic (d) Zero Elastic (d) High proportion of the Consumer's Income spent on
it
Q 142. Goods in respect of which the use or consumption
can be postponed are — Identify the coefficient of price—elasticity of
(a) Less Elastic (b) Unit Elastic demand when the percentage increase in the quantity
(c) More Elastic (d) Zero Elastic demanded of a product is smaller than the percentage
fall in its price.
Q 143.
Goods which are required for immediate or (a) Equal to one (b) Greater than one
urgent consumption are — (c) Smaller than one (d) Zero
Q 150.
(c) More Elastic (d) Zero Elastic Price Elasticity of Demand for addictive products
like cigarettes and alcohol would be
Q 144. Medicines have less elastic demand since — —
(a) They have alternative uses (a) Greater than 1 (b) Less than 1
(b) They have to be used immediately, and their (c) Infinity (d) One
purchase and use cannot be delayed
(c) There are fewer substitutes available Q 151. If Electricity Demand is inelastic, and electric
(d) All of the above rates increase, which of the following is likely to occur?
(a) Quantity demanded will fall by a relatively large
Q 145.
Goods which are subject to Consumer Habits, e.g. amount
Cigarette, Liquor, et(c) are — (b) Quantity demanded will fall by a relatively small
(a) Less Elastic (b) Unit Elastic amount
(c) More Elastic (d) Zero Elastic (c) Quantity demanded will rise in the short run, but
fall in the long run
Q 146. Q 43.
If the demand for a commodity is ..., entire (d) Quantity demanded will fall in the short run, but
burden of indirect tax will fall on the consumer. rise in the long run
(a) Relatively inelastic (b) Perfectly inelastic
Q 152.
7.22 | Page
z`
If the demand for the good is less elastic, the
Demand Curve will be —
Q 158.
(a) Horizontal Line When quantity demanded changes by larger
(b) Vertical Line percentage than Price, Elasticity is termed as —
(c) Downward Sloping to the right, flatter (a) Inelastic (b) Perfectly elastic
(d) Downward Sloping to the right, steeper (c) Elastic (d) Perfectly inelastic
Q 153. If a product has less elastic demand, and there Q 159. Suppose the demand for meals at a medium—
is a change in its price, which of the following is correct? priced restaurant is elasti(c) If the management of the
(a) Percent Change in Quantity demanded will be restaurant is considering raising prices, it can expect a
greater than Percent Change in Price relatively —
(b) Percent Change in Quantity demanded will be lesser (a) Large fall in quantity demanded
than Percent Change in Price (b) Large fall in demand
(c) Percent Change in Quantity demanded will be equal (c) Small fall in quantity demanded
to Percent Change in Price (d) Small fall in demand
(d) Quantity demanded will not change at all
Q 160.
If the demand for the good is more elastic, the
UNIT ELASTIC Demand Curve will be —
(a) Horizontal Line
Q 154.
If the demand for a good is unit elastic, the value (b) Vertical Line
of the elasticity of demand would be — (c) Downward Sloping to the right, flatter
(a) 0 (b) 1 (d) Downward Sloping to the right, steeper
(c) In finity (d) Less than 0
PERFECTLY ELASTIC
Q 155.
If the demand for the good is unit elastic, and E is
the measure of Elasticity, which of the following is true? Q 161. What would be the value of Elasticity of
(a)E=0 (b)0<E<1 Demand, if the demand for the good is perfectly elastic?
(c) E=1 (d) E>1 (a) 0 (b) 1
(c) Infinity (d) Less than 0
Q 156. If the demand for the good is unit elastic, the
Q 162.
Demand Curve will be — If the demand for the good is perfectly elastic,
(a) 45 degree Straight Line, sloping downward to the the Demand Curve will be —
right (a) Horizontal Line
(b) Rectangular Hyperbola (b) Vertical Line
(c) Equilateral Hyperbola (c) Rectangular Hyperbola
(d) Any of the above (d) Downward Sloping to the right
MORE ELASTIC Q 163. What is the mean by price elasticity of demand

greater than 1-
Q 157.
Identify the coefficient of price—elasticity of (a) % change in quantity demanded is less than %
demand when the percentage increase in the quantity change in price.
demanded of a product is more than the percentage fall (b) % change in quantity demanded is more than
in its price. %change in price,
(a) Equal to one (b) Greater (c) No change in quantity and price
than one Q 43.
(d) None of these
(c) Smaller than one (d)
Zero DETERMINANTS OF PRICE ELASTICITY
7.23 | Page
z`
₹ 300 to ₹ 200 and the quantity demaAed increases
Q 164. Price Elasticity of Demand would be higher for from 3,000 plate settings to 5,000 plate-settings, what
those products which have — is the Price Elasticity of Demand for that item?
(a) A larger number of Substitutes (a) 0.8 (b) 2.0
(b) Fewer Substitutes (c) 1.25 (d) 1.5
(c) No Substitutes
Q 172.
(d) Fewer Complementary Goods What is the new quantity demanded when Price
Elasticity is 1 and price changes from ₹ 15 to ₹ 10 and
Q 165.
The Elasticity of Substitution between two the original quantity demanded was 10 units?
Perfect Substitutes is — (a) 15 units (b) 20 units
(a) Zero (b) Greater than zero (c) 8 units (d) 12 units
(c) Less than infinity (d) Infinite
Q 173.
What will be the price elasticity if original price
Q 166. Which is correct about price elasticity of is ₹5, original quantity is 8 units and changed price is ₹6
demand? changed quantity is 4 units?
(a) It is several degrees and natures (a) 2.5 (b) 2.0
(b) It is unaffected due to change in price of other (c) 1.5 (d) 1.0
goods
(c) It is immeasurable concept Q 174. The original price of commodity is 2500 and
(d) It is due to direction of change in price quantity demanded is 20 kgs. If price rises to₹ 750 and
quantity demanded reduce to 15 kgs, price elasticity o f
PROPORTXONATE METHOD demand is
(a) 0.25 (b) 0.50
If the demand for a product reduces by 5% as a (c) 1.00 (d) 1.50
result of an increase in the price by 25%. What is the
Price Elasticity of Demand? POINT ELASTICITY
(a) 0 . 2 (b) – 0.5
Q 175.
(c) -0.25 (d) 0.2 The Elasticity at a given point on a Demand
Curve is known as -
Q 168. If Price of Coffee decreases from ₹ 5 to ₹ 4.50, and (a) Point Elasticity (b) Income Elasticity
as a result the Consumer's Demand for Coffee increase (c) Arc Elasticity (d) Cross Elasticity
from 60 grams to 75 grams, the absolute Price Elasticity
Q 176.
of Demand of Coffee is - Point Elasticity of Demand is calculated as -
(a) 1.5 (b) 3.0 (a) Upper Segment + Lower Segment
(c) 2.0 (d) 2.5 (b) Lower Segment ÷ Upper Segment
Q 170. Suppose the price of movies seen at a Theatre (d) Neither (a) nor (b)
rises from ₹ 120 to ₹ 200 per person. The Theatre
Manager observes that the rise in price causes Q 177. Point Elasticity is useful for which of the
attendance at a given movie to fall from 300 persons to following situations -
200 persons. What is the Price Elasticity of Demand for (a) The bookstore is considering doubling the price of
Movies? notebooks
(a) 0.5 (b) 0.8 (b) A restaurant is considering lowering the price of its
(c) 1.0 (d) 1.2 most expensive dishes by 50%
Q 43.
(c) An automobile producer is interested in
Q 171.
Suppose a Department Store has a sale on its determining the response of consumers to the price
silverware. If the Price of a plate- setting is reduced from of cars being lowered by Z 50,000
7.24 | Page
z`
Q 184.
What is the Original Price of a Product when Price
Q 178.
Which of the following statements regarding Elasticity is 0.71 and Demand changes from 20 units to
Elasticity of Demand is true? 15 units and the new price is ₹ 10? (Use Arc Method for
(a) Elasticity of demand decreases as one goes down a computation)
Straight Line Demand Curve (a) ₹15 (b) ₹18
(b) Elasticity of Demand increases as one goes down a (c) ₹ 20 (d) ₹ 8
Straight Line Demand Curve
(c) Elasticity of Demand is constant throughout the
Straight Line Demand Curve
Q 179. If a point on a Demand Curve of any Product lies TOTAL OUTLAY I REVENUE METHOD
on X Axis, then Price Elasticity of Demand of that
commodity at that point will be - Q 185. Under Total Outlay Method, if as a result of
(a) Infinite the decrease in price of a product, the total expenditure
(b) More than zero (c) Less than zero (d) Zero on the product rises, we say that Price Elasticity of
Demand is —
Q 180.
If a point on a Demand Curve of any Product lies (a) Equal to unity (b) Greater than unity
on Y Axis, then Price Elasticity of Demand of that (c) Less than unity (d) Zero
commodity at that point will be -
Q 186.
(a) Infinite Under Total Outlay Method, if Price and
(b) More than zero (c) Less than zero (d) Zero Consumer's Total Expenditure on the product move in
opposite directions, then, Price Elasticity of Demand is
Q 181.
What is the elasticity between midpoint & upper —
extreme point of a straight line continuous demand (a) Equal to unity (b) Greater than unity
curve? (c) Less than unity (d) Zero
(a) Infinite (b) Ze ro
(c) >1 (d) <1 Q 187. The demand for a product is elastic, an
increase in its price will cause the Total Expenditure of
ARC ELASTICITY the Consumers to —
(a) Remain the same (b) Increase
Q 182. At a price of ₹ 300 per month, there are 30,000 (c) Decrease (d) Any of these
subscribers to Cable TV in a Small Town. If the Cable
Company raises its price to Z 400 per month, the
number of subscribers will fall to 20,000. Using the mid- Q 188. Under Total Outlay Method, if as a result of the
point method for calculating the elasticity, what is the decrease in price of a product, the total expenditure on
Price Elasticity of Demand for Cable TV? the product decreases, we say that Price Elasticity of
(a) 1.4 (b) 0 . 66 Demand is —
(c) 0 . 75 (d) 2.0 (a) Equal to unity (b) Greater than unity
(c) Less than unity (d) Zero
Q 183. 1f the quantity of blankets demanded increases
Q 189.
from 4,600 to 5,700 in response to a decrease in their If the demand for a product is inelastic, an
price from Z 220 to Z 190, the Price Elasticity of Demand decrease in its price will cause the Total Expenditure of
for Blankets using Arc Method is — Q 43.
the Consumers to —
( a) 0.69 ( b) 1.0 (a) Remain the same (b) Increase
( c) 1.46 ( d) 2.66 (c) Decrease (d) Any of these
7.25 | Page
z`
(c) If the demand for the product is inelastic, an
Q 190. Total Expenditure of a Consumer increases if — increase in price will have a negative effect on the
(i) Demand is elastic and price rises total revenue of the Firm
(ii) Demand is elastic and price falls (d) If the demand for the product is inelastic, a
(iii) Demand is inelastic and price rises decrease in price will have a positive effect on the
(iv) Demand is inelastic and price falls total revenue of the Firm
(a) Only (ii) (b) Only (iii)
Q 196.
(c) Both (i) and (iii) (d) Both (ii) and (iii) If a good has price elasticity greater than one
then —
Q 191.
Given the following four possibilities, which one (a) Demand is unit elastic and a change in price does
results in an increase in Total Consumer Expenditure? not affect sellers' revenue.
(a) Demand is unitary elastic and price falls (b) Demand is elastic and a change in price causes
(b) Demand is elastic and price rises Sellers' Revenue to change in the opposite direction.
(c) Demand is inelastic and price falls (c) Demand is inelastic and a change in price causes
(d) Demand is inelastic and price rises Sellers' Revenue to change in the same direction.
(d) None of the above is correct.
Q 192. Due to change in price of the commodity, the
Q 197.
Total Expenditure remains the same as before, then Ceteris paribus, what would be the impact on
Elasticity under Total Outlay Method is — foreign exchange earnings for a given falling export
(a) Equal to unity (b) Greater than unity prices, if the demand for the country's exports is
(c) Less than unity (d) Zero inelastic?
(a) Foreign Exchange Earnings decrease
Q 193.
When Increase in prices is exactly balanced by a (b) Foreign Exchange Earnings increase
proportionate reduction in the purchase quantity, then (c) No effect on Foreign Exchange Earnings
Elasticity under Total Outlay Method is — (d) Foreign Exchange Earnings increase for a brief
(a) Equal to unity (b) Greater than unity period and decrease drastically later on
(c) Less than unity (d) Z e r o
Q 198. If the Railways are making losses on passenger
Q 194. An increase in price will result in an increase in traffic, they should lower their fares. The suggested
Total Revenue if — remedy would only work if the demand for Rail Travel
(a) Percentage Change in quantity demanded is less had a price elasticity of —
than the Percentage Change in Price (a) Z e r o
(b) Percentage Change in quantity demanded is more (b) Greater than zero but less than one.
than Percentage Change in price (c) One
(c) Demand is elastic (d) Greater than one
(d) Consumer is operating along a Linear Demand
Curve at a point at which the price is very high and INCOME ELASTICITY
the quantity demanded is very low
Q 199.
Income Elasticity of Demand is defined as the
Q 195.
Which of the following statements regarding responsiveness of —
Elasticity of Demand is true? (a) Price to a change in quantity demanded
(a) If the demand for the product is inelastic, an (b) Quantity demanded to a Change in Price
increase in price will have a positive effect on the (c) Price to a Change in Income
total revenue of the Firm (d) Quantity demanded to a change in income
(b) If the demand for the product is elastic, an increase Q 43.
Q 200.
in price will have a positive effect on the total Positive Income Elasticity implies that as
revenue of the Firm income rises, demand for the commodity —
7.26 | Page
z`
(a) Rises (b) Falls
(c) Remains unchanged (d) Becomes zero (a) Below 1 (b) Above 1
(c) Zero (d) Between —1 and 0
Q 201. If Income—Elasticity is greater than zero, then
Q 209.
the product is — For goods increase in income leads to increase in
(a) Superior (b) Norma l deman (d)
(c) Infe rior (d) Both (a) & (b) (a) Abnormal (b) Normal
(c) Inferior (d) Superior
Q 202.
... have a positive Income Elasticity of
Q 210.
Deman(d) If Income Elasticity > 1, it means that proportion
(a) Complementary Goods of Income spent on goods , as income of the Consumers
(b) Substitute Goods increases.
(c) Normal Goods (a) Increases (b) Decreases
(d) Inferior Goods (c) Remains constant (d) Nothing can be said
Q 203. Q 211. For a product to be called income elastic, its

For what type of goods does demand fall with rise
in income levels of households? Income Elasticity has to be —
(a) Inferior Goods (b) Substitutes (a) Below1 (b) Above1
(c) Luxuries (d) Necessities (c) Zero (d) Between—1 and 0
Q 204. Negative Income Elasticity implies that as income Q 212.

Services like Air Travel and Movies have an
rises, demand for the commodity — income elasticity of —
(a) Rises (b) F a l l s (a) More than1 (b) 0
(c) Remains unchanged (d) Becomes zero (c) Less than 1 (d) Between 0 and 1
Q 205. Q 213. What would be the value of Income Elasticity of

What type of goods does a consumer eventually
stop buying, when his income rises? demand for the meals in a costly restaurant?
(a) Goods with Positive Income Elasticity (a) Lesser than one (b) Between 0 and 1
(b) Goods with Negative Income Elasticity (c) 1 (d) More than1
(c) Goods with Zero Income Elasticity Q 214.
(d) No relationship exists between the type of the Goods having Income Elasticity > 1 are
goods bought and rise in income considered as -
(a) Luxury Goods (b) Necessities
Q 206.
In Demand—Supply Analysis, if the income of the (c) Normal Goods (d) Inferior Goods
Q 215.
Consumer increases, the Demand Curve for an inferior
good — The Income of a Household rises by 20%, the
(a) Shifts upward to the right demand for Computer rises by 25%, this means
(b) Shifts downward to the left Computer (in Economics) is a/an
(c) Shifts upward to the left (a) Inferior Good (b) Luxury Good
(d) Shifts downward to the right (c) Necessity (d) Nothing can be said
Q 207. Have a negative Income Elasticity of Deman(d) Q 216. If Income Elasticity for the household for
(a) Luxury Goods (b) Necessities Product A is 2 then A is -
(c) Normal Goods (d) Inferior Goods (a) Necessity Item (b) Inferior Goods
Q 43.
(c) Luxurious Item (d) Comfortable Item
Q 208. If quantity demanded does not change as Income
Q 217.
changes, then Income Elasticity of Demand is —
7.27 | Page
z`
If Income Elasticity = 1, it means that (c) Inferior Goods (d) Economic Goods
proportion of Income spent on goods , as income of
the Consumers increases. Q 225. Income of a household increases by 10%, and the
(a) Increase (b) Decreases demand for TV rises by 20%. This means that TV is an
(c) Remains constant (d) Nothing can be said example of —
(a) Normal Goods (b) Luxurious Goods
Q 218.
If Consumers always spend 15% of their income (c) Inferior Goods (d) Economic Goods
on food, then the Income Elasticity of Demand for Food
Q 226.
is of a household increases by 5%, and the demand
(a) 1 .50. (b) 1 .15. for Bajra falls by 2%. In this case, Bajra is an example of
(c) 1 . 00 (d) 0 .15. —
(a) Normal Goods (b) Luxurious Goods
Q 219. Meals in a costly restaurant Necessity is defined (c) Inferior Goods (d) Economic Goods
as a good having - Income
(a) Positive Income Elasticity of Demand CROSS ELASTICITY
(b) Negative Income Elasticity of Demand
(c) Income Elasticity of Demand less than 1. Q 227. In order to assess the effect of a change in
(d) Price Elasticity of Demand less than 1. price of one product on the demand for other products,
which type of elasticity is often used?
Q 220.
Goods having Income Elasticity < 1 are considered (a) Cross Elasticity (b) Income Elasticity
as- (c) Price Elasticity (d) Supply Elasticity
(a) Luxury Goods (b) Necessities
Q 228.
(c) Normal Goods (d) Inferior Goods Cross Elasticity measures the responsiveness
of quantity demanded of a commodity to —
Q 221.
Which of the following is not a determinant of the (a) Changes in Price of that Commodity
Advertising Elasticity of Demand? (b) Changes in Price of other Commodities
(a) Effect of Time (c) Changes in Income Levels of Buyers
(b) Stages of Product (d) All of the above
(c) Advertising by Competitors
Q 229.
(d) Income Level of the Consumers In measuring Cross Elasticity, is / are
considere(d)
Q 222. If income increases by 10% and demand increases (a) Only one product (b) Two products
by 5%, then income elasticity of demand is: (c) Many products (d) No products
( a) + 0 . 5 ( b) - 0 . 5
( c) + 0.05 ( d) - 0 . 05 Q 230. Which of the following statements regarding
Cross Elasticity is true?
Q 223. Concerned about the poor state of the economy, (a) It is always negative
a Car Dealer estimates that if income decreases by 4%, (b) It is always positive
Car Sales will fall from 352 to 335. Consequently, the (c) It can be either positive or negative
Income Elasticity of Demand for cars is approximately - (d) It always lies between 0 and 1
(a) - 1 . 2 (b) 0 . 01
Q 231.
(c) 0.4 (d) 1.2 If Goods X and Y are complementary, their
Cross Elasticity is —
Q 224.
Income of a household increases by 10%, and the (a) Infinity
demand for Wheat rises by 5%. This means that Wheat Q 43.
(b) Greater than zero but less than infinity
is an example of — (c) Zero
(a) Normal Goods (b) Luxurious Goods (d) Negative
7.28 | Page
z`
(a) Negative (b) Positive
Q 232. What will be the Slope of Demand Curve when ( c ) Zero ( d ) Infinite
it shows the Cross Elasticity between two
Q 240.
Complementary Goods? The cross elasticity of demand between two
(a) Negative (b) Positive perfect substitutes will be- *
(c) Horizontal (d) None of these (a) Z e r o (b) I nf i ni ty
(c) Very high (d) Very low
Q 233.
Cross Elasticity between Tea and Sugar is —
(a) Less than 0 Q 241. Goods having positive Cross Elasticity are —
(b) Greater than 1 (a) Mostly complementary goods
(c) Zero (b) Always complementary goods
(d) Greater than 0, but less than 1 (c) Mostly substitute goods
(d) Always substitute goods
Q 234.
Goods having negative Cross Elasticity are —
Q 242.
(a) Mostly complementary goods Positive Cross Elasticity always implies that the
(b) Always complementary goods goods are substitute goods. This statement is —
(c) Mostly substitute goods (a) Tru e (b) False
(d) Always substitute goods (c) Partially True (d) Nothing can be said
Q 235. Negative Cross Elasticity always implies that the Q 243.

If Cross Elasticity of Demand is Infinity, it means
goods are complementary in nature. This statement is that the goods are —
—{Omit this question} (a) Perfect Complementary Goods
( a ) True ( b ) False (b) Perfect Substitute Goods
( c ) Partially True ( d ) Nothing can be said (c) Inferior Goods
(d) Normal Goods
Q 236.
Goods having zero Cross Elasticity are —
(a) Complementary goods Q 244. If the quantity demanded of Tea increases by
(b) Unrelated goods 5% when the price of Coffee increases by 20%, the Cross
(c) Substitute goods Elasticity of demand between Tea and Coffee is —
(d) All of the above (a) —0.25 (b) 0 . 25
(c) 4 (d) 4
Q 237.
Cross Elasticity of Demand between Tea and
Q 245.
Coffee is The Cross Elasticity of monthly demand for ink
(a) Positive (b) Negative pen, when the price of gel pen increases by 25% and
(c) Zero (d) Infinity demand for ink pen increases by 50% is equal to —
( a) + 2.00. ( b) —2.00.
Q 238. If the co—efficient of Cross Elasticity of Demand ( c) 2 . 09 . ( d) + 2.09.
of X for Y is 3, it means that X and Y are —
Q 246.
(a) Complementary Goods Cross Elasticity of Demand for Gel Pen when the
(b) Substitute Goods Price of Refills increases by 20%
(c) Inferior Goods and demand for Gel Pens falls by 30% is equal to —
(d) Normal Goods ( a ) 0 . 71 ( b ) + 0.25.
( c ) 0 . 19 . ( d ) -1.5
Q 239.
When Cola Companies Coke and Pepsi, introduced
Colas in mini bottles at a low price, the demand for Tea QQ247.
43. If the quantity demanded of Product X increases
and Coffee is small tea stalls declined drastically. The from 8 to 12 units in response to an increase in the price
Cross Elasticity between the Colas and Tea / Coffee is — of Product Y from Z 23 to Z 27, the Cross Elasticity of
7.29 | Page
z`
Demand for X with respect to Price of Y is approximately (c) -2.89. (d) +2.89
—
(a) 0.35 and X and Y are Complements. Q 253. What can be said about Fresh Milk and Powdered
(b) 0.35 and X and Y are Substitutes. Milk?
(c) 2.5 and X and Y are Complements. (a) They are Complementary Goods
(d) 2.5 and X and Y are Substitutes. (b) They are Substitute Goods
(c) They are Unrelated Goods
Q 248.
Use the following data for the next 8 questions. (d) Nothing can be said
A Grocery Shop used to sell fresh milk at Z 20 per litre, at
which price 400 litres of milk were sold per month. Q 254. If Income of the Consumers increases by 50%
After some time, the price was raised to Z 30 per and the quantity of Fresh Milk demanded increases by
litre. Following are the consequences: 30%. What is Income Elasticity of Demand for Fresh
• Only 200 litres of milk was sold every month. Milk?
• The number of boxes of cereal customers bought (a) 0.5 (b) 0.6
went down from 200 to 140. (c) 1.25 (d) 1.50
• The number of packets of powdered milk customers
bought went up from 90 to 220 per month. Q 255. We can say that Fresh Milk in economics sense
is an example of -
The Price Elasticity of Demand when fresh milk's (a) Luxury Goods (b) Inferior Goods
price increases from Z 20 per litre to Z 30 per litre is (c) Normal Goods (d) Nothing can be sai(d)
equal to
Q 256.
(a) 2.5 (b) 1.0 Advertisement Elasticity is also Know as:-
(c) 1 . 66 (d) 2 . 66 (a) Marketing Elasticity
(b) Promotional Elasticity
Q 249. What can be said about the Price Elasticity of (c) Commercial Elasticity
Demand for Fresh Milk? (d) All of the above
(a) It is perfectly elastic
(b) It is elastic Q 257. The responsiveness of a good's demand to
(c) It is perfectly inelastic changes in the Firm's spending on advertising is called
(d) It is inelastic —
(a) ) Demand elasticity
Q 250.
The Cross Elasticity of Demand for Cereals when (b) ) Supply elasticity
the price of Fresh Milk increases from ₹ 20 to Z 30 is (c) ) Advertisement elasticity
equal to (d) ) None of the above
(a) -0.6 (b) +0.6
(c) -0.19. (d) +0.38. Q 258. Advertisement Elasticity is the percentage change in
(a) Supply that occurs for every 1% change in Advertising
Q 251. Expenditure.
What can be said about Fresh Milk & Cereals? (b) Demand that occurs for every 1% change in Advertising
(a) They are Complementary Goods Expenditure.
(b) They are Substitute Goods (c) Advertisement expense that occurs for every 1% change in
(c) They are Unrelated Goods Demand
Q 259.
Q 252. The Cross Elasticity of Demand for Powdered Milk, Advertising Elasticity is generally
(a) Positive
Q 43. (b) Negative
when the price of Fresh Milk increases from Z 20 to Z 30
(c) Z e r o (d) None of the above
per litre is equal to -
(a) +1.05. (b) -L05. Q 260. Which of the following statements is correct?
7.30 | Page
z`
(a) Higher the value of Advertising Elasticity, greater (c) Higher the value of Advertising Elasticity, lesser will
will be the responsiveness of demand to change in be the responsiveness of demand to change in
advertisement. advertisement.
(b) Lower the value of Advertising Elasticity, greater (d) None of the above
will be the responsiveness of demand to change in
advertisement.
Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n

1 B 52 A 103 D 154 B 205 B 256 B
2 D 53 D 104 C 155 C 206 B 257 C
3 D 54 A 105 C 156 D 207 D 258 B
4 A 55 A 106 C 157 B 208 C 259 A
5 D 56 B 107 D 158 C 209 B 260 A
6 D 57 B 108 C 159 A 210 A
7 C 58 B 109 D 160 C 211 B
8 B 59 A 110 B 161 C 212 A
9 C 60 C 111 D 162 A 213 D
10 A 61 A 112 C 163 B 214 A
11 A 62 A 113 A 164 A 215 B
12 C 63 C 114 B 165 D 216 C
13 C 64 C 115 A 166 A 217 C
14 D 65 B 116 D 167 A 218 C
15 B 66 A 117 B 168 D 219
16 C 67 B 118 B 169 220 C
17 A 68 C 119 D 170 A 221 D
18 B 69 A 120 A 171 B 222 A
19 B 70 B 121 C 172 A 223 D
20 C 71 C 122 C 173 A 224 A
21 B 72 B 123 C 174 B 225 B
22 B 73 A 124 D 175 A 226 C
23 C 74 A 125 A 176 B 227 A
24 A 75 B 126 D 177 C 228 B
25 D 76 D 127 D 178 A 229 B
26 B 77 C 128 B 179 D 230 C
27 C 78 B 129 B 180 A 231 D
28 B 79 A 130 D 181 C 232 A
29 C 80 C 131 C 182 A 233 A
30 B 81 C 132 C 183 C 234 A
31 B 82 C 133 C 184 A 235 B
32 C 83 C 134 A 185 B 236 B
33 C 84 B 135 C 186 B 237 A
34 D 85 C 136 A 187 C 238 A
35 C 86 C 137 C 188 C 239 B
36 A 87 C 138 C 189 C 240 B
37 B 88 B 139 A 190 D 241 D
38 D 89 B 140 C 191 D 242 A
39 D 90 C 141 C 192 A 243 B
40 C 91 A 142 C 193 A 244 B
41 A 92 A 143 A 194 A 245 A
42 C 93 A 144 B 195 A 246 D
43 B 94 B 145 A 196 B 247 D
44 D 95 D 146 B 197 A 248 B
45 B 96 A 147 D 198 B 249 B
46 B 97 C 148 B 199 D 250 A
47 C 98 A 149 C 200 A 251 A
48 A 99 B 150 B 201 D 252 D
49 B 100 A 151 B 202 C 253 B
50 B 101 D 152 D 203 A 254 B
51 A 102 C 153 B 204
Q 43. B 255 C
7.31 | Page
Chapter – 2 part C- Theory of Supply Q 8. Supply refers to the by Producing Firms.
Supply Basics (a) Quantities offered for sale
Q 1. Supply can be referred as — (b) Prices offered
(a) Those goods which Firms offers for sale (c) Sales achieved
(b) Amount of goods, Firms sells in the market (d) Profits earned
(c) Amount of goods all people want
Q 9.
(d) None of the above Period in which supply cannot be increased is
called
Q 2. The Supply of a product refers to — (a) Market Period (b) Short Run
(a) Actual production of the product (c) Long Run (d) None of these
(b) Total existing stock of the product
(c) Stock available for sale Q 10. ______is the total volume of the commodity
(d) Amount of the product offered for sale at a which can be brought into the market for sale at a short
particular price per unit of time notice.
(a) Demand (b) Supply
Q 3. Supply of a Commodity is a — (c) Stock (d) Sales
(a) Stock Concept
(b) Flow Concept Q 11. ______refers to the quantity which is actually
(c) Both Stock and Flow Concept. brought in the market.
(d) None of these. (a) Demand (b) Supply
(c) Stock (d) Sales
Q 4. Supply refers to the quantity of goods or services,
that are willing and able to offer to the market at Q 12. Supply is different from Stock. This statement is
various prices during a period of time. (a) True (b) False
(a) Producers (b) Consumers (c) Partially True (d) None of the above
(c) Economists (d) Accountants
Q 13.
Stock is potential supply.
Q 5.
Supply Quantity is the same as Sales Quantity. (a) True (b) False
This statement is — (c) Partially True (d) None of the above
(a) True (b) False
Q 14.
(c) Partially True (d) None of the above Stock refers to quantity into the market,
whereas Supply refers to quantity into the market.
Q 6. Supply refers to what Firms offer for sale, and not (a) Actually brought, actually brought
necessarily to what they succeed in selling. This (b) Can be brought, actually brought
statement is — (c) Can be brought, actually brought
(a) True (b) False (d) Can be brought, can be brought
(c) Partially True (d) None of the above
Q 15.
The meaning of time element in economics is
Q 7.
To constitute Supply, the Producing Firms must (a) Calendar time
have (b) Clock time
(a) Ability, i.e. productive capacity (c) Operational time which supply adjusts with the
(b) Willingness, i.e. ready to supply market demand
(c) Both (a) and (b) (d) None of these
7.32 | Page
DETERMINANTS OF SUPPLY (b) Reduction in the supply quantity of products that
are displaced
Q 16. Generally, higher the prices of products, higher (c) Both (a) and (b)
the (d) Neither (a) nor (b)
(a) Profits of Producing Firms
Q 24.
(b) Satisfaction Level of Consumers Other things being equal, the supply quantity of
(c) Tax Rates a product is related to its price.
(d) All of the above (a) Directly (b) Inversely
(c) Proportionally (d) Not at all
Q 17. Producing Firms are guided by —
(a) Service Motive (b) Profit Motive Q 25. Other things being equal, the supply quantity of
(c) Both (a) and (b) (d) Neither (a) nor (b) a product is related to price of related goods.
(a) Directly (b) Inversely
Q 18. Other things being equal, if the price of the (c) Proportionally (d) Not at all
commodity is higher, quantities thereof will be supplied
to the market. Q 26. Other things being equal, the supply quantity of
(a) Equal (b) Lower a product is related to the Cost of Production of that
(c) Greater (d) Zero product.
(a) Directly (b) Inversely
Q 19.
Supply of a Product decreases when the prices of (c) Proportionally (d) Not at all
other related goods increase. This is because
Q 27.
(a) Customers start demanding more of other goods Generally, if there are incentives like Subsidies
(b) Those goods become relatively more profitable to which reduce the cost of production, the supply quantity
the Firm to produce and sell will —
(c) Customers preferences and tastes will change (a) Increase (b) Decrease
(d) Producing Firms' profit motive changes (c) Remain Constant (d) Become Zero
Q 20. If there is an decrease in the Prices of Factors of Q 28. In case of failure of rains, floods, fires, etc. the
Production, Cost of Production of that product will — supply of agricultural commodities will —
(a) Increase (b) Decrease (a) Increase (b) Decrease
(c) Remain Constant (d) Become Zero (c) Remain Constant (d) Become Zero
Q 21. Other things being equal, if the Cost of Production LAW OF SUPPLY AND SUPPLY CURVE
of a commodity is higher, quantities thereof will be
supplied to the market. Q 29. Which of the following is the determinant in the
(a) Equal (b) Lower Law of Supply?
(c) Greater (d) Zero (a) Technology (b) Price of related goods
(c) Price of the product (d) None of these
Q 22. Inventions and Innovations lead to —
(a) Lower Cost of Production in existing products Q 30. As per Law of Supply, other things being equal,
(b) Production of more or better goods if the Price of a Commodity increases, its Supply
(c) Both (a) and (b) Quantity will
(d) Neither (a) nor (b) (a) Increase (b) Decrease
(c) Remain Constant (d) Become Zero
Q 23. Inventions and Innovations lead to —
(a) Increase in supply quantity of new products
7.33 | Page
Q 31. Generally, the Supply Curve — Q 38. Increase in quantity supplied, due to changes in
(a) Slopes downwards from left to right price, may also be called —
(b) Slopes upwards from right to left (a) Contraction of Supply
(c) Slopes upwards from left to right (b) Expansion of Supply
(d) Nothing can be sai (c) Decrease in Supply
(d) Increase in Supply
Q 32.
Generally, the Supply Curve —
Q 39.
(a) Positively sloped Decrease in quantity supplied, due to changes
(b) Negatively sloped in price, may also be called —
(c) Zero—sloped (a) Contraction of Supply
(d) Nothing can be said (b) Expansion of Supply
(c) Decrease in Supply
Q 33.
The Market Supply Curve is a lateral summation (d) Increase in Supply
(totalling) of Individual Supply Curves of all Producing
Q 40.
Firms. This statement is — When more units of the product are supplied at
(a) True (b) False a higher price, it is called —
(c) Partially True (d) None of the above (a) Contraction of Supply
(b) Increase in Supply
Q 34. What would be the shape of the Supply Curve of (c) Change in Supply
the toys, if a Seller offers to sell any number of toys as (d) Expansion of Supply
100?
Q 41.
(a) Vertical (b) Downward sloping Contraction of Supply is the result of —
(c) Horizontal (d) Upward sloping (a) Decrease in the number of Producers
(b) Decrease in the price of the product concerned
INCREASE / DECREASE IN QUANTITY SUPPLIED (c) Increase in the prices of other goods
(d) Decrease in the Outlay of Sellers
Q 35.
Increase or Decrease in the quantity supplied
occurs due to —{Omit this question} INCREASE / DECREASE IN SUPPLY
(a) Changes in Price
(b) Changes in Factors other than Price Q 42. Increase or Decrease in Supply occurs due to —
(c) Both (a) and (b) (a) Changes in Price
(d) Neither (a) nor (b) (b) Changes in Factors other than Price
Q 36. While recognizing Increase or Decrease in the (d) Neither (a) nor (b)
quantity supplied, we assume remain constant.
Q 43.
(a) Price While recognizing Increase or Decrease in the
(b) All Factors other than Price Supply, we assume remain constant.
(c) Both (a) and (b) (a) Price
(d) Neither (a) nor (b) (b) All Factors other than Price
Q 37.
When there is a movement on the Supply Curve, (d) Neither (a) nor (b)
we are referring to —
Q 44.
(a) Change in Supply Change in Supply means —
(b) Change in Quantity Supplied (a) A movement on the same Supply Curve
(c) Both (a) and (b) (b) Shift of the Supply Curve
(d) Neither (a) nor (b) (c) Both (a) and (b)
7.34 | Page
Q 50. Movement from So to S2 is called —
Q 45. When higher quantities are supplied, due to (a) Contraction of Supply
changes in factors other than price, it called (b) Expansion of Supply
(a) Contraction of Supply (c) Decrease in Supply
(b) Expansion of Supply (d) Increase in Supply
(c) Decrease in Supply
(d) Increase in Supply Q 51. Reduction in the price of Related Commodities
will cause a movement from —
Q 46. Which of the following factors will not result in (a) Movement from So to Si
the shifting of Supply Curve for Software Packages? (b) Movement from So to S2
(a) Increase in the wages of computer professionals (c) Movement on So itself
(b) Government tariffs on software export and imports (d) No change at all
(c) Fall in the prices of software packages
Q 52.
(d) All of the above result in the shifting of the curve Increase in the price of Related Commodities
Q 47.
An Increase in the Supply of a product is caused (a) Movement from So to Si
by (b) Movement from So to 52
(a) Improvements in Technology (c) Movement on So itself
(b) Fall in the Prices of other goods (d) No change at all
(c) Fall in the Prices of Factors of Production
Q 53.
(d) All of these Reduction in Cost of Production of this
Commodity will cause a movement from —
Q 48. Use the following diagram to answer the next 11 (a) Movement from So to Si
questions. (b) Movement from So to S2
Y (c) Movement on So itself
(d) No change at all
Q 54. Inventions and Innovations on this commodity

Si (a) Movement from 50 to S1
S0 (b) Movement from So to S2
S2 X (c) Movement on So itself
(d) No change at all
Movement from So to Si is called —
(a) Contraction of Supply Elasticity of supply
(b) Expansion of Supply
(c) Decrease in Supply Q 55. Elasticity of Supply refers to the degree of
(d) Increase in Supply responsiveness of supply of a good to changes in its
(a) Demand (b) Price
Q 49.
Movement from So to Si is caused by — (c) Cost of Production (d) State of Technology
(a) Changes in Price of the product
(b) Changes in Factors other than price Q 56. Which of the following has the lowest Price
(c) Both (a) and (b) Elasticity of Supply?
(d) Neither (a) nor (b) (a) Luxury Items
(b) Necessities
(c) Perishable Goods
(d) Items that have the least budgetary allocation
7.35 | Page
(b) Proportionate change in supply is greater than
Q 57. Given the Market Demand, the burden of specific proportionate change in price
.
tax that will be borne by the Consumer (Buyer) depends (c) Proportionate change in supply is equal to
on the — proportionate change in price.
(a) Price Elasticity of Supply (d) All of the above.
(b) Price Elasticity of Demand
(c) Consumer's Ability Q 65. A Horizontal Supply Curve parallel to the
.
(d) Type of the Product quantity axis implies that the Elasticity of Supply is —
(a) Zero
Q 58. Elasticity of Supply can be measured using — (b) Infinite
(a). Percentage Change or Proportional Method (c) Equal to one
(b) Point Elasticity Method (d) Greater than zero but less than one.
(c) Arc Elasticity Method
Q 66.
(d) All the above When change in the quantity supplied is
.
proportionate to the change in the price, the product is
Q 59. Which of the following method is not used for said to have —
.
measuring elasticity of supply? (a) Unitary Elastic Supply
(a) Arc Method (b) Percentage Method (b) Perfectly Elastic Supply
(c) Total outlay Method (d) Point Method (c) Relatively Elastic Supply
(d) Perfectly Inelastic Supply
Q 60.
If Quantity Supplied increases by 60% for a 500/o
. Q 67.
increase in Price, Elasticity of Supply is — Price is fallen by 20% brings above 10% fall in
.
(a) —1.2 (b) +1.2 quantity supplied then elasticity of supply is
(c) —0.83 (d) +0.83 (a) 2.0 (b) 0.5
(c) 1.0 (d) 1.5
Q 61. If Price is 15, quantity supplied is 150 units. IfPrice
.
is 25, quantity supplied is 300 units. Compute Price EQUILIBRIUM PRICE WITH DEMAND & SUPPLY
Elasticity of Supply using Arc Method.
(a) —1.09 (b) +1.09 Q 68. Market Forces refer to —
.
(c) —0.98 (d) +0.98 (a) Demand (b) Supply
Q 62. When Supply is perfectly inelastic, Elasticity of
.
Supply is equal to — Q 69. Demand & Supply interact in determining—
.
(a) +1 (b) 0 (a) Price and Output (b) Cost and Revenue
(c) —1 (d) Infinity (c) Both (a) and (b) (d) Neither (a) nor (b)
Q 63. If as a result of a change in price, the quantity Q 70. Equilibrium price is where
.
supplied of a product remains unchanged, we conclude (a) Market supply and market demand are equal
that — (b) Firm supply ad market demand are equal
(a) Elasticity of Supply is perfectly inelastic (c) Firm demand and market supply are equal
(b) Elasticity of Supply is relatively greater elastic (d) None of these
(c) Elasticity of Supply is inelastic
Q 71.
(d) Elasticity of Supply is relatively less elastic Other things being equal, as Demand increases,
Equilibrium Price —
Q 64.
Elasticity of Supply is greater than one when (a) decreases (b) increases
.
(a) Proportionate change in price is greater than (c) does not change at all (d) cannot be commented
proportionate change in supply upon.
7.36 | Page
Q 72. Other things being equal, as Demand increases, Q 79. Other things being equal, as Supply decreases,
Quantity at the Equilibrium Price level — Equilibrium Price —
(a) increases (a) Decreases
(b) decreases (b) Increases
(c) does not change at all (c) Does not change at all
(d) cannot be commented upon. (d) Cannot be commented upon.
Q 73. Other things being equal, as Demand increases Q 80.

Other things being equal, as Supply decreases
(a) Equilibrium Price and Quantity both increase. Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease. (a) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases. (b) Equilibrium Price increases and Quantity decreases.
(d) Equilibrium Price decreases and Quantity increases. (c) Equilibrium Price decreases and Quantity increases.
Q 74.
Other things being equal, as Demand decreases,
Equilibrium Price — Q 81. If increase in demand is greater than the
(a) decreases increase in supply, then the Equilibrium Price —
(b) increases (a) Decreases
(c) does not change at all (b) Increases
(d) cannot be commented upon (c) Does not change at all
(d) Cannot be commented upon.
Q 75.
Other things being equal, as Demand decreases,
Quantity at the Equilibrium Price level — Q 82. If increase in demand is greater than the
(a) increases increase in supply, then Quantity at the Equilibrium
(b) decreases Price level —
(c) does not change at all (a) Increases
(d) cannot be commented upon. (b) Decreases
(c) Does not change at all
Q 76.
Other things being equal, as Supply increases, (d) Cannot be commented upon.
Equilibrium Price —
Q 83.
(a) Decreases If increase in demand is greater than the
(b) Increases increase in supply, then —
(c) Does not change at all (a) Equilibrium Price and Quantity both increase.
(d) Cannot be commented upon. (b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
Q 77.
Other things being equal, as Supply increases, (d) Equilibrium Price decreases and Quantity increases.
Quantity at the Equilibrium Price level —
Q 84.
(a) Increases If decrease in demand is greater than the
(b) Decreases decrease in supply, then —
(c) Does not change at all (a) Equilibrium Price and Quantity both increase.
(d) Cannot be commented upon. (b) Equilibrium Price and Quantity both decrease.
(c) Equilibrium Price increases and Quantity decreases.
Q 78. Other things being equal, as Supply increases — (d) Equilibrium Price decreases and Quantity increases.
(a) Equilibrium Price and Quantity both increase.
(b) Equilibrium Price and Quantity both decrease. Q 85. If increase in demand is equal to the increase in
(c) Equilibrium Price increases and Quantity decreases. supply, then the Quantity at the Equilibrium Price level
(d) Equilibrium Price decreases and Quantity increases. —
7.37 | Page
(a) Increases
(b) Decreases Q 91. If the Supply of a commodity is perfectly
(c) Does not change at all inelastic, an increase in Demand will result in —
(d) Cannot be commented upon. (a) Decrease in both Price and Quantity at equilibrium
(b) Increase in both Price and Quantity at equilibrium
Q 86.
If increase in demand is equal to the increase in (c) Increase in Equilibrium Quantity, Equilibrium Price
supply, then — remaining constant
(a) Equilibrium Price and Quantity both increase. (d) Increase in Equilibrium Price, Equilibrium Quantity
(b) Equilibrium Price and Quantity both decrease. remaining constant
(c) Equilibrium Price remains the same but Quantity
Q 92.
increases. If the Demand of a commodity is perfectly
(d) Equilibrium Price remains the same but Quantity elastic, an increase in Supply will result in —
increases. (a) Decrease in both Price and Quantity at equilibrium
Q 87.
If decrease in demand is less than the decrease in (c) Increase in Equilibrium Quantity, Equilibrium Price
supply, then the Equilibrium Price — remaining constant
(a) decreases (d) Increase in Equilibrium Price, Equilibrium Quantity
(b) increases remaining constant
(c) does not change at all
Q 93.
(d) cannot be commented upon. If the Demand of a commodity is perfectly
elastic, a decrease in Supply will result in —
Q 88.
Which of the following situation does not lead to (a) Decrease in both Price and Quantity at equilibrium
an increase in Equilibrium Price? (b) Increase in both Price and Quantity at equilibrium
(a) An increase in demand, without a change in supply. (c) Decrease in Equilibrium Quantity, Equilibrium Price
(b) A decrease in supply accompanied by an increase in remaining constant
demand. (d) Decrease in Equilibrium Price, Equilibrium Quantity
(c) A decrease in supply without a change in demand. remaining constant
(d) An increase in supply accompanied by a decrease in
Q 94.
demand. If a fisherman must sell all of his daily catch
before it spoils for whatever price he is offered once the
Q 89. If the Supply of a commodity is perfectly elastic, fish are caught. The Fisherman's Price Elasticity of
an increase in Demand will result in — Supply for fresh fish is —
(a) Decrease in both Price and Quantity at equilibrium (a) Zero (b) Infinity
(b) Increase in both Price and Quantity at equilibrium (c) One (d) cannot be determined
(c) Increase in Equilibrium Quantity, Equilibrium Price
remaining constant The Below 7 Questions are based on the demand and
(d) Increase in Equilibrium Price, Equilibrium Quantity supply diagrams below. S1 and D1 are the original
remaining constant demand and supply curves. D2, D3, S2 and S3 are
possible new demand and supply curves. Starting from
Q 90. If the Supply of a commodity is perfectly elastic, a initial equilibrium point (1) what point on the graph is
decrease in Demand will result in — most likely to result from each change?
(a) Decrease in both Price and Quantity at equilibrium
(c) Decrease in Equilibrium Quantity, Equilibrium Price
remaining constant
(d) Decrease in Equilibrium Price, Equilibrium Quantity
remaining constant
7.38 | Page
(c) When supply increases and demand increases.
(d) When demand decreases and supply decreases.
Q 100.
When a market is in equilibrium:
(a) No shortages exist.
(b) Quantity demanded equals quantity supplied.
(c) A price is established that clears the market.
(d) All of the above are correct.
Q 101. The market of computers is not in equilibrium,

then which of the following statements is definitely
true?
(a) The prices of computer will rise
Q 95. Assume X is a normal good. Holding everything (b) The prices of computer will fall
else constant, assume that income rises and the price of (c) The prices of computers will change, but not
a factor of production also increases. What point in enough information is given to determine the
Figure 1 is most likely to be the new equilibrium price direction of the change.
and quantity? (d) None of the above
(a) Point 9 (b) Point 5
(c) Point 3 (d) Point 2.
Q Ans Q Ans Q Ans Q Ans Q Ans
Q 96. We are analyzing the market for good Z. The price 1 A 23. C 45. D 67. B 89. C
2 D 24. A 46 C 68. C 90. C
of a complement good, good Y, declines. At the same
3 B 25. B 47. D 69. A 91. D
time, there is a technological advance in the production
4 A 26. B 48. C 70. A 92. C
of good Z. What point Figure 1 is most likely to be the 5 B 27 A 49. B 71. B 93. C
new equilibrium price and quantity? 6 A 28. B 50. D 72. A 94. A
(a) Point 4. (b) Point 5 7 C 29. C 51. B 73. A 95. D
(c) Point 8 (d) Point 7 8 A 30. A 52. A 74. A 96. C
9 A 31. C 53. B 75. B 97. B
Q 97. Heavy rains in Maharashtra during 2005 and 10 C 32. A 54. B 76. A 98. B
11 B 33. A 55. B 77. A 99. D
2006 caused havoc with the rice crop. What point in
12 A 34. C 56. C 78. D 100 D
Figure 1 is most likely to be the new equilibrium price
13 A 35. A 57. A 79. B 101 C
and quantity?
14 C 36. B 58. D 80. B
(a) Point 6 (b) Point 3 15 C 37. B 59. C 81. B
(c) Point 7 (d) Point 8 16 A 38. B 60. B 82. A
17 B 39. A 61. B 83. A
Q 98. Assume that consumers expect the prices on new 18 C 40. D 62. B 84. B
cars to significantly increase next year. What point in 19 B 41 B 63. A 85. A
Figure is most likely to be the new equilibrium price and 20 B 42. B 64. B 86. C
21 B 43 A 65. B 87. B
quantity?
22 C 44. B 66. A 88. D
(a) Point 6 (b) Point 5
(c) Point 3 (d) Point 8
Q 99. What combinations of changes would most likely

decrease the equilibrium quantity?
(a) When supply increases and demand decreases.
(b) When demand increases and supply decreases
7.39 | Page
Q.7. For what type of goods does demand fall with a rise
Chapter 2- Utility + Demand+ Supply in income levels of households?
Past Year Exam + Most Repeated Question (a) Inferior goods (b) Substitutes
(c) Luxuries (d) Necessities
Q.1. “High priced goods consumed by status seeking rich
people to satisfy their need for conspicuous goods” is: Q.8. Which economist said that money is the measuring
(a) Veblen effect (b) Bandwagon effect rod of utility?
(c) Snob effect (d) Demonstration effect (a) A.C Pigou (b) Marshall
(c) Adam Smith (d) Robbins
Q.2.
Q.9. Elasticity between two points:
(a) Point elasticity (b) Arc elasticity
(c) Cross elasticity (d) None.
Q.10. An indifference curve is L shaped, then two goods

will be:
(a) Perfect substitute goods
(b) Substitute goods
(a) elasticity at point A=∞, at B= > 1, at C = 1,at D = < 1 (c) Perfect complementary goods
and at E = 0 (d) Complementary goods
(b) elasticity at A = 0, at B = < 1 , at C = 1 , at D = > 1 and
at E = ∞ Q.11.The concept of consumer’s surplus is derived from:
(c) elasticity at A = 0 , at B > 1, at C = 1, at D = < 1 and at (a) The law of diminishing marginal utility.
E=0 (b) The law of equal-marginal utility
(d) None of these. (c) The law of diminishing returns
(d) Engel’s law
Q.3. Cardinal approach is related to:
(a) Indifference curve Q.12. When supply curve shifts to the right there is:
(b) Equi marginal utility (a) An increase (b) expansion
(c) Law of diminishing returns (c) Contraction (d) decrease
(d) None of these.
Q.13. Short- run price is also called by the name of:
Q.4. An Increase in demand can result from: (a) Market price (b) Showroom price
(a) A decline in the market price (c) Maximum retail price (d) None of these.
(b) An increase in income
(c) Reduction in the price of substitutes Q.14. When supply price increase in the short run, the
(d) An increase in the price of complements. profit of the producer ______.
(a) Increases (b) decreases
Q.5. Cross elasticity of perfect substitutes is (c) Remains constant (d) decreases marginally
(a) Zero (b) Negative
(c) One (d) Infinity Q.15. When Price of a commodity increases what will be
the effect on quantity demanded?
Q.6.Supply is a ______ concept (a) Increases (b) Decreases
(a) Flow (b) Stock (c) No change (d) None of these
(c) Flow and Stock, both (d) Qualitative
7.40 | Page
Q.16. According to the law of supply, change in supply is Q.23. The scope of the indifference curve shows
related to? consumer equilibrium at the point where
(a) Price of goods 𝑃𝑥
𝑀𝑅𝑆(𝑥𝑦) ___ (Price line)
𝑃𝑦
(b) Price of related goods
(a) Less than (b) More than
(c) Factors of production
(c) Equal to (d) None of the above
Q.24. Which of the following is not the property of the
Q.17. In case of inferior goods, with a rise in the income indifference curve?
of consumers, demand for Giffen goods will (a) IC is convex to the origin
(a) Increases (b) Decreases (b) IC scopes downwards from left to right
(c) No change (d) None of the above (c) Two IC can touch each other
(d) IC cannot touch either of the axes
Q.18. In case of necessaries, consumer surplus is?
(a) Infinite (b) Zero Q.25. Case of Normal goods, rise in price leads to
(c) Equals to one (d) More than one ______?
(a) Fall in demand
Q.19. When the price of a commodity rises from 200 to ₹ (b) Rise in demand
300 and Quantity supply increases from 2000 to 5000 (c) No change
units, find the elasticity of supply? (d) Initially rise then ultimately fall
(a) 3.0 (b) 2.5
(c) 0.3 (d) 3.5 Q.26. Method of demand forecasting does not include?
(a) Mathematical method
Q.20. From the following data given below answer (b) Barometric method
question 20 and 21- (c) Expert opinion method
Units TU MU (d) Statistical method
1 200 -
Q.27. An IC shows MRS between the commodity?
2 - 180 (a) Increasing (b) Decreasing
3 480 - (c) Constant (d) Zero
Q.28. Forecasting of demand is the Art and Science of

predicting?
(a) Actual demand for a product at the same future date
(b) Probable demand in future
Total utility derived from 2nd unit
(c) Total demand in future
(a) 380 (b) 20
(d) None of these.
(c) 100 (d) 280
Q.29. Addition made to total utility refers to?
Q.21. Marginal utility of 3𝑟𝑑 unit is? (a) Total utility (b) Average utility
(a) 200 (b) 280 (c) Marginal utility (d) All of the above.
(c) 100 (d) 50
Q.30. The elasticity of supply is zero means?
Q.22. Which Equation is correct— a) Perfectly inelastic (b) Perfectly elastic
𝑀𝑈𝑥 𝑃𝑥 𝑀𝑈𝑥 𝑃𝑥
(a) = (b) > (c) Imperfectly elastic (d) All of the above.
𝑀𝑈𝑦 𝑃𝑦 𝑀𝑈𝑦 𝑃𝑦
𝑀𝑈𝑥 𝑃𝑥 𝑀𝑈𝑥 𝑃𝑥
(c) < (d) ≠
𝑀𝑈𝑦 𝑃𝑦 𝑀𝑈𝑦 𝑃𝑦
Q.31. The Consumer is in equilibrium when the following
condition is satisfied:
7.41 | Page
(a) Budget line is tangent to the Ic curve (d) None
𝑀𝑈𝑥 𝑀𝑈𝑦 𝑀𝑈𝑧
(b) = =
𝑃𝑥 𝑃𝑦 𝑃𝑧
Q.38. Which of the following is not the property of an
indifference curve?
(a) Slopes downwards to the right
(b) Always convex to the origin
Q.32. Which of the following statement is correct? (c) Intersects each other
(a) Supply is inversely related to its cost of production (d) Will not touch either of the axes
(b)Price and quantity demand of a good have a direct
relationship Q.39. Which of the following is correct ?
(c) Taxes and subsidy has no impact on the supply of the (a) Elasticity on the lower segment of demand curve is
product greater than unity
(d) Seasonal changes have no impact on the supply of the (b) Elasticity on the upper segment of demand curve is
commodity lesser than unity
(c) Elasticity at the middle of the demand curve is equal
Q.33. When the supply of a product is perfectly inelastic to unity
then the curve will be (d) Elasticity decreases as one moves from the lower part
(a) Parallel to Y-axis of the mark demand curve to upper part
(b) Parallel to X-axis
(c) At the angle of 45° Q.40. Which of the following will affect the demand for
(d) Sloping upwards non-durable goods?
(a) Disposable (b) Income Price
Q.34. In the case of, there is an inverse relationship (c) Demography (d) All of the above
between income and demand for a product.
(a) Substitute goods Q.41. When the price of tea decreases, people reduce the
(b) Complementary goods consumption of coffee. Then the goods are
(c) Giffen Goods (a) Complementaries (b) Substitutes
(d) None of the above (c) Inferior goods (d) Normal goods
Q.35. If maize has - 0.30 as income elasticity of demand, Q.42. Which of the following relation is true with MU?
then maize will be considered as _ (a) When MU is positive, Total utility rises at a
(a) Necessity (b) Inferior good diminishing rate
(c) Superior good (d) None (b) When marginal utility is zero, total utility is maximum
(c) When marginal utility is negative, total utility is
Q.36. If price decreases from 80 to 60 and elasticity of diminishing
demand is 1.25 then ______. (d) All of the above
(a) Demand increase by 25%
(b) demand decrease by 25% Q.43. Contraction of supply implies ______.
(c) Remains constant (a) Decrease in cost of production
(d) None of the above (b) Decrease in price of the good concerned
(c) Decrease in price of related good mark
Q.37. Which of the following is / are the conditions of (d) Increase in price of the good concerned
theory of consumer surplus if the price is same for all the
units he purchased? Q.44. Perishable commodities will have
(a) The consumer gains extra utility or surplus (a) Perfectly elastic curve
(b) Consumer surplus for the last commodity is zero (b) Perfectly inelastic curve
(c) Both (c) Elastic
7.42 | Page
(d) Inelastic Q.52. Suppose the price of movies seen person to at a
theatre rises from 120 per 200 per person. The theatre
Q.45. Budget line is also called manager observed that the rise in prices has lead to a fall
a) Price line (b) Iso cost line in attendance at a given movie from 300 persons to 200
(c) Iso-quant (d) None persons. What is the price elasticity of demand for the
movie? (Arc elasticity)
Q.46. The Quantity supplied of a goods or services is the (a) 0.50 (b) 0.8
amount that (c) 1.00 (d) None of these.
(a) As actually bought during a given time period at given
price. Q.53. In case of an inferior good, the income elasticity of
(b) Producers wish, they could sell at higher price demand is:
(c) Producers plan to sell during a given time period at (a) Positive (b) Zero
given price. (c) Negative (d) Infinite
(d) People are willing to buy during a given their period
at a given price. Q.54. For what type of goods does demand fall with a
rise in income levels of households?
Q.47. Luxury goods have income elasticity (a) Inferior goods (b) Luxuries
(a) Negative and less than 1 (c) Substitutes (d) Necessities
(b) Positive and greater than 1
(c) Zero Q.55. In case of Inferior goods like bajra, a fall in its price
(d) None tends to:
(a) Make the demand remain constant
Q.48. An in difference curve slopes down towards right (b) Reduce the demand
since more of one commodity and of another commodity (c) Increase the demand
result in (d) Change the demand in an abnormal way
(a) Same level of satisfaction
(b) Maximum satisfaction Q.56. Movement along the same demand curve shows:
(c) Greater satisfaction (a) Expansion of demand
(d) Less satisfaction (b) Expansion of supply
(c) Expansion and contraction of demand (d) Increase and
Q.49. Elasticity for habitual goods is decrease of demand
(a) Perfectly elastic (b) Elastic
(c) Perfectly inelastic (d) Inelastic Q.57. The price of hot-dogs increases by 22% and the
quantity demanded falls by 25% this indicates that
Q.50. Diminishing marginal returns for the first four units demand for hot dogs is:
of variable inputs is exhibited by the total product (a) Elastic (b) Inelastic
sequences. (c) Unitary elastic (d) perfectly elastic
(a) 50,100,150,200 (b)50,50,50,50
(c) 50,110,150,260 (d) 50,90,120,140 Q.58. The quantity demanded does not respond to price
change and so the elasticity is:
Q.51. Demand for a commodity refers to: (a) Zero (c) Infinite
(a) A desire for the commodity (b) One (d) None
(b) Need for the commodity
(c) Quantity demanded of that commodity Q.59. Which factor generally keeps the price-elasticity of
(d) Quantity of the commodity demanded at a certain demand for a good low:
price during any particular period of time. (a) Variety of uses for that goods
(b) Its low price
7.43 | Page
(c) Close substitutes for that goods (c) 0.33 (b) None
(d) A high proportion of the consumer's income spent on
it Q.68. If demand is parallel to the X- axis, what will be the
nature of elasticity?
Q.60. In case of a straight- line demand curve meeting (a) Perfectly elastic (b) Inelastic
the two axes, the price elasticity of demand at the mid- (c) Elastic (d) Highly elastic
point of the line would be:
(a) 0 (b) 1 Q.69. Giffen Paradox is an exception of
(c) 1.5 (d) 2 (a) Demand (b) Supply Production Utility
(c) Production (d) Uitility
Q.61. An increase in demand can result from:
(a) A decline in the market price Q.70. Law of demand is a _________.
(b) An increase in income (a) Quantitative statement (b) qualitative statement
(c) A reduction in the price of substitutes (c) Both (a) & (b) (d) Hypothetical
(d) An increase in the price of complements
Q.71. The demand for which type of goods do not
Q.62. Compute income elasticity of demand increases by decrease with the increase in its price
5% and income by 1%. (a) Comforts (b) Luxury
(a) 5 (b) 1/5 (c) Necessities (d) Capital goods
(c) 0 (d) None
Q.72. Increase in Price from ₹4 to ₹6 then decrease in
Q.63. For a commodity with a unitary elastic demand demand from 15 units to 10 units. What is the price
curve if the price of the commodity rises, then the elasticity? ( Point elasticity )
consumer's total expenditure on this commodity would : (a)0.66 (b)15
(a) Increase (c)-1.5 (b) 2
(b)Decrease
(c)Remains constant Q.73. Expansion & contraction of the demand curve
(d) Either increase or decrease occurs due to:
(a) Change in the price of commodity
Q.64. What is the value of elasticity of demand if the (b) Change in price of substitute or complementary goods
demand for the goods is perfectly elastic? (c) Change in income
(a) 0 (b) 1 (d) None
(c) Infinity (d) Less than 0
Q.74. The elasticity between two points:
Q.65. If the price of a complementary good rises : (a) Point elasticity (b) Arc elasticity
(a)Demand curve shifts to the left (c) Cross elasticity (d) None
(b) Demand curve shifts to the right
(c) Demand curve moves downwards Q.75. When price remains constant and quantity
(d)Demand curve moves upwards demanded changes, then the elasticity of demand will be:
(a) Vertical to X-axis (b)Horizontal to X-axis
Q.66. Cross elasticity of demand in Monopoly market is : (c) Either (a) or (b) (d) None
(a) Elastic (b) Zero
(c)Infinite (d) One Q.76. cDemand of aommodity depends upon:
(a) Price (b) Income
Q.67. What is income elasticity of demand, when income (c) Price of related good (d)All of the above
changes by 20% and demand changes by 40%
(a) 1/2 (b) 2
7.44 | Page
Q.77. In case of substitute goods, cross elasticity (b) negative but greater than one
Is_______. (c) positive but greater than one
(a) Negative (b) Zero (d) positive but less than one
(c) Positive (d) None of these
Q.85. The case of a straight-line demand curve meeting
Q.78. The prices of a commodity were increased from % two axes, the price elasticity of demand at the point
4 to 6. As a result, demand decreased from 15 units to 10 where the curve meets y-axis would Be_____.
units. What is the price elasticity? (Point elasticity) (a)zero (b) greater than one
(a) 0.66 (b) 0.33 (c) less than one (d) infinity
(c) 1.00 (d) 1.5
Q.86. Calculate income elasticity for the household when
Q.79. Other things remaining constant, if the price of the the income of the household increases by 10% and the
inferior goods decreases then what will be the effect? demand for cars rises by 20%.
(a) Demand increases (a) +2 (b) -2
(b) Demand decreases (c) +5 (d) -5
(c) Quantity demanded increases
(d) Quantity demand decreases. Q.87. The commodity whose demand is associated with
the name of Sir Robert Giffen?
Q.80. Consumer spends ₹80 on purchasing a commodity (a) Necessary good (b) Luxury good
when its price is ₹1 per unit and spends ₹96 when the (c) Inferior good (d) Ordinary good
price is ₹2 per unit. Calculate the price elasticity of
demand. Q.88. In expansion and contraction of demand _____.
(a) 0.2 (b) 0.3 (a) Demand curve remains unchanged (b)demand curve
(c) 0.4 (d) 0.5 changes
(c) The slope of the demand curve changes
Q.81. When the price of cylinder rises from ₹120 to ₹200, (d) both (a) & (c) above
the demand falls from 300 to 200. Calculate the price
elasticity of demand. Q.89. Certain goods for which Quantity demanded
(a) 1.00 (b) 0.50 decreases when Income Increases are called______
(c) 5.00 (d) None goods.
(a) superior (b)inferior
Q.82. Demand for electricity power is elastic Because (c) prestige (d) conspicuous
________.
(a) it is available at a very high price Q.90. When the price falls by 5% and the demand in rises
(b) it is essential for life by 6%, then elasticity of demand is ______.
(c) it has many uses (a)elastic (b) inelastic
(d) it has many substitutes (c) unitary elastic (d) zero
Q.83. If the income of a person increases by 10% and his Q.91. Cross elasticity of complementary goods is :
demand for goods increases by 30%, income elasticity (a)Positive (b) Negative
will be (c) Infinity (d) None of these.
(a) equal to one (b) less than one
(c) More than one (d) None of these Q.92.Demand of i-pod increases from 950 to 980 and
income increases from 9,000 to 9,800. What is income
Q.84. The case of luxury goods, the income elasticity of elasticity?
demand will be (a) 0.53 (b) 0.35
(a) zero (c) 0.43 (d) None
7.45 | Page
(b) Change in the taste and preference of the buyer
Q.93. Contraction of demand results due to (c) Change in the price of the commodity
(a) increase in the price of the goods (d) Change in the price of the related goods.
(b) decrease in the no. of the producers
(c) decrease in the output of the sellers Q.101. Fall in the price of normal goods leads to:
(d) decrease in the price of the goods. (a) A shift in the demand curve
(b) Fall in demand
Q.94. Bricks for houses is an example of which kind of (c) Arise in consumers real income
demand? (d) A fall in consumers real income.
(a) Composite (b) Competitive
(c) Joint (d) Derived. Q.102. 10% increase in the price of tea results is an 8%
increase in the demand for coffee. Cross elasticity of
Q.95. Normal goods have demand will be :
(a) zero income elasticity (a) 0.80 (b) 1.25
(b) negative income elasticity (c) 1.50 (d) 0.80
(c) positive income elasticity
(d) infinite income elasticity Q.103. When the total expenditure incurred by the
consumers on a commodity due to a change is its price
Q.96. In which of the following cases the demand for remains the same, then the elasticity of demand for that
goods tends to be less elastic? commodity will be:-
(a) Good is necessary (a) Zero (b) One
(b) The time-period is shorter (c) More than one (d) Less than one
(c) Number of close substitutes is less
(d) All of the above Q.104. What will be the price elasticity if the original
price is ₹5, the original quantity is 8 units and the
Q.97. Which of the following elasticity of demand changed price is ₹6, and the changed quantity is 4 units:
measures a movement along the demand curve rather (a) 2.5 (b) 2.0
than a shift in the curve? (c) 15 (d) 1.0
(a) Income elasticity of demand
(b) Price elasticity of demand Q.105. The original price of a commodity is ₹500 and
(c) Substitution elasticity of demand quantity demanded of that is 20 kgs. If the price rises to
(d) None of these. ₹750 and the quantity demanded falls to 15 kgs. The
price elasticity of demand will be:
Q.98. If the price elasticity of demand is zero, the shape (a) 0.25 (b) 0.50
of the curve will be: (c) 1.00 (d) 1.50
If the price elasticity of demand is zero, the shape of
the curve will be: Q.106. The demand for factors of production is —
(a) Fundamental demand
Q.99. If a 20% fall in the price of a commodity brings (b) Derived demand
about a 40% increase in its demand, then the demand for (c) Market demand
the commodity will be termed as: (d) Joint demand.
(a) Inelastic (b) Elastic
(c) Highly elastic (d) Perfectly elastic Q.107. The price of a Tiffin Box is ₹100 per unit and the
quantity demanded in the market is 1,25,000 units.
Q.100. Expansion and contraction in demand are caused Company increased the price to ₹125. Due to this
by increase in price, the quantity demanded decreases to
(a) Change in the income of the buyer
7.46 | Page
1,00,000 units. What will be the price elasticity of
demand? Q.115. Other things being equal, a fall in the price of the
(a) 0.25 (b) 0.80 complementary goods will cause the of the other to rise.
(c) 1.00 (d) None (a) Price (b) Supply
(c) Demand (d) Utility
Q.108. The price of a commodity decreases from 10 to 8
and the quantity demanded of it increases from 25 to 30 Q.116. A horizontal demand curve parallel to X-axis
units, then the coefficient of price elasticity will be_____. shows that the elasticity of demand is:
(a) 1.00 (b)-1.00 (a) Zero (b) Equal to unity
(c) 1.5 (d) -1.5 (c) Greater than unity (d) Infinite.
Q.109. Which of the following is not a determinant of Q.117. When the price of a commodity increases from Z
demand? 8 to 9, its demand decreases by 10%. The price elasticity
(a) Consumer's tastes and preferences of demand for the commodity
(b) Quality supplied of a commodity (a) 0.8 (b) 0.9
(c) Income of the consumers (c) 1.0 (d) 1.1
Q.118. Which one of the following is correct about the
Q.110. Demand curve parallel to the Y-axis implies: price elasticity of demand for a commodity?
(a) Ep = 0 (b) Ep = 1 (a) It remains the same under all situations
(c) Ep < 1 (d) Ep > 1 (b) It has several degrees/nature
(c) It remains unaffected by the price of any other
Q.111. If the quantity demanded of X commodity commodity
increases by 5% when the price of Y commodity increases (d)It is an immeasurable concept.
by 20%, the cross-price elasticity of demand between X
and Y commodity will be: Q.119. The supply of a good refers to :
(a) -0.25 (b) 0.25 (a) Actual production of goods
(c) -4.00 (d) 4.00 (b) Total stock of goods
(c) Stock available for sale
Q.112. Which amongst the following is the right formula (d) Amount of goods offered for sale at a particular price
for calculating the price elasticity of demand using ratio per unit of time
method?
(a) (ΔQ/ΔP) x (P/Q ) (b) (ΔP/ΔQ) x (Q/P) Q.120. Increase or Decrease in Supply means:
(c) (ΔQ/ΔP) x (Q/P) (d) (ΔP/ΔQ) x (1/P ) (a) Shift in Supply curve
(b) Movement along the same supply curve
Q.113. Straight line demand curve at the point of meeting (c) Both (a) and (b)
the x-axis will indicate elasticity coefficient Equal to (d) Neither (a) or (b)
_______.
(a) One (b) Infinity Q.121. When supply price increase in the short run, the
(c) Zero (d) More than one profit of the producer _______.
(a) Increases (b) Decreases
Q.114. Changes in the quantity demanded in response to (c) Remains constant (d)Decreases marginally
changes in the price of the same commodity is called:
(a) Change in demand Q.122. A change in the supply of a commodity along with
(b)Change in quantity demanded the same supply curve may occur due to:
(c) Income demand (a) Change in the price of the commodity
(d) Cross demand (b) Change in the prices of related goods
7.47 | Page
(c) Change in future expectations about the price of the (a) 0.75 (b) 0.67
goods (c) 00.67 (d) 00.77
(d) Change in the cost of inputs
Q.123. What is the elasticity of supply, when price Q.129. Increase or decrease in supply means:
changes from ₹15 t0 ₹12 and supply change from 6 units (a) Change in supply due to change in its own price
to 5 units? (b) Change in supply due to change in factors other than
(a) 0.77 (b) 0.87 its own price
(c) 0.833 (d) 0.58 (c) Both of the above
Q.124. If the supply of a commodity is perfectly elastic,
an increase in demand will result in: Q.130. When Supply Curve shifts to the right there is
(a) Decrease in both the price and quantity at equilibrium ______ in Supply.
(b) Increase in both the price and quantity at equilibrium (a) In increase (b) Expansion
(c) Increase in equilibrium quantity, equilibrium price (c) Contraction (d) Decrease.
remaining constant
(d) Increase in equilibrium price, equilibrium quantity Q.131. The supply of the commodity implies?
remaining constant (a) Total Output during a specified period
(b) Its total stock
Q.125. When the change in the quantity supplied is (c) Its stock available for sale
proportionate to the change in the price, the producer is (d) Its Quantity Offered for sale at a particular price per
said to have _____. unit of time
(a) Perfectly elastic supply
(b) Relatively elastic supply Q.132. Supply of a commodity is a _____.
(c) Unitary elastic supply (a) Stock concept
(d) Perfectly inelastic supply (b) Flow concept
(c) Both stock and Flow concept
Q.126. Expansion in supply refers to a situation when the (d) Wholesale concept
producers are willing to supply a:
(a) Larger quantity of the commodity at an increased Q.133. The price of mangoes increases from ₹30 per
price kilogram to ₹40 per kilogram and the supply increases
(b) Larger quantity of the commodity due to increased from 240 kilograms the 300 kilograms. What will be the
taxation on that commodity elasticity of supply for mangoes?
(c) Larger quantity of the commodity at the same price (a) -0.67 (b) + 0.67
(d) Larger quantity of the commodity at the decreased (c) -0.77 (d) + 0.75
price
Q.134. If a 20% fall in price brings about a 10% fall in
Q.127. If there is an improvement in the technology quantity supplied, in such a case elasticity of supply will
_____. be equal to:
(a) The supply curve shifts to the left (a) 2.0 (b) 0.5
(b) The supply curve shifts to (c) 1.0 (d) 1.5
(c) The right quantity supplied increase
(d) Both (b) and (c) Q.135. At a price of ₹25 per kg, the supply of a commodity
is 10,000 kg per week. An increase in its price to ₹30 per
Q.128. If the price of apples rises from ₹30 per Kg to ₹40 kg, increases the supply of the commodity to 12,000 kg
per Kg and the supply increases from 240 Kg to 300 Kg. per week. The elasticity of supply will be:
Elasticity of supply is : (a) 0.75 (b) 1.00
7.48 | Page
(c) 1.50 (d) 1.75 (a) Price of the commodity concerned
(b) Prices of the factors of production
(c) State of technology used in the production process
Q.136. Short- run price is also called by the name of (d) Customs and traditions in society
______.
(a) Market price (b) Showroom price Q.143. The Supply Curve shifts to the right because of:
(c) Maximum retail price (d) None of these. (a) Improved technology
(b) Increased price of factors of production
Q.137. The elasticity of supply is greater than one when: (c) Increased excise duty
(a) Proportionate change in price is more than the (d) All of the above.
proportionate change in quantity supplied
(b) Proportionate change in quantity supplied is more
than the proportionate change in price
(c) Change in price and quantity supplied are equal
Q.138. After reaching saturation point consumption of

additional units of commodity causes
(a) Total utility to fall and marginal utility to increase
(b) Total and marginal utility both to increase
(c) Total utility to fall and marginal utility to become
negative
(d) Total utility to become negative and marginal utility
to fall
Q.139. As the price of a commodity increases, normally,

its supply:
(a) Decreases (b) Remains unchanged
(c) Increases (d) Cannot be determined
Q.140. If equilibrium is present in a market then it can be

said that:
(a) The price of the product will tend to rise
(b) Quantity demanded equals quantity supplied
(c) Quantity demanded exceeds quantity supplied
(d) Quantity supplied exceeds quantity demanded
Q.141. An increase in supply denotes a shift in the supply

curve to the right. If there is an increase in supply without
a change in demand, the equilibrium price will and the
quantity demanded will go up.
(a) Fall (b) Remain constant
(c) Increase (d) Becomes zero.
Q.142. Which among the following is not a determinant

of supply?
7.49 | Page
Q. Ans. Q. Ans. Q. Ans. Q. Ans. Q. Ans.
1 A 31 C 61 C 91 B 121 A
2 A 32 A 62 A 92 B 122 A
3 B 33 A 63 C 93 A 123 C
4 B 34 C 64 C 94 D 124 C
5 D 35 B 65 A 95 C 125 C
6 A 36 D 66 B 96 D 126 A
7 A 37 C 67 B 97 B 127 B
8 B 38 C 68 A 98 B 128 A
9 B 39 C 69 A 99 C 129 B
10 C 40 D 70 B 100 C 130 A
11 A 41 B 71 C 101 C 131 D
12 A 42 D 72 A 102 A 132 B
13 A 43 B 73 A 103 B 133 D
14 A 44 B 74 B 104 A 134 B
15 B 45 A 75 B 105 B 135 B
16 A 46 C 76 D 106 B 136 A
17 B 47 B 77 C 107 B 137 B
18 A 48 A 78 A 108 B 138 C
19 A 49 C 79 D 109 B 139 C
20 A 50 D 80 C 110 A 140 B
21 C 51 D 81 B 111 B 141 A
22 A 52 D 82 C 112 A 142 D
23 C 53 C 83 C 113 C 143 A
24 C 54 A 84 C 114 B
25 A 55 B 85 D 115 C
26 A 56 C 86 A 116 D
27 B 57 A 87 C 117 A
28 B 58 A 88 D 118 C
29 C 59 B 89 B 119 D
30 A 60 B 90 A 120 A
7.41 | Page
PRODUCTION BASICS
Q 9. Production refers to —
(a) Creation of value
Q 1. In Economics,______ refers to any economic (b) Addition of value
activity, which is directed towards satisfaction of human (c) Both (a) and (b)
wants. (d) Neither (a) nor (b)
(a) Production (b) Distribution
Q 198. Q 10. Production refers to —
Q 216.
(c) Consumption (d) Economics
(a) Tangible goods and products
In Economics, Production refers to any economic (b) Intangible services
activity — (c) Both (a) and (b)
(a) Which results in a tangible product or commodity (d) Neither (a) nor (b)
(b) Which is directed at the satisfaction of human wants.
(c) Both (a) and (b) Q 11. Production is defined as
(d) Neither (a) nor (b) (a) Creation of matter
(b) Creation of utility in matter
Q 3. Which of the following statement is True? (c) Creation of infrastructural facilities
Production can be defined as— (d) None of these
(a) Creation or addition of utility
(b) Conversion of raw material into finished goods Q 12. Which of the following statements regarding
(c) An activity of making something immaterial Service Industry is true?
(d) All of thesezz (a) Service Industry uses less Capital Equipment
(b) Service Industry uses more Capital
In Economics, Production refers — (c) Service Industry uses no Capital Equipment
Q 4.
(a) Creation of utility (b) Satisfaction of utility (d) Service Industry uses less Variable Factors
Q 13.
Production refers to —
Q 5.
Q 203. Production may be defined as an act of— (a) Capital Goods only
(a) Creating utility. (b) Earning profit. (b) Consumer Goods only
(c) Destroying utility. (d) Providing services. (c) Both (a) and (b)
Q 6. Production is a / an activity.
(a) Charitable (b) Beneficial Q 14. Production includes —
(c) Economic (d) Successful (a) Mining (b) Manufacturing
(c) Service providing (d) All of above
Q 7. Production does not consist of which of the
following activities? Q 15. Which of the following is considered Production
(a) Changing the from of natural resources in Economics?
(b) Changing the place of the resources (a) Tilling of soil
(c) Both of the above (b) Singing a song before friends
(d) None of the above (c) Preventing a child from falling into manhole on the
road
Q 8. Production = Satisfaction of Utility. This statement (d) Painting a picture for pleasure
is
Q 16.
(a) True (b) False Which of the following statements is true?
8.1 | Page
(a) Services of a Doctor are considered Production Q 24. Utility involves making use of personal skills in
(b) Man can create matter the form of services.
(c) Services of a Housewife are considered Production (a) Form Utility (b) Place Utility
(d) When a man creates a table, he creates matter (c) Time Utility (d) Personal Utility
(e) None of the above
Q 25. Raw Material converted into Finished Product in
Q 17. Work of a Professional (like Chartered Accountant) the manufacturing process, refers to creation of
does not result in any tangible output. Hence, it is not a (a) Form Utility (b) Place Utility
Production Activity in Economics. This statement is — (c) Time Utility (d) Personal Utility
Q 198.
(a) QTrue
216.
(b) False Q 26. If Apples from Kashmir are available for Sale in
(c) Partially True Chennai, it refers to creation of —
(d) None of the above (a) Form Utility (b) Place Utility
(c) Time Utility (d) Personal Utility
Q 18.
Which of these is a Production Activity?
(a) Sale of Apples and Mangoes Q 27. Extraction from coal, minerals, gold, etc. from
(b) Sale of Crackers during Festival Season Earth, refers to creation of —
(c) Distributing Water Packets in a temple festival (a) Form Utility (b) Place Utility
(d) All of the above (c) Time Utility (d) Personal Utility
Q 19. Production Activity involves creation of Utility. Such Q 28.

Place Utility involves Changing the place of the
Utility can be created as — resources, from the place where they are of use, to
(a) Form Utility (b) Place Utility another place where they are of use.
(c) Time Utility (d) All of the above (a) Lesser, greater
(b) Greater, lesser
Q 20. In Production Activity, one of the ways of creating (c) Specific, general
Utility is — (d) General, specific
(a) Form Utility (b) Marginal Utility
Q 29.
(c) Total Utility (d) All of the above Storing harvested foodgrains for use till next
Q 203. harvest is an example of creation of —
Q 21. Utility refers to physically changing the form of (a) Form Utility (b) Place Utility
natural resources. (c) Time Utility (d) Personal Utility
(a) Form Utility (b) Place Utility
(c) Time Utility (d) Personal Utility Q 30. Work of Professionals like Doctors, Chartered
Accountants, etc. can be considered under —
Q 22.
Utility refers to changing the place of the (a) Form Utility (b) Place Utility
resources, from place of lesser use to place of greater (c) Time Utility (d) Personal Utility
use.
(a) Form Utility (b) Place Utility Q 31. To complete production, all four types of utilities,
(c) Time Utility (d) Personal Utility i.e. Form, Place, Time and Personal Utility, should be
created. This statement is —{Omit this Question}
Q 23. Utility is created by making goods and services (a) True (b) False
available at times when they are not normally available. (c) Partially True (d) None of the above
(a) Form Utility (b) Place Utility
Q 32.
(c) Time Utility (d) Personal Utility Productive Resources required to produce goods
and / or services are called —
(a) Resources of Production
8.2 | Page
(b) Concepts of Production
(c) Factors of Production
(d) Ideas of Production
LAND
Q 33.
Factors of Production are —
Q 41.
(a) Natural Resources Land refers to —
(b) Man Made Resources (a) All free gifts of nature.
(c) Both (a) and (b) (b) All man—made resources
Q 198.
Q 216. (d) Neither (a) nor (b)
Q 34. Which of these is not a basic Factor of Production
in Economics? Q 42. Land refers to —
(a) Land (b) Enterprise (a) Soil and earth's surface
(c) Capital (d) Money (b) Fertility of soil
(c) Natural resources
Q 35. Which of the following is a factor(s) of (d) All of the above
production?
(a) Labour (b) Capital Q 43. Anything available above the earth's surface is
(c) Entrepreneurship (d) All of these called "Land". This statement is —
(a) True (b) False
Q 36. The demand for a Factor of Production is said to (c) Partially True (d) None of the above
be a Derived Demand because—
(a) It is a function of the profitability of an enterprise Q 44. As a Factor of Production, Land is —
(b) It depends on the supply of complementary factors (a) A free gift of nature.
(c) Its stems from the demand for the final product (b) Fixed in quantity
(d) It arises out of means being scarce in relation to (c) Variable in terms of fertility and uses
wants. (d) All of above are correct.
Q 37. The Incentive / Reward in respect of Land is called Q 45. As a Factor of Production, Land is —
Q 203.(a) Rent (b) Wages (a) Permanent
(c) Interest (d) Profit (b) Original and indestructible
(c) Free gift of nature
Q 38. The Incentive / Reward in respect of Labour is (d) All of above are correct.
called
(a) Rent (b) Wages Q 46. As a Factor of Production, Land is —
(c) Interest (d) Profit (a) Fixed in quantity
(b) Variable in quantity
Q 39.
The Incentive / Reward in respect of Capital is (c) Not quantifiable at all
called (d) Not useful for production.
(a) Rent (b) Wages
(c) Interest (d) Profit Q 47. As a Factor of Production, "Land" is a
means of Production.
Q 40.
The Incentive / Reward in respect of (a) Original (b) Produced
Entrepreneurial Ability is called — (c) Derived (d) Monetary
(a) Rent (b) Wages
(c) Interest (d) Profit Q 48. As a Factor of Production, the Supply of Land is
from the viewpoint of the entire economy.
8.3 | Page
(a) Perfectly elastic (b) More elastic (a) Geographical (b) Utility
(c) Less elastic (d) Perfectly inelastic (c) Both (a) and (b) (d) Neither (a) nor (b)
Q 49. As a Factor of Production, the Supply of Land is Q 56. As a Factor of Production, Land is mobile across
perfectly inelastic from the viewpoint of — (a) Places (b) Uses
(a) The entire economy (c) Both (a) and (b) (d) Neither (a) nor (b)
(b) An Individual Firm
(c) Both (a) and (b) LABOUR
Q 198.
Q 216. Q 57. refers to mental or physical exertion directed to
Q 50.
As a Factor of Production, the Elasticity of Supply produce goods or services, and with a view to gain an
of Land from the viewpoint of the entire economy is — economic reward.
(a) Infinite (b) Zero (a) Land (b) Enterprise
(c) Positive (d) Negative (c) Capital (d) Labour
Q 51. As a Factor of Production, the Supply of Land is Q 58.

Activities done out of pleasure, love and
relatively elastic from the viewpoint of — affection, pastime, hobbies, etc. may be very useful in
(a) The entire economy increasing human well—being, and hence constitute
(b) An Individual Firm Labour. This statement is —
(c) Both (a) and (b) (a) True (b) False
(d) Neither (a) nor (b) (c) Partially True (d) None of the above
Q 52. As a Factor of Production, Land is permanent. Q 59. To have an economic significance, Labour must
This means that Land — be done with —
(a) Remains before and after cultivation (a) The motive of some economic reward
(b) Cannot be destroyed or lost (b) The motive of pleasure and satisfaction
(c) Cannot be used for production at all (c) Both (a) and (b)
(d) None of the above (d) Neither (a) nor (b)
Q 203.Q 53. If Land is used for productive purposes, its Q 60. Which of these constitute "Labour"?
fertility is reduced. Such fertility — (a) Singing in the company of friends for the sake of
(a) Can be restored pleasure.
(b) Cannot be restored at all (b) Singing against payment of a fee.
(c) Is lost forever (c) Singing while walking on the road
(d) Both (b) and (c) (d) None of the above
Q 54. As a Factor of Production, Land lacks mobility. Q 61. Services of a Maid Servant constitutes Labour,
Lack of mobility means — while Services of a Housewife does not. This statement
(a) Land cannot be used for anything other production is
of Rice. (a) True (b) False
(b) Land cannot be shifted from one place to another (c) Partially True (d) None of the above
place
(c) Both (a) and (b) Q 62. As a Factor of Production, "Labour" is a means
(d) Neither (a) nor (b) of Production.
(a) Original (b) Produced
Q 55. As a Factor of Production, Land lacks mobility in (c) Derived (d) Monetary
the sense.
Q 63.
8.4 | Page
Which of these constitute a feature of "Labour", As a Factor of Production, a day's "Labour" lost
as a Factor of Production? cannot be —
(a) Human Efforts (a) Measured at all
(b) Perishable Nature (b) Recovered at all
(c) Weak bargaining power (c) Completely recovered
(d) All of the above (d) None of the above
Q 64. "Labour", as a Factor of Production involves — Q 71. Since there is no Reserve Price, Labour has —
(a) Economic Considerations only (a) Weak bargaining power
Q 198.
(b) QHuman
216. and Psychological Considerations (b) Strong bargaining power
(c) Both (a) and (b) (c) No bargaining power
(d) Neither (a) nor (b) (d) Infinite bargaining power
Q 65. "Labour", as a Factor of Production involves — Q 72. The purpose of Labour Laws is primarily to —
(a) Free Gift of Nature (a) Increase bargaining power of Labour
(b) Human Efforts (b) Maintain Labour Welfare
(c) Both (a) and (b) (c) Guarantee work for each individual
(d) Neither (a) nor (b) (d) All of the above
Q 66. "Labour", as a Factor of Production involves Q 73. Labour is inseparable from the Labourer himself.
human efforts, with a view to gain — This statement is —
(a) Pleasure only (a) True (b) False
(b) Mental satisfaction (c) Partially True (d) None of the above
(c) An economic reward
(d) Use of time Q 74. Labour Power depends upon —
(a) Physical strength
Q 67.
As a Factor of Production, "Labour" is — (b) Education and skills
(a) Perishable (c) Motivation to work
(b) Permanent (d) All of the above
Q 203.(c) Both (a) and (b)
(d) Neither (a) nor (b) Q 75. Generally, Supply of Labour and Wage Rates are
related.
Q 68. Which is not a characteristic of labour? (a) Directly (b) Inversely
(a) Labour is not separable from labourer (c) Equally (d) Not related at all.
(b) Labour is perishable
(c) Labour is not a mobile factor Q 76. Direct relationship between Wage Rates and
(d) Labour is an active factor Supply of Labour means that —
(a) Increase in Wage Rates will decrease the Supply of
Q 69.
As a Factor of Production, "Labour" is Labour
perishable. This means that — (b) Decrease in Wage Rates will increase the Supply of
(a) A day's labour lost cannot be completely recovered Labour
subsequently. (c) Increase in Wage Rates will increase the Supply of
(b) Every human being is mortal and will have to leave Labour
this world some day or the other. (d) Increase in Wage Rates will not affect the Supply of
(c) Both (a) and (b) Labour at all
Q 77.
Q 70.
8.5 | Page
Generally, Supply of Labour and Wage Rates are (d) Neither (a) nor (b)
directly related. However, at very low wage rates, there
Q 83.
is a paradox of excess supply of Labour. This paradox is All Capital is Wealth, but all Wealth is not Capital.
attributed to — This statement is —
(a) Some more members of the family, who were not (a) True
working before, may start working. (b) False
(b) Workers may prefer to work overtime to increase (c) Partially True
their earnings. (d) None of the above
Q 198. Q 84. If a Resource is lying idle, it will constitute
(d) QNeither
216. (a) nor (b)
Q 78. (a) Wealth

Supply of Labour and Wage Rates are always (b) Capital
directly related. This statement is — (c) Both (a) and (b)
(a) True (b) False (d) Neither (a) nor (b)
Q 85. If a Resource is being used for generating
Q 79. Supply of Labour and Wage Rates may become further revenue, it will constitute —
inversely related at — (a) Wealth
(a) Very high wage rates (b) Capital
(b) Very low wage rates (c) Both (a) and (b)
Q 86. Which of these constitutes "Capital"?
Q 80. Which of the following statements is not true (a) Land
about Labour Economies? (b) Water
(a) Larger Scale of Production enables the division of (c) Air
labour (d) Plant and Machinery
(b) Division of Labour is not profitable at small scale of
Q 87.
production As a Factor of Production, "Capital" is a
Q 203.(c) Division of Labour results in imporving worker's ________ concept.
skills (a) Stock
(d) Division of Labour is impossible in Firms with large (b) Flow
scale production (c) Both (a) and (b)
CAPITAL
Q 88. Income arising out of "Capital" is a concept.
Q 81. is that part of wealth of an individual or (a) Stock
community, which is used for further production of (b) Flow
wealth, or which yields an income. (c) Both (a) and (b)
(a) Land (b) Enterprise (d) Neither (a) nor (b)
(c) Capital (d) Labour
Q 89. As a Factor of Production, "Capital" is a
Q 82.
As a Factor of Production, "Capital" can be used _________ means of Production.
for — (a) Original (b) Primary
(a) Further production of wealth (c) Produced (d) Monetary
(b) Yielding further income income
(c) Both (a) and (b) Q 90. Capital * Wealth. This statement is —
8.6 | Page
(a) True Capital Formation is required for —
(b) False (a) Replacement and renovation of existing machinery
(c) Partially True and equipment
(d) None of the above (b) Creating additional productive capacity
Q 91.
As a Factor of Production, "Capital" is — (d) Neither (a) nor (b)
(a) A free gift of nature
Q 98.
(b) Produced by man alone Capital Formation is required for —
(c) Produced by man working with nature (a) Increasing the efficiency of production efforts
Q 198.
(d) QNot
216.relevant at all. (b) Expansion of output of consumer goods in the
future,
Q 92. As a Factor of Production, "Capital" is — (c) Ensuring growth of the economy
(a) Mobile (d) All the above
(b) Produced means of production
(c) Produced by man working with nature Q 99. For the purpose of Capital Formation —
(d) All of the above (a) Current consumption is to be sacrificed to a certain
extent
Q 93.
As a Factor of Production, Capital is mobile across (b) Current income should be saved
— (c) Both (a) and (b)
(a) Places / Countries (d) Neither (a) nor (b)
(b) Uses / Purposes
(c) Both (a) and (b) Q 100. If the whole of the current capacity is used to
(d) Neither (a) nor (b) produce only Consumer Goods —
(a) Production of Consumer Goods in the future will be
Q 94.
As a Factor of Production, "Capital" is — affected
(a) Perishable (b) Economy cannot grow in future
(b) Permanent (c) Production Possibility Curve (PPC) cannot shift
(c) Both (a) and (b) outside
(d) Neither (a) nor (b) (d) All of the above
Q 203.
CAPITAL FORMATION Q 101. Larger production of goods would lead to
higher production in future.
Q 95. The process of increase in the stock of real capital (a) Consumer Goods.
in a country is called — (b) Capital Goods.
(a) Stock Increase (c) Agricultural Goods.
(b) Capital Formation (d) Public Goods.
(c) Increase in GDP
(d) Resource Allocation Q 102. A 100% Consumption Economy —
(a) Cannot have any Capital Formation
Q 96. Capital Formation means — (b) Will become static and cannot grow
(a) A sustained increase in the stock of real capital in a (c) Both (a) and (b)
country. (d) Neither (a) nor (b)
(b) Production of more capital goods, which are used
for further production of goods. Q 103. Capital Formation is possible by —
(c) Investment (a) Using whole of the current capacity to produce only
(d) All of the above Consumer Goods
(b) Reducing present consumption to a certain extent
Q 97.
8.7 | Page
Q 111. 1f there is an increase in income levels, the
Q 104. If current consumption is reduced for the propensity to save —
purpose of Capital Formation, that represents a (a) Reduces,
(a) Uneconomic activity (b) Increases
(b) Current sacrifice for future growth (c) Remains constant
(c) Decrease in demand (d) Becomes zero
(d) Decrease in resources
Q 198.
Q 216. Q 112. Higher the level of income, Higher is the level of
Q 105.
Capital Formation involves — Savings. This statement is —
(a) Creation of Savings (a) True (b) False
(b) Mobilisation of Savings (c) Partially True (d) None of the above
(c) Investment of Savings into Real Capital
Q 113.
(d) All of the above Higher the level of income, Higher is the level of
Savings. This statement is true in respect of
Q 106. For the purpose of Capital Formation, which of (a) Individual Households only
the following create "Savings" in an economy? (b) Overall Economy
(a) Individuals or Households (c) Both (a) and (b)
(b) Business Enterprises (d) Neither (a) nor (b)
(c) Government
Q 114.
(d) All of the above A country has greater ability to save than a
country.
Q 107. For the purpose of Capital Formation, which of (a) Rich, Poor
the following create maximum "Savings" in an (b) Poor, Rich
economy? (c) Good, Bad
(a) Individuals or Households (d) Nothing can be said
(b) Business Enterprises
(c) Government Q 115. Willingness to Save depends upon —
Q 203.(d) None of the above (a) An individual's concern about his future
(b) Social setup in which the individual lives.
Q 108. Level of Savings depends upon — (c) Both (a) and (b)
(a) Ability to Save (d) Neither (a) nor (b)
(b) Willingness to Save
(c) Both (a) and (b) Q 116. If Willingness to Save is less, the level of will be
(d) Neither (a) nor (b) higher.
(a) Government regulated Savings
Q 109. Ability to Save depends upon — (b) Compulsory Savings
(a) Average level of income (c) Forced Savings
(b) Distribution of national income. (d) All of the above
(d) Neither (a) nor (b) Q 117. save by way of Retained Earnings, i.e.
Undistributed Profits.
Q 110. If there is an increase in income levels, the (a) Individuals or Households
propensity to consume — (b) Business Enterprises
(a) Reduces (b) Increases (c) Government
(c) Remains constant (d) Becomes zero (d) All of the above
8.8 | Page
Is the person who combines the various factors
Q 118. Which of these is a source of savings for of production in the right proportions, initiates the
Government? process of production and bears the risk involved in it.
(a) Tax and Fees Collections (a) Capitalist (b) Socialist
(b) Profits of PSUs (c) Government (d) Entrepreneur
(d) Neither (a) nor (b) Q 125. The most important function of an
entrepreneur is to
Q 119. Which of these play a role in mobilisation of (a) Innovate
Q 198.
Q 216.
savings in an economy? (b) Bear the sense of responsibility
(a) Banks (c) Finance
(b) Financial Institutions (d) Earn Profit.
(c) Capital Market
(d) All of the above Q 126. Entrepreneur is also called as —
(a) Organiser (b) Manager
Q 120.
Real Capital Formation requires — (c) Risk—Taker (d) All of the above
(a) An entrepreneurial class which is prepared to bear
the risk of business Q 127. Entrepreneurship is a wider term than
(b) Economic and industrial policies in which organization and management of a business. This
Investment is given initiative statement is —
(c) An inducement to invest, e.g. prospective rate of (a) True (b) False
profit (c) Partially True (d) None of the above
Q 128.
Entrepreneur —
Q 121. Inducement to Invest is influenced by — (a) Is the catalyst in the process of using the factors of
(a) Prospective Rate of Profit production.
(b) Rate of Interest (b) Gives direction to the usage of other factors of
(c) Both (a) and (b) production
Q 203. (d) Neither (a) nor (b)
Q 122. Prospective Rate of Profit is also called —
(a) Rate of Interest on Bank Deposits Q 129. Entrepreneurship gets its reward (i.e. Profit),
(b) Marginal Efficiency of Capital only after all other factors of production have been
(c) Marginal Utility of Capital Employed rewarded. This statement is —
(d) Marginal Revenue (a) True (b) False
Q 123. Scheme of Subsidies for setting up industries
in backward regions leads to — Q 130. The reward / incentive / remuneration for
(a) Balanced Regional Development Entrepreneurship is a amount.
(b) Socially—Beneficial Capital Formation (a) Fixed (b) Variable
(c) Both (a) and (b) (c) Semi—Variable (d) Irrelevant
Q 131.
The functions of an Entrepreneur include —
ENTREPRENEUR (a) Initiating a business enterprise and resource
coordination
Q 124. (b) Risk—bearing or uncertainty—bearing
(c) Introducing Innovations on a continuous basis
8.9 | Page
(d) All of the above (d) There is no difference
Q 139. To enable Employees enjoy a good standard of

Q 132. Innovation theory of entrepreneur is propounded living and maintain work—life balance, is a
by— (a) Social Objective
(a) Prof knight (b) Schumpeter (b) Human Objective
(c) Max weber (d) Peter Ducker (c) National Objective
(d) Economic Objective
Q 198.
Q 133.
Q 216.
Which of the following constitute Innovation?
Q 140.
(a) Introduction of a new or improved product Which of the following is a National Objective
(b) Utilisation of new or improved source of Raw of an enterprise
Material (a) To remove inequality of opportunities and provide
(c) Introduction of new or improved production fair opportunity to all to work and to progress
methods / machinery (b) To make the job contents interesting and
(d) All of the above challenging
(c) To avoid profiteering and anti—social practices
Q 134.
Which of the following constitute Innovation? (d) To maximize profits
(a) Opening—up new or improved markets
Q 141.
(b) Utilisation of new or improved source of Raw To ensure that the Enterprise's output does not
Material cause any type of pollution — air, water or noise, is a
(c) Introduction of a new or improved product (a) Social Objective
(d) All of the above (b) Human Objective
(c) National Objective
Q 135. Organic Objectives of Enterprises — (d) Economic Objective
(a) Survival
(b) Growth and Expansion Part B- PRODUCTION FUNCTION
(d) Either (a) or (b) Q 142. is the functional relationship between physical
Q 203. inputs (i.e. factors of production), and physical outputs
Q 136. Accounting Profits is also called — (i.e. quantity of goods / services produced).
(a) Book Profit (a) Input—Output Function
(b) Pure Profit (b) Demand—Supply Function
(c) Super Profit (c) Production Function
(d) Super Normal Profit (d) Cost Function
Q 137. Economic Profit is also called — Q 143. Production Function deals with —
(a) Pure Profits (a) Quantitative Values of Input and Output
(b) Super Normal Profits (b) Monetary Values of Products
(c) Abnormal Profits (c) Both (a) and (b)
(d) All of the above 180. (d) Neither (a) nor (b)
Q 138. The difference between Economist's Profit and Q 144. Shows the output produced with a given
Accountant's Profit is amount of inputs.
(a) Consideration of Direct Cost (a) Cost Function
(b) Consideration of depreciation (b) Production Function
(c) Consideration of Opportunity Cost (c) Demand Function
8.10 | Page
(d) Isoquants
Q 152. In a Cobb-Douglas production function, two
Q 145.
Production Function explains the relationship inputs are
between — (a) Land and Labour
(a) Maximum Output which can be produced from (b) Capital and Labour
given units of different inputs (c) Capital and Entrepreneur
(b) Price and Cost (d) Entrepreneur and land
(c) Maximum Output which can be produced at various
points of time Q 153. Under Cobb-Douglas production
Q 198.
Q 216. Stages of Production
(d) Various function
contribution of capital and labour respectively-
Q 146.
Production function is (a) 3/14th , 1/4th (b) 1/4th ,3/14th
(a) purely technical relationship between input (c) 1/2 th , 1/2 th (d) none of the above
&output
Q 154.
(b) Purely economic relationship between input Production Function specifies —
&output (a) Maximum amount of output that can be produced
(c) Both (a) & (b) with given quantities of inputs
(d) None of the these (b) Minimum quantities of various inputs that are
required to yield a given quantity of output.
Q 147. In a Production Function, Input means — (c) Both (a) and (b)
(a) Goods and Services produced (d) Neither (a) nor (b)
(b) Factors of Production required
Q 155.
(c) Both (a) and (b) Which of the following is the best definition of
(d) Neither (a) nor (b) the "Production Function"?
(a) The relationship between market price and quantity
Q 148. In a Production Function, Output means — supplied
(a) Goods and Services produced (b) The relationship between the firm's total revenue
(b) Factors of Production required and the cost of production
(c) Both (a) and (b) (c) The relationship between the quantities of inputs
Q 203.(d) Neither (a) nor (b) needed to produce a given level of output
(d) The relationship between the quantity of inputs and
Q 149. Production Function states the relationship the firm's marginal cost of production
between inputs and output, keeping technology
(a) Zero (b) Increasing trend Q 156. The Production Function is a relationship
(c) Decreasing trend (d) Constant between a given combination of inputs and—
(a) Another combination that yields the same output
Q 150. Production Function specifies the output that (b) The highest resulting output
can be produced with given quantities of inputs, in the (c) The increase in output generated by one-unit
existing state of technology. increase in one output
(a) Minimum (b) Maximum (d) All levels of output that can be generated by those
(c) Average (d) Zero inputs
Q 151. Q 157. In general, most of the Production Functions

Production Function specifies the quantities of
various inputs that are required to yield a given quantity measure —
of output. (a) Productivity of factors of production.
(a) Minimum (b) Maximum (b) Relation between the factors of production.
(c) Average (d) Zero (c) Economies of Scale.
8.11 | Page
(d) Relations between change in physical inputs and (a) True (b) False
physical output. (c) Partially True (d) None of the above
Q 158. Which of the following is/are an outcome of a Q 165.

The difference between Fixed and Variable
technological change? Factors of Production is relevant in —
(a) A downward shift in the production function (a) Medium—run (b) Short —run
(b) Same output with fewer inputs or more output with (c) Long—run (d) All of the above
same inputs
(c) Invention of a product or production process Q 166. In the short—run, factors of production
Q 198.
(d) QBoth
216.(b) and (c) above changes.
(a) Proportion between (b) Quantity of
Q 159.
Which of the following statements regarding (c) Both (a) and (b) (d) Neither (a) nor (b)
Production Function is false?{Omit this Question}
(a) It just shows the relationship between output and Q 167. In the short—run, the proportion between
input factors of production —
(b) It does not provide any information on the least— (a) Remains constant (b) Changes
cost Capital Labour combination (c) Is zero (d) Is infinity
(c) In reveals the output that yields the maximum
profit Q 168. In the short—run, the proportion between
(d) Both (a) and (c) factors of production changes because —
(a) One of the Factor is kept constant
SHORT RUN vs LONG RUN (b) Every Factors is kept constant
(c) It is not the long—run
Q 160. The time period(s) covered in Economics Study is (d) There is no explanation for such behaviour
/ are —
(a) short—run (b) long—run Q 169. Law of is applicable in the short— run.
(c) Both (a) and (b) (d) Neither (a) nor (b) (a) Variable Proportions
(b) Returns to Scale
Q 161.
Is the period of time in which all but one (c) Both (a) and (b)
Q 203.factor of production are variable. (d) Neither (a) nor (b)
(a) Short—run (b) Long—run
(c) Medium—run (d) None of the above Q 170. Law of Variable Proportions is applicable to —
(a) Medium—run (b) Short —run
Q 162.
In the short—run, factor(s) of production is / (c) Long—run (d) All of the above
are variable.
(a) All (b) None Q 171. Which of the following activities cannot take
(c) One (d) All of the above place in the short—run?
(a) Changing the quantity of labour employed
Q 163. Variable Factors means those Factors of (b) Changing the input combination
Production — (c) Regular maintenance of the Plant to ensure
(a) Which can be only changed in the long run efficient production
(b) Which can be changed in the short run (d) Installation of an Additional Plant to meet future
(c) Which can never be changed requirements
Q 172. In describing a given production technology, the
Q 164. There is only one Fixed Factor of Production in short run is best described as lasting —
the short—run planning horizon. This statement is — (a) Up to six months from now
8.12 | Page
(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 Q 180. _________ is the improvement in the
production techniques for existing production.
Q 173. ___ is the period of time in which all the factors (a) Process Innovation
of production are variable. (b) Production Innovation
(a) Short—run (b) Long—run (c) Plant Innovation
(c) Medium—run (d) None of the above (d) Production Function
Q 198.
Q 174.
Q 216.
In the long—run, factor(s) of production is / Q 181. The introduction of new product with added
are variable. features in the market is known as —
(a) All (b) Many (a) Process Innovation (b) Product Innovation
(c) One (d) None (c) Plant Innovation (d) Production Function
Q 175. In the long—run, ___________ factors of Q 182. Innovation is of more importance as it helps
production changes. in increasing the standard of living in the long run
(a) Proportion between (b) Quantity of (a) Process
(c) Need for (d) None of the above (b) Product
(c) Plant
Q 176. In the long—run, the quantity of factors of (d) There is no relationship between innovation
production processes and standard of living
(a) Remains constant (b) Changes
(c) Is zero (d) Is infinity TOTAL, AVERAGE AND MARGINAL PRODUCT
Q 177. In the long—run, the quantity of factors of Q 183. ______ is the total output resulting from the
production changes because — efforts of all the factors of production, combined
(a) One of the Factor is kept constant together at any time.
(b) Every Factor is kept constant (a) Total Product (b) Average Product
(c) Every Factor is considered variable (c) Marginal Product (d) All of the above
Q 203.(d) There is no explanation for such behaviour
Q 178. Law of ______________ is applicable in Q 184. is the Total Product per unit of the Variable
the long—run. Factor.
(a) Variable Proportions (a) Total Product (b) Average Product
(b) Returns to Scale (c) Marginal Product (d) All of the above
(d) Neither (a) nor (b) Q 185. ____ is the change in Total Product, for one
unit change in the quantity of Variable Factor.
Q 179. Which of the following statements regarding (a) Total Product (b) Average Product
short run and long run is true? (c) Marginal Product (d) All of the above
(a) Firms plan for the long run but operate in the short
run Q 186. _________ is the addition made to Total
(b) Firms plan in the short run but operate in the long Product, by an additional unit of input of the Variable
run Factor.
(c) Firms operate and plan as well in the long run (a) Total Product (b) Average Product
(d) Firms operate and plan as well in the short run (c) Marginal Product (d) All of the above
8.13 | Page
Q 187. Q 192. When 50 hours of Labour are spent, total
Marginal Product is —
(a) The change in Total Product, for one unit change in output quantity is 2,000 units, When 55 hours of Labour
the quantity of Variable Factor. are spent, total output quantity is 2,250 units. Here,
(b) The addition made to Total Product, by an Marginal Product will be —
additional unit of input of the Variable Factor (a) 2,250 (b) 2,000
(c) Both (a) and (b) (c) 250 (d) 50
Q 198.
(d) QNeither
216. (a) nor (b)
Q 193. Suppose the first four units of a variable input
Q 188. The Marginal Product of an input is generate corresponding total outputs of 150, 200, 350
(a) Extra product produced by one extra unit of input and 550. The marginal product of the third unit of input
while other inputs are held constant is:
(b) Extra product produced by reducing one unit of (a) 50 (b) 100
input while other inputs are held constant (c) 150 (d) 200
(c) Reduction in total product due to one extra unit of Q 194.
input while other inputs are held constant Use the following information to answer next 3
(d) Reduction in total product by reducing one unit of questions
input while other inputs are changing. Hours of Labour Total Output Marginal Product
0 — —
Q 189. The Marginal Product of a variable input is best
1 100 100
described as— 2 — 80
(a) Total product divided by the number of units of 3 240 —
variable input
(b) The additional output resulting from a one unit What is the Total Output when 2 hours of
increase in the variable input Labour are employed?
(c) The additional output resulting from a one unit (a) 80 (b) 100
increase in both the variable and fixed inputs (c) 180 (d) 200
Q 203.(d) The ratio of the amount of the variable input that is
being used to the amount of the fixed input that is Q 195. What is the Marginal Product of the third hour
being used of Labour?
(a) 60 (b) 80
Q 190. If the inputs of all but one factor are held
(c) 100 (d) 240
constant, then will vary with the quantity used of the
Variable Factor. Q 196.
What is the Average Product of the first three
(a) Total Product (b) Average Product hours of Labour?
(c) Marginal Product (d) All of the above (a) 60 (b) 80
(c) 100 (d) 240
Q 191. If the inputs of all but one factor are held
constant, then Total Factor will — Let TP = Total Product, AP = Average Product and MP =
(a) Remain constant Marginal Product. Use the following table and
(b) Become zero answer the next 10 Questions.
(c) Vary with the quantity used of the Variable Factor. Quantity of TP (in AP (in MP (in
(d) Become infinity Variable units) units) units)
Factor
1 1,000 A 1000 B 1000
8.14 | Page
2 C 1600 D 800 600 If Total Product = 1,00,000 units when 20,000
3 E 2100 700 F 500 hours of Labour are used, then Average Product=
4 2,100 G 525 H0 (a) 1,00,000 (b) 20,000
5 I 2000 400 J -100 (c) 5 (d) 1,20,000
Find the value of "A" in the above Table. Read the Table below & answer the following 8
(a) 1,000 (b) 2,000 questions
(c) 3,000 (d) 0 Labour Marginal Total Average
Q 198. Input Product Produc Produ
Q 216. t ct
Find the value of "B" in the above Table. 0 0 0 0
(a) 1,000 (b) 2,000 1 25
(c) 3,000 (d) 0 2 90
3 120
Q 199.
197. Find the value of "C" in the above Table. 4 140
(a) 1,000 (b) 1,300 5 28
(c) 1,600 (d) 1,900 6 20
Q 200. Find the value of "D" in the above Table.

If Labour Input = 1, Total Output is—
(a) 1,000 (b) 800 (a) 25 (b) 30
(c) 600 (d) 400 (c) 50 (d) 75
Q 201. Find the value of "E" in the above Table. Q 209.

If Labour Input = 2, Marginal Product is—
(a) 1,100 (b) 1,600 (a) 25 (b) 90
(c) 1,700 (d) 2,10 (c) 65 (d) 115
Q 202. Find the value of "F" in the above Table. Q 210. If Labour Input = 4, output per worker is:
(a) 500 (b) 600 (a) 20 (b) 35
(c) 700 (d) 800 (c) 45 (d) 90
Q 203.
Find the value of "G" in the above Table. Q 211. If Labour Input = 6, the marginal product of
(a) 500 (b) 525 labour is:
(c) 550 (d) 575 (a) 120 (b) — 20
(c) 15 (d) 10
Q 204. Find the value of "H" in the above Table.
(a) Nil (b) 1,000 Q 212. Output per worker is maximized at a Labour
(c) 2,000 (d) Cannot be calculated Input of:{Omit this Question}
(a) 2 (b) 4
Q 205. Find the value of "I" in the above Table. (c) 6 (d) 8
(a) Nil (b) 1,000
(c) 2,000 (d) Cannot be calculated Q 213. When Labour Input = 5, Marginal Product is—
(a) 20 (b) 120
Q 206. Find the value of "3" in the above Table. (c) 0 (d) -120
(a) Nil (b) — 100
(c) + 100 (d) Cannot be calculated Q 214. At what level of Labour Input are MP and AP
equal?{Omit this Question }
Q 207.
(a) 1 (b) 2
8.15 | Page
(c) 3 (d) 4 (d) First increases, reaches a maximum, and then
decreases
Q 215. As quantity of the Variable Factor increases,
Q 223.
Total Product (TP) Curve — Average Product (AP) Curve —
(a) Always increases (a) Is parallel to X Axis
(b) Always decreases (b) Is parallel to Y Axis
(c) First increases, reaches a maximum, and then (c) First decreases, reaches a minimum, and then
decreases. increases
(d) First decreases, reaches a minimum, and then (d) First increases, reaches a maximum, and then
Q 198.
Qincreases.
216. decreases
Q 224.
If Total Product (TP) increases, Marginal Marginal Product (MP) —
Product (MP) will be — (a) Will have positive values only
(a) Positive (b) Negative (b) Will have negative values only
(c) Zero (d) Infinity (c) Can be positive or zero or even negative.
(d) Can be positive or zero, but not negative.
Q 217. If Total Product (TP) increases at an
increasing rate, Marginal Product (MP) will be — Q 225. Average Product (AP) —
(a) Increasing (b) Decreasing (a) Will have positive values only
(c) Zero (d) Infinity (b) Will have negative values only
(c) Can be positive or zero or even negative.
Q 218. If Total Product (TP) increases at a decreasing (d) Can be positive or zero, but not negative.
rate, Marginal Product (MP) will be —
Q 226.
(a) Increasing (b) Decreasing What is the relationship between AP and MP?
(c) Zero (d) Infinity (a) AP and MP both rise first and thereafter fall
(b) MP Curves always lies half—way between AR Curve
Q 219.
If Total Product (TP) is maximum, Marginal and Origin
Product (MP) will be — (c) AP and MP both can be zero or negative
(a) Positive (b) Negative (d) All of these
Q 203.(c) Zero (d) Infinity
Q 227. If Average Product (AP) Curve is depicted on a
Q 220. What is the maximum point of TP? graph with Quantity on X axis —
(a) When AP becomes zero (a) AP will not go below the X axis.
(b) When MP becomes zero (b) AP may go below the X axis.
(c) At the intersecting point of AP & MP (c) AP cannot be depicted on the graph at all.
(d) None of these (d) None of the above
Q 221. If TP decreases, MP will be — Q 228. Which of the following is correct?

(a) Positive (b) Negative (a) If Marginal Product is positive and falling, Total
(c) Zero (d) Infinity Product will rise at a decreasing rate.
(b) Total Product divided by Quantity of Variable Factor
Q 222. Marginal Product (MP) Curve — equals Average Product.
(a) Is parallel to X Axis (c) Marginal Product and Average Product can be
(b) Is parallel to Y Axis calculated from Total Product.
(c) First decreases, reaches a minimum, and then (d) All of the above.
increases
Q 229.
The point where MP is maximum is called —
8.16 | Page
(a) Point of Increase
Q 237.
(b) Point of Indifference When is Average Product at its maximum?
(c) Point of Inflexion (a) When AP intersects MP
(d) Point of Shut—down (b) When AP intersects TP
(c) At the Point of Inflexion
Q 230. When AP rises as a result quantity of variable (d) All of the above
input —
(a) MP is more than AR Q 238. Marginal Product (MP) Curve cuts Average
(b) MP is less than AP Product (AP) Curve —
Q 198.
(c) QMP
216.
= AP (a) From above
(d) There is no relationship between MP and AP (b) From below
(c) MP does not cut AP at all
Q 231. When Average Product (AP) rises as a result of (d) Nothing can be said
an increase in the quantity of variable input —
(a) MP < AP Q 239. Marginal Product (MP) rises steeply, and also
(b) MP = AP declines slightly earlier than Average Product (AP)
(c) MP > AP Curve. This statement is —
(d) There is no relationship between MP and AP (a) True (b) False
Q 232. When Average Product (AP) decreases as a
result of an increase in the quantity of variable input — Q 240. The Marginal, Average, and Total Product
(a) MP < AP Curves encountered by the Firm producing in the short
(b) MP = AP run exhibit all of the following relationships except —
(c) MP > AP (a) When Total Product is rising, Average and Marginal
(d) There is no relationship between MP and AP Product may be either rising or falling
(b) When Marginal Product is negative, Total Product
Q 233. If the Marginal Product of Labour is below the and Average Product are falling
Average Product of Labour, it must be true that (c) When Average Product is at a maximum, Marginal
(a) The Marginal Product of Labour is negative Product equals Average Product, and Total Product
Q 203.(b) The Marginal Product of Labour is zero is rising
(c) The Average Product of Labour is falling (d) When Marginal Product is at a maximum, Average
(d) The Average Product of Labour is negative Product equals Marginal Product, and Total Product
is falling
Q 234.
When Average Product (AP) is at its maximum
(a) MP < AP (b) MP = AP Part C- LAW OF VARIABLE PROPORTIONS
(c) MP > AP (d) MP = 0
Q 241. The Law of analyses the production function
Q 235.
When Marginal Product (MP) = Average with one factor as variable, keeping quantities of other
Product (AP), it means that AP is — factors fixed.
(a) At its maximum (b) At its minimum (a) Returns to Scale (b) Multiple Proportions
(c) Zero (d) Infinity (c) Variable Proportions (d) Fixed Proportions
Q 242. The Law of Variable Proportions analyses the

Q 236. Marginal Product (MP) Curve cuts Average with one factor as variable, keeping quantities of other
Product (AP) Curve — factors fixed.
(a) MP = AP (b) AP is maximum (a) Revenue Function
(c) MP is falling (d) All of the above (b) Production Function
8.17 | Page
(c) Cost Function
(d) Demand and Supply Function Which of the following is not an assumption in
the Law of Variable Proportions?
Q 243 The Law of Variable Proportions operates in — (a) There are no perfect substitutes for the Fixed Factor
(a) Medium—run (b) Short —run (b) Factors of Production can be used in any proportion
(c) Long—run (d) All of the above (c) Only physical quantities of inputs and outputs are
considered
Q 244.
In the , all factors of production cannot be (d) None of the above
increased or decreased simultaneously.
Q 198.
(a) QMedium—run
216. (b) Short —run Q 251. Which of the following is not an assumption in
(c) Long—run (d) All of the above the Law of Variable Proportions?
(a) There are no perfect substitutes for the Fixed Factor
Q 245.
The Law of Variable Proportions is also called — (b) Only one factor input is considered variable, while
(a) Law of Proportionality all other factors are fixed.
(b) Law of Diminishing Returns (c) State of Technology is improved as more output is
(c) Law of Diminishing Marginal Physical Productivity produced
(d) All of the above (d) Only physical quantities of inputs and outputs are
considered
Q 246.
The Law of Variable Proportions deals with —
Q 252.
(a) Output Quantities (b) Monetary Values The Law of Variable Proportions analyses the
(c) Both (a) and (b) (d) Neither (a) nor (b) economic profitability of the Firm in monetary terms
also. This statement is —
(a) True (b) False
Q 247. Which of the following is an assumption in the (c) Partially True (d) None of the above
Law of Variable Proportions?
(a) The state of technology is constant and unchanged Q 253. In the production of wheat, all of the following
(b) Only physical quantities of inputs and outputs are are variable factors that are used by the farmer except
considered —
(c) Only one factor input is considered variable, while (a) The seed and fertilizer used when the crop is
Q 203. all other factors are fixed planted
(d) All of the above (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
Q 248. Which of the following is an assumption in the cultivating not only wheat but also corn and barley
Law of Variable Proportions? (d) The number of hours that the farmer spends in
(a) The Fixed Factor of production is scarce cultivating the wheat fields
(b) There are no perfect substitutes for the Fixed Factor
(c) Factors of Production can be used in any proportion Q 254. If all factors are required to be used in fixed
(d) All of the above proportions, then the Law of Variable Proportions —
(a) Will apply
Q 249.
Assumption which are applicable under Law of (b) Will not apply at all
Variable Proportion are— (c) Both (a) and (b) are true to some extent
(a) State of technology is constant (d) Neither (a) nor (b) is true
(b) Quantities of some inputs is kept fixed
(c) Economic profitability in monetary terms is not Q 255. As per Law of Variable Proportions, as the
considered quantity of one input which is combined with other fixed
(d) All of these
8.18 | Page
inputs is increased, the of the Variable Input must (c) Diminishing Returns (d) Negative Returns
eventually decline.
Q 261.
(a) Total Productivity In the stage of Increasing Returns, Total
(b) Average Productivity Product (TP) —
(c) Marginal Productivity (a) Remains constant (b) Increases
(d) All the above (c) Decreases (d) Becomes negative
Q 256. The Law of Variable Proportions come into Q 262.

In the stage of Increasing Returns, Marginal
being when— Product (MP)-
Q 198.
(a) QThere
216. are only two variable factors. (a) Remains constant
(b) There is a fixed factor and a variable factor. (b) Increases
(c) All factors are variable. (c) Decreases
(d) Variable factors yield less. (d) First increases, reaches a maximum and then
decreases
Q 257. States that when Labour increases with
capital being the same, the Marginal Productivity of Q 263. What result we get in the first stage of Law of
Labour will increase at first but start decreasing later. Variable Proportions?
(a) Law of Equi—Marginal Returns (a) Total Product is increasing at an increasing rate
(b) Law of Diminishing Marginal Utility (b) Average Product increases only till Inflexion Point
(c) Law of Variable Proportions (c) (a) but not (b)
(d) Law of Constant Returns (d) Both (a) & (b)
Q 258. When a Factory is working at 70% capacity, Q 264.

Which of the following is true?{Omit this
increasing of variable inputs, leads to— Question}
(a) Increasing of output (a) MP does not decrease during the First Stage
(b) Decreasing of output according to the Law of (b) TP remains positive during the First Stage
Diminishing Returns (c) AP starts declining after the Point of Inflexion
(c) Increasing of output up to full capacity and later (d) All of these
decreasing of the Marginal Product according to
Q 203. the Law of Diminishing Returns Q 265. A Firm is operating at an output level, where
(d) Decreasing of output up to full capacity and later its Total Product is increasing at an increasing rate. This
increasing of the output implies that the Firm's
(a) Marginal Cost must be falling at an increasing rate
Q 259.
The order of stages in the Law of Variable (b) Marginal Product is increasing at a increasing rate
Proportions are — (c) Average Product is increasing
(a) Increasing Returns, Negative Marginal Returns, (d) Both (a) and (c)
Diminishing Returns
Q 266.
(b) Increasing Returns, Diminishing Returns, Why does the Law of Increasing Returns
Negative Marginal Returns operate?
(c) Negative Marginal Returns, Increasing Returns, (a) Full Use of Fixed Indivisible Factors
Diminishing Returns (b) Efficiency of Variable Factors
(d) Diminishing Returns, Negative Marginal Returns, (c) Need to reach the right combination
Increasing Returns (d) All of the above
Q 260. Which of the following is not a stage in Law of Q 267. Which of these is a reason for the operation of
Variable Proportions? Law of Increasing Returns?
(a) Increasing Returns (b) Constant Returns (a) Specialisation of functions
8.19 | Page
(b) Division of Labour (a) First increases, reaches a maximum and then
(c) Effective use of Fixed Factor of Production decreases
(d) All of the above (b) Decreases
(c) Increases
Q 268. The stage of Diminishing Returns applies from (d) Remains constant
to
Q 274.
(a) Origin to Point where AP is maximum In the stage of Diminishing Returns —
(b) Point where AP is maximum to Point when TP is (a) MP increases but AP decreases
maximum (b) MP decreases but AP increases
Q 198.
Q 216. when TP declines and and MP becomes
(c) Point (c) MP and AP show increasing trend
negative. (d) MP and AP show decreasing trend
(d) All the above
Q 275. In the stage of Diminishing Returns —
Q 269. The Law of Diminishing Returns —2 (a) MP and AP remain positive
(a) States that beyond some level of a variable input, (b) MP and AP become negative
the Average Product of that variable input begins to (c) MP is positive but AP becomes negative
increase steadily. (d) MP becomes negative but AP remains positive
(b) Assumes that there is technological improvement
over time. Q 276. Which of the following statements show the
(c) States that beyond some level of a variable input, Stage of Diminishing Returns under the Law of Variable
the Marginal Product of that Variable input begins Proportions?
to decrease steadily. (a) Marginal Product is negative
(d) Informs a Firm whether or not to use a factor input. (b) Marginal Product is falling and it is negative
(c) Marginal Product is falling but it is positive
Q 270.
In case of law of variable proportions, (d) None of the above
diminishing returns occur.
(a) When units of a variable input are added to a fixed Q 277. Which of the following is a reason for the
input and total product falls operation of the Law of Diminishing Returns?
(b) When units of a variable input are added to a fixed (a) Inefficiency of Fixed Indivisible Factors
Q 203. input and marginal product falls (b) Inadequacy of Fixed Indivisible Factors
(c) When the size of the plant is increased in the long (c) Indifference of Fixed Indivisible Factors
run. (d) Immobility of Fixed Indivisible Factors
(d) When the quantity of the fixed input is increased
and returns to the variable input falls. Q 278. The "Law of Diminishing Returns" applies to—
(a) The short run, but not the long run
Q 271.
In the stage of Diminishing Returns, Total (b) The long run, but not the short run
Product (TP) — (c) Both the short run and the long run
(a) Remains constant (b) Increases (d) Neither the short run nor the long run
(c) Decreases (d) Becomes negative
Q 279. Law of Diminishing Returns is not relevant
Q 272.
In the stage of Diminishing Returns, Average when—
Product (AP) — (a) All labourers are equally efficient
(a) Remains constant (b) Increases (b) The Time Period is short
(c) Decreases (d) Becomes negative (c) All factory inputs are increased by the same
proportion
Q 273. In the stage of Diminishing Returns, Marginal (d) Technology remains constant
Product (MP) —
Q 280.
8.20 | Page
In which stage of production are the Average (a) Increases
Product and Marginal Product decreasing with the (b) Remains constant
Marginal Product above zero (positive)? (c) Decreases but does not become negative
(a) In the stage of Constant Returns (d) Becomes negative
(b) In the stage of Decreasing Returns
(c) In the stage of Increasing Returns Q 288. The Law of Negative Marginal Returns
(d) Both (a) and (c) operates because the Variable Factor is in relation to
the Fixed Factor of Production.
Q 281. During the stage of Decreasing Returns — (a) Optimal (b) Adequate
Q 198.
(a) QAP
216.
is negative (b) MP is decreasing (c) Excessive (d) Irrelevant
(c) MP is negative (d) Both (a) and (b)
Q 289. In which of the following situations, the Law of
Q 282.
Diminishing Marginal Returns implies — Variable Proportions will not apply?
(a) Decreasing Average Variable Costs (a) Improvement in technology
(b) Decreasing Marginal Costs (b) When all factors are proportionately varied
(c) Increasing Marginal Costs (c) Where the factors must be used in fixed proportions
(d) Decreasing Average Fixed Costs to yield the product
Q 283.
The Third Stage of Law of Variable Proportion
Q 290.
is known as— In which of the following situations, the Law of
(a) Law of Negative Returns Variable Proportions will not apply?
(b) Law of Decreasing Returns (a) Scarcity of Fixed Factor of Production
(c) Law of Diminishing Returns (b) Availability of Perfect Substitutes for the Fixed
(d) All of these Factor
(c) Change in proportions in which Factors are used
Q 284. The stage of Negative Marginal Returns (d) Same level of technology
applies from
_____________________to_________________ Q 291. A Rational Producer will operate in —
(a) Origin to Point where AP is maximum (a) Stage I
Q 203.(b) Point where AP is maximum to Point when TP is (b) Stage II
maximum (c) Stage III
(c) Point when TP declines and and MP becomes (d) All of the above
negative.
(d) All the above Q 292. A Rational Producer will not operate in —
(a) Stages I and II (b) Stages II and III
Q 285.
In the stage of Negative Marginal Returns, (c) Stages III and I (d) All of the above
Total Product (TP) —
Q 293.
(a) Remains constant (b) Increases Stages I and III are called —
(c) Decreases (d) Remains at zero. (a) Economic Absurdity (b) Economic Stability
(c) Economic Equilibrium (d) All of the above
Q 286. In the stage of Negative Marginal Returns,
Average Product (AP) —
(a) Remains constant (b) Decreases
(c) Becomes negative (d) Increases Q 294. Stages I and III are called —
(a) Economic Achievement
Q 287. In the stage of Negative Marginal Returns, (b) Economic Nonsense
Marginal Product (MP) — (c) Economic Optimality
8.21 | Page
(d) Economic Rationality (c) Both (a) and (b) (d) Neither (a) nor (b)
Q 295. Q 302.
A Rational Producer will not operate in Stage I Under the Law of Returns to Scale, is constant.
due to the reason that — (a) Output Quantities
(a) There is more scope for making the best use of the (b) Quantities of Variable Factors of Production
Fixed Factor (c) Quantities of Variable and Fixed Factors of
(b) Total Output still shows an increasing trend Production
(c) Optimal Combination of Fixed and Variable Factors (d) Proportion between different Factors of Production
is not yet achieved
Q 198.
Q 216.
(d) All of the above Q 303. Law of Returns to Scale indicates the
responsiveness of total product when all inputs
Q 296.
A Rational Producer will not operate in Stage III (a) Remain same
due to the reason that— (b) Are changed drastically
(a) The Fixed Factor has become over—used and (c) Are changed marginally
inefficient (d) Are changed proportionately
(b) There is a reduction in Total Output
(c) The MP of the Variable Factor is negative Q 304. Change in Scale means that all Factors of
(d) All of the above Production are increased or decreased —
(a) In different proportions
Q 297. A Rational Producer intends to work in— (b) In the same proportion
(a) Stage of Constant Returns (c) To infinity
(b) Stage of Increasing Returns (d) None of the above
(c) Stage of Diminishing Returns
(d) Stage of Negative Returns Q 305. When there is an increase in all factors of
production together in the same ratio, —(a) increases at
Q 298.
In which stage of production would a rational first, (b) becomes constant thereafter, and (c) starts
entrepreneur like to operate? decreasing beyond a certain level.
(a) Stage 1 where MP is maximum (a) Total Product
(b) Stage 2 where both MP and AP are decreasing, but (b) Average Product
Q 203. both are positive (c) Marginal Product
(c) Stage 3 where MP is negative (d) All of the above
(d) Either Stage 2 or 3
Q 306. In the initial stages, when there is an increase
Part D -LAW OF RETURNS TO SCALE in scale, there is increase in output.
(a) Zero
Q 299. The Law of Returns to Scale operates in — (b) Proportionate
(a) Medium—run (b) Short —run (c) Less than proportionate
(c) Long—run (d) All of the above (d) More than proportionate
Q 300. Q 307.
In the, the quantities of all factors of In the initial stages, there will be increasing
production can be increased or decreased returns to scale, due to —
simultaneously. (a) Indivisibility of Factors
(a) Medium—run (b) Short —run (b) Specialization in Factors
(c) Long—run (d) All of the above (c) Both (a) and (b)
Q 301. The Law of Returns to Scale deals with —
(a) Output Quantities (b) Monetary Values Q 308.
8.22 | Page
In the initial stages, there will be increasing 5 75
returns to scale, due to —
(a) Economies in operations The above data is an example of:
(b) Diseconomies in operations (a) Constant Returns to Scale.
(c) Both (a) and (b) (b) Decreasing Returns to Scale.
(d) Neither (a) nor (b) (c) Increasing Returns to Scale.
(d) Globalization.
Q 309.
In the very beginning of production, generally
the Increasing Returns to scale is found because— Q 315.
Q 198. If one unit of labour and one unit of capital
(a) QInput
216. is increased give 200 units of output, two units of labour and two
(b) Plant and Machinery will be new Q 314.
units of capital give 400 units of output and 5 units of
(c) Production Problems are less labour and five units of capital give 1000 units of output
(d) Economies of Scale then this is a case of:
(a) Constant Returns to Scale.
Q 310. The above data is an example of:
(b) Increasing Returns to Scale.
(a) Decreasing returns to scale. (c) Decreasing Returns to Scale.
(b) Constant returns to scale. (d) All of these.
(c) Increasing returns to scale.
(d) Positive fixed costs. Q 316.
After the stages of constant returns to scale,
the Firm will start experiencing —
Q 311. If as a result of 50% increase in all inputs, the
(a) Still Increasing Returns to Scale
output rises by 75%, this is a case of: (b) Constant Returns to Scale
(a) Increasing Returns to a Factor (c) Diminishing Returns to Scale
(b) Increasing Returns to Scale (d) None of the above
(c) Constant Returns to a Factor
(d) Constant Returns to Scale Q 317. If Decreasing Returns to Scale are present,
then if all inputs are increased by 10% then
Q 312. In which of the following cases does output
(a) Output will also decrease by 10%
double with the doubling of all inputs? (b) Output will increase by 10%
Q 203.(a) Constant Returns to Scale (c) Output will increase by less than 10%
(b) Decreasing Returns to Scale (d) Output will increase by more than 10%
(c) Increasing Returns to Scale
(d) Increasing as well as decreasing returns to Scale Q 318. Which a view to increase his production Hari
Haran a manufacturer of shoes, increases all the factors
Q 313. If a change in scale inputs leads to a
of production in his unit by 100%. But at the end of year
proportional change in the output, it is a case of— he finds that instead of an increase of 100%, his
(a) Increasing Returns to Scale production has increased by only 80%. Which law of
(b) Constant Returns to Scale returns to scale is operating in this case
(c) Diminishing Returns to Scale (a) Increasing returns to scale
(d) Variable Returns to Scale (b) Decreasing returns to scale
You are given the following data: (c) Constant returns to scale
Factor Total Output (d) None of the above
0 0
Q 319.
1 15 In electricity generation plants, when the plant
2 30 grows too large risks of plant failure with regard to
3 45 output increase disproportionately. Hence we are
4 60 talking about which concept of returns to scale?
8.23 | Page
(a) Constant Returns to Scale External Diseconomies may lead to
(b) Increasing Returns to Scale (a) Decrease in cost of technology
(c) Decreasing Returns to Scale (b) External Assistance
(d) Balanced Returns to Scale (c) Increase in the price of factors of production
Q 320. Linear Homogeneous Production function is
based on Q 327. _____ economies result from the use of
(a) Increasing Returns to Scale specialized equipment and modern techniques of
(b) Decreasing Returns to Scale production.
Q 198.
(c) QConstant
216. Returns to Scale (a) Marketing (b) Selling
(d) None. (c) Managerial (d) Production
Q 321. Beyond a certain extent, the Firm will start Q 328.

Which of the following is an important
experiencing decreasing returns to scale, due to ingredient of Selling Economies?
(a) Economies in operations (a) Advertising Economies
(b) Diseconomies in operations (b) Inventory Economies
(c) Both (a) and (b) (c) Transportation Economies
(d) Neither (a) nor (b) (a) as the Firm the Size of its (d) Storage Economies
Plant
Q 329. Economies are associated with the distribution
Q 322. Economies and Diseconomies in operations can of the product of a Firm.
be (a) Manufacturing (b) Inventory
(a) Internal . (c) Production (d) Selling
(b) External
(c) Both (a) and (b) Q 330. Difficulties of management, co—ordination
(d) Neither (a) nor (b) and control due to bigger Plant Size is an example of —
(a) Internal Economies of Scale
Q 323. Internal Economies and Diseconomies are (b) Internal Diseconomies of Scale
dependent on — (c) External Economies of Scale
Q 203.(a) Output level of individual Firms (d) External Diseconomies of Scale
(b) Output level of the entire industry
(c) Both (a) and (b) Q 331. Availability of cheaper Raw Materials and
(d) Neither (a) nor (b) Capital Equipment in the long—run constitutes —
Q 324. External Economies and Diseconomies are (b) Internal Diseconomies of Scale
dependent on — (c) External Economies of Scale
(a) Output level of individual Firms (d) External Diseconomies of Scale
(b) Output level of the entire industry
(c) Both (a) and (b) Q 332. Increase in Prices of Factors of Production
(d) Neither (a) nor (b) due to expansion in industry creates —
Q 325. External economies can be achieved through— (b) Internal Diseconomies of Scale
(a) Foreign trade only (c) External Economies of Scale
(b) Extension of transport & transport credit* facility (d) External Diseconomies of Scale
(c) Superior managerial skills
(d) External assistance Q 333. Discovery of new technical knowledge and
improvements in technology leads to —
Q 326.
8.24 | Page
(a) Internal Economies of Scale (d) Neither (a) nor (b)
(b) Internal Diseconomies of Scale
Q 340.
(c) External Economies of Scale Due to External Economies of Scale, the Long
(d) External Diseconomies of Scale Run Average Cost (LAC) Curve —
(a) Shifts inward
Q 334. Management Efficiency and Productivity due (b) Remains constant
to creation of different specialised functional (c) Shifts outward
departments is an example of — (d) Is not affected at all
Q 198.
(b) QInternal
216. Diseconomies of Scale Q 341. Due to External Diseconomies of Scale, the
(c) External Economies of Scale Long Run Average Cost (LAC) Curve —
(d) External Diseconomies of Scale (a) Shifts inward (b) Remains constant
(c) Shifts outward (d) Is not affected at all
Q 335. Growth of Ancillary Industries supplying
related goods and services is an example of — Q 342. If the LAC curve falls as output expands, this is
(a) Internal Economies of Scale due to —
(b) Internal Diseconomies of Scale (a) Law of Diminishing Returns
(c) External Economies of Scale (b) Economies of Scale
(d) External Diseconomies of Scale (c) Law of Variable Proportions
(a) External Diseconomies of Scale (d) Diseconomies of Scale
Q 336. Q 343.
A large Firm can offer better security to Identify the correct statement
Bankers and obtain credit easily. This creates (a) Average Product is at its maximum when Marginal
________________ for such Firm. Product is equal to Average Product
(a) Internal Economies of Scale (b) Law of Increasing Returns to Scale relates to the
(b) Internal Diseconomies of Scale effect of changes in factor proportions
(c) External Economies of Scale (c) Economies of Scale arise only because of
(d) External Diseconomies of Scale invisibilities of factor proportions
(d) Internal Economies of scale can accrue only to the
Q 203. Q 337. When a large Firm makes bulk purchase and exporting sector
obtains its Raw Materials at lower prices than a small
size Firm, the large Firm is said to have achieved —
(b) Internal Diseconomies of Scale
(c) External Economies of Scale
(d) External Diseconomies of Scale
Q 338. Internal Economies of Scale can arise in

__________ aspects.
(a) Technological (b) Managerial
(c) Financial (d) All of the above
Q. Ans Q Ans Q Ans Q Ans
Q 339. Internal and External Economies and 1 A 51 B 101 B 151 A
2 B 52 B 102 C 152 B
Diseconomies of Scale has its impact on —
3 D 53 A 103 B 153 B
(a) Long Run Average Cost (LAC) Curve 4 A 54 B 104 B 154 C
(b) Short Run Average Cost (SAC) Curve 5 A 55 A 105 D 155 C
(c) Both (a) and (b) 6 C 56 B 106 D 156 B
8.25 | Page
7 D 57 D 107 A 157 D 207 C 257 C 307 C
8 B 58 B 108 C 158 D 208 A 258 C 308 A
9 C 59 A 109 C 159 C 209 C 259 B 309 D
10 C 60 B 110 A 160 C 210 B 260 B 310 C
11 B 61 A 111 B 161 A 211 B 261 B 311 B
12 A 62 A 112 A 162 C 212 A 262 D 312 A
13 C 63 D 113 C 163 B 213 C 263 C 313 B
14 D 64 C 114 A 164 A 214 A 264 B 314 A
15 A 65 B 115 C 165 B 215 C 265 D 315 A
16 A 66 C 116 D 166 A 216 A 266 D 316 C
17
Q 198. B 67 A 117 B 167 B 217 A 267 D 317 C
18Q 216.
D 68 C 118 C 168 A 218 B 268 B 318 B
19 D 69 A 119 D 169 A 219 C 269 C 319 C
20 A 70 C 120 D 170 B 220 B 270 B 320 C
21 A 71 A 121 C 171 D 221 B 271 B 321 B
22 B 72 B 122 B 172 D 222 D 272 C 322 C
23 C 73 A 123 C 173 B 223 C 273 B 323 A
24 D 74 D 124 D 174 A 224 C 274 D 324 B
25 A 75 A 125 A 175 B 225 D 275 A 325 B
26 B 76 C 126 D 176 B 226 A 276 C 326 C
27 B 77 C 127 A 177 C 227 A 277 B 327 D
28 A 78 C 128 C 178 B 228 D 278 A 328 A
29 C 79 C 129 A 179 A 229 C 279 C 329 D
30 D 80 D 130 B 180 A 230 A 280 B 330 B
31 B 81 C 131 D 181 B 231 C 281 B 331 C
32 C 82 C 132 B 182 B 232 A 282 C 332 D
33 C 83 A 133 D 183 A 233 C 283 A 333 C
34 D 84 A 134 D 184 B 234 B 284 C 334 A
35 D 85 C 135 C 185 C 235 A 285 C 335 C
36 C 86 D 136 A 186 C 236 D 286 B 336 A
37 A 87 A 137 D 187 C 237 A 287 D 337 A
38 B 88 B 138 C 188 A 238 A 288 C 338 D
39 C 89 C 139 B 189 B 239 A 289 D 339 A
40 D 90 C 140 A 190 A 240 D 290 B 340 A
41 A 91 C 141 A 191 B 241 C 291 B 341 C
42 D 92 D 142 C 192 D 242 B 292 C 342 B
Q 203. 43 B 93 C 143 A 193 C 243 B 293 A 343 A
44 D 94 A 144 B 194 C 244 B 294 B
45 D 95 B 145 A 195 A 245 D 295 D
46 A 96 D 146 A 196 B 246 A 296 D
47 A 97 C 147 B 197 A 247 D 297 C
48 D 98 D 148 A 198 A 248 D 298 B
49 A 99 C 149 D 199 C 249 D 299 C
50 B 100 D 150 B 200 C 250 D 300 C
Q. Ans Q Ans Q Ans

201 D 251 C 301 A
202 A 252 B 302 D
203 B 253 B 303 D
204 A 254 B 304 B
205 C 255 C 305 C
206 B 256 B 306 D
8.26 | Page
Chapter – 3B – Cost & Revenue (b) Independent Variable
concept (c) Either (a) or (b)
COST ANALYSIS AND COST FUNCTION
Q 9.
In a Cost Function, the Scale of Operations is
Q 1.
Cost Analysis is the study of behaviour of in relation a/an-
to one or more production criteria. (a) Dependent Variable (b) Independent Variable
(a) Prices and Revenue (b) Profits (c) Either (a) or (b) (d) Neither (a) nor (b)
(c) Costs (d) Output Quantity
Q 10. In a Cost Function, the Price of Factors of
Q 2. Cost Analysis is the study of behaviour of Cost, in Production is a/an-
relation to — (a) Dependent Variable (b) Independent Variable
(a) Selling Prices (c) Either (a) or (b) (d) Neither (a) nor (b)
(b) Profits
Q 11.
(c) Total Revenue Identify the Dependent Variable in a Cost
(d) One or more Production Criteria Function from the following.
(a) Quantity of Output
Q 3. For Cost Analysis purposes, the Production Criteria (b) Scale of Operations
may be — (c) Total Cost
(a) Quantity of output (d) Price of Factors of Production
(b) Scale of operations
(c) Prices of factors of production Q 12. Identify the Dependent Variable in a Cost
(d) All of the above Function from the following.
(a) Efficiency
Q 4. Cost Analysis is concerned with of production. (b) Level of Capacity utilisation
(a) Financial aspects (b) Physical aspects (c) Technology
(c) Either (a) or (b) (d) Both (a) and (b) (d) Cost per unit
Q 5. Q 13.
Cost Function refers to the mathematical Identify the Independent Variable in a Cost
relationship between cost of a product and the various Function from the following.
determinants of Cost. This statement is (a) Time Period under study
(a) True (b) False (b) Cost per unit
(c) Partially True (d) None of the above (c) Total Cost
Q 6. A Cost Function deals with —
(a) Total Cost (b) Cost per unit Q 14. Cost Functions are Derived Functions. They are
(c) Either (a) or (b) (d) Neither (a) nor (b) derived from —
(a) Demand Function
Q 7. In a Cost Function, the Total Cost or Cost per unit is (b) Supply Function
a/an — (c) Isoquant Function
(a) Dependent Variable (d) Production Function
(b) Independent Variable
Q 15.
(c) Either (a) or (b) A Cost Function determines the behaviour of
(d) Neither (a) nor (b) Costs with change in —
(a) Output (b) Input
Q 8. In a Cost Function, the Output Quantity is a/an- (c) Technology (d) Wages
(a) Dependent Variable
8.27 | Page
Q 16. The Cost Function indicates the functional (c) In the Long Run, all the inputs are fixed
relationship between Total Cost and — (d) In the Long Run there are no restrictions on the
(a) Total Input (b) Fixed Cost resource allocation in the production process.
(c) Total Output (d) Variable Cost
Q 23. A Product can be produced using two input
Q 17.
Which of the following is not a determinant of the combinations A and B. Combination A takes 2 units of
Firm's Cost Function? Labour and 8 units of Capital. Combination B takes 3 units
(a) Production Function of Labour and 5 units of Capital, what is the Marginal
(b) Price of Labour Rate of Technical Substitution of Labour for Capital?
(c) Rent paid for use of Building (a) 0 (b) 2
(d) Price of the Firm's Output (c) 3 (d) 5
Q 18. Functional Relationship between Output and the EXPLICIT AND IMPLICIT COSTS
Long Run Cost of Production is known as —
(a) Cost Function Q 24. Costs which involve payment made by the
(b) Long Run Cost Function Entrepreneur to providers of other factors of production
(c) Short Run Cost Function are called —
(d) Output Function (a) Explicit Cost (b) Implicit Cost
(c) Variable Cost (d) Fixed Cost
Q 19.
The Functional Relationship between Output and
Q 25.
the Short Run Cost of Production is known as — The Cost that a Firm incurs in hiring or purchasing
(a) Cost Function any Factor of Production is referred to as —
(b) Long Run Cost Function (a) Explicit Cost (b) Implicit Cost
(c) Short Run Cost Function (c) Variable Cost (d) Fixed Cost
(d) Output Function
Q 26. ___ can be defined as the Cost that involve
Q 20. Which of the following statements regarding the actual payment to other parties.
Long Run Cost Function is not true? (a) Implicit Costs (b) Explicit Costs
(a) The Firm adjusts Factors of Production to meet the (c) Hidden Costs (d) Opportunity Costs
market demand
Q 27.
(b) Firms identify a combination that gives maximum Which of the following is an example of an
output at the lowest Cost 'Explicit Cost"?
(c) Inputs are chosen for producing a desired level of (a) Wages a Proprietor could have made by working as
output an employee of a large Firm
(d) All the inputs in the long—run are fixed (b) Income that could have been earned in alternative
uses by the resources owned by the Firm
Q 21. Expansion of Scale of operation forms a part of (c) Payment of Wages by the Firm
Cost Function. (d) Normal Profit earned by a Firm
(a) Long run (b) Short run
Q 28.
(c) Fixed (d) Both (b) and (c) Explicit Costs are also known as —
(a) Out—of—Pocket Costs
Q 22. Which of the following statements regarding Short (b) Outlay Costs
and Long Run Cost Functions is not true? (c) Accounting Costs
(a) A Variable Input varies according to the quantity of (d) All of the above
output to be produced
(b) In the Short Run, one or more of the inputs of the
production process is fixed
8.28 | Page
Q 29. Which of the following does not relate to Explicit Q 36. Implicit Costs are also known as —
Costs? (a) Notional Costs (b) Opportunity Costs
(a) Out—of—Pocket Costs (c) Imputed Costs (d) All of the above
(b) Outlay Costs
Q 37.
(c) Opportunity Costs _______involve subjective estimation.
(d) Accounting Costs (a) Implicit Costs (b) Outlay Costs
(c) Out—of—Pocket Cost (d) Accounting Costs
Q 30. Which of the following Costs is included and
recorded in the books of accounts? Q 38. An entrepreneur who manages his Firm has to
(a) Imputed Costs (b) Opportunity Costs forego his salary, which he could have earned if he had
(c) Notional Costs (d) Explicit Costs worked elsewhere. The foregone Cost is known as —
(a) Implicit Costs (b) Explicit Costs
Q 31.
Explicit Costs are used for purposes. (c) Hidden Costs (d) Actual Costs
(a) Accounting and Reporting
Q 39.
(b) Cost Control Which of the following Costs does not include the
(c) Decision Making contractual cash payments which the Firm makes to
(d) All of the above other Factor Owners for purchasing or hiring various
factors?
Q 32. Costs which do not involve any cash payment to (a) Private Costs (b) Variable Costs
outsiders are called — (c) Accounting Costs (d) Implicit Costs
(a) Explicit Cost (b) Implicit Cost
Q 40.
(c) Variable Cost (d) Fixed Cost Implicit Costs are used for purposes.
(a) Accounting and Reporting
Q 33.
are the value of foregone opportunities that (b) Cost Control
do not involve any physical cash payment. (c) Decision Making
(a) Implicit Costs (b) Explicit Costs (d) All of the above
(c) Hidden Costs (d) Actual Costs
Q 41. If own people (e.g. family members) are
Q 34. An Implicit Cost can be defined as the— employed in the Firm, without paying them any reward
(a) Payment to the non—owners of the Firm for the for their work, Labour Cost is an —
resources they supply (a) Implicit Cost (b) Explicit Cost
(b) Money payment which the self—employed resources (c) Hidden Cost (d) Undisclosed Cost
could have earned in their best alternative
employment Q 42. If Capital is borrowed and used in the business,
(c) Costs which the Firm incurs but does not disclose Interest on Capital is —
(d) Costs which do not change over a period of time (a) Implicit Cost (b) Explicit Cost
(c) Hidden Cost (d) Undisclosed Cost
Q 35.
Which of the following is an example of an "Implicit
Cost"? Q 43. If Entrepreneur employs his own funds as Capital,
(a) Interest that could have been earned on retained then Interest is —
earnings used by the Firm to finance expansion (a) Implicit Cost (b) Explicit Cost
(b) Payment of Rent by the Firm for the building in which (c) Hidden Cost (d) Undisclosed Cost
it is housed
(c) Interest Payment made by the Firm for funds Q 44. When Entrepreneur himself manages the
borrowed from a Bank business, the reward for Entrepreneurial Ability (i.e.
(d) Payment of Wages by the Firm Profit) is an —
(a) Implicit Cost (b) Explicit Cost
8.29 | Page
(c) Hidden Cost (d) Undisclosed Cost (b) Wages or Salary of the Entrepreneur
(c) Interest on the Capital invested
Q 45. . Direct costs are (d) All of the above
(a) Traceable costs (b) Indirect costs
Q 53.
(c) Implicit costs (d) Explicit costs __________ includes all payments paid to
Factors of Production and Opportunity Cost.
Q 46. Suppose the total cost of production of a (a) Implicit Costs
commodity X is 1,25,000 out of which implicit cost 35,000 (b) Explicit Costs
and normal profit is 25,000. What would be the explicit (c) Economic Costs
cost of commodity? (d) Accounting Costs
(a) 90,000 (b) 65,000
Q 54.
(c) 1,00,000 (d) 60,000 Reward for Entrepreneurial Ability (i.e. Normal
Profit in the business) is included in —
ACCOUNTING COSTS AND ECONOMIC COSTS (a) Economic Cost
(b) Accounting Cost
Q 47. Accounting Cost equals — (c) Explicit Cost
(a) Explicit Cost (b) Implicit Cost (d) Undisclosed Cost
Q 55. Which of the following is true regarding
Q 48. Cost incurred in purchasing the Factor of Economic Cost and Accounting Cost?
Production is known as — (a) Economic Cost = Accounting Cost
(a) Accounting Cost (b) Economic Cost (b) Economic Cost > Accounting Cost
(c) Mar ginal Cost (d) Implicit (c) Economic Cost < Accounting Cost
Cost (d) None of the above
(e) Neither (a) nor (b)
Q 56. The difference between Economic Cost and
Q 49. Economic Cost includes— Accounting Cost is equal to —
(a) Accounting Cost + Non—Accounting Cost (a) Explicit Cost
(b) Fixed Cost + Variable Cost (b) Implicit Cost
(c) Explicit Cost + Implicit Cost (c) Both (a) and (b)
(d) Short Run Cost + Long Run Cost (d) Neither (a) nor (b)
Q 50. Economic Cost includes— Q 57. Which of the following is true regarding Economic
(a) Accounting Cost + Explicit Cost Cost and Accounting Cost?
(b) Accounting Cost + Implicit Cost (a) Economic Cost less Accounting Cost = Explicit Cost
(c) Fixed Cost + Variable Cost (b) Economic Cost less Accounting Cost = Implicit Cost
(d) Accounting Cost + Non—Accounting Cost (c) Accounting Cost less Economic Cost = Explicit Cost
(d) Accounting Cost less Economic Cost = Implicit Cost
Q 51. Economic Cost includes —
Q 58.
(a) Wages paid to Workers / Labourers When Total Revenue is less than Accounting
(b) Rent for Land and Building used in business Costs, it means that the Firm —
(c) Normal Rate of Profit in the business (a) Has No—Profit—No—Loss
(d) All of the above (b) Earns Normal Profits
(c) Earns more than Normal Profits (i.e. Super—Normal
Q 52. Which of the following are considered as Profits)
Economic Cost? (d) Incurs Losses
(a) Normal Return on money Capital invested
8.30 | Page
Q 59. When Total Revenue is less than Accounting Costs, Q 65. Which of the following statements is false?
it means that the Firm incurs Losses — (a) Economic Costs include the Opportunity Costs of the
(a) In the accounting sense resources owned by the Firm
(b) In the economic sense (b) Accounting Costs include only Explicit Costs
(c) Both (a) and (b) (c) Economic Profit will always be less than Accounting
(d) Neither (a) nor (b) Profit if resources owned and used by the Firm have
any Opportunity Costs
Q 60. When Total Revenue equals Economic Costs, it (d) Accounting Profit is equal to Total Revenue less
means that the Firm — Implicit Costs
(a) Has No—Profit—No—Loss
(b) Earns Normal Profits OPPORTUNITY COSTS
(c) Earns more than Normal Profits (i.e. Super—Normal
Q 66.
Profits) Opportunity Cost refers to —
(d) Incurs Losses in the accounting sense (a) Cost of opportunity foregone
(b) Comparison between the policy that was chosen and
Q 61. When Total Revenue exceeds Economic Costs it the policy that was rejected
means that the Firm — (c) Costs relating to sacrificed alternatives
(a) Has No—Profit—No—Loss (d) All of the above
(b) Earns Normal Profits
Q 67.
(c) Earns more than Normal Profits (i.e. Super—Normal The Cost of one thing in terms of the alternative
Profits) given up is known as —
(d) Incurs Losses (a) Production Cost (b) Physical Cost
(c) Real Cost (d) Opportunity Cost
Q 62.
When Total Revenue is less than Economic Costs, it
means that the Firm — Q 68. Opportunity Costs are a result of —
(a) Incurs Losses in the economic sense (a) Technology obsolescence
(b) Earns Normal Profits (b) Overproduction
(c) Earns more than Normal Profits (i.e. Super—Normal (c) Scarcity
Profits) (d) Abundance of resources
(d) Incurs Losses in the accounting sense
Q 69. Opportunity Costs arise only when resources are
Q 63. Economic Profits are — —
(a) Difference between Total Revenue, and Total Implicit (a) Scarce
and Explicit Costs (b) Restricted in availability
(b) Difference between Total Revenue and Total (c) Available only to a limited extent
Economic Costs (d) All of the above
(c) Zero in a perfectly competitive industry in the long—
run Q 70. If a resource can be put only to a particular use,
(d) All the above then, Opportunity Costs —
(a) Are applicable and quantifiable
Q 64.
If there are Implicit Costs of Production — (b) Are applicable but not quantifiable
(a) Economic Profit will be equal to Accounting Profit. (c) Are not applicable at all
(b) Economic Profit will be less than Accounting Profit. (d) None of the above
(c) Economic Profits will be zero.
(d) Economic Profit will be more than Accounting Profit.
8.31 | Page
Q 71. Outlay Costs—
(a) Involve cash payment Q 79. Which of the following statement best describes
(b) Do not involve any cash payment Sunk Costs?
(c) Both (a) and (b) (a) Costs which are incurred in the past
(d) Neither (a) nor (b) (b) Cost incurred by the Firm as result of bankruptcy of
one of its Creditors
Q 72. Opportunity Cost is — (c) Cost incurred by the Firm as a result of the fire that
(a) Recorded in books of accounts broke into one of the Firm's Godown.
(b) Not recorded in books of accounts (d) Setting off the losses that the Firm incurred in the
(c) Sometimes (a) sometimes (b) previous years
Q 80. Which of the following is correct?
Q 73.
Opportunity Costs are used for purposes (a) Firms that earn Accounting Profits are economically
(a) Accounting and Reporting profitable.
(b) Cost Control (b) Opportunity Cost plus Accounting Cost equals
(c) Decision Making Economic Cost.
(d) All of the above (c) When a Firm's Demand Curve slopes down, Marginal
Revenue will rise as output rises.
Q 74. Which of the following is not true with reference to (d) Firms increase profits by selling more output than
Opportunity Cost? their rivals.
(a) It is the value of the next best use for an economic
good Q 81. Suppose you find 100. If you choose to use 100 to
(b) It is the value of a sacrificed alternative go to a football match, your opportunity cost of going to
(c) It is useful in decision—making the game is
(d) It does not take into consideration, the cost of time (a) nothing, because you found the money.
(b) Only The value of your time spent at the game + The
Q 75. Cost is the Total Additional Cost that a Firm has to Expected Normal Interest / Return on 100.
incur, as a result of implementing a major managerial (c) 100 (because you could have used the 100
decision. to buy other things) plus the value of your time spent at
(a) Sunk (b) Incremental the game, plus the cost of the dinner you purchased
(c) Opportunity (d) Marginal at the game.
(d) 100 (because you could have used the 100
Q 76. Incremental Cost equals — to buy other things).
(a) Additional Variable Costs only
(b) Additional Fixed Costs only Q 82. _____are readily identified and are traceable to
(c) Both (a) and (b) a particular product, service, operation or plant.
(d) Neither (a) nor (b) (a) Direct Costs
(b) Indirect Costs
Q 77. Which of the following statement is true? (c) Both (a) and (b)
(a) Marginal Cost is a sub—set of Incremental Cost (d) Neither (a) nor (b)
(b) Incremental Cost is sub—set of Marginal Cost
(c) Marginal Cost is a sub—set of Sunk Cost Q 83. _________are not readily identified nor visibly
(d) Sunk Cost is a sub—set of Incremental Cost traceable to specific goods, services, operations, etc.
(a) Direct Costs (b) Indirect Costs
Q 78. Cost is not relevant for Decision—Making (c) Both (a) and (b) (d) Neither (a) nor (b)
(a) Economic (b) Opportunity
(c) Sunk (d) Incremental Cost
8.32 | Page
Q 84. Accounting Process recognizes —
Q 91.
(a) Direct Costs Fixed Costs are —
(b) Indirect Costs (a) Period—related
(c) Both (a) and (b) (b) Product—related
Read the following paragraph and answer the following (d) Neither (a) nor (b)
four questions.
Q 92.
Nicole owns a small pottery factory. She can make 1,000 Fixed cost Costs are a function of —
pieces of pottery per year and sell them for 100 each. It (a) Output
costs Nicole 20,000 for the raw materials to produce the (b) Time
1,000 pieces of pottery. She has invested 100,000 in her (c) Both (a) and (b)
factory and equipment: 50,000 from her savings and (d) Neither (a) nor (b)
50,000 borrowed at 10 per cent. (Assume that she could
Q 93.
have loaned her money out at 10 per cent, too.) Nicole Cost must be paid even if the Firm's level output
can work at a competing pottery factory for 40,000 per is zero.
year. (a) Variable (b) Direct
(c) Incremental (d) Fixed
Q 85. The accounting cost at Nicole's pottery factory is
(a) 25000 (b) 50000 Q 94. If a Firm produces zero output in the short period
(c) 80000 (d) 75000 —
(a) Its Total Cost will be zero
Q 86. The economic cost at Nicole's factory is: (b) Its Variable Cost will be positive
(a) 75000 (b) 70000 (c) Its Fixed Cost will be positive
(c) 80000 (d) 7 30000 (d) Its Average Cost will be zero -
Q 87. The accounting profit at Nicole's pottery factory is: Q 95. As output increases, Total Fixed Cost —
(a) 30000 (b) 50000 (a) Decreases (b) Increases
(c) 80000 (d) 75000 (c) Remains constant (d) Becomes zero
Q 88. Q 96. Some portion of Fixed Costs need not be incurred

The economic profit at Nicole's factory is:
(a) fi 75000 (b) 35000 when operations are suspended. These are called —
(c) fi 80000 (d) 30000 (a) Avoidable Fixed Costs
(b) Committed Fixed Costs
FIXED AND VARIABLE COSTS (c) Variable Costs
(d) Semi—Variable Costs
Q 89. _____ are costs that do not vary with output,
upto a certain level of activity. Q 97. Some portion of Fixed Costs cannot be avoided
(a) Variable even when operations are suspended. These are called —
(b) Fixed (a) Discretionary Fixed Costs
(c) Both (a) and (b) (b) Committed Fixed Costs
(d) Neither (a) nor (b) (c) Variable Costs
(d) Semi—Variable Costs
Q 90. Fixed Cost can be defined as —
(a) Which does not change with output Q 98. Which of the following is not a Fixed Cost?
(b) Which changes with Sales (a) Payment of Interest on Borrowed Capital
(c) Which changes proportionately with output (b) Charges for Fuel and Electricity
8.33 | Page
(c) Depreciation Charges on Equipment and Buildings (c) Fixed Cost (d) Variable Cost
(d) Contractual Rent for Equipment of Building
Q 108.
Total Variable Costs always vary proportionately
with output. This statement is —
Q 99.
The following are some Costs incurred by a (a) True
Clothing Manufacturer. State which among them will be (b) False
considered as Fixed Cost. (c) Partially True
a) Cost of Cloth (d) Nothing can be said
b) Piece Wages paid to Workers
c) Depreciation on Machines owing to time Q 109.. Over certain ranges of production Variable Costs
d) Cost of Electricity for running machines vary less or more than proportionately depending on the
utilisation of fixed facilities and resources during the
Q 100.
____ are costs that change, based on the production process. This statement is —
level of output. (a) True
(a) Variable (b) Fixed (b) False
(c) Both (a) and (b) (d) Neither (a) nor (b) (c) Partially True
Q 101.
Variable Costs are —
(a) Period—related (b) Product—related MARGINAL COSTS
Q 110. Marginal Cost changes due to change in Cost
Q 102. Variable Costs are a function of —* (a) Variable (b) Fixed
(a) Output (b) Time (c) Total (d) Average
Q 111. _______is the addition made to the total cost by
Q 103. _____Cost must be incurred only when the Firm's production of an additional unit of output.
produces output. (a) Fixed Cost (b) Variable Costs
(a) Variable (b) Fixed (c) Total Costs (d) Marginal Costs
Q 112. Marginal Cost can be defined as —
Q 104.
Variable Costs are incurred only when production (a) Change in Average Variable Cost divided by Change
takes place. So, they are in the nature of — in Total Output
(a) Discretionary Costs (b) Committed Costs (b) Change in Average Fixed Cost divided by Change in
(c) Fixed Costs (d) Semi—Variable Costs Total Output
(c) Change in Total Fixed Cost divided by Change in Total
Q 105. All Variable Costs are avoidable or discretionary in Output
nature. This statement is — (d) Change in Total Cost due to Change in Total Output
(a) True (b) False by one additional unit.
(c) Partially True (d) Nothing can be said
Q 113. _____ Costs are important in short term decision
Q 106.
As output increases, Total Variable Cost — making of the Firm, to determine the output at which
(a) Decreases (b) Increases profits can be maximized.
(c) Remains constant (d) Becomes zero (a) Fixed (b) Sunk
(c) Opportunity (d) Marginal
Q 107.
Which Cost increases continuously with the
increase in production?
(a) Average Cost (b) Marginal Cost
8.34 | Page
Q 114. With which of the following is the concept of Q 123. Marginal Cost Curve of a Firm will show
Marginal Cost closely related? behaviour when compared to Marginal Product (MP)
(a) Variable Cost (b) Fixed Cost Curve.
(c) Opportunity Cost (d) Economic Cost (a) Same (b) Reverse
(c) Either (a) or (b) (d) Nothing can be said
Q 115. Marginal Cost is independent of Fixed Cost. This
Q 124.
statement is — Marginal Costs are applicable in —
(a) True (b) False (a) Short—Run (b) Long—Run
(c) Partially True (d) Nothing can be said (c) Both (a) and (b) (d) Neither (a) nor (b)
Q 116. Marginal Cost is independent of Variable Cost. This Q 125. Additional cost incurred by a Firm as a result of a
6
statement is — business decision —
(a) True (b) False (a) Sunk Cost (b) Replacement Cost
(c) Partially True (d) Nothing can be said (c) Incremental Cost (d) Extra Cost
Q 117. Which of the following will affect Marginal Costs? Q 126. Which of the following statement is correct?
6 Variable Costs
(a) (b) Output Quantity (a) An increase in price will make Replacement Costs
(c) Both (a) and (b) (d) Neither (a) nor (b) higher than Historical Cost.
(b) A decrease in price will make Replacement Costs
Q 118. Which of the following will not affect Marginal higher than Historical Cost.
6
Costs? (c) An increase in price will make Replacement Costs
(a) Variable Costs (b) Output Quantity lower than Historical Cost.
(c) Fixed Costs (d) All of the above (d) None of the above
Q 119. TCn TCn_i = which cost function? Q 127. The cost incurred during the acquisition of an
6
(a) Marginal Cost (b) Average Cost asset
(c) Total Cost (d) None of the above (a) Sunk Cost (b) Replacement cost
(c) Historical cost (d) None of the above
Q 120.
Marginal Costs per unit =
(a) Change in Total Costs ÷ Change in Output Quantity Q 128. Cost of Production incurred by an Individual firm
(b) Change in Variable Costs ÷ Change in Output is —
Quantity (a) Private Cost (b) Social Cost
(c) Either (a) or (b) (c) Production Cost (d) None of the above
Q 129. Socia I Cost =
Q 121.
Which of the following describes the behaviour of (a) Explicit Cost + Implicit Cost
Marginal Cost Curve? (b) Private Cost + External Cost
(a) Declines first, reaches its minimum and then rises (c) Private Cost + Internal Cost
(b) Rises first, reaches a maximum and then declines (d) None of the above
(c) Remains constant throughout all output levels
(d) Nothing can be said Short run and long Run cost concept
Q 122. Marginal Cost Curve of a Firm will be — Q 130. Which of the following statements regarding
(a) L Shaped (b) 3 Shaped Output is false?
(c) U Shaped (d) Inverted U Shaped (a) Output is under the control of the Firm
8.35 | Page
(b) Magnitude of the Output determines the Total Cost (c) Either (a) or (b)
of Production (d) Neither (a) nor (b)
(c) Change in output level determines the rate of change
in the Total Cost of Production Q 138. TC Curve will —
(d) Output has no role to play in determining the Cost (a) Increase, i.e. slope upward from left to right
Function (b) Decrease, i.e. slope downward from left to right
Q 131. If Output increases in the short—run, Total Cost (d) Neither (a) nor (b)
will —
(a) Increase due to an increase in Fixed Costs only Q 139. TC Curve will commence from —
(b) Increase due to an increase in Variable Costs only (a) A certain point on the Quantity is (X Axis)
(c) Increase due to an increase in both Fixed and (b) A certain point on the Cost Axis (Y Axis)
Variable Costs (c) Origin
(d) Decrease if the Firm is in the region of Diminishing (d) Any of the above
Returns
Q 140. TVC Curve will be —
Q 132. If the Firm's output level is below its short run (a) Higher than the TC Curve
capacity, it is its Plant and Machinery. (b) Lower than the TC Curve
(a) Under utilizing (b) Fully utilizing (c) Parallel to X Axis
(c) Over utilizing (d) Exploiting (d) Parallel to Y Axis
Q 133. Which of the following statements is correct Q 141. If Variable Cost per unit (i.e. AVC) is constant at
concerning the relationships among the Firm's Costs? all levels of output, NC Curve will be —
(a) TC = TFC — TVC (b) TVC = TFC+ TC (a) Curve with positive slope
(c) TFC = TC –TVC (d) TC = TVC- TFC (b) Straight Line with positive slope
(c) Rectangular Hyperbola
Q 134.
TFC Curve will be a — (d) None of these
(a) Curve
(b) Straight Line Q 142. The Vertical difference between TVC and TC is
(c) Rectangular Hyperbola equal to—
(d) None of these (a) MC (b) AVC
(c) TFC (d) None of these
Q 135. TFC Curve will be a straight line
(a) Parallel to X—Axis Q 143. "I am making a loss, but with the rent I have to
(b) Parallel to Y—Axis pay, I can't afford to shut down at this point of time." If
(c) Increasing from left to right this entrepreneur is attempting to maximize profits or
(d) Decreasing from left to right minimize losses, his behaviour in the short run is:
(a) rational, if the firm is covering its variable cost.
Q 136. TFC Curve will commence from — (b) rational, if the firm is covering its fixed costs.
(a) A certain point on the Quantity Axis (X Axis) (c) irrational, since plant closing is necessary to
(b) A certain point on the Cost Axis (Y Axis) eliminate losses.
(c) Origin (d) irrational, since fixed costs are eliminated if a firm
(d) Any of the above shuts down
Q 137.
TVC Curve will be a —
(a) Curve with a positive slope
(b) Curve with a negative slope
8.36 | Page
AVERAGE COST
Q 151. Average Fixed Cost (AFC) of a Firm is related to
Q 144. Average Cost is the same as — its output.
(a) Average Fixed Cost (a) Directly (b) Inversely
(b) Average Total Cost (c) Proportionately (d) Not
(c) Average Variable Cost
(d) All of the above Q 152. Which of the following describes the behaviour
of Average Fixed Cost Curve?
Q 145. Which of the following is the Average Cost? (a) Declines first, reaches its minimum and then rises
(a) Average Fixed Cost + Average Variable Cost (b) Rises first, reaches a maximum and then declines
(b) Average Total Cost (c) Remains constant throughout all output levels
(c) Total Cost divided by the number of units (d) Declines throughout as output increases
Q 153. Which of the following is true with respect to
Q 146. If TVC = 1,000, TFC = 400, then calculate ATC at Average Fixed Cost?
5 units. (a) It is a bell shaped Curve
(a) 280 (b) 250 (b) As the quantity increases it approaches zero
(c) 150 (d) 300 (c) If quantity produced tends to zero, Average Fixed
Cost approaches infinity
AVERAGE FIXED COST (d) Both (b) and (c) above
Q 147. Average Fixed Cost (AFC) equals — Q 154. AFC Curve will be a —
(a) ATC — AVC (a) Curve with a positive slope
(b) TFC divided by Output Quantity (b) Curve with a negative slope
(c) Both (a) and (b) (c) Straight Line
(d) Neither (a) nor (b) (d) None of the above
Q 148. Which of the following describes the behaviour of Q 155. Which curve is downward sloping and does not
Average Fixed Cost? touch the X-axis?
(a) Remains constant throughout all output levels (a) AVC (b) MC
(b) Declines throughout as output increases (c) ATC (d) AFC
(c) Declines first, reaches its minimum and then rises
(d) Rises first, reaches a maximum and then declines Q 156. All of the following are U—Shaped Curves except
the—
Q 149. In the short run, when the output of a Firm (a) AVC Curve (b) AFC Curve
increases, its Average Fixed Cost\-- (c) AC Curve (d) MC Curve
(a) Increases
(b) Decreases Q 157. The AFC Curve passes through the Origin. This
(c) Remains constant statement is —
(d) First declines and then rises (a) True (b) False
(c) Partially True (d) Nothing can be said
Q 150. In the short run, when the output of a Firm
decreases, its Average Fixed Cost — Q 158. Which statement among below is correct in
(a) Increases reference to AFC?
(b) Decreases (a) Never becomes zero
(c) Remains constant (b) Curve never touch X-axis
(d) First declines and then rises (c) Curve never touch Y-axis
8.37 | Page
(d) All of the these (d) Law of Equi—Marginal Utility
Q 159. Q 166. Average Variable Cost Curve —

Average Cost of Producing 50 units of a
Commodity is 250 and fixed cost is 1000. What will be the (a) Slopes downwards at first and then upwards
average fixed cost of producing 100 units of the (b) Slopes upwards, remains constant and then falls
Commodity? (c) Slopes downwards always
(a) 10 (b) 30 (d) Remains a straight line parallel to X Axis
(c) 20 (d) 5
Q 167. Average Variable Cost Curve has a negative
Q 160. A Firm's average fixed Cost id 20 at 6 units of slope —
output. What will it be at 4 units of output? (a) Upto normal capacity output
(a) 60 (b) 30 (b) Beyond normal capacity output
(c) 40 (d) 20 (c) At all levels of output
AVERAGE VARIABLE COST
Q 168. Average Variable Cost Curve slopes upwards —
Q 161. Average Variable Cost (AVC) equals — (a) Upto normal capacity output
(a) ATC — AFC (b) Beyond normal capacity output
(b) TVC divided by Output Quantity (c) At all levels of output
(c) Both (a) and (b) (d) Nothing can be said
Q 169. A firm produces 10 units of commodity at an
average total cost of ₹ 200 and with a fixed cost of ₹ 500.
Q 162. AVC decreases as output increases — Find out component of average variable cost in total cost.
(a) Upto normal capacity output (a) ₹ 300 (b) ₹ 200
(b) Beyond normal capacity output (c) ₹ 150 (d) ₹ 100
(c) At all levels of output
(d) Nothing can be said AVERAGE COST OR AVERAGE TOTAL COST
Q 163. AVC decreases as output increases, upto normal Q 170. Average Cost (AC) equals —
capacity output, due to — (a) ATC + AFC
(a) Law of constant returns (b) Total Cost divided by Output Quantity
(b) Law of diminishing returns (c) Both (a) and (b)
(c) Law of increasing returns (d) Neither (a) nor (b)
(d) Law of negative returns
Q 171. Initially Average Cost declines sharply due to the
Q 164. AVC increases as output increases — reason that —
(a) Upto normal capacity output (a) AFC declines significantly as output increases
(b) Beyond normal capacity output (b) AVC declines significantly as output increases
(c) At all levels of output (c) AFC increases as output increases
(d) Nothing can be said (d) AVC increases as output increases
Q 165. AVC increases as output increases, beyond Q 172. Initially, even when there is an increase in
normal capacity output, due to — Average Variable Cost (AVC), Average Cost (AC) may still
(a) Law of Constant Returns decline due to the reason that —
(b) Law of Diminishing Returns (a) Fall in AFC is less than the rise in AVC
(c) Law of Increasing Returns (b) Fall in AFC is greater than the rise in AVC
8.38 | Page
(c) Fall in AFC is equal to the rise in AVC MARGINAL COST AND AVERAGE COST RELATIONSHIPS
Q 179. Maginal Cost Curve cuts the Average Cost Curve
Q 173. Beyond certain output level, when there is an —
increase in Average Variable Cost (AVC), Average Cost (a) At the left to its lowest point
(AC) also increases due to the reason that — (b) At its lowest point
(a) Fall in AFC is less than the sharp rise in AVC (c) At the right to its lowest point
(b) Fall in AFC is greater than the sharp rise in AVC (d) Any of the above
(c) Fall in AFC is equal to the rise in AVC
(d) None of the above Q 180. When, we know that the Firms must be
producing at the minimum point of the Average Cost
Q 174. Average Cost Curve — Curve and so there will be productive efficiency.
(a) Slopes downwards at first and then upwards (a) AC = AR (b) MC = AC
(b) Slopes upwards, remains constant and then falls (c) MC = MR (d) AR = MR
Slopes downwards always
(c) Remains a straight line parallel to X Axis Q 181. The relationship between the AC and MC is that
(a) MC will always be less than the AC
Q 175. The AC Curve and AVC Curve start increasing at (b) MC will be more than AC when MC is falling
the same output level only. This statement is (c) AC may be more than MC when MC is rising
(a) True (d) None of the above
(b) False
(c) Partially True Q 182. If a Firm's Average Variable Cost Curve is rising,
(d) Nothing can be said its Marginal Cost Curve must be —
(a) Constant
Q 176. The AC Curve passes through the Origin. This (b) Above the Total Cost Curve
statement is — (c) Above the Average Variable Cost Curve.
(a) True (d) All of the above.
(b) False
(c) Partially True Q 183. Which of the following is true of the relationship
(d) Nothing can be said between Marginal Cost and Average Cost Functions?
(a) If MC is greater than AC, then AC is falling
Q 177. Average Cost Curve is a — (b) AC Curve intersects the MC Curve at minimum MC
(a) U Shaped Curve (c) MC Curve intersects the AC Curve at minimum AC
(b) J Shaped Curve (d) If MC is less than AC, then AC is increasing
(c) L Shaped Curve
(d) Straight Line Q 184. Marginal Cost is —
(a) Always less than the Average Cost
Q 178. Average total cost to firm is ₹ 600 when it (b) Always more than the Average Cost
produces 10 units of output and ₹ 640 when the output is (c) Equal to the Average Cost at its minimum point
11 units. The MC of the 11th unit is (d) Never equal to Average Cost
(a) 40 (b) 540
(c) 840 (d) 1040 Q 185. When shape of Average Cost Curve is upward,
Marginal Cost —
(a) Must be decreasing
(b) Must be constant
(c) Must be rising
8.39 | Page
Q 186. The MC Curve cuts the AVC and ATC Curves Q 194.
A Firm producing 7 units of output has an
(a) At the falling part of each. Average Total Cost of ₹ 150 and has to pay ₹ 350 to its
(b) At different points. Fixed Factors of Production whether it produces or not.
(c) At their respective minimas. How much of the Average Total Cost is made up of
(d) At the rising part of each. Variable Costs?
(a) ₹ 200 (b) ₹ 50
Q 187. MC Curve cuts the AVC and ATC Curves — (c) ₹ 300 (d) ₹ 100
(a) From above
(b) From below
(c) Either (a) or (b) Use the following data to answer the following 11.
(d) Neither (a) nor (b) questions
Output (in units) Total Cost (TC) (in Z )
Q 188. When AC falls as a result of an increase in output
0 240
— 1 330
(a) MC = AC (b) MC < AC 2 410
(c) MC > AC (d) Nothing can be said 3 480
4 540
Q 189. MC Curve is lower than AC, when —
5 610
(a) AC decreases 6 690
(b) AC increases 7 840
(c) AC is at its minimum
(d) Nothing can be said TFC at all levels of Output is —
(a) Nil (b) 240
Q 190. When AC increases as a result of an increase in
(c) 330 (d) 690
output
(a) MC = AC (b) MC < AC Q 196. AFC for 3 units of Output is —
(c) MC > AC (d) Nothing can be said (a) 240 (b) 120 Q 20
(c) 80 (d) 60
COST COMPUTATIONS
Q 197. MC for 2nd unit of Output is —
Q 191. A Firm's Average Total Cost is ₹ 300 at 5 units of
(a) Nil (b) 90
output and 320 at 6 units of output. The Marginal Cost of Q 195.
(c) 80 (d) 70 Q 20
producing the 6th unit is —
(a) ₹ 20 (b) ₹ 120 Q 198. MC for 3rd unit of Output is —
(c) ₹ 320 (d) ₹ 420 (a) Nil (b) 90
(c) 80 (d) 70
Q 192. A Firm has a Variable Cost of 1000 at 5 units
of output. If Fixed Costs are ₹ 400, what will be the Q 199. AC is minimum at units of Output.
Average Total Cost at 5 units of output? (a) 4 (b) 5 Q 20
(a) ₹ 280 (b) ₹ 60 (c) 6 (d) 7
(c) ₹ 120 (d) 1,400
Q 200. MC Curve will cut AC Curve at units of Output
Q 193. What is the Average Total Cost in producing 20
(a) 4 (b) 5
units, if Fixed Cost is 5,000 and Variable Cost is ₹ 200? (c) 6 (d) 7
(a) ₹250 (b) ₹260 Q 20
(c) ₹258 (d) ₹252
Q 201.
8.40 | Page
A company produces 10 units of output and incurs (c) Both (a) and (b)
Z 30 per unit of variable cost and ₹5 per unit of fixed cost. (d) Neither (a) nor (b)
In this case total cost is:
(a) ₹ 300 (b) ₹ 35 Q 209. In the long—run, when there are infinite SAC
(c) ₹ 305 (d) ₹ 350 Curves, the LAC Curve will be —
(a) Perpendicular to each SAC Curve
LONG RUN COST BEHAVIOUR (b) Connecting the lowest points of each SAC Curve
(c) Smooth Curve, so as to be tangent to each of the SAC
Q 202. The period of time in which the Plant Capacity Curves
can be varied is known as — (d) All of the above
(a) Short Period (b) Market Period
(c) Long Period (d) All of the above. Q 210. LAC Curve is tangent to each of the infinite SAC
Curves. This statement is —
Q 203. Which is the other name given to the Long Run (a) True
Average Cost Curve? (b) False
(a) Profit Curve (b) Planning Curve (c) Partially True
(c) Demand Curve (d) Indifference Curve (d) Nothing can be said
Q 204. Which one of the following is also known as Plant Q 211. LAC Curve is the connection of all minimum
Curve? points of SAC Curves. This statement is —
(a) Long—Run Average Cost Curve (a) True
(b) Short—Run Average Cost Curve (b) False
(c) Average Variable Cost Curve (c) Partially True
(d) Average Total Cost Curve (d) Nothing can be said
Q 205. LAC = Least Cost combination for an appropriate Q 212. When LAC Curve is declining, it will be tangent to
output level. This statement is — the
(a) True (b) False (a) Falling portions of the SAC Curves
(c) Partially True (d) Nothing can be said (b) Rising portions of the SAC Curves
Q 206. In the long—run, the Firm will operate at the for (d) Neither (a) nor (b)
any output level, by choosing the appropriate Plant Size.
(a) Optimum cost Q 213. When LAC Curve is rising, it will be tangent to the
(b) Minimum cost —
(c) Maximum cost (a) Falling portions of the SAC Curves
(d) Nothing can be said (b) Rising portions of the SAC Curves
Q 207. In the long—run, the Firm will decide on which (d) Neither (a) nor (b)
SAC Curve it should operate to produce a given
output, so that its — Q 214. Which of the following statements concerning
(a) AC is minimum (b) AC is maxmum the Long—Run Average Cost Curve is false?
(c) MC is minimum (d) MC is maximum (a) It represents the least—cost input combination for
producing each level of output
Q 208. In the long—run, the Firm will try to select — (b) It is derived from a series of Short—Run Average Cost
(a) Lowest point of every SAC Curves
(b) SAC with the lowest cost for a particular level of
output
8.41 | Page
(c) The Short—Run Cost Curve at the minimum point of (c) Change in Total Revenue (TR) resulting from the sale
the LAC Curve represents the least—cost Plant Size of an additional unit of the commodity.
for all levels of output (d) None of the above
(d) As output increases, the amount of capital employed
by the Firm increases along the Curve. Q 221. Marginal Revenue =
(a) Money which a Firm realises, by selling certain units
Q 215. If the LAC Curve falls as output expands, this falls is of a commodity.
due to — (b) Revenue earned per unit of output
(a) Economies of Scale (c) Change in Total Revenue (TR) resulting from the sale
(b) Law of Diminishing Returns of an additional unit of the commodity.
(c) Diseconomies of Scale (d) None of the above
Q 222. Marginal Revenue is equal to —
Q 216. If the LAC Curve rises as output expands, this falls (a) The change in price divided by the change in output
is due to — (b) The change in quantity divided by the change in price
(a) Economies of Scale (c) hThe change in P x Q due to a one unit change in
(b) Law of Diminishing Returns output
(c) Diseconomies of Scale (d) Price, but only if the Firm is a price searcher
Q 223. The firm will attain equilibrium at a point where
Q 217.
Long Run Average Cost Curves are broadly— MC curve cuts curve from below
(a) U — shaped (a) AR (b) MR
(b) Inverted U — shaped (c) AC (d) AVC
(c) V shaped
(d) L shaped Q 224. Price =
(a) Total Revenue (b) Average Revenue
Q 218. The LAC Curve — (c) Marginal Revenue (d) Zero Revenue
(a) Falls when the LMC Curve falls
(b) Rises when the LMC Curve rises Q 225. If a seller obtains Z 3,000 after selling 50 units
(c) Goes through the lowest point of the LMC Curve and Z 3,100 after selling 52 units then MR will be—
(d) Falls when LMC < LAC and rises when LMC > LAC (a) 59.62 (b) 50.00
(c) 60.00 (d) 59.80
Revenue Concept:
Q 226. When Price is ₹ 10, 5 units can be sold. When
Q 219. Total Revenue = price is reduced to ₹ 9, 6 units can be sold. Here, Marginal
(a) Money which a Firm realizes by selling certain units Revenue will be —
of a commodity. (a) ₹ 10 (b) ₹ 9
(b) Revenue earned per unit of output (c) ₹ 1 (d) ₹ 4
(c) Change in Total Revenue (TR) resulting from the sale
of an additional unit of the commodity. Q 227. When Price is ₹ 5, 40 units can be sold. When
(d) None of the above price is reduced to ₹ 4, 60 units can be sold. Here,
Marginal Revenue will be —
Q 220. Average Revenue = (a) ₹ 120 (b) ₹40
(a) Money which a Firm realizes by selling certain units (c) ₹60 (d) ₹ 2
of a commodity.
(b) Revenue earned per unit of output
8.42 | Page
(c) Slopes upward from left to right
Q 228. If a Seller gets ₹ 10,000 by selling 100 units and ₹ (d) Slopes downward from left to right
14,000 by selling 120 units, his Marginal Revenue is
(a) ₹ 4,000 (b) ₹ 450 Q 236. Generally, as quantity sold increases, Marginal
(c) ₹ 200 (d) ₹100 Revenue (MR) and Average Revenue (AR) Curve —
(a) MR and AR increase
(b) MR and AR decrease
Q 229. When Price = ₹ 20, quantity demanded is 15 (c) MR increases but AR decreases
units, and when Price =ͅ ₹ 18, quantity demanded is 16 (d) MR decreases but MR increases
units. What is the Marginal Revenue resulting from Q 24
an increase in output from 15 units to 16 units? Q 237. Let, Marginal Revenue = MR and Average
(a) ₹ 18 negative (b) ₹ 18 positive Revenue = AR. Generally, as quantity sold increases —
(c) ₹ 12 negative (d) ₹ 12 positive (a) MR falls quickly than AR
(b) MR falls slowly than AR
Q 230. As quantity increases, Total Revenue (TR) Curve (c) MR and AR fall at the same rate
— (d) MR and AR do not change
(a) Always increases
(b) Always decreases Q 238. Let, Marginal Revenue = MR and Average
(c) First increases, reaches a maximum, and then Revenue = AR. Generally, as quantity sold increases —
decreases. (a) AR falls quickly than MR
(d) First decreases, reaches a minimum, and then (b) AR falls slowly than MR
increases. (c) AR and MR fall at the same rate
(d) AR and MR do not change
Q 231. If Total Revenue (TR) increases, Marginal
Revenue (MR) will be — Q 239. Marginal Revenue (MR) —
(a) Positive (b) Negative (a) Will have positive values only
(c) Zero (d) Infinity (b) Will have negative values only
(c) Can be positive or zero, but not negative.
Q 232. If Total Revenue (TR) decreases, Marginal (d) Can be positive or zero or even negative.
Revenue (MR) will be —
(a) Positive (b) Negative Q 240. If Marginal Revenue (MR) Curve is depicted on a
(c) Zero (d) Infinity graph with Quantity on X axis —
(a) MR will not go below the X axis.
Q 233. If Total Revenue (TR) is maximum, Marginal (b) MR may go below the X axis.
Revenue (MR) will be — (c) MR cannot be depicted on the graph at all.
(a) Positive (b) Negative (d) None of the above
(c) Zero (d) Infinity
Q 241. Average Revenue (AR) —
Q 234. Generally, Marginal Revenue (MR) Curve — (a) Will have positive values only
(a) Is parallel to X Axis (b) Will have negative values only
(b) Is parallel to Y Axis (c) Can be positive or zero, but not negative.
(c) Slopes upward from left to right (d) Can be positive or zero or even negative.
(d) Slopes downward from left to right
Q 242. What is the relationship between AR and MR?
Q 235. Generally, Average Revenue (AR) Curve — (a) AR and MR both are negatively sloped
(a) Is parallel to X Axis (b) MR Curves always lies half—way between AR Curve
(b) Is parallel to Y Axis and Origin
8.43 | Page
(c) AR and MR both can be zero or negative
(d) All of these Q 251. If Average Revenue (AR) = Z 30, Demand (e) = 1,
then MR will be —
Q 243. Average Revenue (AR) Curve denotes— (a) Positive (b) Negative
(a) Demand (b) Supply (c) Zero (d) Infinity
Q 252. If Average Revenue (AR) = 300, Price
Q 244. If Average Revenue (AR) Curve is depicted on a Elasticity of Demand (e) = 2.5, then MR will be
graph with Quantity on X axis — (a) 180 (b) 120
(a) AR will not go below the X axis. (c) 300 (d) Nil
(b) AR may go below the X axis.
(c) AR cannot be depicted on the graph at all. PROFIT MAXIMISATION
Q 253. Which is the first order condition for the profit of
Q 245. Which of the following is correct? a Firm to be maximum?
(a) If Marginal Revenue is positive and falling, Total (a) AC = MR (b) MC = MR
Revenue will rise at a decreasing rate. (c) MR = AR (d) AC = AR
(b) Total Revenue is equal to price times the quantity
sold. Q 254. In the short run, as the prices are fixed, Firms can
(c) Marginal Revenue and Average Revenue can be maximize their profit when they operate at
calculated from Total Revenue. (a) MC = MR (b) MC > MR
(d) All of the above. (c) MC < MR (d) MC = AC
Q 246. If Marginal Revenue = MR, Price Elasticity Q 255. If Marginal Cost = MC, and Marginal Revenue =
Demand = è', and e < 1, then MR will be — MR, then, for achieving equilibrium output, the
(a) Positive (b) Negative conditions are —
(c) Zero (d) Infinity (a) MC = MR
(b) MC Curve should cut MR Curve from below.
Q 247. If Marginal Revenue = MR, Price Elasticity of (c) Both (a) and (b)
Demand = 'e', and e > 1, then MR will be — (d) Neither (a) nor (b)
(a) Positive (b) Negative (a) MR Curve.
(c) Zero (d) Infinity
Q 256. If Marginal Cost = MC, and Marginal Revenue =
Q 248. If Marginal Revenue = MR, Price Elasticity of MR, and MC < MR, the Firm should —
Demand = è', and e = 1, then MR will be — (a) Increase its output.
(a) Positive (b) Negative (b) Reduce its output
(c) Zero (d) Infinity (c) Operate at the present level itself.
(d) Should shut down.
Q 249. If Marginal Revenue = MR, Price Elasticity of
Demand = è', and MR = 0, e will be Q 257. What should Firm do when Marginal Revenue is
(a) e > 1 (b) e < 1 greater than Marginal Cost?
(c) e = 1 (d) e = zero (a) Firm should expand output
(b) Efforts should be made to make then equal
Q 250. If Average Revenue (AR) = ₹ 30, Price Elasticity of (c) Prices of the products should be lowered down
Demand (e) = 1.5, then MR will be (d) All of the above
(a) ₹ 10 (b) ₹ 20
(c) ₹ 30 (d) ₹ Nil
8.44 | Page
Q 258. If Marginal Cost = MC, and Marginal Revenue = Q 265. When a Market is in equilibrium —
MR, and MC > MR, the Firm should — (a) No shortages exist.
(a) Increase its output (b) Quantity demanded equals quantity supplied.
(b) Reduce its output (c) A price is established that clears the market.
(c) Operate at the present level itself (d) All of the above are correct.
(d) Should shut down
Q 266. Profits of the Firm will be more at —
Q 259. If Marginal Cost = MC, and Marginal Revenue =
(a) MR = MC
MR, then, for achieving equilibrium output — (b) AR > AC
(a) MC Curve should have positive slope (c) Both of the above
(b) MC Curve should have negative slope (d) None of these
(c) MC Curve should be parallel to X Axis
(d) MC Curve should be parallel to Y Axis Q 267. Let Average Cost = AC, and Average Revenue =
AR. If AR > AC, it means that the Firm —
Q 260. Let Marginal Cost = MC, and Marginal Revenue (a) Is earning Super—Normal Profits
MR. If MC Curve cuts MR from above, it means — (b) Is earning Normal Profits
(a) MC Curve is parallel to X Axis (c) Is making Losses
(b) MC Curve is parallel to Y Axis (d) Has to shut—down
(c) MC Curve has a negative slope
(d) MC Curve has a positive slope Q 268. Let Average Cost = AC, and Average Revenue =
AR. If AR = AC, it means that the Firm —
Q 261. Let Marginal Cost = MC, and Marginal Revenue = (a) Is earning Super—Normal Profits
MR. If MC Curve cuts MR from above, it means — (b) Is earning Normal Profits
(a) Firm is at equilibrium output level. (c) Is making Losses
(b) Firm is below equilibrium output level. (d) Has to shut—down
(c) Firm is above equilibrium output level.
(d) Firm does not operate at all. Q 269. Let Average Cost = AC, and Average Revenue =
AR. If AR < AC, it means that the Firm —
Q 262. Let Marginal Cost = MC, and Marginal Revenue (a) Is earning Super—Normal Profits
MR. If MC Curve cuts MR from below, it means — (b) Is earning Normal Profits
(a) Firm is at equilibrium output level. (c) Is making Losses in the economic sense
(b) Firm is below equilibrium output level. (d) Has to shut—down.
(c) Firm is above equilibrium output level.
(d) Firm does not operate at all. Q 270. Which of the following statements is incorrect?
(a) If Marginal Revenue exceeds Marginal Cost, the Firm
Q 263. If any unit of production adds more to revenue should increase output.
than to cost it will result into — (b) If Marginal Cost exceeds Marginal Revenue the Firm
(a) Increase in Profit (b) Decrease in Profit should decrease output.
(c) No change (d) Loss (c) Economic Profits are maximized when Total Costs
are equal to Total Revenue.
Q 264. If any unit of production adds more to cost than
(d) Profits are maximized when Marginal Revenue
to revenue it will result into — equals Marginal Cost.
(a) Increase in Profit (b) Decrease in Profit
(c) No change (d) Loss Q 271. Suppose that a Sole Proprietorship Firm is
earning Total Revenues of ₹ 120,000 and is incurring
Explicit Costs of ₹ 90,000. If the Owner could work for
8.45 | Page
another Company for ₹ 50,000 a year, we would conclude
that Q 277. If AR < AVC and the Firm continues production,
(a) The Firm is incurring an Economic Loss then
(b) Implicit Costs are ₹ 90,000 (a) Losses will be reduced (b) Profits will be reduced
(c) The total Economic Costs are ₹ 100,000 (c) Losses will increase (d) Profits will increase
(d) The Individual is earning an Economic Profit of
₹25,000 Q 278. If AR < AVC and the Firm stops production, then
—
Q 272. Suppose that a Sole Proprietorship is earning (a) There is no profit no loss
Total Revenue of ₹ 1,50,000 and is incurring Explicit Costs (b) There is a Loss equivalent to Fixed Costs
of ₹75,000. If the Owner could work for another Company (c) There is a Profit
for ₹30,000 a year, it can be concluded that (d) None of the above
(a) The Firm is incurring an Economic Loss
(b) Implicit Costs are ₹ 25,000 Q 279. In the short run, if the Firm cannot cover its Total
(c) Total Economic Costs are ₹1,00,000 Variable Cost —
(d) The individual is earning an economic profit of ₹ (a) It continues its operations
45,000 (b) It shuts down its operations temporarily
(c) It shuts down its operations forever
Q 273. Suppose the Total Cost of Production of (d) It makes more investments to make the operations
Commodity X is ₹ 1,25,000. Out of this Cost, Implicit Cost viable
is ₹ 35,000 and Normal Profit is ₹25,000. What will be the
Explicit Cost of Commodity X? Q 280. A Firm encounters its "Shut—Down Point"
(a) ₹ 90,000 (b) ₹ 65,000 when—
(c) ₹60,000 (d) ₹ 1,00,000 (a) Average Total Cost equals price at the profit—
maximizing level of output.
Q 274. If the Total Product Cost for manufacturing of a (b) Average Variable Cost equals Price at the profit—
commodity is ₹1,50,000. Out of this, Implicit Cost is ₹ maximizing level of output.
55,000 and Normal Profit is₹ 25,000, what will be Explicit (c) Average Fixed Cost equals price at the profit-
Cost? maximizing level of output.
(a) ₹95,000 (b) ₹ 1,25,000 (d) Marginal Cost equals Price at the profit-maximizing
(c) ₹ 80,000 (d) ₹70,000 level of output.
SHUT DOWN POINT Q 281. "I am making a loss, but with the rent I have to
pay, I can't afford to shut down at this point of time." If
Q 275. Let Average Variable Cost = AVC, and Average this Entrepreneur is attempting to maximize profits or
Revenue = AR. If AR < AVC, it means that the Firm minimize losses, his behaviour in the short-run is
(a) Is earning Super—Normal Profits (a) Rational, if the Firm is covering its Variable Cost.
(b) Is earning Normal Profits (b) Rational, if the Firm is covering its Fixed Costs.
(c) Is making Losses but need not shut—down (c) Irrational, since Plant Closure is necessary to
(d) Has to shut—down eliminate losses.
(d) Irrational, since Fixed Costs are eliminated if a Firm
Q 276. Which of these is a condition for shut—down of shuts down.
a Firm?
(a) AR > AVC (b) AR > AC Q 282. At Shut-Down Point -
(c) AR < AC (d) AR < AVC (a) Price is equal to AVC
(b) Total Revenue is equal to TVC
(c) Total Loss of the Firm is equal to TFC
8.46 | Page
(d) All of the above 50 5950
Q 283. In the long-run, if the Firm is unable to cover the Q 287.

Average Total Cost then it -
(a) Decreases the Selling Price
(b) Increases the Labour to increase production
(c) Decreases the Labour to decrease prediction
(d) Moves out of the business
Q 284.
In the long-run, any Firm will eventually leave the
industry if -
(a) Price does not at least cover Average Total Cost
(b) Price does not equal Marginal Cost
(c) Economies of Scale are being reaped
(d) Price is greater than Long Run Average Cost When Production is 10 units, AVC will be -
(a) ₹ 50.00 (b) ₹ 47.00
Q 285. In the long-run, Firms will exit the market if the (c) ₹ 46.67 (d) ₹ 49.00
price of the good offered for sale is less than -
(a) Marginal Revenue (b) Marginal Cost Q 288. When Production is 10 units, AC will be -
(c) Average Total Cost (d) Average Revenue (a) ₹ 50.00 (b) ₹ 97.00
(c) ₹ 77.00 (d) ₹ 110.00
Q 286. In the long run, there is enough time for the Firm
to cover its Losses and earn Normal Profits. This is Q 289. When Production is 20 units, AVC will be -
because in the long run, all inputs are - (a) ₹50.00 (b) ₹ 47.00
(a) Identical (b) Homogenous (c) ₹ 46.67 (d) ₹ 49.00
(c) Variable (d) Fixed
Q 290. When Production is 40 units, AC will be -
COMPREHENSIVE PROBLEMS (a) ₹85.00 (b) ₹82.50
(c) ₹ 92.50 (d) ₹95.00
A Competitive Firm sells as much as of its product as it
chooses at a Market Price of 2100 per unit. Its Fixed Q 291. When Production is 50 units, AVC will be -
Costs are 2300 and its Variable Costs for different (a) ₹ 100.00 (b) ₹ 110.00
levels of production are shown in the following table. (c) ₹ 119.00 (d) ₹ 125.00
Use the following table and answer the next 14
questions Q 292. AC is minimum when output is -
Quantit (a) 10 units (b) 20 units
TVC TFC TC AVC AFC AC MC
y (c) 30 units (d) 40 units
0 0
5 250 Q 293. MC Curve will cut AC Curve when output is -
10 470 (a) 10 units (b) 20 units
15 700 (c) 30 units (d) 40 units
20 980
25 1350 Q 294.
To maximize Profit, the Firm should produce -
30 1850 (a) 15 units (b) 30 units
35 2520 (c) 35 units (d) 50 units
40 3400
45 4530 Use Table to answer the following 4 questions.
8.47 | Page
Bozzo's burgers is a small restaurant and a price taker. 11 12
2
The table below provides the data of Bozzo's output 8 5
and costs in Rupees. 11 15
3
2 9
Qty TC FC AVC AC MC
10 19
0 100 - - - 4
6 3
10 210
10 23
20 300 5
0 0
30 400 27
6 94
40 540 3
50 790 32
7 88
60 1060 5
38
8 82
9
Q 295. If burgers sell for Rs14 each, what is Bozzo's profit 9 46
76
5
maximizing level of output : Q 299.
(a) 10 burgers (b) 40 burgers
(c) 50 burgers (d) 60 burgers
Q 296. What is the total variable cost when 50 burgers

are produced?
(a) ₹ 690 (b) ₹960
(c) ₹110 (d) ͅ₹440
Q 297.
What is average fixed cost when 20 burgers are
produced?
(a) ₹ 5 (b) ₹3.33
When production equals 4 units, the firm's:
(c) ₹ 10 (d) ₹ 2.5
(a) Fixed cost is 100 and its variable cost is 93.
Q 298. Between 10 to 20 burgers, what is the marginal (b) Fixed cost is 193 and its variable cost is 0.
(c) Fixed cost is 0 and its variable cost is 193,
cost (per burger)?
(d) Fixed cost is 45 and its variable cost is 148.
(a) ₹ 11 (b) ₹ 13
(c) ₹ 14 (d) ₹ 9 Q 300. When production equals 5 units, the firm's Total
Revenue is:
Use Table to answer the following 5 questions.
(a) ₹ 100 (b) ₹ 270
The following table provides cost and price information
(c) ₹ 324 (d) ₹ 500
for an individual firm. The first two columns represent the
demand curve that the firm faces. The firm has a fixed Q 301.
When production equals 6 units, the firm's
amount of capital equipment, but can change the level of
marginal revenue is:
other inputs. such as labour and materials. Calculate the
(a) ₹ 384 (b) ₹ 94
missing values in the table, and use the table to answer
(c) ₹ 64 (d) ₹ 2.
the below questions. (Make sure you answer each
question using the production level specified.) Q 302. When production equals 7 units, the firm's profit is:
TV M T M
Q P TC (a) +6₹ 0 (b) ₹ 41.57
C C R R
(c) ₹ 291 (d) ₹ 336
13
0 45
0
Q 303. To maximize its profit, the firm should produce:
12
1 88
4 (a) 0 units. (b) 3 units.
8.48 | Page
(c) 5 units. (d) 7 units. (b) Whatever the combination of Factor Inputs the Firm
chooses, the Total Cost to the Firm remains the
Production optimization same.
(c) A change in the relative Input Price will cause a
Q 304. The term "Iso" means — change in the slope of the Isocost Line.
(a) Single (b) Unequal (d) All the above
(c) Equal (d) Similar
Q 312. The point of tangency between any Isoquant and
Q 305. Isoquant represents an Isocost Line gives the
(a) Constant quantity of input (a) highest—cost combination of inputs and maximum
(b) Variable quantity of input level of output that can be produced
(c) Variable quantity of output (b) lowest—cost combination of inputs and minimum
(d) Constant quantity of output level of output that can be produced
(c) lowest—cost combination of inputs and maximum
Q 306.
represents all those combinations of inputs which level of output that can be produced
are capable of producing the same level of output. (d) highest—cost combination of inputs and minimum
(a) Isoquant (b) Isocost level of output that can be produced
(c) Isoprice (d) None of the above
Q 313. A line joining tangency points of Isoquants and
Q 307. Isoquants are also called — Isocosts is called
(a) Equal—Product Curves (a) Expansion Path (b) Contraction Path
(b) Production Indifference Curves (c) Constant Path (d) None of the above
(c) Isoproduct Curves
(d) All the above Q 314. For Having economics losses, the condition is
________ at the point when MC = MR (MC cutting from
Q 308. Isoquants below)
(a) Are concave to the origin (a) AR > AC (b) AR = AC
(b) Touched both the axis (c) AR < AC (d) None of the above
(c) Are non—intersecting
(d) Are positively sloped
Q 309. Isocost Lines are also called — Q 315. The Average Profit is the difference between :--
(a) Equal cost Lines --
(b) Budget Line - (a) AC and TC (b) AC and VC
(c) Budget constraint Line (c) AC and AR (d) AC and TR
(d) All the above
Q 310. shows the various alternative combinations of

two Factor Inputs, which a Firm can buy with given
amount of money.
(a) Isocost Lines (b) Isoproduct Lines
(c) Isoprice Lines (d) Isoquant lines
Q 311. Which of the following statements is true?

(a) All points on a Budget Line would cost the Firm the
same amount.
8.49 | Page
Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n
1 C 51 D 101 B 151 B 201 D 251 C 301 C
2 D 52 D 102 A 152 D 202 C 252 B 302 C
3 D 53 C 103 A 153 D 203 B 253 B 303 D
4 A 54 A 104 A 154 B 204 B 254 A 304 C
5 A 55 B 105 A 155 D 205 A 255 C 305 D
6 C 56 B 106 B 156 B 206 B 256 A 306 A
7 A 57 B 107 D 157 B 207 A 257 A 307 D
8 B 58 D 108 B 158 D 208 B 258 A 308 C
9 B 59 C 109 A 159 A 209 C 259 A 309 D
10 B 60 B 110 AC 160 B 210 A 260 C 310 A
11 C 61 C 111 D 161 C 211 B 261 B 311 D
12 D 62 A 112 D 162 A 212 A 262 B 312 C
13 A 63 D 113 D 163 C 213 B 263 A 313 A
14 D 64 B 114 A 164 B 214 B 264 A 314 C
15 A 65 D 115 A 165 B 215 A 265 D 315 C
16 C 66 D 116 B 166 A 216 C 266 C
17 D 67 D 117 C 167 A 217 A 267 A
18 B 68 C 118 C 168 B 218 D 268 B
19 C 69 D 119 A 169 C 219 A 269 C
20 D 70 C 120 C 170 C 220 B 270 C
21 A 71 A 121 A 171 A 221 C 271 A
22 C 72 B 122 C 172 B 222 C 272 D
23 C 73 C 123 B 173 A 223 B 273 B
24 A 74 D 124 C 174 A 224 B 274 D
25 A 75 B 125 C 175 B 225 B 275 D
26 B 76 C 126 A 176 B 226 D 276 D
27 C 77 A 127 B 177 A 227 B 277 C
28 D 78 C 128 A 178 D 228 C 278 B
29 C 79 A 129 B 179 B 229 C 279 B
30 D 80 B 130 D 180 B 230 C 280 B
31 D 81 B 131 B 181 C 231 A 281 A
32 B 82 A 132 A 182 C 232 B 282 D
33 A 83 B 133 C 183 C 233 C 283 D
34 B 84 C 134 B 184 C 224 D 284 A
35 A 85 A 135 A 185 C 235 D 285 C
36 D 86 B 136 B 186 C 236 B 286 C
37 A 87 D 137 A 187 B 237 A 287 B
38 A 88 B 138 A 188 B 238 B 288 C
39 D 89 B 139 B 189 A 239 D 289 D
40 C 90 A 140 B 190 C 240 B 290 C
41 A 91 A 141 B 191 D 241 C 291 C
42 B 92 B 142 C 192 A 242 D 292 B
43 A 93 D 143 A 193 B 243 A 293 B
44 A 94 C 144 B 194 D 244 A 294 B
45 A 95 C 145 D 195 B 245 D 295 C
46 B 96 A 146 A 196 C 246 B 296 A
47 A 97 B 147 C 197 C 247 A 297 A
48 A 98 B 148 B 198 D 248 C 298 D
49 C 99 C 149 B 199 D 249 C 299 D
8.50 | Page
50 B 100 A 150 A 200 C 250 A 300 D
8.52 | Page
Chapter 3- Production + Cost + Revenue (d) Decreasing average fixed costs
Concepts Q.9. If the marginal product of labour is below the

average product of labour, it must be true that:
(a) Marginal product of labour is negative
Q.1. ________ shows the overall output generated at a
(b) Marginal product of labour is zero
given level of input:
(c) Average product of labour is falling
(a) Cost function
(d) Average product of labour is negative
(b) Production function 0
(c) ISO cost
Q.10. Law of variable proportion is valid when:
(d) Marginal rate of technical substitution
(a) Only one input is fixed and all other inputs are kept
variable
Q.2. If LAC curve falls as output expands, this is due to
(b) All factors are kept constant
_______.
(c) All inputs are varied in the same proportion
(a) Law of diminishing returns
(d) None of these
(b) Economics of scale
(c) Law of variable proportion
Q.11. Change in total revenue due to incremental
(d) Dis-economics of scale
change in quantity supplied is called:
(a) Marginal Revenue (b) Marginal Change
Q.3. Isoquants are equal to:
(c) Average Revenue (d) Average Change
(a) Product Lines (b) Total utility lines
(c) Cost lines (d) Revenue lines
Q.12. Increase in all input leading to less than
proportional increase in output is called ______,
Q.4. The marginal product curve is above the average
(a) Increasing returns to scale
product curve when the average product is:
(b) Decreasing returns to scale
(a) Increasing (b) Decreasing
(c) Constant returns to scale
(c) Constant (d) None
(d) Both increasing and decreasing returns to scale
Q.5. Increasing returns to scale can be explained in

Q.13. Consider the following combinations of inputs and
terms of:
outputs:
(a) External and internal economies
This production technology satisfies
(b) External and internal diseconomies
Labour Capital Output
(c) External economics and internal diseconomies
(d) All of these 5 10 1
6 12 2
Q.6. [6] An isoquant is ______ to an isocost line at the 7 14 3
equilibrium point: 8 16 4
(a) Convex (b) Concave 9 18 5
(c) Tangent (d)Perpendicular 10 20 6
Q.7. At the point of inflexion, the marginal product is: (a) Increasing returns to scale
(a) Increasing (b) Decreasing (b) Diminishing returns to scale
(c) Maximum (d) Negative (c) Constant returns to scale
(d) Increasing returns initially, following by decreasing
Q.8. Diminishing marginal returns implies: returns to scale.
(a) Decreasing average variable costs
(b) Decreasing marginal costs
(c) Increasing marginal costs Q.14. During 𝐼𝐼 𝑛𝑑 stage of law of diminishing returns:
8.53 | Page
(a) P and TP is maximum (d) Any economic activity at a point of time
(b) MP and AP are decreasing
(c) AP is negative Q.23. Labour force wants more
(d) TP is negative (a) facility (b) leisure
(c) benefit (d) all of the above
Q.15. Who has given the concept of Innovative
Entrepreneurship? Q.24. Production activity in the short-run is analysed by:
(a) Robbins (b) Adam Smith (a) Returns to scale (b) Economies of scale
(c) Schumpeter (d) Sweezy (c) Law of variable proportion (d) None of these
Q.16. AT 10 units Total Cost 一 ₹200 Q.2 5. Increasing returns to scale occurs due to:
20 units Total Cost 一 ₹600 (a) Economies of scale (b) Specialization
Marginal Cost = ? (c) Indivisibility of factors (d) All of these
(a) 50 (b) 40
(c) 30 (d) 400 Q.26. Law of diminishing returns is applicable in
(a) Only manufacturing industries
Q.17. Average Fixed Cost = ₹20 (b) Only agriculture
Quantity Produced = ₹10 units (c) Neither in agriculture nor in industries
What will be the Average Fixed Cost of 20 ͭ ͪ unit? (d) In all economic activities after a limit mark
(a) ₹10 (b) ₹20
(c) ₹5 (d) None Q.27. Law of increasing returns is applicable because of
(a) Indivisibility of factors (b) Specialization
Q.18. What is Production in Economics: (c) Economies of scale (d) Both (a) and (b)
(a) Creation / Addition of Utility
(b) Production of food grains Q.28. When output decreases by 20% due to an
(c) Creation of services increase in inputs by 20%, this stage is called the law of
(d) Manufacturing of goods (a) increasing returns to scale
(b)decreasing returns to scale
Q.19. External Economies of Scale are obtained by: (c) constant returns to scale
(a) A firm (b) A group of firm (d)none of the above
(c) Small Production (d) Society
Q.29. In the first stage of the law of variable
Q.20. If a firm’s output is zero, then: proportions, the total product increases at the
(a) AFC will be positive (b) AVC will be zero (a) decreasing rate (b) increasing rate
(c) Both of (a) and (b) (d) None of (a) and (c) constant rate (d) both a and b
Q.21. Functions of the entrepreneur are: Q.30. What will be the total product when two
(a) Risk bearing labourers are hired according to the table given below?
(b) Initiating a business enterprise and resource co- No. of
MP Total product
ordinating labourers
(c) Introducing new innovations 0 -- --
1 350 350
2 230 ?
Q.22. Law of diminishing returns is applicable in: (a) 680 (b) 580
(a) Manufacturing industry (c) 350 (d) 230
(b) Agriculture
(c) Neither (a) nor (b)
8.54 | Page
Q.38. Production activity in the short period is analysed
Q.31. Which function shows the relationship between with the help of:
input and output? (a) Law of variable proportion
(a) Consumption fun ction (b) Laws of returns to scale
(b) Investment function (c) Both (a) & (b)
(c) Production function (d) None of the above.
(d) Cost function
Q.39. Which of the following is the reason for the
Q.32. External economies are enjoyed: working of the law of increasing returns?
(a) By large producers only (a) Fuller utilisation of fixed factors
(b) As the firm expands (b) indivisibility of the factors
(c) Both (a) and (b) (c) Greater specialization of labour
(d) None of above (d) All of the above.
Q.33. The Law of Diminishing Returns is applicable in Q.40. External economies can be achieved through:
_______. (a) Foreign trade only
(a) only in manufacturing industries (b) Superior managerial skill
(b) only in agriculture (c) Extension of transport and credit facilities
(c) neither in agriculture nor in industries (d) External assistance.
(d) all economic activities after a point
Q.41. External economies arise due to:
Q.34. The concept of Returns to Scale is related to: (a) Growth of ancillary industries
(a) Very short period (b) Short period (b) High cost of technologies
(c) Long period (d) None of above (c) Increase in the price of factors of production
(b) None of the above.
Q.35. The function of an entrepreneur is:
(a) Initiating an enterprise and resource coordination Q.42. Innovation theory of entrepreneurship is
(b) Risk bearing propounded by:
(c) Introducing innovations (a) Knight (b) Schumpeter
(d) All of the above (c) Max Weber (d) Peter Drucker
Q.36. Which of the following is not a characteristic of Q.43. Production function is:
land? (a) Purely a technical relationship between input &
(a) It is a free gift of nature output
(b) It is a mobile factor of production (b) Purely an economic relationship between input &
(c) It is limited in quantity output
(d) Its productive power is indestructible. (c) Both the technical & economical relationship
between input & output
Q.37. A production function is defined as the (d) None of the above.
relationship between
(a) The quantity of physical inputs and physical output Q.44. The concept of returns to scale is related with:
of a firm (a) Very short period (b) Short period
(b) Stock of inputs and stock of output (c) Long period (d) None of the above
(c) Prices of inputs and output
(d) Price and supply of a firm. Q.45. In Cobb-Douglas production function, two inputs
are:
(a) Land and Labour
8.55 | Page
(b) Labour and Capital mark (b) Creation of utility in matter
(c) Capital and Entrepreneur (c) Creation of infrastructural facilities
(d) Entrepreneur and land (d) None of the above.
Q.46. Which one of the following is not a characteristic Q.52. Long period production function is related to:
of land? (a) Law of variable proportions
(a) A free gift of nature (b) Laws of returns to scale
(b) Its supply is fixed (c) Law of diminishing returns
(c) An active factor of production (d) None of the above.
(d) It has different uses.
Q.53. The conclusion drawn from Cobb-Douglas
Q.47. An Entrepreneur undertakes which one of the production function is that labour contributed about
following functions? _____ and capital about ______ of the increase in the
(a) Initiating a business and resource co-ordination manufacturing production.
(b) Risk or uncertainty bearing 3𝑡ℎ 1𝑡ℎ 11
(a) , (b) ,
4 4 22
(c) Innovations
1𝑡ℎ 3𝑡ℎ
(d) All of the above. (c) , (d) None of the above.
4 4
Q.48. With a view to increase his production, Hariharan Q.54. ISO quants are also known as:
a manufacturer of shoes, increases all the factors of (a) Production possibility curves
production in his unit by 100%. But at the end of the (b) Indifference curves
year, he finds that instead of an increase of 100%, his (c) Production indifference curves
production has increased by only 80%. Which law of (d) None of the above.
returns to scale is operating in this case?
(a) Increasing returns to scale Q.55. Human capital refers to:
(b) Decreasing returns to scale (a) Savings by individuals
(c) Constant returns to scale (b) Mobilisation of savings
(d) None of the above. (c) Human skills and abilities
(d) Productive investment.
Q.49. Linear homogeneous production function is based
on: Q.56. The Law of Variable Proportions is associated
(a) Increasing returns to scale with:
(b) Decreasing returns to scale (a) Short period
(c) Constant returns to scale (b) Long period
(d) None of the above (c) Both short and long periods
(d) Neither short nor long period.
Q.50. Which of the following statement is true in
relation to an ISO-Quant Curve? Q.57. Which one of the following statements is not
(a) It represents those combinations of two factors of correct?
production that will give the same level of output (a) Land has indestructible powers
(b) It represents those combinations of all the factors (b) Labour is mobile
that will give the same level of output (c) Capital is nature’s gift mark
(c) It slopes upward to the right (d) Land is a passive factor.
(d) It can touch either axis.
Q.58. Which of the following is not a characteristic of
Q.51. Production is defined as: labour?
(a) Creation of matter (a) It is perishable
8.56 | Page
(b) It has weak bargaining power (d) None of the above.
(c) Labour and Labour power cannot be separated
(d) Labour is not mobile Q.66. The conclusion drown from Cobb Douglas
production function is that labour contributed about
Q.59. Which among the following is not a characteristic ______ and capital about _______ of the increase in the
of Land? manufacturing production.
(a) It is an active factor 3𝑡ℎ 1𝑡ℎ 1𝑡ℎ 1𝑡ℎ
(a) , (b) ,
4 4 2 2
(b) It has variety of uses
1𝑡ℎ 3𝑡ℎ
(c) Its production powers are indestructible (c) , (d) None of the above.
4 4
(d) Its supply is limited
Q.67. At the point of inflexion, the marginal product is:
Q.60. When average product rises as a result of an (a) Increasing (b) Decreasing
increase in the quantity of variable factor, marginal (c) Maximum (d) Negative
product is:
(a) Equal to average product Q.68. Isoquante’s are equal to:
(b) More than average product (a) Product lines (b) Total utility lines
(c) Less than average product (c) Cost lines (d) Revenue lines
(d) Becomes negative
Q.69. Increasing returns to scale can be explained in
Q.61. Suppose the first four units of a variable input terms of:
generate corresponding total output of 150, 200, 350, (a) External and internal economics
550. What will be the marginal product of the third unit (b) External and internal diseconomies
of input? (c) External economies and internal diseconomies (d) All
(a) 50 (b) 100 of these.
(c) 150 (d) 200
Q.70. According to Cobb-Douglas production function,
Q.62. The famous Cobb-Douglas production function is will get returns to scale?
based on studies of ______ industries in the United (a) Constant (b) Diminishing
States of America. (c) Increasing (d )Any of the above
(a) manufacturing (b) construction
(c) consumer (d) aviation. Q.71. Which of the following statement about factors of
production is not true?
Q.63. In Economics, entire process of is nothing but (a) Land is a passive factor
creation of utilities in the form of goods and services. (b) Land is a free gift of nature
(a) Consumption (b) Production (c) Land is immobile
(c) Exchange (d) Distribution. (d) Land is perishable
Q.64. Cobb Douglas function is given by Q = 𝐾𝐿𝑎 𝐶 𝑏 Q.72. Which of the following is considered as production
(a) If α + β > 1, increasing returns in economics?
(b) If α + β > 1, increasing returns to scale (a) Helping a blind person in crossing the road
(c) If α + β < 1, diminishing returns (b) Group dance performance in a collage annual
(d) If «+ B = 1, decreasing returns to scale. function
(c) Holding a child who is falling from a wall
Q.65. Production is defined as: (d) Performing an art in a theatre
(a) Creation of matter
(b) Creation of utility in matter
(c) Creation of infrastructural facilities
8.57 | Page
Q.73. Marginal, average and total product of a firm in Q.79. Opportunity cost is:
the short run will not comprise with (a) Direct cost
(a) When marginal product is at a maximum, average (b) Total cost
product is equal to marginal product, and total (c) Accounting cost
product is rising (d) Cost of foregone opportunity
(b) When average product is maximum, average product
is equal to marginal product, and total product is Q.80. As output increases, average fixed cost:
rising (a) Remains constant (b) Starts falling
(c) When marginal product is negative,total product and (c) Start rising (d) None
average product are falling
(d) When total product is increasing, average product Q.81. Average fixed cost can be obtained through :
and marginal product may be either rising or falling 𝑇𝐹𝐶 𝐸𝐶
(a) 𝐴𝐹𝐶 = (b) 𝐴𝐹𝐶 =
𝑇𝑆 𝑇𝑈
𝑇𝐶 𝑇𝐹𝐶
(c) 𝐴𝐹𝐶 = (d) 𝐴𝐹𝐶 =
Q.74. Supply of land is ______ in case of economy? 𝑃𝐶 𝑇𝑈
(a) Elastic (b) Inelastic

(c) Perfectly elastic (d) Perfectly inelastic Q.82. AFC curve is :
(a) Convex & downward sloping
(b) Concave & downward sloping
Q.75. MP is the slope of ______. (c) Convex & upward sloping
(a) TP (b) AP (d) Concave & upward rising
(c) Both (d) None
Q.83. A firm's average fixed cost is ₹20 at 6 units of
For Questions [77] - [79] used the data table given output what will it be at 4 units of output?
below : (a) ₹60 (b) ₹30
No of Total Marginal (c) ₹40 (d) ₹20
workers output output
0 0 0 Q.84. U-shaped average cost curve is based on:
1 10 - (a) Law of increasing cost
2 - 8
3 24 - (b) Law of decreasing cost
(c) Law of constant returns to scale
(d) Law of variable proportions
Q.85. When shape of average cost curve is upward,

marginal cost :
(a) Must be decreasing (b) Must be constant
Q.76. What will be total output for 2 workers? (c) Must be rising (d) Any of these
(a) 6 (b) 18
(c) 12 (d) 17 Q.86. If total cost at 10 units is ₹600 and ₹640 for 11th
unit. The marginal cost of 11th units :
Q.77. What will be marginal output for 3 workers? (a) ₹20 (b) ₹30
(a) 6 (b) 12 (c) ₹40 (d) ₹50
(c) 7 (d) 8
Q.87. Economic cost excludes which of the following :
Q.78. Average Product for three labour: (a) Accounting cost + explicit cost
(a) 12 (b) 11 (b) Accounting cost + implicit cost
(c) 8 (d) None (c) Explicit cost + implicit cost
(d) Accounting cost + opportunity cost
8.58 | Page
(c) ₹90 (d) ₹80
Q.88. Which of the following cost curves is never ‘U’
shaped? Q.95. Returns to scale will said to be in operation when
(a) Average total cost curve quantity of :
(b) Marginal cost curve (a) All inputs are changed
(c) Total cost curve (b) All inputs are changed in already established
(d) Total Fixed cost curve proportion
(c) All inputs are not changed
Q.89. Suppose, the total cost of production of (d) One input is changed while quantity of all other
commodity X is ₹1,25,000. Out this cost implicit cost is inputs remain the same
₹35,000 and normal profit is ₹25,000. What will be the
explicit cost of commodity X? Q.96. Which of the following curves never touch any axis
(a) 90,000 (b) 65,000 but is downward?
(c) 60,000 (d) 1,00,000 (a) Marginal cost curve
(b) Total cost curve
Q.90. What is the total cost of production of 20 units, if (c) Average fixed cost curve
fixed cost is ₹5,000 and variable cost is ₹2 ? (d) Average variable cost curve
(a) 5,400 (b) 5,040
(c) 4,960 (d) 5,020 Q.97. Which of the following is known as Envelope
curve?
Q.91. External economies accrue due to _______ (a) MC curve (b) AFC curve
(a) Increasing returns to scale (c) LAC curve (d) TFC curve
(b) Increasing returns to factor
(c) Law of variable proportion Q.98. A firm producing 7 units of output has an average
(d) Low cost total cost of ¥ 150 and has to pay ¥ 350 to its fixed
factors of production. How much of the average total
Q.92. At which point does the marginal cost curve cost is made up of variable cost?
intersect the average variable cost curve and short run (a) ₹200 (b) ₹50
average total cost curve? (c) ₹300 (d) ₹100
(a) At equilibrium points
(b) At their lowest points Q.99. Firm’s average fixed cost is ₹20 at 6 units of
(c) At their optimum points output. What will it be at units of output?
(d) They don’t intersect at all (a) ₹60 (b) ₹30
(c) ₹40 (d) ₹20
Q.93. Implicit cost may be defined as the:
(a) Costs which do not change over a period of time Q.100.
(b) Costs which the firm incurs but doesn’t disclose Output (Units) Total Cost
(c) Payment to the non-owners of the firm for the 0 30
resources 1 40
(d) Money payment which the self employed resources 2 50
could have earned in their best alternative 3 60
employment
Find Average Fixed Cost of 3 units
Q.94. A firm's average fixed cost is ¥ 40 at 12 units. (a) 10 (b) 30
What will be the average fixed cost at 8 units: (c) 65 (d) 60
a) ₹60 (b) ₹70
Q.101. Long run does not have:
8.59 | Page
(a) Average Cost (b) Total Cost (c) 17 (d) 30
(c) Fixed Cost (d) Variable Cost
Q.109. The total cost of production of 10 units is ₹200.
When production is increased to 20 units its total cost
becomes ₹600. What will be its marginal cost.
Q.102. Which of the following curve is not U shaped? (a) 400 (b) 40
(a) AFC (b) AVC (c) 4 (d) 30
(c) MC (d) TC.
Q.110.
Q.103. From the following details, find out the average Unit 0 1 2 3 4
variable cost of 10 units: Total Cost 20 30 40 50 60
Output 0 10 20
Total Cost ₹200 ₹400 ₹800 What will be the AFC at 4 units of output.
(a) 2 (b) 3
(a) ₹40 (b) ₹20 mark (c) 4 (d)5
(c) ₹200 (d) ₹400
Q.111. Payment made to outsiders for their goods and
Q.104. The total cost incurred for 10 units is ¥ 400 and services are called:
20 units is ¥ 800. Find the marginal cost. (a) Opportunity cost (b)Real cost
(a) ₹400 (b) ₹40 (c) Explicit cost (d) Implicit cost
(c) ₹200 (d) ₹20
Q.112.Direct Cost is also known as:
Q.105.Which one of the following is correct? (a) Indirect Cost (b) Traceable Cost
(a) AFC = AVC + ATC (c) Opportunity Cost (d) Accounting Cost.
(b) ATC = AFC - AVC
(c) AVC = AFC + ATC Q.113. Firms AFC is ₹200 at 10 units of output what will
(d) AFC = ATC - AVC. be it at 20 units of output?
(a) 500 (b) 100
Q.106. Calculate AFC of 3 units from the following data: (c) 150 (d) 200
Unit 0 1 2 3
Total Cost 30 40 50 60 Q.114. Long run price is also called by the name of
______.
(a) 30 (b) 15 (a) market price (b) normal price
(c) 10 (d) 5 (c) administered price (d) wholesale price
Q.107. Find AFC of 3 units : Q.115. What will be the AFC of 2 units according to the
Unit 0 1 2 3 table given below:
Total Cost 15 25 35 45 Output 0 1 2
Total Cost 580 689 850
(a) 5 (b) 10
(c) 15 (d) 25 (a) 105 (b) 135
(c) 235 (d) 290
Q.108. What will be the TVC if we produce 2 units?
Unit 0 1 2 Q.116. Fixed cost is known as ______ cost
Total Cost 20 37 50 (a) Prime (b) Supplementary
(c) Overhead (d) Direct
(a) 15 (b) 05
8.60 | Page
Q.117. Average Revenue Curve is also known as (c) 25 (d) 20
_______.
(a) Profit curve (b) Demand curve
(c) Supply curve (d) Average cost curve
Q.118. Supply curve remaining unchanged, an increase Q.125. Given

in demand will lead to Output 0 4 8
(a) A fall in price (b) Rise in price Total Cost 20 24 48
(c) No change in price (d) An increase in supply
What will be the AFC of 4 units of Output
Q.119. Find out AFC of 3 unit: (a) 2 (b) 3
Unit 0 1 2 3 (c) 4 (d) 5
Total Cost 300 1000 2000 3000
Q.126. Suppose the total cost of production of
(a) 100 (b) 200 commodity 'X' is ₹1,25,000 Out of other cost implicit is
(c) 300 (d) 400 ₹35,000 and normal profit is ₹25,000 what will be the
explicit cost of commodity 'X'?
Q.120. (a) 60,000 (b) 65,000
Unit 0 1 2 (c) 90,000 (d) 80,000
Total Cost 580 1200 1500
Q.127. What will be the total fixed cost for the
Calculate AFC at 2nd unit of output production of three units as per the details given below:
(a) 235 (b) 290 Units 0 1 2 3
(c) 310 (d) 920. Total 62 94 155 367
Cost 0 0 5 0
Q.121. In the long run all factors are

(a) Fixed (a)620 (b) 640
(b) Variable (c) 1115 (d) 2650
(c) All factors remain unchanged
(d) None. Q.128. Cost in terms of pain, discomfort, disability
involved in supplying the various factors of production
Q.122. What is the total cost of production of 20 units, if by their owners are termed as ______.
(a) Aocial cost (b) Explicit cost
fixed cost is T 5,000 and variable cost is x2/﹣﹖
(c) Real cost (d) Implicit cost
a) 5,400 (b) 5,040
(c) 4,960 (d) 5,020 Q.129. Which of the following is known as the Envelope
Curve?
Q.123. Which of the following is known as Envelop (a) Average variable cost curve
Curve? (b) Average total cost curve
(a) Average variable cost curve (c) Long run average cost curve
(b) Average total cost curve (d) Short run average cost curve.
(c) Long run average cost curve
(d) Short run average cost curve Q.130. The cost of resources owned and employed by
the entrepreneur himself in his business is termed as
Q.124. The average fixed cost for producing an output of cost.
6 units of a product by a firm is ¥ 30. The same cost for (a) Explicit (b) Implicit
producing an output of 4 units will be ₹_______. (c) Fixed (d) Variable.
(a) 50 (b) 45
8.61 | Page
Q.138. Suppose the total cost production of a
Q.131. A firm will close down in the short period if its commodity 'x' is ₹1,25,000 out of which Implicit cost is
average revenue is less than its: ₹35,000 and normal profit is ₹25,000. What would be
(a) Average cost (b) Average variable cost the explicit cost of commodity x?
(c) Marginal cost (d) Average fixed cost (a) ₹90,000 (b) ₹65,000
(c) ₹1,00,000 (d) ₹60,000
Q.132. A firm's total cost is T 200 at 5 units of output Q.139. In which of the following cases opportunity cost
and T 220 at 6 units of output. The marginal cost of concept applies?
producing 6th unit of output will be (a) Resources have alternative uses
(a) 20 (b) 120 (b) Resources have limited uses
(c) 220 (d) 320. (c) Resources have no use
Q.133. Consider the following data
Units of 0 1 2 3 4 Q.140. Direct costs are also known as ______.
output (a) Traceable costs (b) Indirect costs
Total Cost 25 45 60 85 105 (c) Opportunity costs (d) Real costs.
The Average Variable Cost (AVC) for an output of 4 units Q.141. Which statement among below is correct in
will be :- reference in Average Fixed Cost
(a) ₹20 (b) ₹30 (a) Never becomes zero
(c) ₹25 (d) ₹26 (b) Curve never touches x-axis
(c) Curve never touches y-axis
Q.134. The change in total cost due to one unit change (d) All of the above.
in the output is called cost.
(a) Marginal (b) Average Q.142. Marginal cost changes due to change in _____
(c) Average variable (d) Average fixed cost.
(a) Total (b) Fixed
Q.135. When AC curve is rising, the MC curve must be (c) Average (d) Variable
______ to it.
(a) Equal (b) Above Q.143. A firm produces 10 units of a commodity at an
(c) Below (d) Parallel. average total cost of 200 and with a fixed cost of ¥ 500.
Find out the component of average variable cost in the
Q.136. The Average fixed cost for producing an output total cost :
of 6 units of a product by a firm is ₹30. The same cost (a) ₹300 (b) ₹200
for producing an output of 4 units will be ₹_______. (c) ₹150 (d) ₹100
(a) 50 (b) 45
(c) 25 (d) 20 Q.144. Average total cost to a firm is ₹600 when it
produces 10 units of output and ₹640 when the output
Q.137. Which of the following cost curve will slope is 11 units. The MC of the 11th unit is :
downward and does not touch the x-axis? (a) ₹340 (b) ₹540
(a) Average cost curve (c) ₹840 (d) ₹1,040
(b) Marginal cost curve
(c) Average variable cost curve Q.145. Average cost of producing 50 units of any
(d) Average fixed cost curve. commodity is T 250 and fixed cost is 1,000. What will be
the average fixed cost of producing 100 units of the
commodity?
8.62 | Page
(a) ₹10 (b) ₹30 (a) Decreasing average variable costs
(c) ₹20 (d) ₹05 (b) Decreasing marginal costs
(c) Increasing marginal costs
Q.146. Company produces 10 units of output and incurs (d) Decreasing fixed costs.
T 30 per unit as variable cost and 5 per unit of fixed cost.
What will be its total cost of producing 10 units?
(a) ₹300 (b) 35 Q.153.When the output of a firm increase in the short
(c) ₹305 (d) ₹350 run, its average fixed cost
(a) Increases
Q.147. On the basis of the following data what will be (b) Decreases
the marginal cost of the 6th unit of output? (c) Remains constant
Output 0 1 2 3 4 5 6 (d) First declines and then rises.
Total 24 33 41 48 54 61 69
Cost (₹) 0 0 0 0 0 0 0 Q.154.Which of the following cost curves is never ‘U’
shaped?
(a) ₹133 (b) ₹75
(a) Average cost curve
(c) ₹80 (d) ₹450
(b) Marginal cost curve
(c) Average variable cost curve
Q.148.The positively sloped (rising) part of the long run
(d) Average fixed cost curve.
average cost curve indicates working of the _______.
(a) Diseconomies of scale
Q.155.Fixed cost curve normally:
(b) Increasing returns to scale
a) Starts from the origin (b) Is U shaped
(c) constant returns to scale
(c) Is vertical line (d) Is horizontal line.
(d) Economies of scale
Q.156.Rational producer will produce in the stage in

Q.149.Average fixed cost curve is always:
which marginal product is positive and :
(a) Declining when output increases
(a) MP > AP (b) MP = AP
(b) U-Shaped, if there are increasing returns to scale
(c) MP < AP (d) MP is zero.
(c) U-Shaped, if there are decreasing returns to scale
(d) Intersected by marginal cost at its minimum point
Q.157.The vertical difference between TVC and TC
curves is equal to:
Q.150.Planning curve is related to which of the
(a) MC (b) AVC
following?
(c) TFC (d) None of the above
(a) Short run average cost curve
(b) Long run average cost curve
Q.158.What happens to marginal cost when average
(c) Average variable cost
cost increases?
(d) Average total cost.
(a) Marginal cost is below average cost
(b) Marginal cost is above average cost
Q.151.Using the following data find out the marginal
(c) Marginal cost is equal to average variable cost
cost (MC) of the sixth unit of output:
(d) Marginal cost is equal to average cost.
Output 0 1 2 3 4 5 6 7
Total cost 4 7 9 11 13 14 16 18
8 3 4 4 0 8 8 9 Q.159.If the market price of good is more than the
opportunity cost of producing it, then:
(a) The market price of the product will increase in the
(a) 24 (b) 16
long run
(c) 20 (d) 21
(b) Producers will increase supply in the long run
Q.152.Diminishing marginal returns implies

8.63 | Page
(c) Resources will flow away from production of the Q.167.In the short run, when the output of a firm
good, causing supply to decline with the passage of increases, its average fixed cost
time (a) Remains constant
(d) The situation will remain unchanged as long as (b) Decreases
supply and demand remain in balance. (c) Increases
(d) First decreases and then rises
Q.160.A firm has variable cost of ₹1,000 at 5 units of
output. If fixed costs are 400, what will be the average Q.168.What will be average variable cost of producing
total cost at 5 units of output? 5 units of blankets as per details given in the following
(a) 380 (b) 600 table?
(c) 280 (d) 400 Blankets 1 2 3 4 5
Total Cost 2,575 3,800 4,500 5,300 6,000
Q.161.The average total cost of producing 50 units is ¥
250 and total fixed cost is 1,000. What is the average (a) ₹500 (b) ₹750
fixed cost of producing 100 units? (c) ₹900 (d) ₹1,000
(a) 5 (b) 30
(c) 20 (d) 10 Q.169.Which of the following is/are example(s) of an
economic cost?
Q.162.When average fixed cost is ₹20 at 6 units of (a) Wage paid to labourers
output, what will it be at units of output? (b) Raw materials purchase cost
(a) ₹60 (b) ₹30 (c) Interest paid on short term loan
(c) ₹40 (d) ₹20 (d) All of the above.
Q.163.Modern industrial units face cost curve due to Q.170.Opportunity Cost is:
change in their technology of production. (a) Marginal cost (b) Variable cost
(a) U shaped (b) L shaped (c) Total fixed cost (d) None of these.
(c) Dish shaped (d) J shaped
Q.171.The “law of diminishing returns” applies to
Q.164.The costs which remain fixed over certain range (a) The short run, but not the long run
of output but suddenly jump to a new higher level when (b)The long run, but not the short run
production goes beyond a given limit are called: (c) Both the short run and the long run
(a) Variable cost (b) Semi- variable cost (d) Neither the short run nor the long run
(c) Stair- step variable cost (d) Jumping cost
Q.172.Linear homogenous production function is based
Q.165.A firm producing 9 units of output has an on
average total cost of ₹200 and has to pay ₹630 to its (a) Increasing returns to scale
fixed cost of production. How much of the average total (b) Decreasing returns to scale
cost is made up of variable cost? (c) Constant returns to scale
(a) ₹150 (b) ₹130 (d) None of the above.
(c) ₹70 (d) ₹300
Q.173.Which of the following curve is not U shaped?
Q.166.The cost of one thing in terms of alternative (a) AFC (b) MC
given up is known as: (c) AVC (d) TC
(a) Opportunity Cost (b) Real Cost
(c) Production Cost (d) Physical Cost. Q.174.Unit TC 580 1200 1500 Calculated AFC at 2™ unit
of output:
(a) 235 (b) 290
8.64 | Page
(c) 310 (d) 920 Q.183.Price of a commodity is best expressed as
(a) Exchange value (b) Cost of goods sold
Q.175.Which of the following curves never touch any (c) Production cost (d) Nominal value
axis but is downward
(a) Marginal cost curve Q.184.Accounting cost is of Economic cost
(b) Total cost curve (a) Equal to (b) Less than
(c) Average fixed cost curve (c) More than (d) Not Included
(d) Average variable cost curve
Q.185.When AC Curve is at minimum then MC Curve is
Q.176.External economies accrue due to _______. (a) Minimum then AC Curve
(a) Increasing returns to scale (b) Equals to AC Curve
(b) Increasing returns to factor (c) Above AC Curve
(c) Law of variable proportions (d) Less then AC Curve
(d) LOW cost
Q.186.Which of the following equation represents profit
Q.177.A firms average fixed cost is ₹20 at 6 units of maximisation condition?
output what will be at 3 units of output? (a) MC = MR (b) MC > MR
(a) ₹60 (d) ₹30 (c) MC < MR (d) None.
(c) ₹40 (d) ₹20
Q.187.MC curve of a firm in a perfectly competitive
Q.178.Which of the following is correct? industry depicts?
(a) AFC =AVC + ATC (b) ATC = AFC - AVC (a) Demand curve (b) Supply curve
(c) AVC =AFC + ATC (d) AFC = ATC - AVC (c) Average cost curve (d) Total cost curve
Q.179.The vertical difference between TVC and TC Q.188.Issues requiring decision making in the context of
curves is equal to: business are:
(a) MC (b) AVC (a) How much should be the optimum output at what
(c) TFC (d) None of the above. price should the firm sell?
(b) How will the product be placed in the market?
Q.180.The cost of one thing in terms of alternative given (c) How to combat the risks and uncertainties involved?
up: (d) All of the above.
(a) Real cost (b) Production cost
(c) Opportunity cost (d) Physical cost Q.189.Law of production does not include?
(a) Returns to scale
Q.181.The cost which remains fixed over certain range (b) Law of variable proportion
of output but suddenly jumps to a new higher level (c) Law of diminishing returns to a factor
when production goes beyond a given limit are called: (d) Least cost combination factors
(a) Variable cost (b) Semi-variable cost
(c) Stair-step variable cost (d) Jumping cost Q.190.A firm producing 15 units of output has average
cost of ¥ 250 and % 125 as per unit cost for fixed factors
Q.182.The slope of Average Fixed cost curve is? of production. Then average variable cost will be
(a) Falls from left to right (a) 80 (b) 50
(b) Rises from left to right (c) 125 (d) None of the above
(c) Parallel to x-axis
(d) Parallel to y-axis Q.191.Which of the following statement is incorrect?
(a) AC is sloping downwards, MC is below AC
(b) AC is sloping downwards, MC must fall
8.65 | Page
(c) AC is sloping upwards, MC is above AC
(d) MC cuts AC from its lowest point.
Q.192.Diminishing marginal returns implies.

(a) Decreasing average fixed cost
(b) Decreasing average variable cost
(c) Decreasing marginal cost
(d) Increasing marginal cost
Q. Ans Q Ans Q Ans Q Ans
1 B 52 B 103 B 154 D
Q.193.Opportunity Cost is ______.
2 B 53 A 104 B 155 D
(a) Recorded in the book of accounts 3 A 54 C 105 D 156 C
(b) Sacrificed alternative 4 A 55 C 106 C 157 C
5 A 56 A 107 A 158 B
(c) Both (a) and 6 C 57 C 108 D 159 B
(d) None of the above 7 C 58 D 109 B 160 C
8 C 59 A 110 D 161 D
9 C 60 B 111 C 162 C
Q.194.Which of the following is true? 10 A 61 D 112 B 163 B
(a) TC=TFC+TVC (b) TC +TVC + TFC 11 A 62 A 113 B 164 C
12 B 63 B 114 B 165 B
(c) 2TC - TVC = TFC (d) None
13 C 64 B 115 D 166 A
14 B 65 B 116 C 167 D
Q.195.Total Economic Cost = Explicit Cost + Implicit Cost 15 C 66 A 117 B 168 C
16 B 67 C 118 B 169 D
+ ________. 17 A 68 A 119 A 170 D
(a) Normal Profit (b) Super Normal Profit 18 A 69 A 120 B 171 A
19 B 70 A 121 B 172 C
(c) Loss (d) None
20 C 71 D 122 B 173 A
21 D 72 D 123 C 174 B
Q.196.Economic cost of production differs from 22 D 73 A 124 B 175 C
23 B 74 D 125 D 176 A
accounting cost of production
24 C 75 A 126 B 177 C
(a) Partially (b) True 25 D 76 B 127 A 178 D
(c) False (d) None 26 D 77 A 128 A 179 C
27 D 78 C 129 C 180 C
28 D 79 D 130 B 181 C
Q.197.Which curve is never U- shaped 29 B 80 B 131 B 182 A
30 B 81 D 132 A 183 A
(a) AFC (b) AVC
31 C 82 A 133 A 184 B
(c) AC (d) None 32 C 83 B 134 A 185 B
33 D 84 D 135 B 186 A
34 C 85 C 136 B 187 B
35 D 86 C 137 D 188 D
36 B 87 A 138 B 189 D
37 A 88 D 139 A 190 C
38 A 89 B 140 A 191 B
39 D 90 B 141 D 192 D
40 C 91 A 142 D 193 B
41 A 92 B 143 C 194 A
42 B 93 D 144 D 195 A
43 A 94 A 145 A 196 B
44 C 95 B 146 D 197 A
45 B 96 C 147 C
46 C 97 C 148 A
47 D 98 D 149 A
48 B 99 C 150 B
49 C 100 A 151 C
50 A 101 C 152 C
51 B 102 A 153 B
8.66 | Page
Chapter – 4 Market & Its Type Q 7. Free Entry / Exit is a characteristic feature of —
(a) Perfect Competition
MARKETS BASICS (b) Monopoly
(c) Monopolistic Competition
Q 1. Which of the following statements best describe (d) (a) and (c)
a "Market"?
(a) Place where Shares and Securities are bought and Q 8. Free Entry / Exit is a not a characteristic
sold. feature of —
(b) Place where Fruits and Vegetables are bought and (a) Perfect Competition
sold. (b) Monopoly
(c) Place where Buyers and Sellers meet and bargain (c) Monopolistic Competition
over a commodity for a price. (d) All the above.
(d) Place where transactions takes place.
Q 9. Free Entry / Exit is possible in —
Q 2. Which of these is not a feature of Market? (a) short—run (b) long—run
a) Buyers and Sellers. (c) Both (a) and (b) (d) Neither (a) nor (b)
b) Commodity, Product or Service.
c) Bargaining for a Price Q 10. Short run price is also known as:
d) Government Regulation and Control (a) Market price
(b) Showroom price
Q 3. Which of these is a feature of Market? (c) Maximum retail price
a) Perishable Nature of the commodity (d) None of these
b) Government Regulation and Control
c) One Price for a Product or Service at a given time Q 11. The market for Foodgrains, Cereals, Vegetables,
d) Scarcity of Resources etc. closely resembles —
Q 4. Which of the following is an element of Market (b) Monopoly
Structure? (c) Monopolistic Competition
(a) Buyers & Sellers (d) Oligopoly.
(b) A product or service
(c) Bargaining for a Price Q 12. Railways is an example of —
(d) All of the above (a) Perfect Competition
(b) Monopoly
Q 5.. The Market for ultimate consumers is known as (c) Monopolistic Competition
(a) Whole Sale Market (d) Oligopoly.
(b) Retail Market
(c) Unregulated Market Q 13. Air Travel Service Industry is an example of —
(d) Regulated Market (a) Perfect Competition
(b) Monopoly
Q 6. Which of the following types of competition is just (c) Monopolistic Competition
a theoretical economic concept, not a realistic case (d) Oligopoly.
where actual competition and trade take place?
(a) Monopoly Q 14. Bottled Cold Drinks Industry is an example of —
(b) Oligopoly (a) Perfect Competition
(c) Perfect Competition (b) Monopoly
(d) Monopolistic Competition (c) Monopolistic Competition
9.1 | P a g e
(d) Oligopoly.
Q 22. What is the other name given for Average
Q 15. Agricultural Goods markets depict Revenue Curve?
characteristics close to — (a) Profit Curve (b) Demand Curve
(a) Perfect Competition (c) Average Cost Curve (d) Indifference Curve
(b) Oligopoly
(c) Monopoly Q 23. Which of the following is not a characteristic
(d) Monopolistic Competition feature common to both Monopolistic Competition and
Perfect Competition?
Q 16. Which of the following is an Oligopoly? (a) Many Buyers and Sellers
(a) Mobile Industry (b) Cold Drink (b) Identical Products
(c) Automobile (d) All of these (c) Easy entry and exit of Firms
(d) Firms take other Firms' prices as given
Q 17. Toothpaste Manufacturing Industry is an
example of Q 24. The relationship Firm = Industry is applicable for
(a) Perfect Competition —
(b) Monopoly (a) Perfect Competition
(c) Monopolistic Competition (b) Monopoly
(d) Oligopoly. (c) Monopolistic Competition
(d) Oligopoly.
Q 18. Automobile (Cars) Manufacturing Industry is an
example of — Q 25. In which of the following market structures is
(a) Perfect Competition the demand curve of the market is represented by the
(b) Monopoly demand curve of the Firm?
(c) Monopolistic Competition (a) Monopolistic competition
(d) Oligopoly. (b) Perfect Competition
(c) Monopoly
Q 19. Toilet Soaps Industry is an example of — (d) Oligopoly
(b) Monopoly Q 26. The AR Curve and Industry Demand Curve are
(c) Monopolistic Competition same in the case of —
(d) Oligopoly. (a) Monopoly
(b) Oligopoly
Q 20. Mobile Phone Service Providers is an example of (c) Perfect Competition
(a) Perfect Competition (d) None of the above
(b) Monopoly
(c) Monopolistic Competition Q 27. Why is the Demand Curve of the Market in
(d) Oligopoly. Monopoly is represented by the Demand Curve of the
Firm?
Q 21. The conditions of Firm Equilibrium, i.e. MC = (a) Because there are many Firm in the market
MR, and MC cuts MR from below, is applicable for — (b) Because there is only one Firm in the market
(a) Perfect Competition (c) Because there is only one buyer in the market
(b) Monopoly (d) Because there are many buyers in the market
(d) All of the above. Q 28. The relationship Industry = Large Number of
Firms, is applicable for —
9.2 | P a g e
(b) Monopolistic Competition
(c) Monopoly
(d) Both (a) and (b) Q 35. Under which of the following forms of market
structure does a Firm has no control over the price of its
Q 29. The relationship Industry = a Few Firms, is product
applicable for — (a) Monopoly
(a) Perfect Competition (b) Monopolistic competition
(b) Monopoly (c) Oligopoly
(c) Monopolistic Competition (d) Perfect Competition
(d) Oligopoly.
Q 36. A market structure in which many Firms sell
Q 30. Which among the following market structures products that are similar but not identical is known as —
has the highest product differentiation? (a) Monopolistic Competition A
(a) Pure or Perfect Competition (b) Monopoly
(b) Monopolistic Competition (c) Perfect Competition
(c) Oligopoly (d) Oligopoly
(d) Monopoly
Q 37. Which of the following types of market structure
Q 31. Which among the following market structures is the exact opposite of Perfect Competition?
has the highest price elasticity? (a) Monopolistic competition
(a) Pure or Perfect Competition (b) Monopoly
(b) Monopolistic Competition (c) Oligopoly
(c) Oligopoly (d) Duopoly
(d) Monopoly
Q 38. Which of the following statements about Price
Q 32. Which of the following market forms will never and Marginal Cost (MC) in competitive and monopolized
suffer losses in the short run? markets is true?
(a) Perfect Competition (a) In Competitive Markets, Price = MC; in monopolized
(b) Oligopoly Markets, Price > MC.
(c) Monopoly (b) In Competitive Markets, Price = MC; in Monopolized
(d) None of these Markets, Price = MC.
(c) In Competitive Markets, Price > MC; in Monopolized
Q 33. Under which of the following market structures markets, Price > MC.
is the price lower and output larger? (d) In Competitive Markets, Price > MC; in Monopolized
(a) Perfect Competition markets, Price = MC.
(b) Monopolistic Competition
(c) Monopoly Q 39. In which of the following types of market
(d) Oligopoly structures can a Firm earn abnormal profits in the long
run?
Q 34. In which form of the market structure is the (a) Perfect Competition
degree of control over the price of its product by a Firm (b) Monopolistic competition
very large (c) Monopoly
(a) Monopoly (d) None of the above
(b) Imperfect Competition
(c) Oligopoly
(d) Perfect Competition
9.3 | P a g e
Q 40. In which of the following types of market Q 46. A market characterized by a Single Buyer of a
structure, do Firms produce homogeneous products? product or service.
(a) Monopoly (a) Monopsony (b) Bilateral Monopoly
(b) Differentiated Oligopoly (c) Duopoly (d) Oligopoly
(c) Perfect Competition
(d) Monopolistic Competition Q 47. A market characterized by a small number of
large buyers.
Q 41. Which of the following statements is incorrect? (a) Monoposony (b) Bilateral Monopoly
(a) Even Monopolist can earn losses (c) Duopoly (d) Oligopsony
(b) Firms in a perfectly competitive market are Price
Takers. Q 48. A market structure in which there is only a
(c) It is always beneficial for a Firm in a Perfectly Single Buyer and a Single Seller
Competitive Market to discriminate prices. (a) Monoposony (b) Bilateral Monopoly
(d) Kinked demand curve is related to an Oligopolistic (c) Duopoly (d) Oligopsony
Market.
Q 49. Duopoly is a market situation in which —
Q 42. Which of the following statements is not true (a) there are only two Firms in the market
with respect to the long run? (b) there is a Single Buyer of a product or service
(a) A Firm in a monopolistically competitive industry (c) there is only a Single Buyer and a Single Seller
earns only normal profits in the long run (d) none of the above
(b) A Monopolist does not make losses
(c) A Perfectly Competitive Firm earns only normal Q 50. A person who charges different prices in
profits in the long run different sub—markets is —
(d) Monopolistically Competitive Firms will be (a) Discriminating Monopolists
producing at minimum average cost (b) Simple Monopolists
(c) Selective Monopolists
Q 43. P = MR = MC = AC = is the condition of — (d) None of the above
(a) Long run equilibrium for a Firm under Perfect
Competition PERFECT COMPETITION
(b) Long run disequilibrium for a Firm
(c) Long run equilibrium for a Firm under Monopoly Q 51. In India which of the following best describes a
(d) Long run equilibrium for a Firm under Monopolistic perfectly competitive market?
competition (a) Sugarcane Cultivation / Agriculture
(b) Indian Railways
Q 44. Which of the following features is not seen in (c) Toilet Soap Industry
Imperfect Competition? (d) Electricity Distribution
(a) Few Sellers
(b) Product Differentiation Q 52. Under Pure Competition, there are Sellers.
(c) Price wars (a) Many (b) Only one
(d) All goods are Homogenous (c) A Few (d) No
Q 45. Market situation in which there are only two Q 53. Which of the following is not an essential
Firms in the market condition of Pure Competition?
(a) Monoposony (b) Bilateral Monopoly (a) Large number of Buyers and Sellers
(c) Duopoly (d) Oligopoly (b) Homogeneous Product
(c) Freedom of entry
9.4 | P a g e
(d) Absence of Transport Cost
Q 61. How are prices determined under Perfect
Q 54. Which of the following is not true about perfect Competition?
competition? (a) At the equilibrium price of Firm
(a) Purchase and sale of homogeneous goods (b) At the equilibrium prices of Industry
(b) Mobility of factors of production (c) At the point where MR = MC
(c) Free entry and exit (d) All of these
(d) Presence of advertisement
Q 62. Under Perfect Competition, each Firm's control
Q 55. Under Perfect Competition, the product is — over price is —
(a) Differentiated (a) Nil
(b) Homogeneous (b) Full and Absolute
(c) Influenced by Brand Name (c) Subject to Competing Firms' Strategies
(d) Always Intangible (d) None of the above.
Q 56. Under Perfect Competition, each Firm is a Q 63. Under Perfect Competition, Price Elasticity of
(a) Price Maker Demand is
(b) Price Taker (a) Nil (b) Less Elastic
(c) Price Maker for its own product. (c) More Elastic (d) Infinity
(d) All of the above.
Q 64. Under Perfect Competition, the Firm's Demand
Q 57. Price under perfect competition is determined Curve is
by — (a) Horizontal Line, parallel to X Axis
(a) Fir (b) Industry (b) Vertical Line, parallel to Y Axis
(c) Government (d) Society (c) Negatively Sloped
(d) Kinked.
Q 58. In a perfect competition, who set the prices:
(a) Buyers Q 65. In India, the Milk Market resembles a perfectly
(b) Sellers competitive industry. If the industry is an increasing cost
(c) Both buyers and sellers industry, the long run supply curve of the industry
(d) Government (a) Slopes upward to the right
(b) Slopes downward to the right
Q 59. In a Perfect Competitive Market — (c) Would be a vertical straight line
(a) Firm is the Price—Giver and Industry is the Price (d) Would be horizontal straight line
Taker
(b) Firm is the Price Taker and industry is the Price— Q 66. Under Perfect Competition, a Firm can earn
Giver in the long—run.
(c) Both are Price Takers (a) Normal Profits only
(d) none of the above (b) Super Normal Profits
(c) Losses
Q 60. The distinction between a single firm & an (d) All of the above.
Industry vanishes in which of the following market
condition Q 67. Under Perfect Competition, in the long—run, a
(a) Monopoly Firm
(b) Perfect competition (a) will not have excess capacity.
(c) Monopolistic competition (b) may have excess capacity
(d) Imperfect competition (c) has no capacity at all
9.5 | P a g e
(d) will leave the industry. (c) In the short run, the Firm takes Market Price as
given
Q 68. Under Perfect Competition, in the long—run, a (d) Considering the Market Price, Firm adjusts the level
Firm of output to maximize profits
(a) will always be a Optimal Firm.
(b) will never be an Optimal Firm. Q 74. Which of these is not a feature of Perfect
(c) may or may not be an Optimal Firm. Competition?
(d) will leave the industry. (a) Restriction in Entry of new Firms
(b) Perfect Knowledge
Q 69. Which of these is not a feature of Perfect (c) Efficient Transportation Facilities
Competition? (d) Uniform Market Price
(a) Large Number of Buyers & Sellers
(b) Homogeneous Products Q 75. Which of the following is not a condition of
(c) Free Entry / Exit Perfect Competition?
(d) Preference of Consumers towards one Supplier (a) Large Number of Firms
(b) Perfect Mobility of Factors
Q 70. Which of the following is a feature of Perfect (c) Informative advertising to ensure that consumers
Competition? have good information
(a) Firms are free to produce any number of units of (d) Freedom of entry and exit into and out of the
different commodities market
(b) Firms are free to enter and exit from the industry
(c) Firms are free to produce any type of a commodity Q 76. Which of the following is not a characteristic of
(d) None of the above a Perfectly Competitive Market?
(a) Large number of Firms in the industry
Q 71. One of the essential conditions Perfect (b) Outputs of the Firms are perfect substitutes for one
Competition is — another
(a) Product Differentiation (c) Firms face downward—sloping Demand Curves
(b) Multiplicity of prices for identical product at any (d) Resources are very mobile
one time
(c) Many Sellers and few Buyers Q 77. Which of the following is not a characteristic
(d) Only one price for identical goods at any one time of a Perfectly Competitive Market?
(a) Large number of Buyers and Sellers
Q 72. Which of the following is true about Perfect (b) Homogeneous Product
Competition? (c) Free entry and exit of Firms
(a) Firms can enter freely in the market but it is difficult (d) Presence of high transportation costs
to exit from the market
(b) Firms face difficulty in entering the market, but Q 78. Which of the following is not a characteristic
Firms can freely exit from the market feature of Perfect Competition?
(c) Entry and exit in the market is highly restricted (a) All the sellers sell at the same price
(d) Firms are free to enter and exit the market (b) All the products are homogenous
(c) Customers have no bargaining power
Q 73. Which of the following statements regarding (d) Customers have no purchasing power
Perfect Competition is false?
(a) Supply and Demand forces determine the price of a Q 79. Which of the following statements regarding
commodity Perfect Competition is false?
(b) All Buyers in the Market are always in position to (a) The Marginal Revenue Curve is a straight line
influence the market
9.6 | P a g e
(b) In the short run, Fixed Costs remain constant and (d) Marginal Revenue = Price
cannot be changed
(c) The Firm becomes a Price—Taker and tries to Q 86. Price—Taking Firms, i.e., Firms that operate in
achieve equilibrium a perfectly competitive market, are said to be "small"
(d) Marginal Revenue is more than the price relative to the market. Which of the following best
describes this smallness?
Q 80. Under Perfect Competition, all output can be (a) The individual Firm must have fewer than 10
sold — employees
(a) at different prices (b) The individual Firm faces a downward—sloping
(b) at the same price only demand curve
(c) at zero price (c) The individual Firm has assets of less than 20 la kh
(d) only when Buyers are willing to buy. (d) The individual Firm is unable to affect market price
through its output decisions
Q 81. Under Perfect Competition, Demand (D) =
(a) Average Revenue (AR) Q 87. For the price—taking Firm —
(b) Marginal Revenue (MR) (a) Marginal Revenue is less than Price
(c) Price (P) (b) Marginal Revenue is equal to Price
(d) All of the above (c) Marginal Revenue is greater than Price
(d) The relationship between Marginal Revenue and
Q 82. Under Perfect Competition price of the Product Price is indeterminate
(a) can be controlled by individual Firm
(b) cannot be controlled by individual Firm Q 88. The Firm in a Perfectly Competitive Market is a
(c) can be controlled within certain limit by individual Price Taker. This designation as a Price Taker is based on
Firm the assumption that —
(d) none of the above (a) The Firm has some, but not complete, control over
its product price
Q 83. In Perfect Competition, since the Firm is a (b) There are so many buyers and sellers in the market
price—taker, the Curve is a Straight Line. that any individual Firm cannot affect the market
(a) Marginal Cost (c) Each Firm produces a homogeneous product
(b) Total Cost (d) There is easy entry into or exit from the market
(c) Total Revenue place
(d) Marginal Revenue
Q 89. A Perfectly Competitive Firm Producer has
Q 84. Price Taker Firms — control over —
(a) Advertise to increase the demand for their products. (a) Price
(b) Do not advertise because most advertising is (b) Production as well as price
harmful for the society. (c) Control over production, price and consumers
(c) Do not advertise because they can sell as much as (d) None of the above
they want at the current price.
(d) Who advertise will get more profits than those who Q 90. Under Perfect Competition, Demand (D) = AR =
do not. MR = Price. This statement is —
(a) True (b) False
Q 85. Which of the following is not a characteristic (c) Partially True (d) None of the above
of a "Price Taker"?
(a) TR = P xQ Q 91. Under Perfect Competition, Total Revenue is
(b) AR = Price equal to Marginal Revenue times the quantity sold. This
(c) Negatively — sloped Demand Curve statement is —
9.7 | P a g e
(a) True (b) False (b) MC cuts MR from below
(c) Partially True (d) None of the above (c) MC is rising when it cuts MR
Q 92. If a Competitive Firm doubles its output, its
Total Revenue — Q 99. Under Perfect Competition, a Firm can earn in
(a) doubles the short—run.
(b) more than doubles (a) Normal Profits only (b) Super Normal Profits
(c) less than doubles (c) Losses (d) All of the above.
(d) cannot be determined because the price of the good
may rise or fall Q 100. Under Perfect Competition, in the short—run,
the condition AR = MR = MC = AC, means that the Firm
Q 93. A Competitive Firm maximizes profit at the is earning —
output level where — (a) Normal Profits only
(a) Price equals Marginal Cost. (b) Super Normal Profits
(b) Slope of the Firm's profit function is equal to zero. (c) Losses
(c) Marginal Revenue equals Marginal Cost. (d) All of the above.
Q 101. Under Perfect Competition, in the short—run, if
Q 94. In Perfect Competition, when MC=MR, Profit is AR > AC at the point when MC = MR, it means that the
(a) Maximum (b) Average Firm —
(c) Zero (d) Not Possible (a) Normal Profits only
(b) Super Normal Profits
Q 95. In Perfect Competition, a Firm maximizing its (c) Losses
profits will set its output at that level where — (d) All of the above.
(a) Average Variable Cost = Price
(b) Marginal Cost = Price Q 102. Under Perfect Competition, in the short—run,
(c) Fixed Cost = Price if AR < AC at the point when MC = MR, it means that the
(d) Average Fixed Cost = Price Firm —
(a) Normal Profits only
Q 96. Which of the following market situations (b) Super Normal Profits
explains Marginal Cost equal to Price for attaining (c) Losses
equilibrium? (d) All of the above.
(a) Perfect Competition.
(b) Monopoly Q 103. In the short run, if a Perfectly Competitive Firm
(c) Oligopoly. finds itself operating at a loss, it will —
(d) Monopolistic Competition. (a) reduce the size of its plant to lower fixed costs.
(b) raise the price of its product.
Q 97. In a Perfectly Competitive Market, if MC = (c) shut down.
Marginal Cost, MR = Marginal Revenue, AR = Average (d) continue to operate as long as it covers its variable
Cost and P = Price, the first order condition for profit cost.
maximization will be —
(a) MC< MR<AR< P (b) MC= MR=AR=P Q 104. Under Perfect Competition, in the short—run,
(c) MC> MR>AR> P (d) MC=MR>AR=P the condition for shut—down is —
(a) AR < AC (b) AR > AC
Q 98. Under the Perfect Competition a Firm will be in (c) AR > AVC (d) AR < AVC
Equilibrium when —
(a) MC = MR
9.8 | P a g e
(c) Total
Q 105. Which of the following is true with reference (d) Average
to shut down point in a Perfect Competition?
(a) The profits of the Firm equals its total costs Q 111. Under Perfect Competition, the burden of a
(b) At that output level the price covers the average specific tax would be borne by —
fixed costs of the Firm (a) Seller
(c) At that output level the price covers the average (b) Buyer
variable costs of the Firm (c) Seller and buyer equally
(d) At that output level the price covers the average (d) Cannot say
total costs of the Firm
Q 112. Under Perfect Competition, in the long—run,
Q 106. If the price falls below the Minimum Average the LAC Curve will be to the AR Curve.
Variable Cost, a Firm operating under Perfect (a) tangent (b) perpendicular
Competition should, in the short run, (c) parallel (d) coinciding
(a) Produce an output where MR = MC
(b) Reduce its output so as to increase the price and Q 113. Under Perfect Competition, in the long—run,
profits the ______ will be tangent to the AR Curve.
(c) Stop production (output) until price increases (a) LAC Curve (b) LMC Curve
(d) Continue to produce in the short run, but not in long (c) Demand (d) Supply
run
Q 107. In Perfect Competition, a Firm increases profit the industry is said to be in equilibrium, if —
when exceeds (a) All the Firms are earning normal profits only.
(a) Total Cost, Total Revenue (b) There is no further entry or exit of Firms to / from
(b) Marginal Cost, Marginal Revenue the market.
(c) Total Revenue, Total Fixed Cost (c) Both (a) and (b)
(d) Average Revenue, Average Cost (d) Neither (a) nor (b)
Q 108. In a perfectly competitive markets, if MR is Q 115. Under Perfect Competition, in the long—run, if
greater than MC then a firm should— SMC = SAC = LAC = LMC = LMR = LAR = Price, then the
(a) Increase its production industry is said to be —
(b) Decrease its production (a) Growing
(c) Increase in sales (b) in troubled times
(d) Decrease in sales (c) in Equilibrium
(d) inefficient
Q 109. In Perfect Competition, a Firm's Profit
diminishes when ________exceeds Q 116. In the long—run, Industry Equilibrium is
(a) Marginal Revenue, Marginal Cost achieved if SMC = SAC = LAC = LMC = LMR = LAR = Price.
(b) Marginal Cost, Marginal Revenue This condition is applicable for —
(c) Marginal Revenue, Average Cost (a) Perfect Competition
(d) Average Revenue, Average Cost (b) Monopoly
Q 110. In a perfectly competitive market, in the long (d) Oligopoly.
run, competitive prices equal the minimum possible
cost. Q 117. Under Perfect Competition, the condition for
(a) Marginal Industry Equilibrium, i.e. SMC = SAC = LAC = LMC = LMR
(b) Variable = LAR = Price, is applicable for —
9.9 | P a g e
(a) short—run (b) long—run
(c) Both (a) and (b) (d) Neither (a) nor (b) Q 125. Excess Capacity is not found under —
(a) Monopoly
Q 118. When the Perfectly Competitive Firm and (b) Monopolistic Competition
industry are in long run equilibrium then — (c) Perfect Competition.
(a) P=MR=SAC=LAC. (d) Oligopoly.
(b) D=MR=SMC=LMC.
(c) P=MR=Lowest point on the LAC curve. Q 126. Under Perfect Competition, the Firm's AR and
(d) All of the above. MR Curve will be the same as —
(a) Supply Curve
Q 119. In the long run, the Pure Competition Firm can (b) Demand Curve
have (c) Production Possibility Curve
(a) Super Normal Profit (b) Normal Profits (d) Indifference Curve
(c) Losses (d) All of these
Q 127. Under Perfect Competition, the Firm's Demand
Q 120. In Long run which of the following is true for a Curve will be the same as —
perfect competition (a) Marginal Revenue (MR) Curve
(a) Industry is operating at minimum point of AC curve (b) Average Revenue (AR) Curve
(b) MC is greater than MR (c) Both (a) and (b)
(c) AFC is less than AVC (d) Neither (a) nor (b)
(d) Price is less than AC
Q 128. Under Perfect Competition, the Firm's MC
Q 121. In Perfect Competition, in the long run — Curve will be the same as —
(a) There are large Profits for the Firm (a) Supply Curve
(b) There are large Losses for the Firm (b) Demand Curve
(c) There is no super—normal profit and no loss for the (c) Production Possibility Curve
Firm (d) Indifference Curve
(d) There are negligible profits for the Firm
Q 129. Normally, in the short run, the supply curve of
Q 122. What are the conditions for long—run a perfectly competitive Firm slopes
equilibrium of the Competitive Firm? (a) Downward from left to right
(a) LMC = LAC = P (b) SMC = SAC = LMC (b) Upward from right to left
(c) P = MR (d) All of these (c) Upward from left to right
(d) Downward from right to left
Output is produced at — Q 130. A Purely Competitive Firm's Supply Schedule in
(a) minimum feasible cost the short run is determined by —
(b) maximum cost (a) Its Average Revenue
(c) optimal cost (b) Its Marginal Revenue
(d) zero cost (c) Its Marginal Utility for money curve
(d) Its Marginal Cost curve
resources will be — Q 131. In Perfect Competition, in the long run, if a
(a) fully used (b) partially used new Firm enters the industry, the Supply Curve shifts to
(c) not used at all (d) wasted the right resulting in —
(a) Fall in Price (b) Rise in Price
(c) Reduction in Supply (d) No change in Price
9.10 | P a g e
A Competitive Firm sells its product at Market Price of Z
51 per unit. The Fixed Cost is 300 and Variable Cost Q 138. Monopolist can control only
for different level of production are shown in the (a) Price (b) Demand
following table. Answer the following questions (c) Utility (d) Both (a) & (b)
Q 139.
Fixed Total Which of the following is false regarding
C C
Variable Monopoly?{Omit this Question}
Quantity o o AVC ATC MC
Cost (a) Firm is a price taker
s s
t t (b) Unique product
0 (c) Single Seller
10 470 (d) None of the above
20 980
30 1850 Q 140. Under which of the followings forms of market
40 3400 structure does a firm has very considerable control over
the price of its product?
Q 132. When production is 30 units, the Average (a) Monopoly
Variable Cost is — (b) Perfect competition
(a) 70.6 (b) 60.6 (c) Monopolistic competition
(c) 61.6 (d) 71.6 (d) Oligopoly
Q 133. To maximize profit, the Firm should produce Q 141. Which of the following best describes
— Monopoly?
(a) 30 units (b) 10 units (a) An indisputable market leader in an industry
(c) 20 units (d) 40 units (b) Only a single buyer in the market
(c) A single seller with large control over the price in
Q 134. If the Market Price drops from ₹ 51 to ₹ 47, the industry
the Firm should — (d) Only a single seller with complete control over the
(a) Close down (b) Produce 10 units industry
(c) Produce 30 units (d) Produce 20 units
Q 142. In India, Monopoly exists in the following
Monopoly industry —
(a) Courier Services
Q 135. Under Monopoly, the product is — (b) Internet Services providing industry
(a) Differentiated (b) Homogeneous (c) Rail Transportation
(c) Necessity Goods (d) Always Intangible (d) Toilet Soaps Industry
Q 136. In Monopoly, entry of new Firms — Q 143. A Market in which a Single Seller is required
(a) is restricted at all times for efficient production is called —
(b) is possible only in short—run (a) Regulated Industry
(c) is possible only in long—run (b) Natural Monopoly
(d) both (b) and (c) (c) Legal Monopoly
(d) Contestable Market
Q 137. Under Monopoly, each Firm is a
(a) Price Maker Q 144. If the Electricity Market is a Natural Monopoly,
(b) Price Taker it is preferred to have a single producer rather than
(c) Price Maker for its own product. several small producers because —
9.11 | P a g e
(a) Marginal Cost is maximized (c) AR Curve lies below the MR Curve.
(b) Marginal Revenue is maximized (d) AR Curve is parallel to the MR Curve.
(c) Average Total Cost is minimized
(d) Profits are maximized Q 152. Under Monopoly, a Firm can earn in the long-
run.
Q 145. By Imperfect Monopoly, we mean — (a) Normal Profits only
(a) It is possible to substitute the Monopolized product (b) Super Normal Profits
with another monopolized product (c) Either (a) or (b)
(b) Entry of new Firms is possible to produce the same (d) Losses
product
(c) The amount of output produced is very small Q 153. In long-run a monopolist always earn profits
(d) None of the above (a) Normal (b) Abnormal
(c) Zero profit (d) Loss
Q 146. Under Monopoly, each Firm's control over
price is — Q 154. In the short run, the Monopolist —
a) Nil (a) Earns Normal Profits
b) Full and Absolute (b) Earns Super Normal Profits
c) Subject to Competing Firms' Strategies (c) Incurs losses
d) None of the above. (d) Any of these
Q 147. In case of a profit maximizing Monopolist, Q 155. Abnormal profits exists in the long run only
what point determines the Selling Price? under
(a) Point where marginal cost equals average revenue (a) Monopoly
(b) Point where average cost equals marginal revenue (b) Perfect competition
(c) Point where average cost equals average revenue (c) Monopolistic competition
(d) Point where marginal cost equals marginal revenue (d) Oligopoly
Q 148. Under Monopoly, Price Elasticity of Demand is Q 156. Under Monopoly, in the long—run, a Firm —
(a) Nil (b) Less Elastic (a) will not have excess capacity.
(c) More Elastic (d) Infinity (b) may have excess capacity
(c) has no capacity at all
Q 149. Under Monopoly, the Firm's Demand Curve is (d) will leave the industry.
(a) Horizontal Line, parallel to X Axis
(b) Vertical Line, parallel to Y Axis Q 157. Under Monopoly, in the long—run, a Firm —
(c) Negatively Sloped (a) will always be a Optimal Firm.
(d) Kinked. (b) will never be an Optimal Firm.
(c) may or may not be an Optimal Firm.
Q 150. A Monopolist who faces a negatively sloped (d) will leave the industry.
demand curve operates in the region where the
elasticity of demand is — Q 158. Monopolies are allocatively inefficient because
(a) Less than one (b) Equal to one (a) they restrict the output to keep the price higher
(c) Greater than one (d) Between zero and one than under Perfect Competition.
(b) they charge a price higher than the Marginal Cost.
Q 151. In Monopoly, the relationship between (c) both (a) and (b) are correct.
Average and Marginal Revenue Curves is as follows: (d) both (a) and (b) are incorrect.
(a) AR Curve lies above the MR Curve.
(b) AR Curve coincides with the MR Curve.
9.12 | P a g e
(c) Economics of scale does not influence the price
Q 159. The degree of Monopoly Power is measured in (d) At the existing market rate
terms of difference between —
(a) Marginal Cost and Price Q 167. In Monopoly Market, the product has —
(b) Average Cost and Average Revenue (a) Perfect Substitutes
(c) Marginal Cost and Average Cost (b) No Close Substitutes
(d) Marginal Revenue and Average Cost (c) the same feature as Giffen Goods
Q 160. Which of these is not a feature of Monopoly? .
(a) Many Sellers (b) Many Buyers Q 168. Under Monopoly, in the short—run, the Firm
(c) No substitutes (d) Firm = Industry can never make Losses. This statement is —
(a) True (b) False
Q 161. Which of these is not a feature of Monopoly? (c) Partially True (d) None of the above
(a) Single Seller (b) Firm = Industry
(c) No substitutes (d) Elasticity of Demand = 0 Q 169. Under monopoly which of the following are
correct—
Q 162. Which of these does not apply to Monopoly? (a) AR&MR both are downward sloping
(a) Single Seller (b) MR lies half way between AR & Y axis
(b) Firm = Industry (c) MR can be zero or negative
(c) Free Entry and Exit of Firms (d) all of the above
(d) No substitutes
Q 170. Equilibrium Price of a Monopolist is -
Q 163.
Which of the following is not the (a) Less than Marginal Cost
characteristic of Monopoly? (b) Equal to Marginal Cost
(a) Many Buyers (c) Equal to Marginal Revenue
(b) Heterogeneous Products (d) More than Marginal Cost
(c) Free Entry of new Firms
(d) Both b & c Q 171. A Monopolist is able to maximize his profits
when —
Q 164. Which of the following features is not (a) His output is maximum
associated with a Monopoly market structure? (b) He charges a high price
(a) There is only one seller in the market (c) His average cost is minimum
(b) There are no close substitutes for the product (d) His Marginal Cost is equal to Marginal Revenue
(c) There are barriers to entry
(d) There are no close complements for the product Q 172. If Marginal Revenue exceeds Marginal Cost, a
Monopolist should —
Q 165. All of the following are characteristics of a (a) increase output.
Monopoly except — (b) decrease output.
(a) There is a single Firm (c) keep output the same because profits are
(b) The Firm is a Price Taker maximized when Marginal Revenue exceeds
(c) The existence of some advertising Marginal Cost.
(d) The Firm produces a unique product (d) raise the price.
Q 166. Economics of Scale allows the Monopolist to Q 173. Under Monopoly, in the short—run, if AR > AC
set a _______ price than any new entrant. at the point when MC = MR, it means that the Firm —
(a) Higher (a) Normal Profits only
(b) Lower (b) Super Normal Profits
9.13 | P a g e
(c) Losses
(d) All of the above. Q 180. Price Discrimination in a Monopoly is described
as —
Q 174. Under Monopoly, in the short—run, if AR < AC (a) Same product selling at different prices since the
at the point when MC = MR, it means that the Firm — costs of production are different
(a) Normal Profits only (b) Same product selling at different prices though the
(b) Super Normal Profits costs of production are same
(c) Losses (c) Different products having same price though costs
(d) All of the above. of production are same
(d) Different products having different prices since
Q 175. Under Monopoly, in the short—run, the Firm costs of production are different
will never shut—down. This statement is —
(a) True (b) False Q 181. Objectives of price discrimination in
(c) Partially True (d) None of the above international market is—
(a) To capture foreign markets
Q 176. Under Monopoly, in the short—run, the (b) To dispose of surplus stock
condition for shut—down is — (c) To earn maximum profit
(a) AR < AC (b) AR > AC (d) All of the these
(c) AR > AVC (d) AR < AVC
Q 182. Price discrimination will not be profitable if
Q 177. If a Monopolist is operating at a production elasticity of demand is_____ in different markets.
level where Marginal Cost is 10 and Marginal Revenue is (a) Uniform (b) Different
25, what action you would suggest to him? (c) Less (d) Zero
(a) To reduce the price to 20
(b) To increase the costs by ' 4 Q 183. Discriminating Monopoly implies that the
(c) To increase output till Marginal Revenue would Monopolist charges different prices for his commodity
equal Marginal Cost —
(d) To stop production (a) From different groups of consumers
(b) For different uses
Q 178. When different prices are charged by the (c) At different places
Producer, from different customers, it is called (d) Any of the above
(a) Demand Supply Equilibrium
(b) Price Discrimination Q 184. Which of these is not a pre—requisite for Price
(c) Optimum Price Search Discrimination?
(d) Profiteering (a) Seller's Control over the supply of his product
(b) Market Segmentation
Q 179. A Monopolist who is selling in two markets in (c) Differing Elasticity in various market segments
which demand is not identical will be unable to (d) Different versions of the same product
maximize his profits unless he —
(a) Sells below Costs of Production in both markets. Q 185. The price discrimination under monopoly will
(b) Practices Price Discrimination. be possible under which of the following conditions?
(c) Equates the volume of sales in both markets. (a) The seller has no control over the supply of his
(d) Equates Marginal Costs with Marginal Revenue in product
one market only. (b) The market has the same conditions all over
(c) The price elasticity of demand is different in
different markets
(d) The price elasticity of demand is uniform
9.14 | P a g e
(e) —
Q 186. Which of these is a pre—requisite for Price (a) e = 1 (b) e < 1
Discrimination? (c) e > 1 (d) e = 0
(a) Divisibility of Market into segments
(b) No scope of re—sale between segments Q 192. Under Price Discrimination, the Producer Firm
(c) Differing Elasticity in various market segments may charge lower prices from a market, if Price
(d) All of the above Elasticity (e)
(a) e = 1 (b) e < 1
Q 187. Which of the following is a condition which (c) e > 1 (d) e = 0
makes Price Discrimination possible?
(a) The market must be divided into sub markets with Q 193. For price discrimination to be successful, the
different price elasticities elasticity of demand for the commodity in the two
(b) There has to be an effective separation of the markets, should be:{Omit this question}
submarkets (a) Same
(c) Size of the submarkets should be very large (b) different
(d) Both a and b above (c) Constant
(d) Zero
Q 188. Barriers to entry like_________allows the
Monopolist to charge a price much below then the price Q 194. Price Discrimination is not possible if the market
of new entrant, thereby driving the new entrant out of is an indivisible whole of Buyers. This statement is —
business. (a) True
(a) Economics of Scale (b) False
(b) Product Differentiation (c) Partially True
(c) Price Discrimination (d) None of the above
(d) High Quality Product
Q 195. For practicing Price Discrimination, the Seller
Q 189. Why is first degree price discrimination termed should be able to divide his market into two or more
as the extreme form of price discrimination — sub—markets. The statement is —
(a) All the Firms in the industry undertake price (a) True
discrimination (b) False
(b) Firms in the industry discriminate in price for almost (c) Partially True
all the products they are producing (d) None of the above
(c) Firms earn the least profit in this type of
discrimination; they are just able to cover the cost Q 196. Price Discrimination is possible —
(d) In this type of discrimination Firms charge the (a) Only under Monopoly situation
consumers the maximum price (b) Under any market form
(c) Only under Oligopoly
Q 190. Which of the following statements in not true (d) Only under Perfect Competition
about a discriminating Monopolist?
(a) He operates in more than one market Q 197. Discriminating Monopoly is possible if two
(b) He makes more profit because he discriminates markets have
(c) He maximizes his profits in each market (a) Rising Cost Curves
(d) He charges different prices in each market (b) Rising and declining Cost Curves
(c) Different Elasticities of Demand
Q 191. Under Price Discrimination, the Producer Firm (d) Equal Elasticities of Demand
can charge higher prices from a market, if Price
Elasticity
9.15 | P a g e
Q 198. Which of the following is false with reference to Q 204. Under Monopolistic Competition, each Firm's
first—degree price discrimination? control over price is —
(a) The Monopolist will be able to extract entire (a) Nil
Consumer's Surplus (b) Full and Absolute
(b) The price of each unit will be different (c) Reasonable
(c) By following first degree price discrimination, the (d) None of the above.
Monopolist will earn higher profits than he would
have earned by adopting a single price Q 205. Under Monopolistic Competition, Price
(d) The price of the first unit will be less than that of Elasticity of Demand is —
the subsequent units (a) Nil (b) Less Elastic
(c) More Elastic (d) Infinity
Monopolistic Competition Q 206. Under Monopolistic Competition, the Firm's

Demand Curve is —
Q 199. Under Monopolistic Competition, there are (a) Horizontal Line, parallel to X Axis
_______Sellers. (b) Vertical Line, parallel to Y Axis
(a) Many (b) Only one (c) Negatively Sloped
(c) A Few (d) No (d) Kinked.
Q 200. Under Monopolistic Competition, the product is Q 207. Under Monopolistic Competition, a Firm can
(a) Differentiated earn _______ in the long—run.
(b) Homogeneous (a) Normal Profits only (b) Super Normal Profits
(c) Necessity Goods (c) Losses (d) All of the above.
(d) Always Intangible
Q 208. Which of the following markets has the
Q 201. A market structure in which many firms sell concept of group equilibrium in long—run?
product that are similar, but not identical. (a) Monopoly
(a) Monopolistic Competition (b) Perfect competition
(b) Monopoly (c) Monopolistic competition
(c) Perfect Competition (d) Oligopoly
(d) Oligopoly
Q 209. 'Excess Capacity' is the essential characteristic
Q 202. Selling outlay is an essential part of which of of the Firm in the market form of —
the following market situation (a) Monopoly
(a) Monopolistic Competition (b) Perfect Competition
(b) Perfect Competition (c) Monopolistic Competition
(c) Monopoly (d) Oligopoly
(d) Pure Competition
Q 210.
N on-price competition in popular sense called —
Q 203. Under Monopolistic Competition, each Firm is (a) Monopoly market
a_________ (b) Oligopoly market
(a) Price Maker (c) Monopolistic competition
(b) Price Taker (d) Perfect competition
(c) Price Maker for its own product.
9.16 | P a g e
(d) Pure Competition.
Q 211. Which of these does not apply to Monopolistic
Competition? Q 218. A Firm under Monopolistic Competition
(a) Large Number of Buyers advertises —
(b) Large Number of Sellers (a) to compete successfully with the rival Firms
(c) Product Differentiation (b) to lower cost of production
(d) Price Competition (c) to increase sales and profit
(d) because it cannot raise price
Q 212. Which of these does not apply to Monopolistic
Competition? Q 219. Through more advertising, a monopolistically
(a) Product Differentiation competitive Firm has successfully created more demand
(b) Free entry /exit for its product. It would have resulted in shifting of —
(c) Large Number of Buyers (a) AC Curve upward
(d) Single Seller (b) MR Curve to the left
(c) AC Curve upward and MR curve to the left
Q 213. Which of the following is not a feature of (d) AC Curve upward and MR curve to the right
Monopolistic Competition?
(a) Large Number of Sellers Q 220. Under Monopolistic Competition, Price
(b) Product differentiation Discrimination is not possible at all. This statement is —
(c) Non—Price competition (a) True (b) False
(d) None of these (c) Partially True (d) None of the above
Q 214. Which of the following is not a characteristic Q 221. Which of these does not apply to Monopolistic
feature of Monopolistic Competition? Competition?
(a) Many Buyers and Sellers (a) Aggressive Advertising and Publicity
(b) Identical Products (b) Product improvement and Development
(c) Easy entry and exit of Firms (c) Price Competition
(d) Firms take other Firms' prices as given (d) Efficient after—sales service
Q 215. Which of these applies to Monopolistic Q 222. Under Monopolistic Competition, in the short—
Competition? run, the Firm can never make Losses. This statement is
(a) Price Competition —
(b) Restrictions in entry /exit (a) True (b) False
(c) Large Number of Sellers (c) Partially True (d) None of the above
(d) Homogeneous Product
Q 223. Under Monopolistic Competition, the Firm can
Q 216. Under Monopolistic Competition, each Seller earn _________in the short—run.
tries to develop Brand Loyalty for his product. This (a) Normal Profits only
statement is — (b) Super Normal Profits
(a) True (b) False (c) Losses
(c) Partially True (d) None of the above (d) All of the above.
Q 217. The sale of branded articles is common in a Q 224. In short run, a Firm in Monopolistic Competition
situation of —
(a) Excess Capacity. (a) always earns profits
(b) Monopolistic Competition. (b) incurs losses
(c) Monopoly. (c) earns normal profit only
9.17 | P a g e
(d) may earn normal profit, super normal profit or incur (c) In the rising segment of the LAC Curve.
losses (d) when price is equal to Marginal Cost.
Q 225. In long—run, all Firms in Monopolistic Q 232. Under Monopolistic Competition, in the long—
Competition — run, resources —
(a) earn super normal profits (a) will be fully used
(b) earn normal profits (b) may be partially used
(c) incur losses (c) may not be used at all
(d) may earn super normal profit, normal profit or in (d) will not be required at all
incur losses
Q 233. Monopolistic Competition differs from Perfect
Q 226. In the short run equilibrium of a Firm in Competition primarily because —
Monopolistic Competition, which Curve is U shaped? (a) In Monopolistic Competition, Firms can differentiate
(a) AR (b) AC their products
(c) MR (d) MC (b) In Perfect Competition, Firms can differentiate their
products
Q 227. Under Monopolistic Competition, in the short— (c) In Monopolistic Competition, entry into the industry
run, the condition AR = MR = MC = AC, means that the is blocked
Firm is earning — (d) In Monopolistic Competition, there are relatively
(a) Normal Profits only (b) Super Normal Profits few barriers to entry
(c) Losses (d) All of the above.
Q 234. The long—run equilibrium outcomes in
Q 228. In Monopolistic Competition, the long—run Monopolistic competition and Perfect Competition are
equilibrium price will be equal to — similar, because in both market structures —
(a) Marginal Revenue (a) The efficient output level will be produced in the
(b) Average Cost long run
(c) Marginal Cost (b) Firms will be producing at minimum average cost
(d) Both (a) and (c) (c) Firms will only earn a normal profit
(d) Firms realize all economies of scale
Q 229. Under Monopolistic Competition, in the long—
run, if MC = MR and LAC = LAR, then the industry is said Oligopoly
to be — Q 235. Under Oligopoly, there are Sellers.
(a) Growing (b) in troubled times (a) Many (b) Only one
(c) in Equilibrium (d) inefficient (c) A Few (d) No
Q 230. In the long—run, Industry Equilibrium is Q 236. ________is a situation is which a firm bases its
achieved in Monopolistic Competition only at the lowest market policy on part of the expected behavior of a few
point of LAC Curve. This statement is close rivals-
(a) True (a) monopoly (b) oligopoly
(b) False (c) perfect competition (d) monopolish
(c) Partially True
(d) None of the above Q 237. Which one of the following is the best example
of agreement between Oligopolists?
Q 231. In Monopolistic Competition, a Firm is in long (a) GATT (b) OPEC
run equilibrium —{Omit this Question} (c) WTO (d) UNIDO
(a) at the minimum point of the LAC Curve.
(b) in the declining segment of the LAC Curve.
9.18 | P a g e
Q 238. If Firms in the Toothpaste Industry have the
following market shares, which market structure would Q 243. Which of the following most closely
best describe the industry? approximates the definition of an Oligopoly?
Firm Market Share% (a) Tobacco Industry
White Shine Ltd 29.8 (b) Vehicle manufacturers in India
White Teeth Ltd 18.7 (c) Rice Producers
More White Teeth Ltd 14.3 (d) Readymade Garments units in a city
Sure Health Ltd 11.6
Bright Teeth Ltd 9.4 Q 244. Pure Oligopoly is one where —
Dental Care Ltd 8.8 (a) There are many sellers producing homogeneous
Brighter than White Ltd 7.4 product
Total 100.0 (b) There are many sellers producing differentiated
product
(a) Perfect Competition (c) There are few sellers producing homogeneous
(b) Monopolistic Competition product
(c) Oligopoly (d) There are few sellers producing differentiated
(d) Monopoly product
Q 239. One characteristic not typical of Oligopolistic Q 245. Oligopolistic Industries are characterized by
Industry is (a) A few dominant Firms and substantial barriers to
(a) Horizontal Demand Curve entry
(b) Too much importance to Non—Price Competition (b) A few large Firms and no entry barriers
(c) Price Stickiness (c) A large number of small Firms and no entry barriers
(d) A small number of Firms in the industry (d) One dominant Firm and low entry barriers
Q 240. Under Oligopoly, each Firm's control over Q 246. In which of the following, a Kinked Demand
price is — Curve can be seen in a Firm?
(a) Nil (a) Monopolistic competition
(b) Full and Absolute (b) Monopoly
(c) Subject to Competing Firms' Strategies (c) Duopoly
(d) None of the above. (d) Oligopoly
Q 241. Under Oligopoly, the Firm's Demand Curve is Q 247. Which of these does not apply to Oligopoly?
— (a) A Few Sellers
(a) Horizontal Line, parallel to X Axis (b) Inter—dependence between Sellers
(b) Vertical Line, parallel to Y Axis (c) Only one Buyer
(c) Negatively Sloped (d) Group Behaviour between Sellers
(d) Kinked.
Q 248. One characteristic not typical of Oligopolistic
Q 242. Oligopoly is the market from in which there industry is
are (a) Too much importance to Non—Price Competition
(a) Many Sellers and many Buyers (b) Price Leadership
(b) One Seller and many Buyers (c) Horizontal Demand Curve
(c) Few Sellers and many Buyers (d) A small number of Firms in the industry
Q 249. Which of these applies to Oligopoly?
(a) A Few Sellers
9.19 | P a g e
(b) Group Behaviour between Sellers
(c) Non—Price Competition Q 256. As per Kinked Demand Curve Theory of
(d) All the above Oligopoly, the Kink is formed at —
(a) Prevailing Price
Q 250. Duopoly is a specific form where are — (b) Higher than Prevailing Price
(a) No Sellers at all (c) Lower than Prevailing Price
(b) Only one Seller (d) Origin
(c) Two Sellers
(d) Large Number of Sellers Q 257. As per Kinked Demand Curve Theory of
Oligopoly, the demand above the Kink is —
Q 251. The American Economist Sweezy developed (a) more elastic
the — (b) less elastic
(a) Production Possibility Curve concept (c) unit elastic
(b) Diminishing Marginal Utility Theory (d) zero elastic
(c) Kinked Demand Curve Theory
(d) Price Discrimination Theory Q 258. As per Kinked Demand Curve Theory of
Oligopoly, the demand below the Kink is —
Q 252. When an Oligopolistic Firm changes its price, (a) more elastic
its rival Firms — (b) less elastic
(a) will retaliate or react and change their prices (c) unit elastic
(b) will not react at all (d) zero elastic
(c) will exit the market
(d) will appeal to the Government Q 259. The upper part of kinked demand curve is — Q 26
(a) Elastic
Q 253. A Price War in an Oligopoly refers to — (b) Inelastic
(a) Successive and continued price cuts by the Firms to (c) Perfectly Elastic
increase sales and revenues (d) Unitary Elastic
(b) Free gift offers by all Firms on a competitive basis
(c) Flooding the market with its goods by one Firm Q 260. What does the Kinked Demand Curve explain?
leading to price reduction by others (a) Price Differentiation
(d) Increase in the price by one Firm and other Firms (b) Other than Price Competition
following in a reverse way by decreasing their prices (c) Rivalry reactions in an Oligopoly
Q 254.A Firm under ________ cannot have sure and
definite Demand Curve. Q 261. A Firm having a Kinked Demand Curve
(a) Perfect Competition indicates that
(b) Monopoly (a) If the Firm increases the price, competitive Firms
(c) Monopolistic Competition reduce the price
(d) Oligopoly. (b) If the Firm increases the price, competitive Firms
also increase the price
Q 255. Under Oligopoly, if one Firm reduces its prices, (c) If the Firm reduces the price, competitive Firms do
the other Firms will generally — not reduce the price
(a) reduce their prices (d) If the Firm increases the price, competitive Firm do
(b) increase their prices not increase the price
(c) not react at all
(d) exit the market.
9.20 | P a g e
Q 262. The Kinked Demand Hypothesis is designed to Q 268. If the Demand Curve confronting an individual
explain in the context of Oligopoly — Firm is perfectly elastic then
(a) Price and Output Determination (a) The Firm is a Price Taker
(b) Price Rigidity (b) The Firm cannot influence the Price
(c) Price Leadership (c) The Firm's Marginal Revenue Curve coincides with
(d) Collusion among Rivals Average Revenue Curve
Q 263. The Kinked Demand Curve model assumes
that price elasticity of demand — Q 269. Kinked demand curve of the Oligopoly
(a) Is higher for a price increase than for a price indicates
decrease I. If one firm decreases price other firms also
(b) Is lower for a price increase than for a price increase decreases the price
(c) Is perfectly elastic for a price increase perfectly II. If one firm increases price other firms also increases
inelastic for a price decrease the price
(d) Is perfectly inelastic for a price increase and III. If one firm decreases the price other firms does not
perfectly elastic for a price increase decrease the price.
IV. If one firm increases the price other firms does not
Q 264. The demand curve of an oligopolist is increase the price.
(a) Determinate (b) Indeterminate (a) Only I
(c) Circular (d) Vertical (b) II and IV
(c) I and IV
Q 264. Kinky demand curve model explains the (d) II and III
market situation known as
(a) Pure Oligopoly
(b) Collusive oligopoly
(c) Differentiated Oligopoly
(d) Price rigidity
Q 266. The Kinked Demand Curve model of Oligopoly

assumes that —
(a) Response to a price increase is less than the
response to a price decrease
(b) Response to a price increase is more than the
response to a price decrease
(c) Elasticity of demand is constant regardless of
whether price increases or decreases
(d) Elasticity of demand is perfectly elastic if price
increases and perfectly inelastic if price decreases.
Q 267. In Oligopoly, why it difficult to determine the

equilibrium price and output?
(a) All the Firms take their independent decisions
(b) Firms are interdependent making it difficult to
specify the particular reaction of the rivals
(c) Very few Firms exist in the market
(d) A large number of Firms exist in the market
9.21 | P a g e
Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n Q. n A.n
1 C 52 A 103 D 154 D 205 C 256 A
2 D 53 D 104 D 155 A 206 C 257 A
3 C 54 D 105 C 156 B 207 A 258 B
4 D 55 B 106 C 157 C 208 C 259 A
5 B 56 B 107 D 158 C 209 C 260 C
6 C 57 B 108 A 159 A 210 C 261 D
7 D 58 C 109 B 160 A 211 D 262 B
8 B 59 B 110 D 161 D 212 D 263 B
9 C 60 B 111 D 162 C 213 D 264 B
10 A 61 B 112 A 163 C 214 B 265 D
11 A 62 A 113 A 164 D 215 C 266 A
12 B 63 D 114 C 165 B 216 A 267 B
13 D 64 A 115 C 166 B 217 B 268 D
14 D 65 A 116 A 167 B 218 C 269 C
15 A 66 A 117 B 168 B 219 C
16 D 67 A 118 D 169 D 220 B
17 C 68 A 119 B 170 D 221 C
18 D 69 D 120 A 171 D 222 B
19 C 70 B 121 C 172 A 223 D
20 D 71 D 122 D 173 B 224 D
21 D 72 D 123 A 174 C 225 B
22 B 73 B 124 A 175 B 226 B
23 B 74 A 125 C 176 D 227 A
24 B 75 C 126 B 177 C 228 B
25 C 76 C 127 C 178 B 229 C
26 A 77 D 128 A 179 B 230 B
27 B 78 D 129 C 180 B 231 B
28 D 79 D 130 D 181 D 232 B
29 D 80 B 131 A 182 A 233 A
30 D 81 D 132 C 183 D 234 C
31 A 82 B 133 C 184 D 235 C
32 D 83 D 134 B 185 C 236 B
33 A 84 C 135 A 186 D 237 B
34 A 85 C 136 A 187 D 238 C
35 D 86 D 137 A 188 A 239 A
36 A 87 B 138 A 189 D 240 C
37 B 88 B 139 A 190 C 241 D
38 A 89 D 140 A 191 B 242 C
39 C 90 A 141 D 192 C 243 B
40 C 91 A 142 C 193 B 244 C
41 C 92 A 143 B 194 A 245 A
42 D 93 D 144 C 195 A 246 D
43 A 94 A 145 A 196 A 247 C
44 D 95 B 146 B 197 C 248 D
45 C 96 A 147 D 198 D 249 D
46 A 97 B 148 B 199 A 250 C
47 D 98 D 149 C 200 A 251 C
48 B 99 D 150 A 201 A 252 A
49 A 100 A 151 A 202 A 253 A
50 A 101 B 152 B 203 D 254 D
51 A 102 C 153 B 204 C 255 A
9.22 | P a g e
Q.8. Market which have two firms are known as
Chapter 4- Market & Its Forms (a) Oligopoly (b) Duopoly
(c) Monopsony (d) Oligopsony
Q.1. Which of the following is not an essential condition
of pure competition? Q.9. Monopolist can determine :
(a) Large number of buyers and sellers (a) Price (b) Output
(b) Homogeneous product (c) Either price or output (d) None
(c) Freedom of entry
(d) Absence of transport cost Q.10. MR of n th unit is given by :
(a) 𝑇𝑅𝑛 /𝑇𝑅𝑛−1 ， (b) 𝑇𝑅𝑛 +𝑇𝑅𝑛−1
Q.2. Under which of the following forms of market (c) 𝑇𝑅𝑛 -𝑇𝑅𝑛−1 (d) All of these
structure does a firm has no control over the price of its
product : Q.11. The market structure in which the number of
(a) Monopoly sellers is small and there is inter dependence in decision
(b) Oligopoly making by the firms is known as :
(c) Monopolistic competition (a) Perfect competition (b)Oligopoly
(d) Perfect competition (c)Monopoly (d) Monopolistic competition
Q.12. In perfect competition, since the firm is a price
1
Q.3. Given the relation MR = 𝑀𝑅 = 𝑃 (1 − ) if e > taker, the _______ curve is a straight line:
𝑒
1then: (a) Marginal cost (b) Total cost
(a) MR>0 (b) MR <0 (c) Total revenue (d) Marginal revenue
(c) MR=0 (d) None
𝑒 −1
Q.13. Given the relation MR = 𝑃 ( ) , if e < 1, then:
𝑒
Q.4. Profits of the firm will be more at : (a) MR<0 (b) MR > 0
(a) MR=MC (c) MR = 0 (d) None of these.
(b) Additional revenue from extra unit equals its
additional cost Q.14. For a discriminating monopolist the condition for
(c) Both of above equilibrium is:
(d) None (a) MR >MC (b) MR, = MR,
(c) MR, = MR, = MC (d) All of the above.
Q.5. What should firm do when Marginal revenue is
greater than marginal cost? Q.15. Average revenue curve is also known as:
(a) Firm should expand output (a) Profit curve (b) Demand curve
(b) Effect should be made to make them equal (c) Supply curve (d) Average cost curve.
(c) Prices should be covered down
(d) All of these Q.16. Given, AR = 5 and Elasticity of demand = 2 Find
MR.
Q.6. Under monopoly price discrimination depends upon (a) + 2.5 (b)-2.5
(a) Elasticity of demand for commodity (c) +1.5 (d) +2.0
(b) Elasticity of supply for commodity
(c) Size of market Q.17. If a seller obtains ₹3,000 after selling 50 units and
(d) All of above ₹3,100 after selling 52 units, then marginal revenue will
be
Q.7. Firms in a monopolistic market are price _______. (a) ₹59.62 (b) ₹50.00
(a) Takers (b) Givers (c) ₹60.00 (d) ₹59.80
(c) Makers (d) Acceptors
9.23 | Page
Q.18. A firm will close down in the short period, if its AR (b) A firm will be making maximum profits by expanding
is less than : output to the level where marginal revenue is equal
(a) AC (b) AVC to marginal cost.
(c) MC (d) None of the above (c) Both (a) and (b)
(d) None of these
Q.19. Which one of the following expressions is correct
for Marginal Revenue? Q.27. Market consists of
1−𝑒 (a) Buyer and Seller
(a) MR = 𝐴𝑅 ( ) (b) MR =𝑇𝑅𝑛 - 𝑇𝑅𝑛+1
𝑒
𝛥𝑇𝑅 𝑇𝑅 (b) One price for one product at a given time
(c) MR = (d) MR =
𝛥𝑄 𝑄 (c)Both (a) and
(d) None
Q.20. The market for ultimate consumer is known as:
(a) Wholesale market (b) Regulated market Q.28. Demand for a product is unitary elastic then
(c) Unregulated market (d) Retail market (a) MR=0 (b) MR > 0
(c) MR < 0 (d) None of the above
Q.21. For a firm to become profitable it should expand
output whenever: Q.29. Which of the following is true, when the firm is at
(a) Marginal revenue is equal to marginal cost equilibrium?
(b) Marginal revenue is less than marginal cost (a) MC < MR
(c) Marginal revenue is greater than marginal cost (b) MC curve cuts the MR curve from below
(d) Average revenue is greater than average cost. (c) Both (a) and (b)
Q.22. On the basis of nature of transactions, a market
may be classified into: Q.30. When TR is at its peak then MR is equal to -
(a) Spot market and future market (a) Zero (b) Positive
(b) Regulated market and unregulated market (c) Negative (d) None of the above
(c) Wholesale market and retail market
(d) Local market and national market. Q.31. When price is ₹20, Quantity demanded is 10 units
and price is decreased by 5% then quantity demand
Q.23. In very short period market: increased by 10% then Marginal revenue is _______.
(a) Supply changes but demand remains same (a) ₹10 (b) ₹11
(b) Supply changes but price remains same (c) ₹9 (d) ₹20
(c) Supply remains fixed
(d) Supply and demand both changes Q.32. Which of the following represents the supply curve
in a perfect competitive market?
Q.24. firm will close down in the short period, if its AR is (a) MC curve (b) AC curve
less than: (c) AR curve (d) R curve
(a) AC (b) AVC
(c) MC (d) None of the above. Q.33. When TR is man, then MR is
(a) Zero (b) One
Q.25. Which of the following is correct? (c) Both (a) & (b) (d) None
(a) MR = AR (e -1)/e (b) MR = AR (e +1)/e
(c)MR = AR (1- e)/e (d) None of the above Q.34. _________ is also called a free market as there
are no stipulations on the transactions
Q.26. According to Behavioural Principles. (a) Unregulated (b) Regulated
(a) A firm should not produce at all if its total variable (c) Retail (d) Spot
costs are not met.
9.24 | Page
Q.35. In this market, transactions involve contracts with Q.44. An increase in supply with demand remaining the
a promise to pay and deliver goods at some future date same, brings about.
(a) Spot market (b) Future market (a) An increase in equilibrium quantity and decrease in
(c) Unregulated market (d) Retail market equilibrium price.
(b) An increase in equilibrium price and decrease in
Q.36. A firm reaches its shut down point equilibrium quantity
(a) When price is less than AVC in long run. (c) Decrease in both equilibrium price and quantity.
(b) When price is less than AVC in short run. (d) None of these.
(c) When price is more than AC in long run.
(d) When price is more than AC in short run. Q.45. When the price of a commodity is ₹20, the
quantity demanded is 9 units and when its price is ₹19,
Q.37. Demand of good increases from 15 units to 16 the Quantity demanded is 10 units. Based on this
units if price decreases from T 40 to ¥ 38. What will be information what will be the marginal revenue resulting
MR of 16" units. from an increase in output from 9 units to 10 units?
(a) 8 (b) 16 a) ₹20 (b) ₹19
(c) 38 (d) 15 (c) ₹10 (d) ₹01
Q.38. For maximum profit, the condition is : Q.46. If the price of a commodity is fixed, then with
(a) AR = AC (b) MR = MC every increase in its sold quantity the total revenue will
(c) MR = AR (d) MC = AR ______ and the marginal revenue will _______
(a) Increase, also increase
Q.39. Equilibrium price may be determined through: (b) Increase, remain unchanged
(a) Only demand (b) Only supply (c) Increase, decline
(c) Both demand & supply (d) None (d) Remain fixed, increase.
Q.40. If price is forced to stay below equilibrium price Q.47. If supply decreases and demand remains constant,
then consequently it can be said that: then equilibrium price will be?
(a) Excess supply exists. (b)Excess demand exists (a) Increases (b) Decreases
(c) Either (a) or (b) (d)Neither (a) nor (b) (c) No change (d) Become Negative
Q.41. An increase in supply with unchanged demand Q.48. According to pigou, first degree price
leads to : discrimination charges price to;
(a) Rise in price and fall in quantity (a) Individual capacity (b) Quantities sold
(b) Fall in both price and quantity (c) Location (d) None of the above
(c) Rise in both price and quantity
(d) Fall in price and rise in quantity Q.49. What is the shape of monopolist Average Revenue
Curve?
Q.42. In the long run: (a) Falls from left to right (b) Is parallel to X — axis
(a) Only demand can change (c) Is parallel to Y — axis (d) Rise from left to right
(b) Only supply can change
(c) Both demand and supply can change Q.50. What is the shape of perfectly competitive
(d) None of these Average Revenue Curve?
(a) Parallel to X axis (b) Parallel to Y axis
Q.43. Condition for producer equilibrium is : (c) Fall from left to right (d) Rise from left to right
(a) TR=TVC (b) MC = MR
(c) TC=TAC (d) None of these Q.51. Monopsony means
(a) Where there are large firms
9.25 | Page
(b) There is a single buyer (c) Highly inelastic (d) Zero
(c) Small number of large buyers
(d) Single seller and single buyer Q.59. When AR = ₹10 and AC = ₹8 the firm makes
________.
Q.52. When increase in demand is equal to increase in (a) Normal profit (b) Net profit
supply and equilibrium price remains constant, then (c) Gross profit (d) Supernormal profit
what about equilibrium quantity?
(a) Increases (b) Decreases Q.60. What are the conditions for the long run
(c) Remains Constant (d) None of the above equilibrium of the competitive firm?
(a) LMC=LAC=P (b) SMC = SAC = LMC
Q.53. An increase in supply with demand remaining the (c) P =MR (d) All of these
same, brings about
(a) An increase in equilibrium quantity and decrease in Q.61. Kinked demand curve hypothesis is given by:
equilibrium price. (a) Alfred marshal (b) A.C Pigou
(b) An increase in equilibrium price and decrease in (c) Sweezy (d) Hicks & Allen
equilibrium quantity.
(c) Decrease in both equilibrium price and quantity. Q.62. Supernormal profits occur, when :
(d) None of these (a) Total revenue is equal to total cost
(b) Total revenue is equal to variable cost
Q.54. A competitive firm in the short run incur losses. (c) Average revenue is more than average cost
The firm continues production, if: (d) Average revenue is equal to average cost
(a) P > AVC (b) P = AVC
(c) P < AVC (d) P >= AVC Q.63. If under perfect competition, the price line lies
below the average cost curve, the firm would : Incur
Q.55. Under _______ market condition, firms make losses
normal profits in the long run: (a) Make only Normal profits
(a) Perfect competition (b) Monopoly (b) Incur losses
(c) Oligopoly (d) None (c) Make abnormal profit
(d) Profit cannot be determined
Q.56. A monopolist is able to maximize his profits when :
(a) His output is maximum Q.64. The MR curve cuts the horizontal line between Y
(b) He charges a high price axis and demand curve into:
(c) His average cost is minimum (a) Two unequal parts
(d) His marginal cost is equal to marginal revenue (b) Two equal parts
(c) May be equal or unequal parts
Q.57. Under which of the following market structure AR (d) None of these
of the firm will be equal to MR?
(a) Monopoly Q.65. Kinked demand curve is observed in _______.
(b) Monopolistic Competition (a) Duopoly market (b) Monopoly market
(c) Oligopoly Perfect (c) Competitive market (d) Oligopoly market.
(d) Competition
Q.66. Competitive firms in the long run earn:
Q.58. Under Monopolistic competition the cross (a) Super normal profit (b) Normal profit
elasticity of demand for the product of a single firm (c) Losses (d) None
would be:
(a) Infinite (b) Highly elastic
9.26 | Page
Q.67. For a monopolist, the necessary condition for Q.76. MR Curve = AR = Demand Curve is a feature of
equilibrium is: = which kind of Market?
(a) P = MC (b) P= MR = AR (a) Perfect Competition (b) Monopoly
(c) MR = MC (d) None (c) Monopolistic (d) Oligopoly
Q.68. A firm will shut down in the short run if : Q.77. In the long-run monopolist can:
(a) It is suffering a loss (a) Incur losses
(b) Fixed costs exceeds revenue (b) Must earn super normal profits
(c) Variable costs exceed revenues (c) Wants to shut-down
(d) Total costs exceed revenues (d) Earns only normal profits.
Q.69. _______ is the price at which demand for a Q.78. The demand curve of the firm and industry will be
commodity is equal to its supply : same in which form of market :
(a) Normal Price (b) Equilibrium Price (a) Monopolistic Competition
(c) Short run Price (d) Secular Price (b) Perfect Competition
(c) Monopoly
Q.70. OPEC is an example of : (d) Oligopoly.
(a) Monopolistic competition
(b) Monopoly Q.79. Oligopoly having identical products is:
(c) Oligopoly (a) Pure oligopoly (b) Imperfect oligopoly
(d) Duopoly (c) Price leadership (d) Collusion.
Q.71. _______ is an ideal Market. Q.80. The demand curve of oligopoly is :

(a) Monopoly (b) Monopolistic (a) Horizontal (b) Vertical
(c) Perfect Competition (d) Oligopoly (c) Kinked (d) Rising left to right
Q.72. Under which Market Situation demand curve is Q.81. Demand curve is equal to M. R. curve in which
linear and parallel to X axis : market?
(a) Perfect Competition (b) Monopoly (a) Oligopoly
(c) Monopolistic Competition (d) Oligopoly (b) Monopoly
Q.73. Which market have characteristic of product (d) Perfect Competition
differentiation?
(a) Perfect Competition (b) Monopoly Q.82. Kinked demand hypothesis is designed to explain
(c) Monopolistic Competition (d) Oligopoly _______ in context of oligopoly.
(a) Price and output determination
Q.74. Which of these are characteristics of Perfect (b) Price rigidity
Competition? (c) Collusion between firm
(a) Many Sellers & Buyers (d) All of the above
(b) Homogeneous Product
(c) Free Entry and Exit Q.83. Price discrimination can take place only in
(d) All of the above ________.
Q.75. The demand curve of oligopoly is : (b) Oligopoly
(a) Horizontal (b) Vertical (c) Perfect competition
(c) Kinked (d) Rising left to right (d) Monopoly
9.27 | Page
Q.84. In oligopoly, the kink on the demand curve is more (d) Competitive firm always seeks to discriminate prices.
due to _______.
(a) Discontinuity in MR. Q.91. Under which of the following market structure AR
(b) Discontinuity in AR. of the firm will be equal to MR?
(c) Fulfilment of the assumption that a price cut is (a) Monopoly (b) Monopolistic Competition
followed by others and a price increase by a firm is (c) Oligopoly (d) Perfect Competition
not followed by others.
(d) Price war amongst the firms. Q.92. Tooth paste industry is an example of ______.
(a) Monopoly (b) Monopolistic Competition
Q.85. Price Discrimination is possible only when (c) Oligopoly (d) Perfect Competition
(a) Seller is alone
(b) Goods are homogeneous Q.93. OPEC is an example of :
(c) Market is controlled by the government (a) Monopolistic competition (b) Monopoly
(d) None of the above (c) Oligopoly (d) Duopoly
Q.86. Which of the following is not the feature of an Q.94. Monopolistic Competitive firms ______.
imperfect competition? (a) Are small in size
(a) Product differentiation (b) Few sellers (b) Have small share in total market
(c) Homogeneous products (d) Price wars (c) Are very large in size
(d) both (a) and (b)
Q.87. Price taker firms ______.
(a) Do not advertise their product because it misleads Q.95. The price discrimination under monopoly will be
the customers. possible under which of the following conditions?
(b) Advertise their products to boost the level of (a) The seller has no control over the supply of his
demand. product
(c) Do not advertise but give gifts along with the sold (b) The market has the same condition all over
items to attract customers (c) The price elasticity of demand is different in different
(d) Do not advertise because they can sell as much as markets 1 mark
they wish at the prevailing price (d) The price elasticity of demand is uniform.
Q.88. Price rigidity is a situation found in which of the Q.96. Oligopoly having identical products is known as
following market forms? (a) Pure oligopoly (b) Collusive oligopoly
(a) Perfect competition (c) Independent oligopoly (d) None of these
(b) Monopoly
(c) Monopolistic competition Q.97. Which of these is the best example of oligopoly?
(d) Oligopoly. (a) OPEC (b) SAARC
(c) WTO (d) GATT
Q.89. When elasticity of demand is Equal to one in
monopoly, marginal Revenue will be ______. Q.98. Monopolist can fix him price of goods whose
(a) Equal to one (b) Greater than one elasticity is
(c) Less than one (d) Zero (a) Less than 1 (b) More than 1
(c) Elastic (d) Inelastic
Q.90. Which one of the following statement is Incorrect?
(a) Competitive firms are price takers and not price Q.99. Kinked demand curve is observed in
makers. (a) Duopoly market (b) Monopoly market
(b) Price discrimination is possible in monopoly only. (c) Competitive market (d) Oligopoly market.
(c) Duopoly may lead to monopoly.
9.28 | Page
Q.100. Perfectly competitive firm faces: Q.106. In monopolistic competition excess capacity in
(a) Perfectly elastic demand curve the firm
(b) Perfectly inelastic demand curve (a) Always exists (b) Sometimes exists
(c) Zero (c) Never exists (d) None of the above
(d) Negative
Q.107. Selling costs have to be incurred in case of:
Q.101. In perfect Competition when the firm is a price (a) Perfect Competition
taker, which curve among the following will be a (b) Monopolistic Competition
straight line? (c) Monopoly
(a) Marginal Cost (b) Average Cost (d) None of these.
(c) Total Cost (d) Marginal Revenue
Q.108. In market, the price and output equilibrium is
Q.102. "Price Discrimination" can be best exercised by determined on the basis of:
the Seller in _______. (a) Total revenue and total cost
(a) Oligopoly (b) Total cost and marginal cost
(b) Monopoly (c) Marginal revenue and marginal cost
(c) Monopolistic competition (d) Only marginal cost.
(d) perfect competition
Q.109. A perfect market is characterised by :
Q.103. In Oligopoly the kink in the demand curve is more (a) Existence of large number of buyers and sellers
due to ________ (b) Homogenous products
(a) Discontinuity in MR (c) Perfect knowledge of the market
(b) Discontinuity in AR (d) All of the above.
(c) Fulfilment of the assumption that a price fall is
followed by the other and a price increase by a firm Q.110. Which of the following IS not a feature of
is not followed by the other oligopoly market?
(d) Price war among the firms (a) Interdependence of the firms In decision making
(b) Price rigidity
Q.104. A firm encounters "shut down" point when (c) Group behaviour
________. (d) Existence of large number of firms.
(a) Marginal cost equals the price of the profit
maximising level of output Q.111. A monopolist can fix:
(b) Average fixed cost equals the price at the profit (a) Both price and output
maximising level of output (b) Either price or output
(c) Average variable cost equals the price at the profit (c) Neither price nor output
maximising level of output (d) None of the above.
(d) Average total cost equals the price at the profit
maximising level of output Q.112. In a perfectly competitive market, the demand
curve of a firm is:
Q.105. Under which market Condition firms make only (a) Elastic (b) Perfectly elastic
normal profits in the long run? (c) Inelastic (d) Perfectly inelastic
(a) Oligopoly
(d) Monopoly Q.113. In a competitive market, if price exceeds Average
(c) Monopolistic competition Variable Cost (AVC) but remains less than Average Cost
(d) Duopoly (AC) at the equilibrium, the firm is:
(a) Making a profit
(b) Planning to quit
9.29 | Page
(c) Experiencing loss but should continue production (c) Zero profit (d) Loss
(d) Experiencing loss but should discontinue production.
Q.122. Under which of the following forms of market
Q.114. Price under perfect competition is determined by structure does a firm has a very considerable control
the over the price of its product?
(a) Firm (b) Industry (a) Monopoly (b) Monopolistic Competition
(c) Government (d) Society. (c) Oligopoly (d) Perfect Competition
Q.115. Under monopoly, which of the following is Q.123. One of the essential conditions of Perfect
correct: Competition is :
(a) AR and MR both are downward sloping (a) Product differentiation
(b) MR lies halfway between AR and Y axis (b) Many sellers and few buyers
(c) MR can be zero or even negative (c) Only one price for identical goods at any one time
(d) All of the above. (d) Multiplicity of prices for identical product at any one
time
Q.116. Non price competition is very popular in:
(a) Monopoly market Q.124. The demand curve of an oligopolist is :
(b) Monopolistic competition (a) Determinate (b) Indeterminate
(c) Oligopolistic market (c) Circular (d) Vertical
(d) Perfect competition.
Q.125. Abnormal profits exist in the long run only under
Q.117. In the 'kinked demand' curve model, the upper _____
portion of the demand curve is: (a) Perfect competition
(a) Elastic (b) Inelastic (b) Monopoly
(c) Perfectly Elastic (d) Unitary Elastic. (c) Monopolistic competition
(d) Oligopoly
Q.118. Equilibrium price for an industry in perfect
competition is fixed through. Q.126. The distinction between a single firm and an
(a) Input and Output Industry vanishes in which of the following market
(b) Market demand and market Supply conditions?
(c) Market demand and firms supply (a) Perfect Competition (b) Imperfect Competition
(d) None of the above. (c) Pure Competition (d) Monopoly
Q.119. In a perfectly competitive market, if MR is Q.127. Selling outlay is an essential part of which of the
greater than MC, then a firm should following market situations?
(a) Increase its production (a) Perfect Competition
(b) Decrease its production (b) Monopoly
(c) Decrease its sales (c) Monopolistic Competition
(d) Increase its sales (d) Pure Competition.
Q.120. Kinked demand curve is related to which market Q.128. The Kinked demand curve model explains the
structure market situation
(a) Oligopoly (b) Monopoly (a) Pure Oligopoly (b) Differentiated Oligopoly
(c) Monopsony (d) Monopolistic competition. (c) Collusive Oligopoly (d) Price Rigidity
Q.121. In the long run a monopolist always earns

(a) Normal profit (b) Abnormal profit
9.30 | Page
Q.129. For price discrimination to be successful, the Q.134. In the long run, which of the following statement
elasticity of demand for the commodity in the two is true for a firm in a perfectly competitive industry?
markets should be : (a) It operates at its minimum average cost
(a) Same (b) Different (b) The price is more than the average fixed cost
(c) Constant (d) Zero (c) The marginal cost is greatest than marginal revenue
(d) The fixed cost is lower than the total variable cost
Q.130. The firm in a perfectly competitive market is a
price taker. This designation as a price taker is based on Q.135. The firm will attain equilibrium at a point where
the assumption that: MC curve cuts _______ from below.
a. The firm has some but not complete control over its (a) AR curve (b) MR curve
product price (c) AC curve (d) AVC curve.
b. There are so many buyers and sellers in the market
that any one buyer or seller cannot affect the Q.136. In a monopoly market, a producer has control
market only over:
c. Each firm produces a homogeneous product (a) Price of the commodity
d. There is easy entry into or exit from the market (b) Demand of the commodity
place. (c) Both (a) and (b)
(d) Utility of the product.
Q.131. A market structure in which many firms sell
products that are similar and identical is known as Q.137. One of the following is not correct about perfect
________. competition:
(a) Monopolistic competition (a) Purchase and Sale of homogeneous goods
(b) Monopoly (b) Existence of marketing costs
(c) Perfect competition (c) Absence of transportation costs
(d) Oligopoly (d) Perfect mobility of factors of production.
Q.132. A firm having kinked demand curve indicates Q.138. Kinked demand curve under oligopoly is designed
that: to show:
(i) If the firm reduces the price, competitive firms also (a) Price and output determination
reduce the price (b) Price rigidity
(ii) If the firm' Increases the price, competitive firms also (c) Price leadership
Increases the price (d) Collusion among rivals.
(iii) If the firm reduces the price, competitive firms do
not reduce the price Q.139. “I am making a loss, but with the rent I have to
(iv) If the firm increases the price, competitive firms do pay, I can’t afford to shut down at this point of time." If
not increase the price this entrepreneur is attempting to maximize profits or
(a) Only (i) above minimize losses.
(b) Both (i) and (iv) above (a) Rational, if the firm is covering its variable cost
(c) Both (ii) and (iv) above (b) Rational, if the firm is covering its fixed cost
(d) Both (ii) and (iii) above (c) Irrational, since plant closing is necessary to
eliminate losses
Q.133. Price discrimination will not be profitable, if the (d) Irrational, since fixed costs are eliminated if a firm
elasticity of demand is ________ in different markets shut down.
(a) Uniform (b) Different
(c) Less (d) Zero Q.140. Kinked demand curve is the demand curve of
(b) Monopoly
9.31 | Page
(c) Monopolistic Competition Q.147. The price elasticity of demand for a product is
(d) None of the above. infinite under:
(a) Perfect competition
Q.141. Price discrimination M” be profitable only if the (b) Monopolistic competition
elasticity of demand in different markets is (c) Monopoly
(a) Uniform (b) Different (d) Oligopoly.
(c) Less (d) Zero
Q.148. Comparing a Monopoly and Competitive firm the
Q.142. Under which of the following form of market Monopolist will:
structure does a firm have no control over the price of (a) Produce less and sell at a lower price
its production? (b) Produce more and sell at a lower price
(a) Monopoly (b) Monopolistic Competition (c) Produce less and sell at a higher price
(c) Oligopoly (d) Perfect Competition. (d) Produce zero and sell at a lower price.
Q.143. _________ is that situation in which a firm bases Q.149. The reason for the kinked demand curve is that:
its market policy, in part on the expected behaviour of a (a) The oligopolist believe that competitors will follow
few close rivals. output increases but not output reductions.
(a) Oligopoly (b) Monopolistic Competition (b) The oligopolist believe that competitors will follow
(c) Monopoly (d) Perfect Competition. price increases but not output reductions.
(c) The oligopolist believe that competitors will follow
Solve the question No. 91, 92 and 93 on the base of price cuts but not price rises.
following figure: (d) The oligopolist believe that competitors will follow
price increases but not output increases.
Q.150. A discriminating monopolist will charge a higher

price in the market in which the demand for its product
is .
(a) Highly elastic (b) Relatively elastic
(c) Relatively inelastic (d) Perfectly elastic.
Q.151. If a firm under monopoly wants to sell more, its

Q.144. In the above figure, curve E is the firm’s average revenue curve will be a line.
(a) Marginal Cost Curve (b) Average Cost Curve (a) Horizontal (b) Vertical
(c) Demand Curve (d) Marginal revenue (c) Downward sloping (d) Upward sloping
Curve.
Q.152. Who sets the price of the product under perfect
Q.145. Above figure represents a competition?
(a) Monopolist (a) Government (b) Consumers
(b) Perfectly competition industry (c) Sellers (d) Both buyers and sellers
(c) Perfectly competitive firm
(d) None of the above. Q.153. Which is the first order condition for the firm to
maximise the profit.
Q.146. In above figure, firms marginal revenue curve is (a) AC = MR (b) AC = AR
curve (c) MC = MR (d) MR = AR
(a) E (b) A
(c) F (d) B Q.154. Which market has the concept of 'group'
equilibrium in the long run?
9.32 | Page
(a) Oligopoly (b) A monopolist may restrict the output and raise the
(b) Monopoly price.
(c) Monopolistic competition (c) Commodities offered for sale under a perfect
(d) Perfect competition. competition will be heterogeneous.
(d) Product differentiation is peculiar to monopolistic
Q.155. Which of the following is incorrect? competition.
(a) Even monopolistic can earn losses.
(b) Firms in perfect competitive market is price taker. Q.162. Under perfect competition firm is described as:
(c) It is always beneficial for a firm in a perfectly (a) Price taker and not price maker
competitive market to discriminative prices. (b) Price maker and not price taker
(d) Kinked demand curve is related to an oligopolistic (c) Neither price maker nor price taker
market. (d) None of the above.
Q.156. Average revenue curve is also known as: Q.163. Under which of the following forms of market
(a) Profit Curve (b) Demand Curve structure does a firm have no control over the price of
(c) Average Cost Curve (d) Indifference Curve its product?
(a) Monopoly
Q.157. Which is not characteristic of monopoly? (b) Monopolistic Competition
(a) The firm is price taker (c) Oligopoly
(b) There is a single firm (d) Perfect Competition.
(c) The firm produces a unique product
(d) The existence of some advertising. Q.164. Condition for equilibrium of firm:
(a) MR = MC
Q.158. Price discrimination is profitable only when: (b) AR = AC
(a) Different markets are kept separate (c) MC curve cuts MR curve from below
(b) Distance between the consumer and the market is (d) Both (a) and (c)
more
(c) Elasticity of demand in different markets is different Q.165. What is/ are feature (s) of oligopoly
(d) The consumers are segregated on the basis of their (a) Kinked Demand curve
purpose of use of the commodity. (b) Cartel
(c) Downward sloping demand curve
Q.159. When the industry is dominated by one large (d) Both (a) and (b) are correct
firm which is considered as the leader of the group, the
market is described as: Q.166. Monopoly is undesirable due to:
(a) Open oligopoly (b) Perfect oligopoly (a) It has prices higher than competitive firms
(c) Partial oligopoly (d) Organised oligopoly. (b) It produces less output than competitive firms
(c) It discriminates on prices
Q.160. Which amongst the following is not an objective (d) All of the above.
of price discrimination?
(a) To hold the extra stocks Q.167. In long run equilibrium undue perfect
(b) To earn maximum profits competition is/are satisfied by which condition
(c) To enjoy economies of scale (a) MC = MR (b) AC = AR
(d) To secure equity through pricing. (c) CMC = LAC = P (d) All of the above.
Q.161. Which of the following statement is not correct? Q.168. In the long run monopolist
(a) Under monopoly there is no difference between a (a) Incur losses
firm and industry. (b) Must earn super normal profits
9.33 | Page
(c) Wants to shut down (a) Oligopoly
(d) Earns only normal profits. (b) Monopolistic
(c) Discriminating Monopoly
Q.169. The demand curve of the firm and industry will (d) Perfect competition
be same in which form of market:
(a) Monopolistic competition Q.177. Which market is having a single seller and single
(b) Perfect competition Buyer?
(c) Monopoly (a) Duopoly (b) Monopsony
(d) Oligopoly (c) Bilateral Monopoly (d) None of the above
Q.170. Which of these is the best example of oligopoly? Q.178. In Long run perfect competitive market incurs
(a) OPEC (b) SAARC (a) Normal profit (b) Supernormal profit
(c) WTO (d) GATT (c) Losses (d) Constant Returns
Q.171. In a perfectly competitive market, if MR is Q.179. Which one of the following is not the feature of
greater than MC, then a firm should: Oligopoly?
(a) Increase its production (a) Interdependency
(b) Decrease its production (b) Selling cost
(c) Decrease its sales (c) Free Entry
(d) Increase its sales (d) None of the above/ group behaviour
Q.172. Equilibrium price for an industry in prefect Q.180. Price leadership is the characteristic of
competition is fixed through (a) Oligopoly
(a) Input and output (b) Monopoly
(b) Market demand and market supply (c) Perfect competition
(c) Market demand and firms supply (d) Discriminating Monopoly
Q.181. MR Curve in perfect competition is
Q.173. A competitive firm in the short rum insure losses. (a) Parallel to X axis (b) Parallel to Y axis
The firm continues production, if: (c) Fall from left to right (d) Rise from left to right
(a) P > AVC (b) P = AVC
(c) P < AVC (d) P > AVG Q.182. Which of the following is not the characteristic of
MR?
Q.174. Market form in which there is only one buyer and (a) When TR is maximum, then MR is zero
one seller is: (b) MR cannot be negative
(a) Oligopoly (b) Duopoly (c) MR slopes downward from left to right
(c) Bilateral Monopoly (d) Monopsony (d) MR Curve is below AR Curve
Q.175. The structure of the Toothpaste Industry in India Q.183. Which out of these are not features of perfect
is best described as: competition?
(a) Perfectly competitive (a) Homogeneous
(b) Monopolistic (b) Large number of buyer and sellers
(c) Monopolistically competitive (c) Free entry and exit
(d) Oligopolistic (d) Selling cost.
Q.176. Product differentiation is the main features of Q.184. Which of the following statement is correct?
which market? (a) Price rigidity is an important feature of monopoly
9.34 | Page
(b) Selling cost is possible under perfect competition
(c) An industry consists of many firms Q.192. Live and let live is characteristics of which of the
(d) Under perfect competition factor of production do following market?
not move freely as these are legal restriction (a) Perfect Competition
(b) Monopoly Competition
Q.185. Which is the characteristic feature of monopoly? (c) Imperfect Competition
(a) Homogeneous goods (d) Oligopoly Competition
(b) Strong barriers to entry
(c) Perfect competition Q.193. In which of the following market there are only
(d) Perfectly elastic demand curve two sellers?
(a) Duopoly Competition
Q.186. A discriminating monopolist to reach equilibrium (b) Perfect Competition
position, his decision on total output depends upon (c) Monopoly Competition
(a) How much total output should be produce ? (d) Perfect Competition and Duopoly
(b) How the total output should be distributed between
the two sub market ? Q.194. The degree of elasticity in perfect competition
(c) Both (a) and (b) market.
(d) None (a) Perfectly elastic (b) Inelastic
(c) Perfectly inelastic (d) Elastic
Q.187. Price discrimination is possible only in ______.
(a) Monopoly (b) Perfect Competition Q.195. A perfect competitive firm earns super normal
(c) Oligopoly (d) Monopolistic Competition profits when
(a) ATC < MC (b) ATC > MC
Q.188. Kinked demand curve is (c) MR < AR (d) MR > AR
(a) Highly elastic at above the prevailing price
(b) Inelastic at below the prevailing price Q.196. A firm is said to earn normal profit when
(c) Both (a) and (b) (a) AC = AR (b) MC = MR
(d) None of the above (c) AR = NH (d) MC > MR
Q.189. Demand curve is horizontal in the case of Q.197. Two firms are selling cold drinks and competing
________. with some identical characteristics, This is an example of
(a) Monopoly (a) Duopoly (b) Monopoly
(b) Perfect Competition (c) Oligopoly (d) Monopolistic
(c) Imperfect Competition
(d) Monopolistic Competition Q.198. Group Behaviour is a characteristics of _______.
(a) Oligopoly (b) Monopoly
Q.190. What is the characteristic of monopolistic (c) Perfect Competition (d) Monopolistic Competition
competition?
(a) Price elasticity is low for the product concerned (b) Q.199. Myth in Real world
Large number of sellers (a) Oligopoly (b) Duopoly
(c) No degree of control over price (c) Perfect Competition (d) Monopoly
(d) One buyer
Q.200. ________ oligopoly refers to that situation
Q.191. If a perfectly competitive firm earns super where the firms sell their products through a centralized
normal profits then ________ body
(a) AR > MR (b) AR < MR (a) Syndicate oligopoly (b) Organized oligopoly
(c) AR = MR (d) None of the above (c) Collusive oligopoly (d) Partial oligopoly
9.35 | Page
Q.201. The similarity between monopolistic and perfect
competition is _______.
(a) In short run both earn super normal profit
(b) In long term both earn normal profit
(c) In short run their prices remain constant
(d) None
Q.202. Which Market has a downward demand curve?

(b) Monopoly
(c) Perfect competition
(d) Both (a) and (b)
9.36 | Page
QUESTION ANS QUESTION ANS QUESTION ANS QUESTION ANS
1 D 52 A 103 C 154 C
2 D 53 A 104 C 155 C
3 A 54 D 105 C 156 B
4 C 55 A 106 A 157 A
5 A 56 D 107 B 158 C
6 A 57 D 108 C 159 C
7 C 58 B 109 D 160 A
8 B 59 D 110 D 161 C
9 C 60 D 111 A 162 A
10 C 61 C 112 B 163 D
11 B 62 C 113 C 164 D
12 D 63 B 114 B 165 D
13 A 64 B 115 D 166 D
14 C 65 D 116 B 167 D
15 B 66 B 117 A 168 B
16 A 67 C 118 B 169 C
17 B 68 C 119 A 170 A
18 B 69 B 120 A 171 A
19 C 70 C 121 B 172 B
20 D 71 C 122 A 173 D
21 C 72 A 123 C 174 C
22 A 73 C 124 B 175 B
23 C 74 D 125 B 176 B
24 B 75 C 126 D 177 C
25 A 76 A 127 C 178 A
26 C 77 B 128 D 179 C
27 C 78 C 129 B 180 A
28 A 79 A 130 B 181 A
29 A 80 C 131 C 182 B
30 A 81 D 132 B 183 D
31 C 82 B 133 A 184 D
32 C 83 D 134 A 185 B
33 A 84 C 135 B 186 C
34 A 85 A 136 A 187 A
35 B 86 C 137 B 188 C
36 A 87 D 138 B 189 B
37 A 88 D 139 A 190 B
38 B 89 D 140 D 191 C
39 C 90 D 141 B 192 D
40 B 91 D 142 D 193 A
41 D 92 B 143 A 194 A
42 C 93 C 144 C 195 A
43 B 94 D 145 A 196 A
44 A 95 C 146 C 197 A
45 C 96 A 147 A 198 A
46 B 97 A 148 C 199 C
47 A 98 A 149 C 200 A
48 A 99 D 150 C 201 B
49 A 100 A 151 C 202 D
50 A 101 D 152 D
51 B 102 B 153 C
9.37 | Page
Chapter – 5 Business Cycle
Q 9. The lowest point in the business cycle is referred
Q 1.
The term business cycle refers to to as the
(a) the ups and downs in production of commodities (a) Expansion. (b) Boom.
(b) the fluctuating levels of economic activity over a (c) Peak. (d) Trough.
period of time
(c) decline in economic activities over prolonged period Q 10. Even with lower rate of interest, demand for
of time credit declines in
(d) increasing unemployment rate and diminishing rate (a) Expansion Phase (b) Peak
of savings (c) Contraction Phase (d) Depression
Q 2. Q 11.
When does an economic expansion occur in the Which of the following statements is true?
business cycle? (a) An Economy grows endlessly
(a) At the peak of the business cycle (b) An Economy Contracts endlessly
(b) At the trough of the business cycle (c) It is easy to predict turning points of Business Cycle
(c) Between the peak and trough (d) None of the above
(d) Between the trough and peak
Q 12. Which of the following statement is not correct?
Q 3. Increasing Prosperity and High standards of living (a) Business Cycles are periodical
are the characteristics of (b) Business Cycles are regular
(a) Peak (b) Contraction (c) Business Cycles vary in intensity
(c) Expansion (d) Trough (d) Business Cycles vary in length
Q 4. The end of expansion is termed as — Q 13. A leading indicator is

(a) Peak (b) Contraction (a) a variable that tends to move along with the level
(c) Trough (d) None of the above of economic activity
(b) a variable that tends to move in advance of
Q 5. The beginning of recession is aggregate economic activity
(a) Peak (b) Trough (c) a variable that tends to move consequent on the
(c) Contraction (d) Expansion level of aggregate economic activity
Q 6.
A significant decline in general economic activity
extending over a period of time is Q 14. A variable that tends to move later than
(a) business cycle (b) contraction phase aggregate economic activity is called
(c) Trough (d) recovery (a) a leading variable (b) a coincident variable.
(c) a lagging variable. (d) a cyclical variable.
Q 7. Severe form of recession is
(a) Contraction (b) Depression Q 15. Changes in housing interest rate is a
(c) Expansion (d) Peak (a) a leading indicator (b) a coincident indicator
(c) a lagging indicator (d) a cyclical indicator
Q 8.
The trough of a business cycle occurs when
_______hits its lowest point. Q 16. Unemployment is a
(a) inflation in the economy (a) a leading indicator (b) a coincident indicator
(b) the money supply (c) a lagging indicator (d) a cyclical indicator
(c) aggregate economic activity
(d) the unemployment rate
10. 1 | Page
Q 17. GDP is a Q 23. The four phases of the business cycle are\
(a) a leading indicator (b) a coincident indicator (a) Peak, recession, trough, and boom
(c) a lagging indicator (d) a cyclical indicator (b) Peak, depression, trough, and boom
(c) Peak, recession, trough, and recovery
(d) Peak, depression, bust, and boom
Industries that are extremely sensitive to the
business cycle are the Q 24. Leading economic indicators
(a) Durable goods and service sectors. (a) are used to forecast probable shifts in economic
(b) Non-durable goods and service sectors. policies
(c) Capital goods and non-durable goods sectors. (b) are generally used to forecast economic
(d) Capital goods and durable goods sectors. fluctuations
(c) are indicators of stock prices existing in an economy
(d) are indicators of probable recession and depression
Q 19.
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. Q 25. When aggregate economic activity is declining,
(c) a movement down and to the right along the the economy is said to be in
aggregate demand curve. (a) Contraction. (b) an expansion.
(d) a movement up and to the left along the aggregate (c) a trough. (d) a turning point.
demand curve.
Q 26. Peaks and troughs of the business cycle are
Q 20. Which of the following does not occur during an known collectively as
expansion? (a) Volatility.
(a) Consumer purchases of all types of goods tend to (b) Turning points.
increase. (c) Equilibrium points.
(b) Employment increases as demand for labour rises. (d) Real business cycle events.
(c) Business profits and business confidence tend to
Q 27.
increase The most probable outcome of an increase in
(d) None of the above. the money supply is
(a) interest rates to rise, investment spending to rise,
Q 21.
Which of the following best describes a typical and aggregate demand to rise
business cycle? (b) interest rates to rise, investment spending to fall,
(a) Economic expansions are followed by economic and aggregate demand to fall
contractions. (c) interest rates to fall, investment spending to rise,
(b) Inflation is followed by rising income and and aggregate demand to rise
unemployment. (d) interest rates to fall, investment spending to fall,
(c) Economic expansions are followed by economic and aggregate demand to fall
growth and development.
(d) Stagflation is followed by inflationary economic Q 28. Which of the following is not a characteristic of
growth. business cycles
Q 22. During recession, the unemployment __________ (a) Business cycles have serious consequences on the
rate __________________ and output well-being of the society.
(a) Rises; falls (b) Rises; rises (b) Business cycles occur periodically, although they do
(c) Falls; rises (d) Falls; falls not exhibit the same regularity.
10. 2 | Page
(c) Business cycles have uniform characteristics and
causes.
(d) Business cycles are contagious and unpredictable.
Q 29. 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 Sr. No Ans Sr. No Ans
investments may not be forthcoming 1 B 19 D
(d) Increase in the price of inputs due to increased 2 D 20 D
demand for inputs 3 C 21 A
4 A 22 A
Q 30. The different phases of a business cycle 5 C 23 C
(a) Do not have the same length and severity 6 C 24 B
(b) expansion phase always last more than ten years 7 B 25 A
8 C 26 B
(c) last many years and are difficult to get over in short
9 D 27 C
periods
10 D 28 C
11 D 29 D
Q 31. 12 B 30 A
Which of the following is not an example of
13 B 31 D
coincident indicator?
14 C 32 D
(a) Industrial production 15 A 33 D
(b) inflation 16 C
(c) Retail sales 17 B
(d) New orders for plant and equipment 18 B
Q 32. According to _________ trade cycle occurs due to

onset of innovations.
a) Hawtrey (b) Adam Smith
(c) J M Keynes (d) Schum peter
Q 33. According to Keynes, Fluctuations activity are

due to fluctuations in.
a) aggregate effective demand
b) Price
c) Supply of resources
d) None of the above
10. 3 | Page
How many phases are there in business cycle?
Chapter 5- Business Cycle (a) Four (b) Five
(c) One (d) Many
Rampant unemployment is found in:
(a) Boom (b) Recovery The world economy suffered the longest, deepest
(c) Contraction (d) Depression and most widespread depression of the 20"1 century
during?
According to which economist trade cycle is a (a) 1934 (b) 1928
purely monetary for phenomenon (c) 1930 (d) 1932
(a) Schumpter (b) Pigou
(c) Hawtrey (d) Marshall Business cycle is contagious and _______ in
character?
Greatest depression suffered by economy in which (a) Local (b) Regional
year. (c) National (d) International
(a) 1924 (b) 1930
(c) 2008 (d) 2009 Which External Factor affects the business cycle?
(a) Population growth
Last stage of recession is called: (b) Variation in government spending
(a) Depression (b) Recovery (c) Money supply
(c) Slowdown (d) All of these. (d) Macro economic policies
In the long run, a reduction in labour supply would Which internal factor affects the Business cycle?
cause output to _____ and the aggregate price level (a) Fluctuations in investment
to____. (b) Natural factors
(a) fall, rise (b) fall, fall (c) Technology shocks
(c) rise, tall (d) rise, rise. (d) Population growth
Which of the following macro-economic variables Whose statement out of these is false?
would you include in an index of leading economic (a) Hawtrey “Trade cycle is purely Monetary
indicators? phenomena”
(a) Employment (b) Inflation (b) Keynes “Fluctuations in aggregate Demand"
(c) Real interest rates (d) Residential investment (c) Pigou “Fluctuations in investment”
(d) Schumpeter-“Innovations”
Industries that are extremely sensitive to the
business cycle are the When once peak is reached, increase in demand is
(a) Durable goods and service sectors halted, then _______ phase begins?
(b) Non-durable goods and service sectors (a) Trough (b) Contraction
(c) Capital goods and non-durable goods sectors (c) Expansion (d) Trend
(d) Capital goods and durable goods sectors
Fashion Retailer is business of?
An economic variable that moves in the opposite (a) Cyclical business (b) Sun rise business
direction as aggregate economic activity down in (c) Sluggish business (d) None of these
expansions, up in contractions is called.
(a) Pro cyclical (b) Counter cyclical Features of business cycles include?
(c) A cyclical (d) A leading variable (a) Discuss periodically
(b) Have four different phases
10.4 | P a g e
(c) Originate in free Market Economy (c) Both (a) and (b) (d) None of the above
Which is not the characteristic feature of
Which of the following is true about leading expansion phase in business cycle ?
indicators? (a) Increase in national output
(a) Measurable economic factors (b) Unemployment
(b) Changes after real output (c) Rise in price and costs
(c) Both (a) and (b) (d) Boost in business confidence
(d) None
“Modern business activities are based on the
The internal causes of business cycle is anticipations of business community and are affected by
(a) Fluctuation in effective demand waves of optimism or pessimism, according to _______.
(b) Technology shocks (a) Pigou (b) Keynes
(c) Both (a) and (b) (c) Hawtrey (d) Schumpeter
(d) None
Find the odd man out: Which of these is not a
Economics activities will be declining in the phase coincident factor?
of _______. (a) Retail sale
(a) Expansion (b) Depression (b) Industrial production
(c) Contraction (d) Peak (c) Inflation
(d) New orders for plant & machine
Business Cycle occurs
(a) Periodically (b) In different phases Excess capacity in capital industries leads to
(c) Both (a) and (b) (d) None of the above (a) Peak (b) Trough
(c) Expansion (d) Recovery
According to some economists, __________ are
the prime causes of business cycles. Here, growth moves in reverse direction
(a) Fluctuations in effective demand (a) Peak (b) Expansion
(b) Fluctuations in investments (c) Contraction (d) Recovery
(c) Macroeconomic policies
(d) All of the above Frictional unemployment exists in
(a) Peak (b) Contraction
Which is not related to great depression of 1930? (c) Expansion (d) Recovery
(a) It started in USA
(b) John Maynard Keynes regarded lower aggregate In which stage maximum production occurs.
expenditure as the cause (a) Peak (b) Expansion
(c) Excess Money Supply (c) Boom or Expansion (d) Tough or boom
(d) Both (a) and (b)
Unemployment is caused due to structural
Which of the following is not the phase of changes is known as?
business cycles? (a) Ethnic unemployment
(a) Prosperity (b) Upswing (b) Involuntary unemployment
(c) Reconstruction (d) Depression (c) Structural
(d) None
Boom and depression in business cycle are
(a) Turning points (b) Equilibrium points
10.5 | P a g e
At trough production is? (c) Psychological factors
(a) High (b) Low (d) All of these
(c) Negative (d) None
External factors for depression does not include:
Stage at which actual demand is stagnated? (a) Population growth
(a) Peak (b) Boom or Peak (b) Technology shocks
(c) Contraction (d) Tough (c) Macro economic policies
(d) Post war reconstruction
A change of reaction producer cancels their order
in which, stage? _______ is the measurable economic factorthat
(a) Peak (b) Contraction changes before economy starts to follow a particular
(c) Trough (d) None pattern or trend:
(a) Leading indicator
Which of the following is true? (b) Lagging indicator
(a) Depression is secure form trough (c) Concurrent indication
(b) Depreciation causes fall in interest rate. (d) Coincident indicators
(d) None The Rhythmic fluctuations in aggregate economic
activity over a period of time are called:
China’s recent slovedow caused (a) Business cycles (b) Trade cycles
(a) Cycle of decline and panic across the world. (c) Both (a) and (b) (d) None of these
(b) Countries across the globe were able to insulate
themselves from the crisis. According to __________, modern business
(c) Stock Markets in the emerging economics largely activities are based on the anticipation of business
remained unaffected communities and are affected by waves of optimism and
(d) Old technology fuelled the economic decline. pessimism:
(a) Pigou (b) Hawtrey
What of the following are not external causes? (c) Keynes (d) Schumpeter
(a) Past war reconstruction
(b) Population growth According to __________ trade cycles occurs as a
(c) Technology factors result of innovation which takes place in the system
(d) Fluctuation in effective demand from time to time:
(a) Pigou (b) Hawtrey
The four phases of the business cycles are: (c) Keynes (d) Schumpeter
(a) Peak, recession, trough and depression
(b) Peak, recession, trough and boom Variables that change after real output changes
(c) Peak, depression, trough and boom are:
(d) Peak, depression, burst and boom (a) Leading indicators (b) Lagging indicators
(c) Coincident indicators (d) None of these
Great Depression occurred during:
(a) 1930 (b) 1947 Severe form of recession is called:
(c) 1857 (d) 2000 (a) Boom (b) Depression
(c) Trough (d) Recovery
Internal causes of depression include:
(a) Fluctuation in investments
(b) Money supply
10.6 | P a g e
Industries which are extremely sensitive to (a) Industrial production
business cycles includes: (b) Residential investment
(a) Non-durable goods (c) Money supply
(b) Service Sector (d) Inventory investment
(c) Capital goods and durable goods
(d) None of these When aggregate economic activity is declining, is
the phase of:
Peaks and troughs of the business cycles are (a) Expansion (b) Contraction
known collectively as: (c) Recovery (d) Trough
(a) Turning points (b) Indicators
(c) Equilibrium points (d) Contraction Sr. No Ans Sr. no Ans Sr. No Ans
1 D 28 D 55 B
2 C 29 B 56 B
During recession output: 3 B 30 A 57 D
(a) Falls (b) Rises 4 A 31 C 58 A
(c) Expands (d) None of these. 5 A 32 A 59 B
6 D 33 C
7 D 34 B
Business cycles generally originate in: 8 B 35 B
(a) Free market economies 9 A 36 B
(b) Imperfect economies 10 C 37 A
11 D 38 A
(c) Developed nations
12 A 39 D
(d) Low growth economies 13 A 40 B
14 C 41 A
At the time of Great Depression of 1930, GDP fell 15 B 42 D
16 A 43 C
around:
17 D 44 A
(a) 14% (b) 15% 18 A 45 C
(c) 20% (d) 25% 19 A 46 A
20 C 47 D
21 C 48 B
The highest point of business cycle is known as: 22 D 49 B
(a) Trough (b) Peak 23 C 50 C
(c) Trend (d) Boom 24 C 51 A
25 A 52 A
26 B 53 A
During the slowdown of economy, 27 A 54 B
(a) GDP is increasing at fast rate
(b) GDP is increasing at slow rate
(c) GDP is decreasing at fast rate
(d) All of these
The economic boom is characterised as period

when:
(a) Rising employment
(b) High demand of imported goods
(c) Increase in investments
(d) All of these
Which macro-economic variables are excluded

from leading economic indicators:
10.7 | P a g e
Nature and Scope of business Economics
Chapter 1
Nature and Scope of Business Economics
1. Economics originated from Greek work ‘'Oikonomia’. ‘Oiko’-‘House’ & ‘Nomia’,-‘Management’.
2. Till 19th century, Economics was also known as ‘Political Economy’
3. Basic Economics problem unlimited wants, and Scarce resources.
4. Resources shall be allocated to their highest valued uses.
5. Economics is study of transformation of the scarce resources into G&S to satisfy the most
important of our infinite wants
6. The book named ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ (1776), by
Adam Smith is considered as the first modern work of Economics.
7. Decision making - process of selecting an appropriate alternative that will provide the most
efficient means of attaining a desired end, from two or more alternative courses of action’.
8. Decision making arises only if there is choice available. No alternatives no decision making- e.g.-
Continue or shut down decision, New Product, Make or buy, Marketing
9. Joel Dean defined Business Economics as the use of economic analysis to make business decisions
involving the best use of an organization’s scarce resources.-
10. Business Economics is referred as Managerial Economics, generally refers to the integration of
economic theory with business practice.
11. Economic theories are hypothetical and simplistic in since based on simplifying assumptions.
12. Business Economics enables application of economic logic and analytical tools to bridge the gap
between theory and practice.
13. Business Economics is not only valuable to business decision makers, but also useful for managers
of ‘not-for-profit’ organizations
14. Difference between Micro and Macro Economics
Micro Economics Macro Economics
Greek work ‘Mikros’ which means ‘Small’ Greek work “Makros’ which means ‘large’
“Study of particular firm, particular household, “Macro Economics examines the Forest and
individual price, wages, income, individual industries, not the Trees. Large aggregates”-
particular commodities”- Prof. Boulding Prof.Mc.Connel
Behavior of individual firm or industry Overall economic phenomena
It is also called as ‘Price Theory’ It is also called as ‘Income Theory’
15. The Nature of Business Economics is described as under-

(a) Business Economics is a Science- Explains cause and effect relationships.
(b) Business Economics is an art -application of rules and principles
(c) Micro Economics based and Macro Analysis based
(d) Analysis from Private Enterprises Economy viewpoint
(e) Inter-Disciplinary- Integrates the tools of decision sciences such as Mathematics,
Statistics and Econometrics with Economic.
(f) Pragmatic Approach-
Telegram – CA Aditya Sharma Foundation 12.1

16. Normative and positive –
Positive Economics or Pure economics Normative Economics
It is based on facts and there is no point of It tells us about how the things should be.
ambiguity or second view
Descriptive in nature & It states 'what is' Prescriptive in nature & describes ‘what ought to be’.
It explains cause & effect relationship and It passes value judgments /suggestions and offers
there will be no value judgments/suggestions. advice.
It is based on past data and can be checked Cannot be verified because it is opinion based and
with data not fact based
No Matter of debate Matter of Debate
According to Robbins, Economics is neutral It is based on welfare economics - (Marshall &Pigou)
between ends. Complete neutrality between ends is, however,
neither feasible nor desirable.
17. Scope of Business Economics
a. Microeconomics applied to operational or internal Issues- issues within the organization and
fall within the purview and control of the management.
1. Demand Analysis 2. Demand Forecasting 3. Cost analysis
4. Theory of Capital and 5. and Uncertainty Analysis 6. Market Structure and
Investment Decisions Pricing Policies
7. Resource Allocation 8. Production analysis 9. Inventory Management
10. Profit analysis
b. Macroeconomics applied to environmental or external issues- issues out of preview of an

organization The major macro-economic factors relate to
1) The type of economic system.
2) Stage of business cycle.
3) The general trends in national income, employment, prices, saving and investment.
4) Government’s economic policies like industrial policy, competition policy, monetary and fiscal
policy, price policy, foreign trade policy and globalization policies.
5) Working of financial sector and capital market.
6) Socio-economic organizations like trade unions, producer and consumer unions and
cooperatives.
7) Social and political environment.

Central Economic Problems
1. All countries, without exceptions, face the problem of scarcity because their resources are
limited and these resources have alternative uses.
2. If a resource has only a single use, then also the economic problem would not arise.
3. The central economic problem is further divided into four basic economic problems.
a) What to produce? Which goods and in what quantities
b) How to Produce? Method of production,(labour- intensive or capital – intensive)
c) For whom to produce? How the G&S should be distributed among members of the society.
Also shares of different people in the national product.
d) What provisions (if any) are to be made for economic growth?-saving and investment
4. Understanding different types of Economies
Particular Capitalist economy Socialist economy Mixed Economy
Also Known as Free market economy or laissez- Karl Marx and Frederic Depends on
faire economy Engels in their work ‘The both markets
Communist Manifesto’ and govt.
published in 1848
Most imp Private Ownership Collective Ownership/ Public Include the
Feature ownership best features
Other points Private property is the mainstay. of both the
Profit motive is its driving force controlled
How CEP are Impersonal forces of market economy and
solved demand and supply or the price the market
mechanism economy while
What To Decided by consumers Decided by CPE excluding the
produce demerits of
How to Cost of production minimum. both.
produce Labor or capital Intensive
For Whom to Those who have buying capacity
produce
What provision Depends upon level of interest
are to be made rate for consumer and rate of
for economic return in Market for business
growth? firm
5. Characteristics of each type of economy

a. Right to private a. Collective Ownership of means of a. Government
property production by state however, small farms, itself must run
b. Freedom of enterprise workshops & trading firms which may important and
c. Freedom of economic remain in private hands. selected
choice b. Profit- motive and self- interest are not industries and
d. Profit Motive the driving forces eliminate the
e. Consumer Sovereignty c. The resources are used to achieve certain free play of
f. Competition socio-economic objectives. profit motive and

g. Absence of Government d. Centrally planned economy self-interest.
Interference e. Absence of Consumer Choice-
f. Relatively Equal Income Distribution-
g. Minimum role of Price Mechanism or
Market forces-
h. Absence of Competition
6. Merits of each type of economy

a) Self-regulating through a) Equitable distribution of a) Economic freedom and
price mechanism. wealth and income existence of private property
b) Rewards efficiency and b) Rapid and balanced b) Price mechanism
punishes inefficiency. economic development c) Consumer sovereignty and
c) Faster economic growth c) Planned Economy- freedom of choice.
d) Optimum allocation of d) Minimum Wastage and d) Appropriate incentives
resources optimum utislisation of e) Encourages enterprise and
e) Operative efficiency. resource- risk taking.
f) Lower cost of production e) Unemployment is f) Advantages of economic
g) Better standard of living minimized, planning
of consumers f) Absence of profit motive g) Comparatively greater
h) Incentive for innovation g) Right to work and minimum economic and social equality
and Technological progress. standard of living and freedom
i) Right to private Property h) High Social security h) No cut throat competition
j) No costs for collecting and
processing of information
7. Demerits of each type of economy

a) Precedence of property rights a) Inefficiency and delays, corruption, a) Excessive
over human rights. red-tapism, favoritism, controls the
b) Inequality and social injustice b) All material means of production are private sector.
c) Wide differences in economic under the control and direction of b) Poor
opportunities. state. implementation
d) Does not represent the real c) Takes away right of private property. c) Undue delays
needs of the society. d) No incentive for hard work
e) Exploitation of labour e) Administered prices
f) Consumer sovereignty is a myth f) State monopolies become
g) Misallocation of resources uncontrollable
h) Less of merit goods g) Consumers have no freedom of choice.
i) Unplanned production. h) No importance topersonal efficiency
j) Waste of productive resources and productivity.
k) Formation of monopolies i) The extreme form of socialism is not
l) Environmental degradation. at all practicable

Consumer Behavior and Utility Analysis
Chapter 2A
Consumer Behaviour & Utility Analysis
1. Utility is want satisfying power of a commodity is called as utility.

2. Utility is subjective term and differs from person to person
3. Utility does not mean usefulness.
4. Utility is ethically neutral.
5. Human beings have virtually unlimited wants, Each single want is satiable (capable of being
satisfied)
6. Consumer spends his income on different G&S to attain maximum satisfaction.
7. Difference Between Cardinal and Ordinal Approach
Cardinal Approach Ordinal Approach
Assumptions Measurable and quantifiable Utility is not quantifiable
Rationale Human satisfaction can be expressed in Human Satisfaction is psychological
monetary terms, phenomenon
Economists Alfred Marshall Hicks and Allen
CARDINAL APPROACH
Refer Table for further discussion :( Table 2.1)

Quantity of Oranges Total utility Marginal Utility Price Consumer’s
consumed per day Surplus in Rs.
0 0 0 0 0
1 60 60 40 20
2 110 50 40 10
3 150 40 40 0
4 180 30 40 -10
5 200 20 40 -20
6 210 10 40 -30
7 210 0 40 -40
8 200 -10 40 -50
9 180 -20 40 -60
8. Total Utility- The sum total of utility derived from different units of commodity
9. Marginal Utility- Additional utility derived from additional unit of a commodity.

Marginal Utility can also be defined as change in the total utility resulting from one- unit
change (TUn-TU(n-1)) in consumption of commodity, per unit of time or, Change in Utility/
change in Qty.
Use Code CAADITYA10 to get best discount on Unacademy subscription 13.1

10. Assumptions under Marginal utility analysis and cardinal approach
a) Cardinal Measurability of Utility- Utility is measurable and quantifiable.
b) Comparability of Utility across the goods- Satisfaction derived by a person from different
commodities can be compared.
c) Independence of Utilities-
d) Constant Marginal Utility of Money-
11. Law of diminishing Marginal utility states -as a consumer consumes more of stock, the extra
satisfaction that he derives from an extra unit, declines with the increase in consumption of that
item.
12. If same goods have capacity to satisfy other wants then their marginal utility would not have
decreased.
13. Conclusion as per law of Diminishing marginal utility

a) Total Utility increases at diminishing rate.
b) Marginal Utility is Downward Sloping curve, moving
from left to right
c) Marginal utility is negatively sloped curve.
d) Where Marginal Utility is negative, Total utility
decreases.
e) MU goes on decreasing & becomes negative beyond
a certain point of time.
14. Assumptions and Exception to Law of Marginal utility

a) Standard Units- Suitable size.
b) Homogeneous units-
c) Constant Income-
d) Constant Taste/ fashion- Continuous consumption-
e) Cardinal approach- Utility is quantifiable
15. Exceptions to Law-

a) Personal Aspects- music, hobbies, etc
b) Money is excluded-
c) Other possessions- substitute or complimentary.
16. Significance of Law

a) Law of diminishing marginal utility forms the basis of Law of demand.
b) Law of diminishing marginal utility indicates consumer’s equilibrium and price.
c) Law of diminishing marginal utility explains the concept of consumer surplus
d) Price and MU moves together up and down.
e) Marginal utility varies inversely with the supply.
f) MU of the goods increases as the quantity of complementary goods increases
g) MU of the goods decreases as the quantity of substitute goods with the consumer increases.

17. Law of Equi- marginal utility - As per the law of Equi- marginal utility, If marginal utility of
money spent on commodity X is greater than marginal utility of money spent on commodity Y, then
the consumer will withdraw some money from purchase of Product Y and will spent on purchase of
X, till MU of money in two cases becomes equal.
18. Maximum Satisfaction- The consumer will attain maximum satisfaction, and will be in equilibrium
when MU of money spent on various goods that he buys, are equal.
19. Consumer’s Equilibrium: Consumer is in equilibrium when price of the commodity = MU.
Similarly for more than two products, consumer will be in equilibrium if-
MU X = MU Y = MU Z
Price X Price Y Price Z
20. The consumer will attain maximum satisfaction, and will be in equilibrium when MU of money
spent on various goods that he buys, are equal.
21. Consumer Surplus: What a consumer is ready to pay – what he actually pays.(refer table 2.1)
a) The consumer continues to buy a commodity till MU = Price of the commodity
b) For all the earlier units purchased, MU > price paid. This difference is called as consumer’s
surplus
22. Limitations to Consumer surplus

a) Relevant only if cardinal approach to measurement of utility is assumed.
b) Consumer’s surplus cannot be measured precisely
c) Consumer’s surplus derived is affected by availability of substitutes.
d) In case of necessaries, consumer’s surplus is infinite
e) Not applicable to prestigious items
f) It is assumed that MU of the money is constant, which is unrealistic.
23. Graphical Interpretation: refer schedule above (2.1)

a) Consumer is in equilibrium at 3 units, where price = MU.
b) Consumer surplus is INR 20 and INR 10 at consumption level of 1 Orange and 2 oranges
respectively.

Ordinal Approach- Hicks and Allen Approach
24. Indifference curve analysis- Assumptions
a) Ordinal Approach to utility- UTILITY is not measurable in monetary terms.
b) Consistency in ranking- If a consumer prefers X to Y and Y to Z , this automatically means
that he must prefer X to Z.
c) Rational Consumer-Ranking and preferences-
d) Number of Goods- Customer prefers that combination which has more commodity in
combination and tries to maximize his satisfaction.
25. Indifference curve analysis
a) An Indifference curve is a curve which represents all those combination of goods which
gives same satisfaction to the consumer.
b) He remains indifferent among those combinations.
Example:
Combin- Roses Lilies Marginal Rate of
ation substitution (
MRS)
A 15 1 -
B 11 2 4 Roses per lily
C 8 3 3 Roses per lily
D 6 4 2 Roses per lily
E 5 5 1 Roses per lily
26. Indifference Map:

a) A set of indifference curves is called as Indifference Map.
b) An indifference map depicts complete picture of customer’s
taste and preferences.
c) The consumer is indifferent for any combination lying on same IC.
d) However he prefers combination on Higher IC to combinations
on lower IC, as the combinations of higher IC give more
satisfaction. So IC4 > IC3>IC2>IC1.
e) Farther the IC from the origin, higher is the satisfaction level.
27. Marginal rate of Substitutions

a) Marginal rate of substitutions (MRS) indicates how much of one commodity is substituted for
how much of another commodity.
b) MRS is indicated by Slope of IC curve at a particular point.
c) MRS show decreasing trend similar to concept of diminishing marginal utility.
28. Property of indifference curve

a) Downward sloping to right- negatively sloped.
b) Convex to the origin- due to diminishing nature of MRS.
c) All point on an IC gives same satisfaction-
d) Higher IC gives Higher level of satisfaction-
e) Non Intersecting

29. Budget line - Price line, Price opportunity line, Price- income
line, Budget constraint line.
a) A Budget line shows all those combinations of two goods which
a consumer can buy spending his given money income on two
goods at their given prices.
b) Budget line is also called as Every point on Budget line

represents full spending by the consumer.
30. Consumer Equilibrium under indifference curve approach
a) Consumer will try to reach the highest possible IC.
b) However his objective of buying higher quantity of goods is
restricted by Budget line.
c) Thus a consumer is in equilibrium when he derives maximum
possible satisfaction from the goods, and is in no position to
re- arrange his purchase of goods.
31. Assumptions under Ordinal Approach:

a) The consumer has fixed money income which he has to spend wholly on 2 Goods
b) Prices are constant.
c) The consumer has given an indifference map which shows his scale of preferences
32. Relationship of MRS and price at equilibrium,

a) At equilibrium, slope of price line is equal to slope of Indifference curve.
b) Slope of the line is PX/PY.
c) Slope of indifference curve indicates Marginal rate of substitution of X for Y.
MRSXY=MUX/MUY.
d) Hence at equilibrium MRSXY=MUX/MUY= PX/PY, alternatively, MUX/ PX = MUY/PY.

Demand Analysis
Chapter 2B – Demand Analysis

1. Demand = Willingness (Desire) and ability (Resources/Means) + willingness to use those means
2. Demand is determined at certain, (i) Price (ii) place or (iii) time.
3. The quantity demanded is a flow.
4. Types of Demand
a. Individual Demand/ Company demand- sub-system of total demand.

b. Market Demand/ Industry demand. sum total demand of all individual demand
c. Price Demand -Demand of consumer at various prices
d. Income demand- DD at various income levels. According to this superior goods have greater
demand and as the level of income lowers, inferior goods have higher demand.
e. Cross demand- Demand due to availability of Substitute goods or complementary goods.
f. Short run demand- refers to the demand with its immediate reaction
g. Long run demand- refers to demand which exists over a long period.
h. Derived demand-The demand because of the demand for some other commodity called
‘parent product’,
i. Autonomous demand- Independent of the demand for other goods.
j. Producer goods are used for the production of other goods - either consumer goods or
producer goods themselves.
k. Consumer goods are used for final consumption.
Durable goods are those which can be consumed more than once.
Non-durable goods are those which cannot be consumer more than once
5. Factors of Demand
a. Price of the commodity: demand for a commodity is inversely related to its price.
Complementary goods Inversely Related
Competing goods or substitutes- Directly Related
b. Income of the consumer-
As the level of income rises, increase in demand of necessities is proportionally less
than increase in income.
As the income level increase importance of food and other non durable goods in the
overall consumption basket and a rise in the importance of durable goods
There are some commodities for which the quantity demanded decreases with an
increase in money income beyond this level. These goods are called inferior goods.[ Also
called as Giffen goods]
c. Tastes and preferences of consumers-

Tastes and preferences of consumers are also influence by ‘Demonstration effect’ or
‘bandwagon effect’, i.e. by seeing another person use a particular product/ commodity.
Sometimes, when a product becomes common among all, some people decrease or
altogether stop its consumption. This is called ‘snob effect’.
Watch all free revision lectures for free on my YouTube channel “ CA ADITYA SHARMA” 13.6
Demand Analysis
Highly priced goods are consumed by status seeking rich people to satisfy their need for
conspicuous consumption. This is called ‘Veblen effect’
d. Population aspect-
Size of the population-Directly related
Composition of population: Directly if composition is in favor of demand
The level of National Income and its Distribution: Even Distribution More DD, uneven
distribution less Demand
Consumer-credit facility and interest rates: Cheaper interest rate and larger
availability of credit increases DD
6. Law of Demand
(a) Other things being equal, inverse relationship between price and quantity demanded,
(b) The other things which are assumed to be equal or constant are:-
Prices of related commodities (complementary goods or substitute goods)
Income of consumers
Tastes and preferences of consumers, and
Such other factors which influence demand.
7. Schedule:-
8. Features of the Demand Curve

(a) Slopes downwards from left to right
(b) Negatively sloped
(c) May sometimes be a straight-line or sometimes a free hand curve
(d) Demand curve is also called Average Revenue curve (ARC).
(e) The Market Demand curve is a lateral summation of individual Demand curve.
9. Rationale of the Law of Demand

a) Law of diminishing marginal utility
b) Substitution effect:-When the price of a commodity falls, it becomes relatively cheaper
than other commodities.
c) Income effect: As a result of fall in the price of the commodity, consumer’s real income or
purchasing power increases.
d) Arrival of new consumer: Rise in number and rise in buying capacity
e) Different uses:
Demand Analysis
10. Exceptions to the Law of Demand
a) Conspicuous goods: Prestige value or snob appeal or conspicuous consumption or Veblen
effect or prestige goods effect.
b) Giffen goods: Inferior goods , with no close substitutes easily available and which occupy
a substantial place in consumer’s budget are called ‘Giffen goods’
c) Conspicuous necessities: The demand for certain goods is affected by the demonstration
effect of the consumption pattern of a social group to which an individual belongs.
d) Future expectations about prices:
e) Irrational consumer-
f) Demand for necessaries
g) Ignorant consumer:
h) Speculative goods
11. Expansion and contraction in Demand VS Increase and decrease in Demand

Term Meaning Effect
Expansion/ Extension of Quantity demanded Increases, due to Downward movement along
Demand decrease in price same Demand curve
Contraction of Demand Quantity demanded decreases, due to Upward movement along same
increase in price Demand curve
Increase in DD Quantity demanded Increases, due to Rightward Shift of Demand
change in any factor other than price Curve
Decrease in DD Quantity demanded decreases, due to Leftward Shift of Demand
change in any factor other than price Curve
12. Elasticity of Demand

Elasticity of demand is defined as the responsiveness of the quantity demanded of a good
to changes in one of the variables on which demand depends.
the percentage change in quantity demanded divided by the percentage change in one of
the variables on which demand depends
13. Factors affecting demand and name of their elasticity

Factors Name of Elasticity Denoted by
Price of the commodity Price Elasticity EP
Income of the consumer Income Elasticity EI
Price of the related product Cross Elasticity EC
Availability of the substitute Substitution Elasticity ES
Demand Analysis
14. Methods of calculation of Price Elasticity of Demand
Methods Formula Used when Diagram
Percentage 1. Responsiveness of quantity Answer will be in
change or demanded of a commodity, negative denoting
proportional to a change in Price Inverse relation
Method 2. % change in quantity
demanded divided by the %
change in price, other things
remaining equal
Point Ep = -dq p ÷ dp q 1. change in price is
Elasticity- infinitesimal (very small)
Method of 2. Makes use of derivative
derivative rather than finite changes in
price and quantity
Point EP Lower segment 1. Applicable only for
Elasticity – Upper segment Straight- line Demand curve
Method of touching both the axes.
Graph
Arc 1. EP= q1-q2 x p1+p2 1. Arc Elasticity is a measure

Elasticity q1+q2 p1-p2 of average responsiveness
Method 2. Large change in prices and
quantities
Total Outlay 1. Elasticity is calculated by analysisng the change in Total

Method expenditure or Outlay of the household.
2. By this method we can only say whether the demand for a
good is elastic or inelastic; we cannot find out the exact
coefficient of price elasticity
EP < 1 • Price and Expenditure moves in same direction. ▪ Price Increase
• Demand is said to be less elastic, or inelastic and TR increase
▪ Price Decrease
and TR decrease
EP = 1 • Total Expenditure remains Unchanged. • Price Increase
• Demand is said to be unit elastic and TR
unchanged
• Price Decrease
and TR
unchanged
EP > 1 • Price and Expenditure moves in opposite direction. • Price Increase
• Demand is said to be elastic and TR decrease
• Price Decrease
and TR increase
Demand Analysis
15. Interpretation of Elasticity of Demand
Description Numerical Interpretation Nature of Curve
value
Perfectly EP =0 Qty. demanded does not Vertical line
inelastic changes as price changes Parallel to Y axis
Inelastic or 0<EP <1 Qty demanded changes by Relatively steeper
less elastic smaller percentage than Demand curve
price
Unit Elastic EP =1 Qty demanded changes 45 degree
exactly by same % as straight line
price Or rectangular
hyperbola
Elastic 1<EP <∞ Quantity demanded Relatively flatter
changes by larger demand curve
percentage than price
Perfectly EP =∞ Small change in price will Parallel to X axis
elastic bring infinite change in
quantity demanded
16. Determinants of price Elasticity

a) Availability of substitutes:_________________ relationship
b) Position of a commodity in a consumer’s budget:
➢ Goods having higher proportion of consumers’ spending are __________ to demand.
➢ Goods having lower proportion of consumers’ spending are ______________ to demand.
c) Number of uses to which a commodity can be put:
➢ Multiple uses have _________ to demand.
➢ Specified or particular use have ____________ to demand.
d) Time period:
➢ The long run demand for a commodity is _________.
➢ The short run demand for a commodity is ______________ to change in price.
e) Consumer habits:
➢ Habitual Goods _________________Demand
f) Tied demand:
➢ Goods which have autonomous demand on their own are _____________
➢ Goods which have tied or joint demand are ____________
g) Nature of the need that a commodity satisfies:
➢ Luxury goods are price __________-while necessities are price __________to price
change.
h) Price range:
➢ Goods which are in medium range of price level are ____________ to price change.
➢ Goods which are in very high price range or in very low price range have __________ DD.
Demand Analysis
Responsiveness of quantity demanded of a Ei =Percentage change in quantity Demand x100
good to changes in the income of Percentage change in income
consumers

Type Relation between income & Example Formula Curve
demand
Positive Positive Normal and Ey = 1
Income Luxury goods Ey > 1
Elasticity Ey < 1
Negative Inverse Inferior goods Ey < 0

Income
Elasticity
Zero Constant (No change Necessaries E=0

Income in demand though there is goods
Elasticity change in income)
19. Cross Elasticity of Demand

Cross elasticity of demand is degree of responsiveness of demand for one
good to a change in price of other good.
Positive Direct or Positive relation Tea & Coffee, CED = 1

Cross (Goods must be substitute) CED > 1
Elasticity CED < 1
Negative Inverse relation Car & Petrol CED < 0
Cross (Goods must be complementary
Elasticity goods
Zero Constant Cloth & salt CED = 0
Cross (No change in demand of
Elasticity one product though there is
change in price of other
product)
goods must be unrelated
20. Methods of demand Forecasting

1. Survey of Buyers’ Intentions: direct interview of potential customers.
a. Complete enumeration method
b. Sample survey method
Demand Analysis
c. End–use method, especially used in forecasting demand for inputs, involves identification of
all final users,
2. Collective opinion method:
a) Sales force opinion method or grass roots approach. Firms having a wide network of sales
personnel can use the knowledge, experience and skills of the sales force.
b) Although this method is simple and based on first-hand information of those who are directly
connected with sales, it is subjective as personal opinions.
3. Expert Opinion method:
Delphi Technique
a) The Delphi technique, developed by Olaf Helmer at the Rand Corporation of the USA,
provides a useful way to obtain informed judgments from diverse experts
4. Statistical methods:
a) Forecasts using statistical methods are considered as superior methods because they are
more scientific, reliable and free from subjectivity.
b) Trend Projection method: This method, also known classical method, is considered as a
‘naive’ approach to demand forecasting.
i. Graphical Method:
ii. Fitting trend equation: Least Square Method: sum of the squared differences between the
calculated and observed value is minimised.
5. Regression analysis: Relationship is established between the quantity demanded (dependent
variable) and the independent variables (explanatory variables) such as income, price of the
good, prices of related goods etc. Once the relationship is established, we derive regression
equation assuming the relationship to be linear. The equation will be of the form Y = a + bX.
6. Controlled Experiments: also known as market experiment method.
a) Under this method, future demand is estimated by conducting market studies and
experiments on consumer behaviour under actual, though controlled, market conditions.
7. Barometric method of forecasting:

a) Just as meteorologists use the barometer to forecast weather, the economists use economic
indicators to forecast trends in business activities. This information is then used to forecast
demand prospects of a product, though not the actual quantity demanded.
b) For this purpose, an index of relevant economic indicators is constructed.
c) Movements in these indicators are used as basis for forecasting the likely economic
environment in the near future. There are leading indicators, coincidental indicators and
lagging indicators. The leading indicators move up or down ahead of some other series.
21. For Quick Practice

Factors Explanation Elasticity
Nature of the Necessities. Inelastic
commodity
Luxurious goods. Elastic
Level of income Goods demanded by high income group. Inelastic
Goods demanded by low income group. Elastic
Proportion of Commodity on which Proportion of expenditure is low. Inelastic
Demand Analysis
expenditure
Commodity on which Proportion of expenditure is large. Elastic
Level of price and When price level of a commodity is too high and change in Inelastic
change in price price is smaller.
If price level is low and change in price is large. Elastic
Number of uses Commodity which has limited uses. Inelastic
Commodity which used to satisfy several wants. Elastic
Substitutes Commodity which have less substitutes. Inelastic
Commodity having several substitutes. Elastic
Urgency Commodity which is required urgently. Inelastic
Commodity which is not required urgently. Elastic
The Period Demand for commodity is inelastic in long run. Inelastic
Demand for commodity is elastic in short period. Elastic
Tied demand or Joint Demand for those goods, which are tied to others. Inelastic
demand
Consumer habits Demand for commodity used by habitual consumer. Inelastic
Supply
Chapter 2C- Supply Analysis

1. Supply refers to amount of a commodity seller is
➢ Able to sell - depends upon stock of a commodity
➢ And willing to sell- depends upon price of a commodity
.
2. Determinants of supply on Factors affecting supply
Factors Relation Factor Relation
Price Cost of Production***
Stock Techniques of
Time Taxation policy
Natural Resources Trade policy
Production Infrastructure
Weather conditions Monetary Policy
3. Law of supply states that “other things being equal” there is a direct relationship between
price and supply.
4. The law of supply is explained by Dr. Alfred Marshall.
5. Supply Schedule and Graph

Price Supply
1 10
2 20
3 30
4 40
5 50
6. Features of Supply curve

a) Slopes upwards from left to the right.
b) Positively slope
c) Straight—line or sometimes a free hand curve.
d) The Market Supply Curve is a lateral summation (totaling) of Individual Supply Curves
7. Assumptions of Law of supply

a. No change in cost of production
b. No change in technology
c. Normal weather conditions
d. No change in infrastructural facilities
e. No change in amount of Natural Resources
f. No change in Taxation policy
g. No change in monetary and trade policy
Contact No. 7410134858 13.14

Supply
8. Increase and Decrease VS Expansion and contraction in the Quantity Supplied
Increase In SS Decrease In SS Expansion in SS Contraction in SS
Increase in Supply take place as Decrease in Supply take place Rise in the quantity Fall in the quantity
a result of changes in factors as a result of changes in supplied takes place as supplied takes place as
other than price, while price factors other than price, a result of changes a result of changes
remains constant. while price remains constant. in price in price
Upward Movement Downward Movement
_________________Shift ________________Shift along same SS curve along same SS curve
9. Exceptions to law of Supply

Labour Supply
Wage rate Labour Total

supply income
Rs.100/hr 12 hr. 1200/day
Rs.250/hr. 15 hr. 3750/day
Rs.700/hr. 10 hr. 7000/day
This is Backward bending supply curve
Need for cash- Seller may sell at lower price and supply more Qty if
needs more cash
Savings If a person wants a fixed amount of income in the form
of interest then, he will save more at a lower rate of
interest and save less at a higher rate of interest
Future Expectations With a small rise in price, if seller expects a further rise
in future he will decrease the supply & vice-versa
10. Methods of measurement of Elasticity of supply

Methods of measurement of Elasticity of supply
1. Percentage / Proportionate Method: According to this method elasticity of supply is
calculated by dividing a % or proportionate change in supply with the % or proportionate
change in price. As explained above
% Change in supply S1-S2 X 100
% Change in Price S1
P1-P2 X100
P1
Contact No. 7410134858 13.15

Supply
2. Point Method: This method is used to find out elasticity at a point on supply curve. The
elasticity at a point on the supply curve can be measured with the help of following formula.
ES =dq p
dp q
3 Arc Elasticity: when the price change is somewhat larger and we have to measure elasticity
over an arc rather than at a specific point on it, in such cases, the concept of arc elasticity is
used. In arc elasticity we use the average of the two prices and quantities (Original & new)
ES = Where P1and Q1 are original price and quantity respectively
and P1 and P2 are new price and quantity respectively.
11. Elasticity of Supply refers to degree of responsiveness of supply to change in its price.
Or, Elasticity of Supply refers to the ratio between percentage or proportionate change in supply
and percentage or proportionate change in price.
Perfectly Elastic Relatively Elastic Unitary Elastic Relatively Perfectly
Supply Supply Supply Inelastic Supply Inelastic Supply
Or, More Elastic Or, less Elastic
Es = Es> 1 Es = 1 Es< 1 Es = 0
12. Equilibrium Price:

The determination of Equilibrium Price using Demand and Supply
is explained in the following manner –
Demand Curve slopes downwards from left to right, while
Supply Curve slopes upwards from left to right.
Point E constitutes the Stable Equilibrium for the product,
other things remaining equal.
The Equilibrium Price is OP, and the quantity bought and sold
at that level is OQ units.
Contact No. 7410134858 13.16

Production Analysis
Chapter 3A – Production Concepts
1. According to James Bates and J.R. Parkinson “Production is the organized activity of
transformation of Raw material into Finished G&S to satisfy the demand
2. Production is any economic activity, which satisfy human wants.
3. Production = Creation of Utility or Addition of utility.
4. Methods of Creation of Utility-
a) Form Utility
b) Place Utility
c) Time Utility
d) Personal Utility
5. Factors Of Production
I. Land
a) Every free gift of nature on Surface of the earth + below the surface of the earth+ above the
surface of the earth
b) No Social Cost: Since no sacrifice is made in creation of land.
c) Permanent factor:
d) Passive factor:
e) Heterogeneous factor and site value differs from place to place
f) Mobility: Geographically land is ___________ but occupationally it is ___________.
g) Subject to diminishing returns:
h) Supply: Supply of level is perfectly _______________.
II. Labour
a) Mental or physical exertion to produce G&S, for economic reward.

b) Perishable Nature- Labourer cannot store his Labour
c) Labour is said to have no reserve price
d) Weak bargaining power.
e) Self- Source- Labour is inseparable from the Labourer himself.
f) Variations in skill and productivity
g) Productivity differs from person to person
h) Peculiar relationship between labour supply and Wage rate- Backward bending Supply curve
i. Direct Relationship: Generally
ii. Reverse Relationship at Higher Prices
iii. Reverse Relationship at Lower Prices
CA Foundation Eco Fast Track –Production Concepts 14.1

Production Analysis
III. Capital
a) Part of wealth which is used for further production of wealth, or which yields an income.
b) Capital is a stock concept
c) Capital refers to only that part of wealth, that is used for further production. Therefor not all
wealth is capital but all capital is wealth.
d) Produced means of Production
e) Man—made means / factor
f) Mobility
g) Perishable factorthat’s why we charge depreciation
h) Types of Capital:
Fixed Working Sunk Floating Money Real
Capital: Capital: Capital: Capital: Capital: Capital:
j) Stages in capital Formation

i. Savings: Ability to save depends upon the income capacity of individual.
ii. Mobilization of Savings: network of banking and other financial institutions
iii. Investments:
IV. Entrepreneur-
a) Person who combines the various factors of production in the right proportions, initiates the
process of production and bears the risk involved in it.
b) Also Called as Organiser, Manager or the Risk—Taker.
c) Without the Entrepreneur, the other factors of production would remain unutilized or idle.
d) Holds final responsibility of the business.
e) Entrepreneurship gets its reward (i.e. Profit),only after all other factors of production have been
rewarded, i.e. after Rent, Wages and Interest.
f) Functions of an Entrepreneur
i. Initiating and Running the business:
ii. Risk—Bearing:
iii. Innovations:
g) Enterprise Objective
i. Organic Objectives – Survival then Growth and Expansion
ii. Economic Objectives- Profit Maximizing Objective
iii. Social Objectives: Avoid anti—social practices, opportunities for gainful employment ,
continuous and sufficient supply of unadulterated goods ,does not cause any type of pollution.
iv. Human Objectives: All the objectives towards its employees
v. National Objectives:

Production Analysis
h) Constrains and Problems in achieving objective
Constrains in achieving the objectives Enterprise's Problems
a) Information a) Objective
b) Infrastructure b) Location of Plant
c) Factors of Production c) Size of Plant:
d) Economic Aspects d) Physical Facilities
e) Finance:
f) Organisation Structure:
g) Legal Compliance:
h) Industrial Relations:
PART B – PRODUCTION FUNCTION
1. Production Function is the functional relationship between physical inputs and physical outputs
2. The maximum amount of output that can be produced with given quantities of inputs, in the existing
state of technology.
3. Production Function gives the minimum quantities of various inputs that are required to yield a given
quantity of output.
4. Cobb-Douglas Production Function
a) Output is manufacturing production and inputs used are Labour and Capital.
b) Cobb-Douglas Production Function is Q=KLaC(1-a),

Where, Q is output, L is Quantity of Labour and C the qty of Capital. K and a are Positive Constants.
c) Labour contributed about 3/4w and Capital about1/4 of the increase in the Manufacturing Production.
th
5. Short run and long run production function

Short Run Long Run
Fixed Only one Factor of Production is kept There is no Fixed Factor of Production in the
Factor constant or fixed. [Generally and, Capital long—run planning horizon.
or Enterprise is taken as fixed.] all the factors production are variable.
Proportion Production is increased by increasing Production is changed by changing all the Factor
between proportion of variable factor only, keeping of Production simultaneously
Factors fixed factor constant
Theory Law of Variable Proportions is Law of Returns to Scale is applicable in the
. applicable in the short—run. long—run.
6. Assumptions:
• It is related to a particular unit of time.
• The technical knowledge during that period of time remains constant.
• The factors of production are divisible into most viable units.
• The producer is using the best technique available.

Production Analysis
7. Understanding Short term production function
Total Total Output
Production
Average AP = TP/Units of variable input (labour)
Production
Marginal Additional TP due to an additional unit of input.
Production MP = Change TP / change in Labors Or,
(MP) Mp = MP = TPn - TPn_1
Relationship 1. Both AP and MP can be calculated by TP.
between AP 2. When AP rises then MP also rises but MP>AP.
and MP 3. When AP is maximum then MP =AP or say MP curve cuts the AP curve at its
maximum point
4. When AP falls then MP also falls but MP<AP.
5. There may be a situation when MP decreases and AP increases but opposite never
happened.
Schedule Labour TP AP MP Analysis
1 2 2 2
MP &AP both increases; MP>AP; TP also
2 5 2.5 3
increases
3 9 3 4
4 12 3 3 MP=AP, AP = maximum
5 14 2.8 2
MP &AP both decreases, MP<AP; TP increases
6 15 2.5 1
MP = 0, TP=maximum
7 15 2.1 0
8 14 1.7 -1
AP > MP both decreases TP decreases
9 12 1.3 -2
Relationship a. When AP rises, MP >AP.

between b. When AP is maximum, MP =AP.
Average c. MP declines slightly earlier than AR
Product and d. MP Curve cuts AP Curve from above when AP is maximum.
Marginal e. When AP decreases, MP <AP.
Product f. MP Curve declines steeply than AP.
g. MP may become zero and negative later, but AP continues to remain positive
Note: The point on the TP Curve when MP is maximum, is called Point of Inflexion

Production Analysis
8. Law of Variable Proportion/ Law Of Proportionality/ Law Of Diminishing Returns /Law Of
Diminishing Marginal Physical Productivity.
(a) The Law of Variable Proportions operates in short run only
(b) Output is increased by varying the quantity of one input.
9. Explanation to Various Stages
a) Explanation to Stage 1
01. Full Use of Fixed Indivisible Factors- Fixed Factors are more intensively and effectively
utilized. This causes the production to increase at a rapid rate.
02. Efficiency of Variable Factors- Through Specialization
03. No Scarcity of Variable factor
04. Reaching the right combination
b) Explanation to Stage 2-
Note: Stage II is called Law of
01. Inadequacy of Fixed Factor Diminishing Returns since MP and AP
02. Less efficiency of Variable Factor both show decreasing trend. However,
03. Imperfect Substitutes both MP and AP remain positive
04. Wrong combinations
c) Explanation to Stage 3
01. Variable Factor becomes too excessive, Due to this, the total output falls instead of
rising.
02. Stage III is called Law of Negative Marginal Returns
Since the second stage is the most important, So stage II will be stage of operation and
because of that in practice we normally refer to the law of variable proportion as the
law of diminishing returns.
Stage I and III is the stage of economic absurdity or stage of economic nonsense

Production Analysis
Law of Return to scales- Operates in Long Run Only
1. All factor inputs in the production function can be changed. The behavior of output consequent
to change in the quantities of all factor inputs in the same proportion (i.e. keeping, the factor
proportions unaltered) is known as 'returns to scale'.
Increasing Simultaneous increase in all the inputs in the
Returns to same given proportion result in a more than
Scale: proportionate increase in the output.
Constant 1. Proportionate increase in all the inputs

Returns to results in proportionate increase in output.
Scale: 2. Constant return to scale is also called
'Linear Homogeneous Production Function'.
Diminishing Simultaneous increase in all inputs in the same

Returns to given proportion result in a less than
scale: proportionate increase in the output
2. Internal Economies and Diseconomies to Scale- Use of greater degree of division of

Labour and specialised machinery at higher levels of output are generally termed as Internal
Economies.
Technical Managerial Commercial Risk— bearing Financial
All these factors are within the control of an organization and thus are internal Factors. These
factors initially acts Economies but after a pint becomes diseconomies
3. External Economies are explained below —

Cheaper Raw Materials Technological Development Growth of Better
and Capital Equipment for development for of Skilled ancillary transportation
entire industry entire industry Labour industries and marketing
4. External Diseconomies:
Rise in Factor Prices: Higher Costs: Government Restrictions:

Production Analysis
1. Isoquant Curve:- "Iso" means equal and "quant" means quantity.
(a) An Isoquant is a Curve that shows all the combinations of inputs that yield the same level of output.
2. MRTS=Marginal Rate of Technical Substitution
(a) MRTS always shows diminishing trend.
(b) MRTS= Change in units of capital/ change in units of labour
Combination Units of Labour (x) Units of Capital (y) Product Output MRTS (See Note)
A 5 9 100 units
B 10 6 100 units (9- 6)/(10-5) = 0.6
C 15 4 100 units (6 – 4)/( 15 -10) = 0.4
D 20 3 100 units (4-3)/(20-15)= 0.2
3. Features of Isoquants:
(a) Isoquants are convex to the origin, due to diminishing trend of MRTS
(b) Isoquants are negatively sloped, i.e. downwards from left to right.
(c) Isoquant do not touch either axis.
(d) Isoquants need not be parallel.
(e) Two Isoquants cannot cut each other, i.e. Isoquants are non—
intersecting.
(f) An Isoquant lying above and to the right represents a higher level of
output.
4. Isocost Lines: Equal—Cost Lines or Budget Line or the Budget Constraint Line.
Isocost Line shows the various alternative combinations of two Factor Inputs, which a Firm can buy with given
amount of money.
5. Production Optimisation
1. A Profit Maximising Firm is interested to know what combination
of factors of production would minimise its Cost of Production for
a given output, and also the optimum level of output.
2. This is obtained by combining the Firm's Production and Cost
Functions, namely Isoquants and Isocost Lines respectively.
3. Isoquants represent the technical conditions of production for a
product, and Isocost Lines represent various "levels of cost"(given
the prices of two factors). Together, these can help the Firm to
optimize its production.

Theory Of Cost & Revenue
Meaning
1. Business decisions are generally based on cost of production i.e. the money value of inputs and
output is considered.
2. In other words, cost analysis is concerned with the financial aspects of production.
3. Types of cost
Name Explanation
• Explicit cost 1. Costs which involve cash payment towards factors of production.
• Out-of-Pocket 2. Recorded in books of accounts.
Costs 3. Rent, Wages & Salaries, Interest on Loans borrowed for business, etc.
• Outlay Costs.
• Accounting Costs
• Implicit cost 1. Costs do not involve any cash payment to outsiders.
• Notional cost 2. It is the monetary reward for all factor of production owned by
• Imputed cost entrepreneur himself
• Opportunity 3. Not recorded in books of account.
Costs. 4. Interest on own Capital, Rent of own premises, Salary to Entrepreneur,
etc.
Economic Costs Explicit Costs + Implicit Costs.
Opportunity Cost 1. It refers to the value of sacrifice made, or benefit of opportunity
foregone in accepting a next best alternative course of action.
2. Opportunity Cost arises only when alternatives are available. If a
resource can be put only to a particular use, there are no Opportunity
Costs.
3. Opportunity Costs do not involve any cash payment as such.
4. It is considered only for decision—making and analytical purposes.
5. Examples: A person quits his job and enters into business. Here, the
Salary foregone from employment constitutes Opportunity Cost.
• Direct cost 1. Direct costs are those which have direct relationship with a component
• Traceable cost of operation like manufacturing a product, organizing a process or an
activity etc.
2. They are charged directly to product
3. They can be generally quantified and expressed per unit of output, e.g.
5 kg of Raw Materials per unit of product, etc.
• Indirect cost 1. Indirect costs are those which are not easily and definitely identifiable
• Non-traceable in relation to a plant, product, process or department.
cost 2. Therefore, such costs are not visibly traceable to specific goods,
services, operations, etc.; but are nevertheless charged to different jobs
or products in standard accounting practice and Apportioned on suitable
basis.
3. Factory Rent, Electric Power, and other Common Costs incurred for
general operation of business benefiting all products jointly.
Chapter 6 14.8
Committed Fixed Also known as "Unavoidable" Fixed Costs. These costs cannot be controlled.
Costs
Discretionary Fixed
Also known as "Avoidable" Fixed Costs. These costs can be controlled.
Costs
Historical cost / Historical cost refers to the cost incurred in the past on the acquisition of
Sunk Cost a productive asset such as machinery, building etc.
Replacement cost is the money expenditure that has to be incurred for
Replacement cost
replacing an old asset.
Incremental cost Incremental cost refers to the additional cost incurred by a firm.
Private cost
Private costs are costs actually incurred or provided for by firms and are
either explicit or implicit.
Social Cost
1. Social cost =private cost + external cost.
2. It includes the cost of resources for which the firm is not required to
pay price such as atmosphere, rivers, roadways etc. and the cost in
terms of dis-utility created such as air, water and environment pollution.
4. Strike the incorrect

1. Rent is paid to the Landlord, Salary/ wages paid to employee/ workers, Interest on Capital is
borrowed and used in business is Explicit / Implicit cost.
2. Land is owned by the Entrepreneur, Own people are employed in the firm, Entrepreneur employs
his own funds as Capital is Explicit / Implicit cost.
3. Entrepreneur himself manages the business is Explicit / Implicit cost.
5. Important types of cost

Output Total Total Total Average Average Average Marginal
(Unit) fixed cost variable cost fixed cost variables Total Cost Cost Rs.
TFC TVC TC AFC AVC AC MC
0 10 - 10 - - - -
1 10 10 20 10 10 20 10
2 10 18 28 5 9 14 8
3 10 24 34 3.33 8 11.3 6
4 10 28 38 2.5 7 9.5 4
5 10 32 42 2 6.4 8.4 4
6 10 38 48 1.67 6.33 8 6
7 10 46 56 1.43 6.57 8 8
8 10 56 66 1.25 7 8.25 10
9 10 68 78 1.11 7.55 8.67 12
Chapter 6 14.9
Type Nature
1. Fixed Costs are costs that do not vary with output.
2. They are period—related.
3. They are taken as a function of time and not of output.
Fixed
4. They are incurred even at zero level of output.
Costs
5. Fixed Cost per unit of output decreases with increase in output, and vice—
versa.
6. Rent, Insurance, Interest on Loans, Depreciation, etc. are Fixed Costs.
1. Variable Costs are costs that vary, based on the level of output.
2. They are product—related.
3. They are taken as a function of output and not of time.
Variable 4. They are incurred only when production commences.
Costs 5. Variable Costs are avoidable costs.
6. Variable Cost per unit of output generally remains constant, if Total Variable Costs
vary proportionately with output.
7. Cost of Raw Materials and Wages are Variable Costs.
Marginal 1. Marginal Cost is the addition made to the total cost by production of an additional unit of
Costs output.
2. Marginal Costs per unit = Difference in Total Cost (TC) between two output levels
Difference in Output Quantity at those levels
3. TCn- TCn-1
4. Marginal Cost (MC) Curve of a Firm declines first, reaches its minimum and then
rises. Hence, Marginal Cost Curve of a Firm is U—shaped.
Cost Mathematical relationship between cost of a product and the various determinants of cost
Function
Short Run 1. Period in which some factors are fixed and some factors are variable. Fixed
factor have fixed cost and variable factor have variable cost.
2. So, law of variable proportion applies here. In short-run, output can be increased or
decreased by changing variable factors only but fixed factors cannot be varied
Total TFC is parallel to X-axis. In the figure given below,

Fixed cost even at zero output-fixed cost remain the same in
the short run. e.g. rent and insurance
(Short
run)
Total Variable Costs are those costs that change with

Variable changes in level of output. It has inverse’s' shape
cost (TVC) and start from origin. Figure given below shows that
as output is zero cost is also zero and as output
increases cost increases. e.g. raw material, power
etc.
Chapter 6 14.10
Semi- There are some costs which are neither perfectly variable, nor absolutely fixed in
variable relation to the changes in the size of output.
Example: Elasticity charges include both a fixed charge and a charge based on
consumption.
Short run 1. It can be noticed that TFC is constant at

Total cost all levels of output.
behaviour 2. TVC increases with the increase in output
but rate of increase is changing.
3. Initially TVC increases at decreasing rate
but after some time it increases at
increasing rate.
4. Behaviour of TVC is determined by law of
variable proportion.
5. TC increases with increase in output. Changes in TC are determined by TVC.
6. TFC curve is a horizontal line starting from y–axis.
7. TVC curve is upward slopping. Initially it is fatter and later on steeper.
8. TC curve is upward sloping starting from y-axis.
Chapter 6 14.11
6. Short Run Average Cost
Average Fixed 1. Average fixed cost is the total fixed cost divided by the output.
Cost (AFC) 2. TFC/Q.
3. The general shape of the AFC curve is downward sloping it does not touch the
X-axis as AFC cannot be zero.
4. It is not 'U' shape. This curve is also called Rectangular Hyperbola.
Average 1. Average variable cost is the total variable cost divided by the output.
Variable Cost 2. TVC/Q.
(AVC) 3. The average cost curve will first fall, then reach a minimum and then rise
again.
4. It has 'U' shape.
Average Total 1. Average total cost is total cost divided by the output.
Cost (ATC) 2. TC/Q or AFC+AVC.
3. The ATC curve first falls, reaches it’s minimum and then rises.
4. The ATC curve is 'U' shape due to law of variable proportions.
Marginal Cost 1. Marginal cost is the change in total cost due to change in the output.
(MC) 2. MC= Change in Total Cost / Change in Qty. produced
3. MC = Change Total Variable Cost / Change Qty. produced.
4. The MC curve is also 'U' shape
Behavior of AFC goes on diminishing with the increase in

Average – output but it never becomes zero.
costs in Short AVC initially declines but later on goes on
- Run increasing.
ATC initially decreases, constant for a
while & finally goes on increasing.
MC initially decreases & finally increases.
The point at which ATC is minimum. It is
equal to MC.
AFC curve is a ‘rectangular hyperbola’
because AFC x Q is always constant.
7. Relationship between Average Cost and Marginal Cost Curves

1. When AC falls as a result of an increase in output, MC is less than AC.
2. When AC is minimum, MC = AC. So, MC Curve cuts the AC Curve at its minimum.
3. When AC increases due to increase in output, MC is greater than AC.
8. Relationship between ATC and MC

✓ Initially ATC & MC both decline with increase in output. In this situation ATC > MC.
✓ When ATC is minimum ATC = MC.
✓ When ATC & MC both are increasing MC > ATC.
Chapter 6 14.12
✓ When AC is decreasing, MC may be decreasing or increasing.
✓ When AC is increasing MC must be increasing.
9. Long run average cost curve

a) LAC Curve: A Long Run Average Cost Curve (denoted as
LAC Curve) depicts the functional relationship between
output and the long—run cost of production.
b) No distinction of Fixed - Variable: All factors of
production are variable in long—run.
c) AC cannot be higher in the long—run, than in the short—run.
Thus, LAC is the least—cost combination, for any particular
output level.
d) Planning Curve: LAC Curve is called Planning Curve.
e) SAC (Short—Term Average Cost) Curves are called Plant
Curves.
f) LAC derived from SAC: LAC Curve is derived as an envelop / tangent of all SAC Curves. Further, the
g) LAC Curve is a U—Shaped Curve, due to the operation of Law of Returns to Scale.
h) Selecting the suitable SAC Curve at different output levels:
i) Note: The Firm should select the SAC, not the lowest point of that SAC.
j) Deriving LAC Curve in case of numerous / infinite SAC Curves:
k) In the diagram, the LAC Curve is drawn as a smooth curve, so as to be tangent to each of the SAC
Curves.
l) Note: LAC Curve is tangent to each of the SAC Curves, not the minimum points of the SAC Curves. So
When LAC Curve is — LAC will be tangent to Principle
—portions of the
The falling Returns to Scale will first increase, due to
Declining SAC Curves. internal and external economies. So, LAC will
decline.
The rising portions of the Returns to Scale will decrease later, due to
Rising SAC Curves. internal and external diseconomies. So, LAC will
rise.
Thus, as a result of initial fall and subsequent increase in LAC, it will be a U—shaped Curve.
Chapter 6 14.13
REVENUE CONCEPT
Qty Price pu TR = MR Space for Diagram
(Q) (AR=P) PxQ
1 22 22 22
2 20 40 18
3 18 54 14
4 16 64 10
5 14 70 6
6 12 72 2
7 10 70 -2
8 8 64 -6
9 6 54 -10
10 4 40 -14
Meaning 1. Revenue refers to money received by a seller by selling his product in the
market.
2. Hence, revenue is sales receipts or sales proceeds.
Total Revenue 1. It is the total money received from the sale of all units of the product.
2. Total Revenue = Price x Quantity (P x Q)
Average 1. Average Revenue = Total Revenue/Quantity (TR/Q)
Revenue (AR) 2. Average Revenue is always equal to Price
Marginal 1. MR is the change in TR resulting from the sale of an additional unit of a
Revenue (MR) commodity.
2. Marginal Revenue = Change in TR/ Change in Qty.
3. Marginal Revenue= TRn – TRn-1
MR, AR, TR Marginal Revenue = Average Revenue (E – 1/E)
and Elasticity Where E = Price elasticity of demand
of Demand 1. If E = 1, Then MR = 0
2. If E > 1, Then MR will be Positive
3. If E < 1, Then MR will be Negative
Behaviour of 1. A firm should produce at all if Total Revenue(TR) from its product is equal to
TR, AR & MR or exceeds its Total Variable Cost (TVC) or say TR > TVC (Price > AVC).
2. If TR = TVC, firm's maximum loss will be equal to its Fixed Cost. As we know P
x Q = TR and AVC x Q = TVC
3. It will be profitable for the firm to increase output whenever MR > MC and
decrease output whenever MR < MC and the firm should continue production
till
4. MR = MC and MC curve should cut to MR from below.
Chapter 6 14.14
Summary of Relationships:
▪ If TR increases, MR will be positive.

TR and ▪ When TR is maximum, MR = 0.
MR ▪ If TR decreases, MR will be negative.
▪ MR and AR both decline, but MR falls rapidly than AR
MR and ▪ AR Curve is flatter than MR.
AR ▪ MR can be zero and even negative, while AR will never cross below the X axis.
▪ At the point where MR = 0, Elasticity of Demand on AR Curve will be 1.
E qu i li b ri um Po i nt of the F i rm
1. It will be profitable for the Firm to expand its output Y

whenever Marginal Revenue (MR) is greater than
Marginal Cost (MC), and to keep on increasing output
until MR = MC.
2. If any unit of production adds more to Revenue than to

Cost, production and sale of that unit will increase
profits. Similarly, if it adds more to Cost than to
Revenue, it will decrease profits.
3. Profits will be maximum at the point where Additional Revenue (MR) from a unit equals its Additional
Cost (MC). So, MC = MR.
4. Further, the MC Curve should cut the MR Curve from below (and not from above). This is so
because, upto this point MR > MC, hence there is an incentive for further production. Beyond this point,
MC > MR.
5. This position (i.e. where MC = MR, and MC cuts MR from below) is called Equilibrium position for the
Firm.
6. Thus, Note: For achieving Equilibrium Position, the conditions to be satisfied are —MC = MR, and MC
Curve should cut MR Curve from below, i.e. MC should have +ve slope.
7. Merely being in Equilibrium position does not mean that the Firm is making profits. The actual position of
profits can be known only on the basis of AR and AC Curves
Chapter 6 14.15
Meaning and Types of Market
Chapter 4 – Market and its type

1. Elements of a Market: The elements of a Market are —
a) Buyers and Sellers,
b) Product or Service,
c) Bargaining for a Price,
d) Knowledge about market conditions, and
e) One Price for a Product or Service at a given time.
2. Types of Market -The Market Structures analysed in Economics are --

a) Perfect Competition: Many Sellers selling identical products to many Buyers.
b) Monopoly: Single Seller producing differentiated products for many Buyers.
c) Monopolistic Competition: Many Sellers offering differentiated products to many Buyers.
d) Oligopoly: A Few Sellers selling competing products to many Buyers.
e) Duopoly: Duopoly is a market situation in which there are only two Firms in the market. It is a
sub—set of Oligopoly,
f) Monopsony: Monopsony is a market characterized by a Single Buyer of a product or service. It
is mostly applicable to Factor Markets in which a Single Firm is the only Buyer of a Factor.
g) Oligopsony: Oligopsony is a market characterized by a small number of large buyers. It is also
mostly relevant to Factor Markets.
h) Bilateral Monopoly: It is a market structure in which there is only a Single Buyer and a Single
Seller. Thus, it is a combination of Monopoly Market and a Monopsony Market.
I. Perfect Competition
Large No of Homogeneous Products Free Entry / Exit Perfect Knowledge

Buyers & Sellers
Transportation Uniform Market Indifference / Lack of Mobility of Factors of
Price Preference Production
Price Taker
1. How Price is determined in Perfect Competition

a) Revenue (MR) for the Firm, since the price is uniform in the market. So, in Perfect
Competition,
b) D = AR = MR = Price.
15.1
2. Short Run price determination, Optimum output and profit Determination

For Equilibrium
1. ______________________________
_______________
______________________________
_______________
2. ______________________________
_______________
______________________________
_______________
3. For Determination of profit or loss

Super profits: Normal profits: Losses Shut Down point
AR > ATC. Super AR = ATC. It is also AR < ATC. A Firm will shut down,
profits also called called B.E.P (Break- if AR < AVC, at a point
Economic Profits, even-Point) means No where MC = MR (MC
abnormal profits and Loss No Profit. It is cutting from below
super normal profits. called Marginal Firm.
4. Long – run Equilibrium of a firm under Perfect Competition.

In the Long run the firms will be earning just NORMAL PROFITS and There is no further entry or
exit of Firms to / from the market.
1. To earn normal Profits, LAR should be equal to LAC or say LAR = LAC
2. In the long run, following conditions are satisfied:
• The output is produced at the minimum feasible cost or minimum LAC
• Consumers pay the minimum possible price.
• Full utilization of plants is possible, MC = AC
• There is no wastage of resources. optimal allocation
• Firms earn only normal profits i.e. AC = AR.
• Firms maximize profits i.e. MC = MR, but level of profits will be normal.
• In the long run LMC = LMR = P = LAR = LAC = SMC = SAC
• When LAC falls LAC> LMC and when LAC raises LMC > LAC
15.2
Question 1: What can be the profit/ loss condition in long run in Perfect competition?
Answer:_____________________________________________________________________
II. Monopoly
1. Features of Monopoly
a) Single Seller
b) Firm = Industry
c) Entry Restrictions- (i) economic, (ii) institutional, (iii) legal, or (iv) artificial.
d) No substitutes. - Cross Elasticity of Demand for the Monopolist's Product and any other
product is __________________
e) Elasticity of demand- Price Elasticity of Demand for Monopolist's Product is less than one.
f) Monopolist is a Price—Maker, not a Price—Taker.
2. Why Monopoly exists?

Monopoly is caused by "barrier to entry", i.e. other Firms cannot enter the market. Some reasons
for occurrence and continuation of Monopoly are -
a) Strategic Control over scarce resources
b) control over a unique product.
c) Patents and Copyrights g
d) Governments granting exclusive rights
e) Substantial Goodwill
f) Natural Monopoly e.g. Natural Gas Supply, Electrical Power Distribution, etc.
g) Stringent Legal and Regulatory Requirements
h) Very high initial start—up costs
i) Use of Anti—Competitive Practices or Predatory Tactics.
j) Business Combinations or Cartels
3. Effects of Monopoly-
a) Higher Prices for Consumers,
b) Loss of Consumer Surplus,
c) Inability of Consumers to substitute the goods or services,
d) Transfer of Income from Consumers to Monopolists,
15.3
e) Restriction of Consumer Sovereignty
f) Payment of lower prices by Monopolies to their Suppliers
g) Lower levels of Output, that what would be produced in a competitive environment,
h) Influence political process and thereby obtain a favourable legislation,
i) Lack of Innovation,
j) Higher Costs of Output, the burden of which will be shifted to Consumers
k) Lack of Productive and Allocative Efficiency,
l) Possibility of misuse of scarce resources,
m) Earning of Economic Profits (above Normal Profits) in the long run, which is unjustifiable,
n) Use of Monopoly Power to create barriers to entry by undue means,
Qty Price TR = AR = MR Diagram

(Q) PxQ TR/Q
1 22 22 22 22
2 20 40 20 18
3 18 54 18 14
4 16 64 16 10
5 14 70 14 6
6 12 72 12 2
7 10 70 10 -2
8 8 64 8 -6
9 6 54 6 -10
10 4 40 4 -14
4. Determination of Demand/ Revenue curve

a. Market Demand Curve = Firm's Demand Curve = Average Revenue (AR).
b. Relationship between AR & MR under Monopoly:
i. Both AR and MR are negatively sloped (downward sloping) curves.
ii. MR Curve lies half—way between the AR Curve and the Y—axis, i.e. it cuts the horizontal
line between Y axis and AR into two equal parts.
iii. AR cannot be zero, but MR can be zero or even negative.
5. For Short Run Equilibrium

________________________________________
_________________________________________
15.4
6. For Determination of profit or loss
Super profits: Normal profits: Losses Long Run profit
AR > ATC. Super AR = ATC. It is also AR < ATC.
profits also called called B.E.P (Break-
Economic Profits, even-Point) means No
abnormal profits and Loss No Profit. It is
super normal profits. called Marginal Firm.
7. Price Discrimination
Price Discrimination occurs when a Producer sells a commodity to different Buyers, at different
prices, for reasons not related to differences in cost.
a) Objectives:
i. To earn Maximum Profit
ii. To Dispose of Surplus stock
iii. To enjoy Economies of Scale
iv. To capture foreign markets
v. To secure equity thorough pricing.
b) Examples: Doctors, Electricity Rates, Export Prices, Railways charge
c) Conditions for Price discrimination
i. Full control over supply:
ii. Division of market into two or more sub-markets:
iii. Different price elasticity under different markets:
iv. No possibility to resale:
d) The Monopolist will be charging different prices in the two markets — a higher price in
Market with lower elasticity of demand, and a lower price in Market with higher elasticity of
demand. This practice of charging different prices to different segments is known as Price
Discrimination.
15.5
Monopolistic Competition
1. Imperfect competition is found in the industry where there are a large numbers of small sellers,
selling differentiated but close substitutes products. E.g. LUX, HAMAM, LIRIL etc. This market
contains features of both competitive and monopoly markets.
2. Large number of sellers and buyers
3. Free entry and exit of firms.
4. Product differentiation:
5. Non price competition:
6. Every firm is price maker and price taker of his own product
7. Imperfect mobility:
8. AR and MR: In monopolistic competition AR/MR will be more elastic than monopoly market.
9. Question: Determine Condition for Equilibrium

1. ______________________________________________________________________
2. ______________________________________________________________________
10. Question: will happen to firm in long run- Losses/ profit/ Supernormal profit
___________________________________________________________________________
Note: The AR curve in the long-run is not tangent to the ATC curve at the lowest point. This shows
each firm produces at before the lowest TAC/LAC or produces less than the optimum output and
Charges from the customers a price higher than the competitive price. A firm under monopolistic
petition has always excess capacity but perfect competition never has excess capacity and monopoly
mayor may not be
OLIGOPOLY MARKET
1. An oligopoly is a market in which there are few producers of a product. Oligopoly is an important
form of imperfect competition.
2. Types of Oligopoly
a) Pure / Perfect oligopoly - deals in homogeneous products- Aluminum industry
b) Differentiated / imperfect oligopoly - deals in product differentiated.
c) Open oligopoly - New firms can enter the market and
compete with existing firms
d) Closed oligopoly - new entry is restricted.
e) Collusive oligopoly - common understanding or collusion in
fixing price and output
f) Competitive oligopoly - Lack of understanding and
compete with each other.
g) Partial oligopoly - when industry is dominated by one
large firm i.e. price leader
15.6
h) Full oligopoly - absences of price leadership.
i) Syndicated oligopoly - Firms sells their products through centralized syndicate/channel
j) Organized oligopoly -: Firms Organize into a central association for fixing price, output etc
3. Features
a) Few sellers
b) Interdependence:
c) Advertising and selling costs (Non price competition):
d) There is no generally accepted theory of group behaviour.
e) Kinked demand curve / Indeterminateness of demand curve
15.7
Business Cycle
Business Cycle
1. Business Cycles refer to alternate expansion and contraction of overall

business activity as reflected in fluctuations in measures of aggregate
economic activity, like Gross National Product, Employment and Income.
2. Expansion / Boom / Upswing),
3. Peak / Prosperity,
4. Contraction / Downswing / Recession), and
5. Trough / Depression).
6. Good trade characterized by rising prices and low unemployment
levels.
7. Bad trade characterized by falling prices and high unemployment levels.
8. Features of Business cycle

a) Business cycles occur periodically
b) Do not exhibit the same regularity.
c) The duration of these cycles vary.
d) The intensity of fluctuations also varies.
e) The length of each phase is also not definite.
f) Business cycles generally originate in free market economies*****.
g) They are pervasive as well. Disturbances in one or more sectors get easily transmitted to all other
sectors.
h) Although all sectors are adversely affected by business cycles, some sectors such as capital
goods industries, durable consumer goods industry etc, are disproportionately affected.
i) Moreover, compared to agricultural sector, the industrials sector is more prone to the
adverse effects of trade cycles.
j) Business cycles are exceedingly complex phenomena;
k) It is difficult to make an accurate prediction of trade cycles before their occurrence.
l) Repercussions of business cycles get simultaneously felt on nearly all economic variables
m) Business cycles are contagious and are international in character.
n) Business cycles have serious consequences on the well-being of the society.
9. Expansion: Features
a) Increase in national output, employment, aggregate demand, capital and consumer
expenditure, sales, profits, rising stock prices and bank credit.
b) This state continues till there is full employment of resources and production is at its
maximum possible level using the available productive resources.
c) Involuntary unemployment is almost zero and whatever unemployment is there is either frictional or
structural Prices and costs also tend to rise faster. Good amounts of net investment occur.
d) Increasing prosperity and people enjoy high standard of living due to high levels of consumer
spending, business confidence, production, factor incomes, profits and investment.
Chapter 8 16.1
Business Cycle
10. Peak:
a) Peak refers to the top or the highest point of the business cycle.
b) Output prices also rise rapidly leading to increased cost of living and greater strain on fixed income
earners. Actual demand stagnates.
11. Contraction:
a) During contraction, there is fall in the levels of investment and employment.
b) Supply far exceeds demand. Initially, this happens only in few sectors and at a slow pace, but
rapidly spreads to all sectors.
c) Producers holds back future investment plans, cancellation and stoppage of orders for
equipment and all types of inputs including labour.
d) Decrease in input demand pulls input prices down; incomes of wage and interest earners gradually
decline resulting in decreased demand for goods and services.
e) The process of recession is complete and economy into the phase of depression.
12. Trough and Depression:
a) Depression is the severe form of recession and is characterized by extremely sluggish economic
activities.
b) During this phase of the business cycle, growth rate becomes negative
c) National income and expenditure declines rapidly.
d) Demand for products and services decreases, prices are at their lowest and decline rapidly
forcing firms to shutdown several production facilities.
e) A typical feature of depression is the fall in the interest rate.
f) Large number of bankruptcies and liquidation significantly reduce the magnitude of trade and
commerce.
13. Question: How does the economy recover?

Economic activity reaches Trough and then starts recovering >>>>> marks the end of pessimism and the
beginning of optimism>>>>> Reversal is first felt in the Labour Market >>>>> workers accepts wages
lower than the prevailing rates. >>>>> Business Confidence slowly increases, >>>>> spurring of
investment causes recovery of the economy. >>>>> Banking System now slowly starts expanding
credit, matching with the business confidence. >>>>> Employment, Factor Payments, Disposable Incomes,
Consumer Spending, Aggregate Demand, etc. all rises
14. Indicators- 3 Indicators ( Leading, Lagging, concurrent)

I. Leading Indicators:
a) It is a measurable economic factor that changes before the economy starts to follow a
particular pattern or trend. Variables that change before the Real Output changes
b) However, Indicators are not always accurate and Experts disagree on the timing of these
Leading Indicators.
II. Lagging Indicators:

a) Changes in these indicators are observable only after an economic trend or pattern has
already occurred. variables that change after the Real Output changes,
Chapter 8 16.2
Business Cycle
III. Coincident or Concurrent Indicators:
a) It coincides or occurs simultaneously with the business—cycle movements.
b) It gives information about the rate of change of the expansion or contraction of an
economy more or less at the same point of time it happens.
15. Role/ Importance of Business cycle in Business Decision making

a) Assessment of Impact on Demand
b) Expansion Decisions:
c) To Frame Business Policies:
d) To plan Production:
e) Market Entry / Product Launch:
f) Cyclical Businesses: Examples: House—Builders, Construction, Infrastructure, Restaurants,
Advertising, Overseas Tour Operators, Fashion Retailers, etc.
16. Causes of Business Cycle

Internal Causes External Causes
Fluctuations in Effective Demand Wars
Fluctuations in Investment Post War Reconstruction
Variations in government spending Technology shocks
Macroeconomic policies Natural Factors
Money Supply Population Growth
Psychological factors
17. Some important Points for MCQ
a) According to Pigou, modern business activities are based on the anticipations of business
community and are affected by waves of optimism or pessimism.
b) According to Schumpeter’s innovation theory, trade cycles occur as a result of innovations

which take place in the system from time to time.
c) The cobweb theory propounded by Nicholas Kaldor holds that business cycles result from
the fact that present prices substantially influence the production at some future date.
Chapter 8 16.3
CA Foundation – Economics & BKC - Economist Summary
CHAPTER 1:NATURE AND SCOPE OF BUSINESS ECONOMICS

Sno. Concept Formula
th
1 Total Utility TU=MU1+MU2+MU3+....MU n Units
3 Marginal Utility 1. Marginal Utility = Change in Total Utility (ΔTU) .

Change in No. of Units Consumed(ΔQ)
2. MUn=TUn–TUn–1
4 Consumer __MU X = MU Y__
Equilibrium - Price x price Y
Cardinal
5 Consumer Surplus 1. What a consumer is ready to pay – what he actually pays.
2. Marginal Utility (MU) - Price
6 Consumer MRS XY = MUX/ MUY
Equilibrium - Ordinal
7 PRICE ELASTICITY % Change in quantity demanded
{PERCENTAGE % change in price
METHOD}=
8 Method of -dq x p
derivative dp x q
9 Method of Graph Lower segment/Upper segment

10 Arc Elasticity (q1-q2) x (p1+p2)
(q1+q2) (p1-p2)
11 Total Outlay 1. If Total expenditure & Price moving in same direction – Inelastic
Method 2. If Total expenditure & Price moving in Opposite direction – Elastic
3. If total revenue remains unchanged – Unit elastic
12 Income Elasticity %change in Demand
% change in income
13 Cross Elasticity %change in Demand of good X

% change in price of good Y
14 Advertisement % change in demand of commodity

Elasticity % change in advertisement expenditure
15 Elasticity of supply- % change in Quantity supplied

% Change method % change in price
16 Arc Elasticity (S1-S2) x (P1+P2)

(S1+S2) (P1-P2)
17 Method of dq x p
derivative dp x q
18 Cobb-Douglas Q=KLaC(1-a)
CA Aditya Sharma 7410134858 Page. No. 17.1

19 Average Product Total product .
Quantity of input
20 Marginal Product 1. Change inTotal Product (ΔTP)
Change in No. of Quantity (ΔQ)
2. MPn=TPn–TPn–1
21 Economic Costs Explicit Costs + Implicit Costs
22 Marginal cost per 1. Difference in Total Cost (TC) between two output levels
unit Difference in Output Quantity at those levels
2. Difference in Total variable (TVC) of two units
Difference in Output Quantity of two units
3. TCn – TCn-1
4. TVCn – TVCn-1
23 Total Cost Total Fixed cost + Total variable cost
24 Average Total Cost 1. Total Cost

Total output
2. Average Fixed cost + Average Variable cost
3.
25 Average Fixed cost- TFC
AFC Q.
26 Average Variable TVC
cost - AVC Q
27 Total Revenue Price x Quantity (P x Q)
28 Average Revenue 1. Total Revenue (TR/Q)

Quantity
2. Also Known as Price
29 Marginal Revenue 1. Change in TR .

Change in Qty. sold
2. TRn – TRn-1
3. Marginal Revenue = Average Revenue (E – 1/E)
30 Accounting profit Total revenue - Explicit cost
31 ECONOMIC PROFIT Total Revenue-(Explicit Cost + Implicit Cost)
32 Profit maximisation 1. MC = MR
condition 2. MC Curve cuts MR from Below

CHAPTER 1:NATURE AND SCOPE OF BUSINESS ECONOMICS

S.NO ECONOMIST DEFINITION
NAME
1 Adam Smith 1. Economics is an inquiry into the nature and causes of
wealth of nations.
2. Economics is a science which deals with wealth.
3 Alfred Marshall 1. Economics is a study of mankind in the ordinary business of
life.{Welfare Definition.}
2. Law of Demand
3. Law of diminishing Utility
4. Time Element
4 AC Pigou 1. Money Measurement concept (Measuring Rod)
2. Price Discrimination
3. Modern business activities are based on the anticipations of
business community and are affected by waves of optimism
or pessimism.(CH-5)
5 Lionel Robbins Scarcity Definition.
6 Paul.A.Samuelson Growth Definition.
7 Joel Dean Use of economic analysis to make business decisions involving
the best use of an organization’s scarce resources
8 Prof. Boulding “Study of particular firm, particular household, individual price,
wages, income, individual industries, particular commodities”-
9 Prof.Mc.Connel “Macro Economics examines the Forest and not the Trees.
Large aggregates”-
10 Karl Marx And 1. Concept of socialist economy.
Frederic Engles 2. The Communist Manifesto in year 1848
Chapter 2:Theory Of Demand And Supply
11 Hicks And Allen 1. Substitution Effect
2. Indifference Curve Analysis
12 James Demonstration Effect
Dusesenberry
13 Thorstein Veblen 1. Veblen Effect
2. Conspicuous Consumption
14 Robert Giffen Giffen Goods
15 Olaf Helmer Delphi Technique
Chapter 3:Theory Of Production And Cost
16 James Bates And “Production Is The Organized Activity Of Transformation Of
J.R.Parkinson Raw Material Into Finished G&S to Satisfy The Demand
17 Ricardo Definition of land – indestructible and permanent
18 R.L.Marris Maximize the firm balanced growth rate
19 Schumpeter Function of an entrepreneur is to do innovation
20 H.A.Simon Satisficing behaviour
21 Baumol Sales revenue maximization.
22 A.A.Berle & Manager enjoy discretionary powers to set goals
G.C.Means
23 Williamson Maximisation of managerial utility function
24 Cyert & March 5 Goals -Profit goals, production goal, inventory goal, sales goal,
market share goal
25 Paul.H.Douglas & Applies not to only individual firm but to the whole of
C.W.Cobb manufacturing industry.
26 Chamberlin Distinction between selling cost and production cost
27 Frank Knight - Profit is the reward for bearing uncertainties
Chapter 4:Meaning And Types Of Market
28 Porf.Stigler Defined oligopoly
29 Paul.A.Sweezy Kinked demand curve
30 Cournot Model The firms control variable is output in contrast to price.
31 Stackelberg Model The leader commits to an output before all other firms.
32 Bertrand Model Price is control variable for firms and each firm is
independently sets its price in order to maximize profits.
Chapter 5: Business Cycle
33 Keynes Aggregate effective demand
34 Schumpeter Innovation theory
35 Jm Keynes Fluctuation in effective demand
36 Nicholas Kaldor Cobweb theory - holds that business cycles result from the
fact that present prices substantially influence the production
at some future date.
37 Hawtrey Trade cycle is purely monetary phenomenon
BCK SUMMARY
1 Charles Darwin It is not the strongest of the species that survive, nor the
most intelligent, but the one most responsive to change.
2 Gluek & Jauch Business environment includes factors outside the firm which
can lead to opportunities for threats to the firm.
3 Barry.M.Richman Environment factors or constraint are largely if not totally
And Melvyn Copen ,external and beyond the control of individual industrial
enterprises.
4 Peter Drucker The aim of business is to create and retain customer.
5 Dadabhai Naoroji Book “Poverty and Un-British Rule in India” drew attention to
drain of wealth from India to Britain.
6 J.P.Devadhar SEBI order can be appealed to securities appellate tribunal
which is three member tribunal and headed

CA Foundation Book

Uploaded by

Copyright:

Available Formats

CA Foundation Book

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

CA Foundation Book

Uploaded by

Copyright:

Available Formats

INDEX

Fast Track & Marathon

Summary 1-Formula Summary……………………………………………………………. 17.1—17.2

Name of the chapter Page No.

Section B - Business Economics M

Chapter 2- Utility, Demand and Supply Analysis ………………………………..

Chapter 3- Production, cost and Revenue Concepts ………………………….

Chapter 4 - Market and Its Types……………………………………………………….

Chapter 5 - Business Cycle………………………………………………………………….

Chapter 1- Nature and Scope of Business Economics

1. The word ‘Economics’ originates from the Greek work ‘'Oikonomia’

2. Till 19th century, Economics was also known as ‘Political Economy’

Want- Something that is desired. want is simply something

Need- Something that is necessary for survival (such as

CA Aditya Sharma 1.1

Case study:- Imagine you are Managing Director of a company,

CA Aditya Sharma 1.2

3. There is a gap between the propositions of

5. Economic theories provide the tools which

CA Aditya Sharma 1.3

Micro Economics Macro Economics

CA Aditya Sharma 1.4

Nature of Business Economics

1. Business Economics is a Science- as it explains cause and effect

2. Business Economics is an art as it involves practical application of rules

3. Micro Economics based- Since Business Economics is concerned more

4. Macro Analysis based-Business unit is affected by its external

5. Analysis from Private Enterprises Economy viewpoint-Business

6. Inter-Disciplinary- Business Economics is interdisciplinary in

7. Pragmatic Approach- While Micro-Economics is abstract and

CA Aditya Sharma 1.5

8. Normative and positive – Business Economics focus more on Normative compared to

Points Positive Economics or Pure Normative Economics

Complete neutrality between ends

CA Aditya Sharma 1.6

Scope of Business Economics

1. Microeconomics applied to operational or internal

CA Aditya Sharma 1.7

2. Macroeconomics applied to environmental or external Issues- These factors are

1) The type of economic system.

CA Aditya Sharma 1.8

Central Economic Problems:

1. All countries, without exceptions, face the problem of scarcity

The 4 Central Economic Problems:

c) For whom to produce?

CA Aditya Sharma 1.9

The Capitalist Economy:- Command Economy / Centrally Planned Economy

1. Capitalist economy is also known as free market economy or laissez-faire economy.

Solution to central Economic problems under Capitalist Economy

Capitalist economy uses the impersonal forces of

CA Aditya Sharma 1.10

4. What provisions are to be made for economic growth?-

1. The concept of socialist economy was propounded by Karl

1. The mixed economic system depends on both markets and

3. In mixed economy there are three sectors of industries-

CA Aditya Sharma 1.11

Capitalist economy Socialist economy Mixed Economy

e. Consumer Sovereignty d. Centrally planned economy

f. Competition e. Absence of Consumer Choice-

g. Absence of f. Relatively Equal Income