ECONOMICS CUET - UG

(MOCK TEST)

1. Economists regard decision making as important because:

a) the resources required to satisfy our unlimited wants and needs are nite, or scarce
b) it is crucial to understand how we can best allocate our scarce resources to satisfy
Satisfy society’s unlimited wants and needs.
c) resources have alternative uses.
d) all the above.

Correct answer: D

EXPLANATION: economists focus on decision-making because resources are scarce,

they must be e ciently allocated, and they have alternative uses. This helps in
maximizing satisfaction and economic growth.

2. Macroeconomics is also called _____ economics.

a) applied
b) aggregate
c) experimental
d) none of the above.

Correct answer: B

EXPLANATION: macroeconomics is called aggregate economics because it studies

The overall economy, including, in ation, and employment, rather than individual
Consumers or rms.

3. If the value of investment multiplier is 4 and the increased income is Rs1200

crore in an economy, there nd the value of change in investments in the
economy.

a) Rs 500 crore
b) Rs 400 crore
c) Rs 300 crore
d) Rs 600 crore

Correct answer: Rs 300 crore

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Solution: the investment multiplier formula is: k= change in( y) / change in (I)
Where:
k= 4 (multiplier)

Change in income (y) = 1200 cr.

Change in investment (I) = ?

Rearranging formula= change in Income = change in income / k

1200/4= Rs 300 crore

4. “No change in consumer preferences” is the assumption of which of the

following laws of economics?

a) law of constant returns to scale

b) law of demand
c) law of variable proportion
d) law of increasing returns to scale

Correct answer: B

EXPLANATION: the law of demand states that, ceteris paribus (other things remaining
constant), when the price of a good falls, its quantity demanded increases, and vice
versa. One key assumption of this law is that consumer preferences do not change
during the analysis. If consumer preferences change, the relationship between the
price and demand may not hold.

5. Assertion (A): an increase in the price of a substitute good leads to a rise in the
demand for a given good.

Reason (R) : consumer tend to shift towards relatively cheaper alternatives when
the price of a substitute good rises.

a) Both (A) and (R) are true, and (R) correctly explains (A)
b) Both (A) and (R) are true, but (R) does not explain (A)
c) (A) is true, but (R) is false
d) (A) is false, but (R) is true

Correct answer: A
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EXPLANATION:
A substitute good is a product that can replace another, such as tea and co ee.

When the price of a substitute rises, consumers switch to the cheaper alternative,
increasing its demand.

This supports Assertion (A): When the price of a substitute increases, the demand for a
given good also rises.

Reason (R) correctly explains this behavior by stating that consumers shift to relatively
cheaper alternatives.

Thus, both the Assertion and Reasoning are true, and (R) correctly explains (A).

6. Loan obtained from the reserve bank of India (RBI) by the government of India
will be covered under which of the following?

a) Capital budget
b) Revenue budget
c) Cash budget
d) Defence budget

Correct answer: A

EXPLANATION: The Capital Budget includes transactions that a ect the assets and
liabilities of the government. Loans taken from the Reserve Bank of India (RBI) create a
liability for the government, so they are recorded under the Capital Budget.

7. In law of demand, the demand curve is:

a) downward sloping
b) Upward sloping
c) Horizontal to the x axis
d) U shaped

Correct answer: A

EXPLANATION: The Law of Demand states that, ceteris paribus (other things
remaining constant), when the price of a good decreases, its quantity demanded
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increases, and vice versa. This creates a downward-sloping demand curve, which
shows the inverse relationship between price and quantity demanded

8. In every economic system, scarcity imposes limitations on:

a) Households, business rms, governments, and the nation as a whole

b) Households and business rms, but not the governments
c) Local and state governments, but not the business rms
d) Households and governments, but not the business rms

Correct answer: A

EXPLANATION: scarcity is the fundamental economic problem where limited

resources must be allocated to satisfy unlimited wants.

It a ects all economic agents:

Households (limited income and choices).

Business rms (limited raw materials, labor, and capital).

Governments (limited budgets and resources for public services).

Nations (limited natural and human resources).

Thus, scarcity imposes limitations on everyone in an economy, making Option A the

correct answer.

9. Identify the factor which is generally keeps the price elasticity of demands for a
good low:

a) variety of uses for that good

b) Very low price of a commodity
c) Close substitutes for that good
d) High proportion of the consumers income spent on it.

Correct answer: B

EXPLANATION: Price Elasticity of Demand (PED) measures how much quantity

demanded changes in response to price changes.
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When a good is very cheap, consumers do not signi cantly reduce or increase
consumption if the price changes. This makes demand inelastic (low PED).

Other options increase elasticity:

Variety of uses (A) → More uses = Higher elasticity.

Close substitutes (C) → More substitutes = Higher elasticity.

High income proportion spent (D) → Costly goods = Higher elasticity.

10. With an increase in the price of diamond, the quantity demanded also
increases. This is because it is a:

a) substitute good
b) Complementary good
c) Conspicuous good
d) None of the above

Correct answer: C

EXPLANATION: Diamonds are luxury goods (Veblen goods), where higher prices
increase their desirability because they are status symbols.

For normal goods: When the price increases, demand falls (Law of Demand).

For conspicuous goods (Veblen goods): When the price increases, demand rises as
consumers associate high price with exclusivity and prestige.

Other options are incorrect:

Substitute goods (A) → Demand moves opposite to price changes.

Complementary goods (B) → Demand moves with the price of the paired good.

11. A rm’s average total cost is rs 300 at 5 units of output and rs 320 at 6 units of
output. The marginal cost of producing the 6th unit is:

a) Rs 20
b) Rs 120
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c) Rs 320
d) Rs 420

Correct answer: Rs 420

SOLUTION: marginal cost (mc)= change in total cost ÷ change in output

Step 1: nd total cost (TC) at 5 and 6 units

TC5 = ATC5 ✖ Q5 = 300 ✖ 5= 1500
TC6= ATC6 ✖ Q6= 320 ✖ 6= 1920

Step 2: nd marginal cost (MC) for the 6th unit

MC6 = TC6 - TC5 = 1920 - 1500 = 420

12. Assume that when price is Rs 20, the quantity demanded is 9 units, and when
price is Rs 19, the quantity demanded is 10 units. Based on this information, what
is the marginal revenue resulting from an increase in output from 9 units to 10
units.

a) Rs 20
b) Rs 19
c) Rs 10
d) Rs 1

Correct answer: Rs 10

EXPLANATION: the formula of marginal revenue (MR)

MR = change in total revenue / change in quantity

STEP 1: calculate total revenue (TR) at both outputs levels

TR9 = P9 ✖ Q9 = 20 ✖ 9 = 180
TR10 = P✖ Q10 = 19 ✖ 10 = 190

STEP 2: nd the marginal revenue (MR)

MR = TR 10 - TR9 / Q10 - Q9
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190 -180 / 10-9

10/1 = 10

13. Suppose that a sole proprietorship is earning total revenues of Rs 100000 and
is incurring explicit costs of Rs 75000. If the owner could work for another
company for Rs 30000 a year, we would conclude that:

a) the rm is incurring an economic loss

b) Implicit costs are Rs 25000
c) The total economic costs are Rs 100000
d) The individual is earning an economic pro t of Rs 25000

Correct answer: A

SOLUTION: the formula of economic pro t

EP = total revenue - (explicit costs + implicit costs)

STEP 1: identify given values

• Total revenue (TR) = Rs 100000

• Explicit costs = Rs 75000
• Implicit cost ( opportunity cost) = Rs 30000 ( owner’s forgone salary)

STEP 2: calculate economic pro t

EP = 100000 - (75000+30000) -5000

Since economic pro t is negative(-Rs5000), the rm is incurring an income loss.

14. If prices of computers increases by 10% and supply increases by 25%. The
elasticity of supply is:

a) 2.5
b) 0.4
c) (-) 2.5
d) (-) 0.4
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Correct answer: A

SOLUTION: the formula for price elasticity of supply

(PES)

PES = %change in quantity supplied / % change in price

STEP 1: identify given values

• % change in price = 10%

• % changer in quantity supplied = 20%

STEP 2: calculate PES

PES = 25% / 10%

= 2.5

15. A rm’s total revenue at a price of Rs 50 per unit is Rs2500. When the price
decreases to Rs45, the total revenue becomes Rs2700
Find:
1. The price elasticity of demand (PED)
2. Whether demand is elastic, inelastic, or unitary elastic

a) PED = 1.5, demand is elastic

b) PED = 0.75, demand is inelastic
c) PED = 1, demand is unitary elastic
d) PED= 2, demand is highly elastic

Correct answer: D

SOLUTION:

STEP 1: nd initial and new quantity = demanded

Q1 = total revenue at p1 / price at p1

= 2500/50 = 50

Q2 = total revenue at p2 / price p2

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= 2700/45 = 60

STEP 2: calculate PED

PED = % change in quantity demanded / % change in price

% changer in quantity demanded

(60 - 50 / 50) ✖ 100

= 10 / 50 ✖ 100 = 20 %

% change in price

(45 - 50 / 50) ✖ 100

= -5 / 50 ✖ 100 = -10%

PED = 20 / 10 = 2

16. Given the following data for an economy (in Rs crores):

• Private nal consumption expenditure (PFCE) = RS 8000
• Government nal consumption expenditure (GFCE) = Rs 3000
• Gross domestic capital formation (GDCF) = RS 4000
• Net exports ( exports - imports) = Rs (-500)
• Net factor income from abroad (NFIA) = RS 200
• Depreciation = Rs 300

Find the net national product at factor cost ( NNPFC)

a) Rs 14400 crores
b) Rs 14200 crores
c) Rs 14000 crores
d) Rs 13900 crores

Correct answer : A

SOLUTION: we use the formula:

NNPFC = GDPMP + NFIA - depreciation

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STEP 1: calculate GDP at market price (GDPMP)

GDPMP = PFCE + GFCE + GDCF + (X - M)

GDPMP = 8000 + 3000 + 4000 + (-500)

GDPMP = 14500

STEP 2: convert GDPMP to NNPFC

NNPFC = 14500 + 200 - 300

NNPFC = 14400

17. In a market, the demand function is given as:

Qd = 500 - 5p

And the supply function is:

QS = -100+10P

Find the equilibrium price (P) and equilibrium quantity (Q).

a) P = Rs 40, Q = 300
b) P = Rs 30, Q = 250
c) P = Rs 50, Q = 400
d) P= Rs 20, Q = 200

Correct answer: A

SOLUTION: at a market equilibrium, quantity demanded (Qd) = quantity supplied (Qs).

500 - 5P = -100 + 10P

STEP 1: solve for P

500+100 = 10P+5P
600 = 15P
P = 40

STEP 2: nd equilibrium quantity (Q)

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Substituting P = 40 in the demand function:

Qd = 500 - 5(40) = 500 - 200 = 300

Or in the supply function:

Qs = -100+10(40) = -100+400 = 300

Since Qd = Qs, the equilibrium quantity is 300.

18. In an economy, the marginal propensity to consume (MPC) is 0.8. the

government decides to increase investments by Rs 500 crores.

Find the total increase in income (∆Y) using the investment multiplier formula.

a) Rs 2000 crores
b) Rs 2500 crores
c) Rs 3000 crores
d) Rs 3500 crores

Correct answer: B

SOLUTION: the formula for the investment multiplier (K) is :

K = 1 / 1-MPC

K = 1 / 1 - 0.8
= 1/ 0.2 = 5
Now we calculate the total increase (∆Y) in income:

∆Y = K × ∆I
∆Y = 5 × 500 = 2500

19. A rm produces 5 units of output at an average total cost (ATC) OF Rs200.

When output increases to 6 units, the ATC rises to Rs 220.

Find the marginal cost (MC) of the 6th unit.

a) Rs 120
b) Rs 200
c) Rs 220
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d) Rs 320

Correct answer: D

SOLUTION: the formula for total cost (TC) is:

TC = ATC × Q

STEP 1: nd total cost for 5 units

TC5 = 200 × 5 = 1000

STEP 2: nd total cost for 6 units.

TC6 = 220 × 6 = 1320

STEP 3: nd the marginal cost (MC)

MC = TC6 - TC5
MC = 1320 - 1000 = 320

20. Match list 1 with list 2

List-1 ( banking terms) List-2 ( meaning)

(A) repo rate (I) rate at which RBI borrows money from
commercial banks

(B) cash reserve ratio (CRR) (ii) rate at which RBI lends money to commercial
banks against securities

(C) reverse repo rate (iii) percentage of bank’s total deposits that must
be kept with the rbi in cash

(D) statutory liquidity ratio (iv) percentage of net demand and time liabilities
(SLR) that banks must maintain in liquid assets like gold
and government securities.

1. (A) - (II), (B) -(I), (C) - (III), (D) - (IV)

2. (A) - (I), (B) - (III), (C) - (IV), (D) - (II)
3. (A) - (III), (B) - (IV), (C) - (I), (D) - (I)
4. (A) - (IV), (B) - (II), (C) - (I), (D) - (III)

Correct answer: 1
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EXPLANATION: (A) Repo Rate (II) → The rate at which RBI lends money to commercial
banks against government securities.

(B) Reverse Repo Rate (I) → The rate at which RBI borrows money from commercial
banks, absorbing excess liquidity.

(C) Cash Reserve Ratio (CRR) (III) → The percentage of a bank’s total deposits that
must be kept with the RBI in cash to ensure liquidity.

(D) Statutory Liquidity Ratio (SLR) (IV) → The percentage of net demand and time
liabilities (NDTL) that banks must maintain in liquid assets like gold and government
securities.

21. Contraction of demand is the result of:

a) decrease in the numbers of consumers.

b) Increase in the prices of the good concerned
c) Increase in the prices of other goods
d) Decrease in the income of purchasers.

Correct answer: B
EXPLANATION:
Contraction of demand refers to a decrease in quantity demanded due to an increase
in the price of the good, while other factors remain constant (ceteris paribus).

It is not caused by a decrease in consumer income, an increase in other goods' prices,

or fewer consumers—those factors shift the demand curve rather than cause a
contraction.

22. Which of the following is not included in the calculation of a country’s gross
domestic product (GDP)?

a) wages paid to workers in a factory

b) Purchase of machinery by a company
c) Transfer payments like pensions and scholarships
d) Expenditure on construction of a new highway

Correct answer: C
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EXPLANATION: GDP measures the total value of all nal goods and services produced
within a country’s borders in a given period.

Included in GDP:

Wages (A) → Part of factor income.

Machinery purchase (B) → Part of investment expenditure.

Government spending on infrastructure (D) → Part of government expenditure (G).

NOT included in GDP:

Transfer payments (C) (like pensions, scholarships, or unemployment bene ts) do not
represent production of goods/services; they are just a redistribution of income.

23. A purely competitive rm’s supply schedule in the short run is determined by:

a) its average revenue

b) Its marginal revenue
c) Its marginal utility for money curve
d) Its marginal cost curve

Correct answer: D

EXPLANATION: In a purely competitive market, rms are price takers, meaning they
accept the market price.

A rm's short-run supply curve is determined by the part of its marginal cost (MC)
curve that lies above the average variable cost (AVC).

This is because:

Marginal cost (MC) determines how much quantity a rm is willing to supply at di erent
price levels.

If price ≥ AVC, the rm continues producing; otherwise, it shuts down.

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24. If the marginal product of labour is below the average product, it must be true
that:

a) the marginal product of labour is negative

b) The marginal of labour is zero
c) The average product of labour is falling
d) The average product of labour is negative

Correct answer: C

EXPLANATION: The relationship between Marginal Product (MP) and Average Product
(AP) follows this rule:

When MP > AP, AP increases.

When MP < AP, AP decreases.

When MP = AP, AP is at its maximum.

Since the question states that MP is below AP, this means AP must be falling.

25. Total cost in the short run is classi ed into xed costs and variable costs.
Which one of the following is a variable cost?

a) cost of raw material

b) Cost of equipment
c) Interest payment on past borrowings
d) Payment of rent on building

Correct answer: A

EXPLANATION: Fixed Costs: These costs do not change with the level of output, such
as property costs, equipment costs, and interest payments.

Variable Costs: These change with the level of production, such as wages, raw
materials, and rent payments (if rent is based on usage).

Payment on rent can be a variable cost if it uctuates based on business activity.

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26. C = 40 = O.8Y and I = 10, then what will be the equilibrium level of income?

a) -300
b) -250
c) 300
d) 25

Correct answer: B

SOLUTION: the equilibrium level of income is determined using the Keynesians

aggregate demand equation:

Y=C+I

Given:

• Consumption function:
C = 40. + 0.8Y

• Investments (I): 10

Substituting values into the equation:

Y = (40+0.8Y)+ 10
Y - 0.8Y = 50
0.2Y = 50
Y = 50/0.2 = 250

27. If India’s imports exceed its exports, what happens to the current account
balance?

a) it results in a multiple
b) It results in unchanged
c) It results in de cit
d) It has no impact on the economy

Correct answer: C

EXPLANATION: a current account de cit occurs when account spends more on

imports that it earns from exports.
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28. Fiscal de cit in a government budget represents:

a) excess of total expenditure over total revenue

b) Excess of total revenue over total expenditure
c) Excess of tax revenue over total expenditure
d) Excess of capital expenditure over revenue expenditure

Correct answer: A

EXPLANATION: scal de cit occurs when government spending exceeds total

revenue (excluding borrowings)

29. What happens when the reserve bank of India (RBI) increase the cash reserve
ratio (CRR)?

a) banks have more money to blend

b) Banks have less money to lend
c) Money supply in the economy increases
d) In ation rises

Correct answer: B

EXPLANATION: a higher CRR means banks must keep more reserves with the RBI,
lending, thereby tightening money supply

30. Which of the following can be a major cause of demand-pull in ation?

a) increase in production costs

b) Decrease in money supply
c) Increase in aggregate demand
d) Increase in taxation

Correct answer: C

EXPLANATION: demand-pull in ation occurs when aggregate demand exceeds

aggregate supply, causing prices to rise.
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31. Which of the following is not included in the gross national produce(GNP) of
India?
a) salaries of Indian residents working in the use
b) Pro ts earned by foreign companies operating in India
c) Remittances sent by Indian workers from abroad
d) Income earned by Indian rms from their branches in foreign countries

Correct anser: B

EXPLANATION: GNP includes all income earned by a country’s residents and rms
globally but excludes income generated by foreign entities within domestic borders.

32. For luxury goods the demand is:

a) Elastic
b) Highly elastic
c) Inelastic
d) Perfectly inelastic

Correct answer: B

EXPLANATION: Luxury goods are not essential, so consumers can easily reduce their
demand when prices rise.

Demand for luxury goods is highly elastic, meaning a small price increase leads to a
larger decrease in quantity demanded.

Necessary goods (like food or medicine) tend to have inelastic demand, but luxury
goods do not.

33. If GDP at market prices is Rs 200 cr. and net income from abroad is Rs 100 cr.,
then what will be the value of GNP at market prices?

a) RS 100 cr
b) Rs 400 cr
c) Rs 300
d) Rs 500 cr

Correct answer: C
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SOLUTION: we use this formula:

GNP at market price = GDP at market price + net income from abroad

Given:

• GDP at market price = Rs 200 crore

• Net income from abroad (NFIA) = Rs 100 crore

GNP at market price = 200 + 100 = 300 crore

34. From the following data, calculate the primary de cit.

Rs in crores
Revenue expenditure 22500
Capital expenditure 30000
Revenue receipts 20500
Capital receipts (net of borrowings) 22000
Interest payment 6000
Borrowings 15000

a) Rs 9000 crore
b) Rs 13000 crore
c) Rs 7000 crore
d) Rs 15000 crore

Correct answer: C

SOLUTION: the formula for primary de cit is:

Primary de cit = scal de cit - interest payments

STEP 1: calculate total expenditure

TE = revenue expenditure + capital expenditure

= 25500 + 30000 = 55500

STEP 2: calculate total receipts (excluding borrowings)

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Total receipts = revenue receipts + capital receipts (net of borrowings)

= 20500 + 22000 = 42500

STEP 3: calculate scal de cit :

Fiscal de cit = total expenditure - total receipts (excluding borrowings)

= 55500 - 42500 = 13000

STEP 4: calculate primary de cit

Primary de cit = scal de cit - interest payments

= 13000 - 6000 = 7000

35. Calculate margins propensity to consume from the following data about an
economy which is in equilibrium

• National income = Rs 1500 crore

• Autonomous consumption expenditure = Rs 300 crore
• Investment expenditure = Rs 450 crore

a) 0.4
b) 0.5
c) 0.6
d) 0.75

Correct answer: C

SOLUTION: we use the equilibrium formula:

Y=C+I
Where,

• Y = 1500
• C = Ca + MPC × Y
• Ca = 300
• I = 450
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STEP 1: plug values into the equation

1500 = 300 + MPC×1500 + 450

1500 = 750 + MPC×1500

STEP 2: solve for MPC

1500 - 750 = MPC×1500
750 = MPC × 1500
MPC = 750 / 1500 = 0.5

36. If the total cost of manufacturing commodity ‘X’ is Rs 150000. Out of this
implicit cost is Rs 80000. What is will be the explicit cost:

a) Rs 95000
b) Rs 125000
c) Rs 80000
d) Rs 70000

Correct answer: D

SOLUTION: formula:

Total cost = explicit cost + implicit cost

Given:
• Total cost (TC) = RS 150000
• Implicit cost = Rs 80000
• Explicit cost = ?

Explicit cost = total cost - implicit cost

= 150000 - 80000
= 70000

38. Arrange the following steps of the income method in the correct order:

1. Sum of compensation to employees

2. Net factor income from abroad (NFIA) is added to obtain NNP
3. Rent, interest and, pro t are added
4. Depreciation is subtracted to obtain net domestic product (NDP)
5. Mixed income of self-employed is added

a) 1 - 3 - 5 - 4 - 2
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b) 1 - 5 -3 - 2 - 4
c) 1- 3 - 5 - 2 - 4
d) 5 - 1 - 3 - 4 - 2

Correct answer: A

EXPLANATION: the income method includes summing up factor incomes (wages, rent,
interest, and pro t), then adjusting for depreciation and net factor income from abroad

39. In the money supply - demand curve, when the central bank increases money
supply, what happens to the interest rate?

a) it increases
b) It decreases
c) It remains constant
d) It rst increases and then decreases

Correct answer: B

EXPLANATION: when the money supply increases, there is no more liquidity, leading
to lower interest rates in the economy.

40. Match list 1 with list 2

List-1 (economic terms) List-2 (de nitions)

A) scal de cit (I) total value of nal goods and services produced
within a country in a year at market prices.

B) GDP at market price (II) the di erence between total expenditure and
total revenue of the government

C) repo rate (III) the rate at which the central bank lends money
to commercial banks.

D) consumer price index (CPI) (iv) measures changes in the price of goods and
services purchased by households.

1. (A) - (II), (B) - (I), (C) - (III), (D) - (IV)

2. (A) - (I). (B) - (II), (C) -(IV), (D) - (III)
3. (A) - (IV), (B) - (III), (C) - (II), (D) - (I)
4. (A) - (III), (B) - (IV), (C) - (I), (D) - (II)

Correct answer: 1
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EXPLANATION: Fiscal De cit → It is the shortfall between total expenditure and total
revenue of the government (II).

GDP at Market Price → Measures the total production of nal goods and services
within a country (I).

Repo Rate → The interest rate at which the central bank (RBI) lends money to
commercial banks (III).

CPI (Consumer Price Index) → Measures in ation by tracking changes in the price level
of household goods and services (IV).

41. Contraction of demand is the result of

a) decrease in the number of consumers

b) Increase in the price of the good concerned
c) Increase in the prices of other goods
d) Decrease in the income of purchasers

Correct answer: B

EXPLANATION:Contraction of demand refers to a decrease in quantity demanded due

to an increase in the price of the good itself, keeping other factors constant.

It follows the Law of Demand, which states that when the price of a good rises, its
quantity demanded falls, assuming other factors remain unchanged.

42. The kinked demand hypothesis is designed to explain in the context of

oligopoly

a) price and output determination

b) Price rigidity
c) Price leadership
d) Collusion among rivals

Correct answer: B

EXPLANATION: The kinked demand hypothesis is a theory of oligopoly pricing that

explains price rigidity, which is the tendency of oligopoly rms to maintain stable prices
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despite changes in cost or demand. The hypothesis is based on the idea that the
demand curve facing an oligopoly rm is kinked at the current price level, meaning that
the demand is more elastic above the current price than below it. This leads to a
situation where a rm will not change its price unless its costs change signi cantly or
unless all of its competitors change their prices as well.

43. The demand for a factor of production is said to be derived demand because

a) it is a function of the pro tability of an enterprise

b) It depend on the supply of complementary factors
c) Its seems from the demand for the nal product
d) It arises out of means being scarce in relation to wants

Correct answer: C

EXPLANATION:Derived demand refers to the demand for a factor of production that

arises due to the demand for the nal goods and services it helps produce.

For example, if the demand for cars increases, the demand for steel, rubber, and labor
used in car production will also rise.

Hence, the demand for factors of production is not direct but derived from the demand
for the nal goods they help produce.

44. Demand for electricity is elastic because _______

a) it is very expensive
b) It has number of close substitutes
c) It has alternative uses
d) None of the above

Correct answer: C

EXPLANATION:The demand for electricity is considered elastic because it has multiple

uses, such as lighting, heating, cooking, and industrial production.

When the price of electricity rises, consumers may reduce consumption in less
essential uses (e.g., switching o unnecessary lights or using energy-e cient
appliances).

This characteristic of alternative uses makes electricity more price-sensitive, leading to

an elastic demand.
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45. When the perfectly competitive rm and industry are in long run equilibrium
then:

a) P = MR = SAC = LAC
b) D = MR = SMC = LMC
c) P = MR = lowest point on the LAC curve
d) All of the above

Correct answer: D

EXPLANATION: the long-run equilibrium of a perfectly competitive rm and industry,

the following conditions hold:

1. Price (P) = Marginal Revenue (MR) = Short-run Average Cost (SAC) = Long-run
Average Cost (LAC)

Since rms are price takers, P = MR in perfect competition.

In the long run, rms operate at the minimum point of the LAC curve, ensuring no
abnormal pro ts or losses.
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2. Demand (D) = Marginal Revenue (MR) = Short-run Marginal Cost (SMC) = Long-run
Marginal Cost (LMC)

In equilibrium, the rm produces at a level where MR = MC, ensuring pro t

maximization.

Since MR = P and P = MC in perfect competition, D = MR = SMC = LMC holds true.

3. P = MR at the lowest point of the LAC curve

In the long run, rms operate at the minimum e cient scale, meaning they produce at
the lowest point of the LAC curve, achieving productive e ciency.

46. Industries that are extremely sensitive to the business cycle are the

a) durable goods and service sectors

b) Non - durable goods and service sectors
c) Capital goods and on- durable goods sectors
d) A cyclical variable

Correct answer: D

EXPLANATION:Industries that are highly sensitive to the business cycle experience

large uctuations in demand and production during periods of economic expansion
and contraction.

1. Capital Goods Sector:

Capital goods (e.g., machinery, equipment, buildings) are investment-driven.

During economic booms, businesses increase investments, leading to higher demand

for capital goods.
During recessions, rms cut back on investments, reducing demand.
2. Durable Goods Sector:

Durable goods (e.g., cars, appliances, furniture) are expensive, long-lasting consumer
goods.

Consumers tend to delay purchases during downturns, leading to major demand

uctuations.
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Why not the other options?

Option A (Durable Goods and Service Sectors):

Services are generally less cyclical than capital goods.

Option B (Non-Durable Goods and Service Sectors):

Non-durable goods (e.g., food, toiletries) and services (e.g., healthcare, utilities) are
less a ected by the business cycle.

Option C (Capital Goods and Non-Durable Goods Sectors):

Non-durable goods maintain stable demand, unlike capital goods.

Thus, Capital Goods and Durable Goods Sectors are the most cyclically sensitive,
making Option D the correct answer.

47. If the government imposes a price oor above the equilibrium price in the
given graph, what will be the likely consequences
a) shortage in the market
b) Surplus in the market
c) No change in the market
d) Equilibrium price remains the same

Correct answer: B

EXPLANATION: A price oor is a minimum legal price set above equilibrium. It results
in excess supply (surplus) because:

Sellers want to supply more at the higher price.

Buyers demand less because the price is too high.

This causes unsold goods in the market, leading to a surplus.

48. In which of the following scenario, the cross elasticity between two
commodities x and y will be zero?

a) commodity x is nearly a perfect substitute for commodity y

b) Commodities x and y are complementary
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c) Commodities x and y are not related

d) Commodity x is superior to commodity y

Correct answer: C

EXPLANATION: Cross-price elasticity of demand measures how the demand for one
good changes when the price of another good changes. If two goods are not related, a
change in the price of one will have no e ect on the demand for the other, making the
cross-price elasticity zero. Hence, the correct answer is Option C: Commodity X and Y
are not related.

49. Salaries, subsidies and interest payments of government are covered under
which of the following?

a) capital expenditure
b) Miscellaneous expenditure
c) Imputed expenditure
d) Revenue expenditure

Correct answer: D

EXPLANATION: Revenue expenditure includes recurring expenses of the government

that do not create assets, such as salaries, subsidies, and interest payments. These
expenses are made to ensure the smooth functioning of the government and do not
contribute to capital formation.

50. The structure of the cold drink industry in India is best described as

a) perfectly competitive
b) Monopolistic
c) Monopolistically competitive
d) Oligopolistic

Correct answer: C

EXPLANATION :The cold drink industry in India is dominated by a few major rms like
Coca-Cola and PepsiCo, which control most of the market share. This market
structure, where a few large rms dominate and in uence prices and competition, is
known as an oligopoly. Oligopolies often exhibit interdependence, product
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di erentiation, and barriers to entry, making them distinct from perfect competition or
monopolistic competition.
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