question paper economics (cfa520): january 2008 eco (cfa520).pdf · question paper economics...

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Question PaperEconomics (CFA520): January 2008

Answer all 73 questions.

Marks are indicated against each question.

Total Marks : 100

1. Which of the following statements is not true?

(a) The quantity demanded is a flow concept(b) The negative slope of demand curve reflects the law of demand(c) The demand for a product increases when the price of its complement product decreases(d) The demand for a product decreases when the price of its substitute product increases(e) A shift in demand curve will occur only when the quantity demanded at each level of price

increases. (1 mark)

<Answer>

2. The demand function for the tickets of a test match is estimated as Q = 8,000 – 20P. The prices are set to maximize revenue. The main stadium holds 4,000 spectators (entry is for one person per ticket). In order to generate maximum revenue, the price that can be set for the ticket would be

(a) Rs. 50(b) Rs. 75(c) Rs.100(d) Rs.150(e) Rs.200. (1 mark)

<Answer>

3. In a year, the number of units sold of product X decreased by 30%. During the year, the price of X increased by 6%, per capita income decreased by 4% and the price of product Y (complementary product of product X) increased by 15%. Income elasticity of demand for product X is estimated to be 3 and cross price elasticity of Y and X is estimated to be – 0.25. What is the price elasticity of demand for product X?

(a) –2.130(b) 3.330(c) 2.103(d) –3.383(e) –2.375. (2 marks)

<Answer>

4. The demand and supply functions of a product are given as follows:

Qd = 11,000 – 5P

Qs = 7,400 + 4P

The Government imposes a sales tax of Rs.22.50 per unit. If the equilibrium price is given as Rs.400, then the proportion of tax borne by the producer is

(a) 66.56%(b) 64.56%(c) 60.56%(d) 50.56%(e) 55.56%. (2 marks)

<Answer>

5. The cross elasticity of demand for perfect substitutes is

(a) Infinity (b) Zero(c) Positive but less than infinity(d) Less than zero(e) One. (1 mark)

<Answer>

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6. Which of the following is/are not price floor(s)?

I. Minimum wages.

II. Rent control.

III. Agricultural price support.

(a) Only (I) above(b) Only (II) above(c) Only (III) above(d) Both (I) and (II) above(e) Both (I) and (III) above. (1 mark)

<Answer>

7. When the price elasticity of demand is one then marginal revenue will be

(a) Equal to zero(b) Equal to one(c) Less than 1 but greater than zero(d) Infinity(e) Less than zero. (1 mark)

<Answer>

8. A consumer is indifferent between the combinations A and B.

Combination Good X Good Y

A 17 16

B 19 14

The value of Marginal Rate of Substitution (MRSXY) for the consumer is

(a) – 1(b) 1(c) 0.50(d) – 0.50(e) Zero. (1 mark)

<Answer>

9. A consumer with an income of Rs.600 can buy 10 units of good X and 25 units of good Y. If price of both the goods is same, absolute value of slope of the budget line for the consumer is

(a) 0.25(b) 0.50(c) 1.00(d) 1.50(e) 2.00. (1 mark)

<Answer>

10. Mr. Ganesh consumes only two products, X and Y. Utility function of Mr. Ganesh is as follows:

U = 10X0.5Y0.5

The price of good X is Rs.10 per unit and price of good Y is Rs.5 per unit and Ganesh’s weekly budget is Rs.750. What is the optimum allocation of expenditure in terms of units of both the products for Mr. Ganesh?

(a) 20 units of X and 75 units of Y(b) 25 units of X and 100 units of Y(c) 50 units of X and 25 units of Y(d) 45 units of X and 55 units of Y(e) 25 units of X and 35 units of Y. (2 marks)

<Answer>

11. A consumer consumes three units of a product. Marginal utilities derived from the three units are Rs.180, Rs.155 and Rs.120, respectively. If the price of the good is Rs.40 per unit, the consumer surplus is

(a) Rs.335(b) Rs.223(c) Rs. 40(d) Rs.123(e) Rs. 78. (1 mark)

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12.If the Marginal Rate of Technical Substitution (MRTS) is equal to

6K

4L

, then the slope of the isoquant will be

(a) 4L × 6K

(b)–

4L

6K

(c)

6K4L

(d)

4L6K

(e)6K4L

. (1 mark)

<Answer>

13. Which of the following production function(s) exhibits decreasing returns to scale?

I. 4K + 2L + 4KL.

II. 22

K

L .

III. 20K0.5L .

(a) Only (I) above(b) Only (II) above(c) Both (I) and (II) above(d) Both (I) and (III) above(e) All (I), (II) and (III) above. (1 mark)

<Answer>

14. The production function of a firm is given as Q = 1,000L – 0.2L2. If 100 units of labor are used, average productivity of labor is

(a) 940 units(b) 960 units(c) 980 units(d) 990 units(e) 920 units. (1 mark)

<Answer>

15. When 10 units of labor are employed, average productivity of labor (APL) is 6 units. If APL increases to 7 units as a result of increase in labor input by one, marginal productivity of 11th unit of labor is

(a) 6 units(b) 7 units(c) 10 units(d) 11 units(e) 17 units. (1 mark)

<Answer>

16. Which of the following statements is not true?

(a) The time cost in money terms can be referred as implicit cost(b) If a firm’s total receipts are exceeding its economic cost then the residual accruing to the firm is

called as pure profit (c) Fixed cost will be zero when the production is zero(d) Average cost will never be zero(e) The cost of raw material is a variable cost. (1 mark)

<Answer>

17. Which of the following is always true of the relationship between average cost and marginal cost of a firm?(a) Average total costs are increasing when marginal costs are increasing(b) Marginal costs are increasing when average variable costs are higher than marginal costs(c) Average variable costs are increasing when marginal costs are increasing (d) Average variable costs are increasing when marginal costs are higher than average variable

costs (e) Average variable costs are constant when marginal costs are constant. (1 mark)

<Answer>

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18. A firm’s total cost function is estimated as TC = 20Q – 90Q2 + 10Q3. What is the output at which average cost is minimum assuming there is no fixed cost?

(a) 2.5 units(b) 5.5 units(c) 3.5 units(d) 4.5 units(e) 7.5 units. (2 marks)

<Answer>

19. The cost function of a firm is TC = 3,150 + 3.5Q. If the current market price of the good produced by the firm is Rs.5 per unit, what will be the break-even output for the firm?

(a) 1,600 units(b) 1,200 units(c) 1,550 units(d) 1,900 units(e) 2,100 units. (2 marks)

<Answer>

20. Consider the total cost function given below.

TC = 200 + 15Q – 0.25Q2 + 3Q3

Which of the following statements are false?

I. Fixed cost is 200Q.

II. Average variable cost function is 200/Q + 15 - 0.25Q + 3Q2.

III. Marginal cost function is 15 – 0.5Q + 9Q2.

IV. Variable cost function is 15Q – 0.25Q2 + 3Q3.

V. Average fixed cost is 200/Q.

(a) Both (I) and (II) above(b) Both (II) and (III) above(c) Both (III) and (IV) above(d) Both (III) and (V) above(e) Both (IV) and (V) above. (1 mark)

<Answer>

21. The long run total cost function of firm is given as TC = 18Q + 4Q2 – Q3. What is the optimum level of output for the firm?

(a) 1 unit(b) 2 units(c) 4 units(d) 5 units(e) 6 units. (2 marks)

<Answer>

22. The cost schedule of a firm is given below:

Output (units)Average Variable

Cost (Rs.)1 502 1503 3504 6505 850

What will be the marginal cost of producing 3rd unit of output?

(a) Rs.600(b) Rs.650(c) Rs.750(d) Rs.900(e) Rs.450. (1 mark)

<Answer>

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23. The cost function of a particular firm is given as follows:

TC = 3,000 + Q3 – 12Q2 + 240Q

What is the average variable cost if output is 6 units?

(a) Rs.204(b) Rs.203(c) Rs.202(d) Rs.201(e) Rs.200. (2 marks)

<Answer>

24. Which of the following statements is false about perfect competition?

(a) The market price is determined by the forces of demand and supply(b) An individual seller has only an unnoticeable influence on the market price(c) A market is said to be perfect only when perfect competition prevails on both sides of the

market i.e. buyers and sellers(d) For a individual firm output is the parameter of action(e) The price in perfect competition is always higher than its marginal revenue. (1 mark)

<Answer>

25. Refer to the diagram below:

Which point in the diagram is the shut-down point for the firm?

(a) E1

(b) E2

(c) E3

(d) R(e) E. (1 mark)

<Answer>

26. Which of the following is not true about the supply curve of a perfectly competitive industry?

(a) The short run supply curve of the industry is obtained from horizontal summation of the short run supply curves of the individual firms

(b) The short run supply curve of an individual firm is the upward rising portion of the marginal cost curve which lies above the average cost curve

(c) In the long run the marginal cost curve is not the supply curve(d) If the industry is an constant cost industry then the supply curve will be a vertical straight line(e) If the industry is an increasing cost industry then the supply curve will be a downward sloping

straight line. (1 mark)

<Answer>

27. The average revenue function of a perfectly competitive firm is given as follows:

AR = 3,200 – 80Q

The marginal cost of the firm is Rs.800. If the firm is maximizing profit, the output to be produced by the firm is

(a) 4 units(b) 20 units(c) 30 units(d) 40 units(e) 80 units. (2 marks)

<Answer>

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28. In monopoly, the rate of decline of marginal revenue is

(a) Half the rate of decline in price(b) Twice the rate of decline in price (c) Not related to decline in price(d) Equal to rate of decline in price(e) Always greater than rate of decline in price. (1 mark)

<Answer>

29. Which of the following is not true about monopoly?

(a) The monopolist can produce at the minimum point of the average cost curve(b) The monopolist firm can earn negative profit(c) In monopoly price is greater than marginal cost(d) In monopoly if the marginal cost curve is horizontal the equilibrium is indeterminate(e) The monopolist will not have a supply curve. (1 mark)

<Answer>

30. A monopolist has two effectively segmented markets x and y with demand functions as given below :

Qx = 2,000 – 100Px

Qy = 1,600 – 50Py.

Total cost function of the monopolist is TC = 500 + 10Q.

If the monopolist does not practice price discrimination, then sales maximizing price is


<Answer>

31. The demand function of a monopolist is given as

Qd = 200 – 20P.

If the marginal revenue is Rs.4, what is the price elasticity of demand for the good?

(a) 3.50(b) 5.73(c) 7.24(d) 9.19(e) 2.33. (2 marks)

<Answer>

32. A monopolist is facing the following demand function:

P = 220 – 8Q.

The cost of producing an additional unit remains at Rs.60. If the industry transforms into perfect competition, the additional units of output produced because of perfect competition is

(a) 7.50 units(b) 10.00 units(c) 30.00 units(d) 14.00 units(e) 25.00 units. (2 marks)

<Answer>

33. For a monopolist the demand and cost functions are estimated as:

P = 800 – 10Q

TC = 300Q + 2.5Q2.

Profit maximizing price for the monopolist is


<Answer>

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34. For a firm operating in a monopolistic competition the demand function is estimated as:

P = 1,000 – Q.

If the marginal cost of the firm is constant at Rs.20, the equilibrium output in the short run is

(a) 720 units(b) 980 units(c) 525 units(d) 490 units(e) 690 units. (2 marks)

<Answer>

35. Which of the following is not true about oligopoly market?

(a) Few sellers in the market(b) Entry into the market is restricted (c) Products are differentiated(d) Low market concentration(e) Interdependence among the sellers. (1 mark)

<Answer>

36. In an oligopoly market the demand curve faced by a firm is indeterminate. This is due to the difference in

(a) Products(b) Price(c) Market share(d) Reaction pattern of the rival firm(e) Level of output. (1 mark)

<Answer>

37. The demand function for a commodity in a duopoly industry is P = 500 – Q. The reaction functions of the two firms are given as

Q1 = 360 – 2Q2

Q2 = 190 – Q1.

Equilibrium price of the product will be


<Answer>

38. Which of the following is an assumption of Cournot’s model of duopoly?

(a) There are two interdependent firms selling differentiated goods(b) There are few buyers in the market(c) Both the duopolists have different cost curves(d) Each duopolist makes an output plan during a period which cannot be reversed during that

period(e) Each duopolist set price for his product. (1 mark)

<Answer>

39. An increase in __________ results in a lower GDP.

(a) Consumption(b) Investment(c) Government spending(d) Exports(e) Imports. (1 mark)

<Answer>

40. The periodic fluctuations in real GDP are called as

(a) Business cycles(b) Recessions(c) Troughs(d) Expansions(e) Peaks. (1 mark)

<Answer>

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41. Which of the following is true according to Classical Economics?

(a) Business cycles explain long-run fluctuations in the economy(b) The economy is at full employment in the short run, but in the long run, business cycle

movements direct the economy away from full employment(c) The economy is always at full employment in the short run(d) The economy moves to full employment in the long run(e) The economy is seldom at full employment. (1 mark)

<Answer>

42. The focus of the Keynesian model is on the role of

(a) Spending in explaining economic fluctuations (b) Output in explaining economic fluctuations(c) Production in explaining economic fluctuations(d) Labor in explaining economic fluctuations(e) Financial markets in explaining economic fluctuations. (1 mark)

<Answer>

43. Which of the following is an open market purchase?

(a) When private individuals sell government bonds (b) When the Reserve Bank of India sells government bonds (c) When private individuals purchase government bonds (d) When bond dealers buy government bonds from the Reserve Bank of India (e) When the Reserve Bank of India buys government bonds. (1 mark)

<Answer>

44. The actions of Reserve Bank of India (RBI) that could decrease money supply are

(a) Making open market sales, increasing the required reserve ratio and increasing the discount rate(b) Making open market purchases, decreasing the required reserve ratio and decreasing the

discount rate (c) Making open market sales, increasing the required reserve ratio and decreasing the discount rate(d) Making open market sales, decreasing the required reserve ratio and increasing the discount rate(e) Making open market purchases, increasing the required reserve ratio and increasing the

discount rate. (1 mark)

<Answer>

45. Which of the following would shift the aggregate demand curve to the right?

(a) Increase in government purchases, investment spending, autonomous consumption, taxes or the money supply

(b) Decrease in government purchases, investment spending, autonomous consumption, taxes or the money supply

(c) Increase in government purchases, investment spending, autonomous consumption or taxes (d) Increase in government purchases, investment spending, autonomous consumption or the money

supply (e) Decrease in government purchases or investment spending, and increases in autonomous

consumption, taxes or the money supply. (1 mark)

<Answer>

46. Which of the following happen, if there is an increase in taxes?

(a) The demand for goods decreases and it leads to a leftward shift of the IS curve which increases both equilibrium income and interest rates

(b) The demand for goods decreases and it leads to a rightward shift of the IS curve which lowers both equilibrium income and interest rates

(c) The demand for goods decreases and it leads to a leftward shift of the IS curve which lowers both equilibrium income and interest rates

(d) The demand for goods increases and it leads to a rightward shift of the IS curve which increases both equilibrium income and interest rates

(e) The demand for goods increases and it leads to a rightward shift of the IS curve which leads to constancy of both equilibrium income and interest rates. (1 mark)

<Answer>

47. In the long run, increasing the budget deficit will

(a) Raise interest rates leading to higher investment and hence higher output(b) Lower interest rates leading to lower investment and hence lower output(c) Raise interest rates leading to lower investment and hence lower output(d) Lower interest rates leading to higher investment and hence higher output(e) Lower interest rates leading to higher investment and hence output remain constant. (1 mark)

<Answer>

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48. When the economy is in boom,

I. Taxes should be increased.

II. Government spending should be decreased.

III. Taxes should be remain constant.

(a) Only (I) above(b) Only (II) above(c) Only (III) above(d) Both (I) and (II) above(e) Both (II) and (III) above. (1 mark)

<Answer>

49. Which of the following is/are being considered as the debit entry/entries of Balance of Payment accounts?

I. Merchandise imports and invisible imports.

II. A capital outflow or lending abroad.

III. Export of goods or merchandise exports.

(a) Only (I) above(b) Only (II) above(c) Only (III) above(d) Both (I) and (II) above(e) Both (II) and (III) above. (1 mark)

<Answer>

50. In an open economy, an increase in the domestic willingness to save should

(a) Reduce net foreign borrowing(b) Increase net foreign borrowing(c) Not affect foreign borrowing(d) Increase the world interest rate(e) Keep the world interest rate constant. (1 mark)

<Answer>

51. The GDP deflator can be used to

(a) Reduce the overstatement of economic activity that would occur if we included intermediate production

(b) Correct nominal GDP for the contribution to domestic GDP made by foreign owned factors of production

(c) Decompose a change in nominal GDP into a change in real GDP and an average change in prices

(d) Obtain the factor income flows that result from the economic activities(e) Obtain the factor income flows that result from the non-economic activities. (1 mark)

<Answer>

52. Which of the following is an example of a discretionary fiscal policy?

(a) Automatic changes in net tax revenues that result from the income rate structure(b) A Governments’ mandated change in the level of government spending or net tax revenues(c) Payment of unemployment insurance(d) Payment of old age benefits to retired individuals(e) Payment to victims of flood. (1 mark)

<Answer>

53. There is a multiplier effect from changes in investment spending because

(a) Exports are positively related to the level of output(b) Consumer spending is negatively related to the level of output(c) Aggregate supply is related to the level of output(d) Consumer spending is positively related to the level of output(e) Imports are negatively related to the level of output. (1 mark)

<Answer>

54. Which of the following statements is not true in the long run?

(a) Output converges towards natural rate of output (b) Output becomes insensitive to changes in aggregate demand (c) Input costs play a greater role in the determination of equilibrium output (d) Aggregate supply curve is vertical(e) Unanticipated price changes would have adverse impact on output. (1 mark)

<Answer>

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55. Production Account of an economy is given below:

Dr. Cr.

Particulars Rs. (Crore) Particulars Rs. (Crore)Wages paid to domestic residents

2,600 Sales to Households 3,050

Wages paid to foreigners 720 Gross Fixed Investment 255Interest payments on loans taken from foreign banks

30 Changes in stock 165

Retained profits 60 Exports 120Corporate tax 30Imports 75Indirect taxes 45Depreciation 30

Total 3,590 Total 3,590

For the economy NDP at market prices is

(a) Rs.3,050 crore(b) Rs.3,270 crore(c) Rs.3,410 crore(d) Rs.3,440 crore (e) Rs.3,485 crore. (2 marks)

<Answer>

56. The following data is taken from National Income Accounts of a country:

Particulars Rs. Cr

GNP at market prices 5,100

Transfer payments 726

Indirect taxes 519

Personal taxes 609

Consumption of capital 570

Corporate tax 225

Subsidies 60

If personal income in the country is Rs.4,488 Cr, undistributed corporate profits would amount to

(a) Rs.189 Cr(b) Rs. 63 Cr(c) Rs. 90 Cr(d) Rs. 84 Cr(e) Rs.288 Cr. (2 marks)

<Answer>

57. The following data is taken from National Income Accounts of a country:

Particulars Rs. in crore

National income 13,570

Transfer payments 2,420

Personal taxes 2,030

Undistributed corporate profits 280

Corporate tax 750

Personal disposable income in the country is(a) Rs.13,630 crore(b) Rs.12,930 crore(c) Rs.12,390 crore(d) Rs.13,140 crore(e) Rs.11,210 crore. (2 marks)

<Answer>

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58. The following information is extracted from National Income Accounts of an economy:

Investment by business sector = 700 MUC

Corporate profit tax = 350 MUC

Dividends paid by the business sector = 105 MUC

Retained earnings = 140 MUC

Corporate profits for the economy is(a) 245 MUC(b) 595 MUC(c) 1,050 MUC (d) 1,295 MUC(e) 1,435 MUC. (1 mark)

<Answer>

59. The following information is extracted from the National Income Accounts of an economy:

Particulars MUCDepreciation 2,360Government expenditure 11,880Corporate taxes 2,880Gross domestic investment 12,780Transfer payments 2,780Personal taxes 8,100Net income earned from abroad 440Retained earnings 6,000Consumption expenditure 80,000

If the national income is 1,00,000 MUC, the personal savings in the economy is

(a) 4,160 MUC(b) 5,880 MUC(c) 5,800 MUC(d) 5,690 MUC (e) 8,800 MUC. (2 marks)

<Answer>

60. In an economy the marginal propensity to consume is estimated to be 0.40. If tax rate is 50%, an increase in 1,500 MUC in government spending would result in

(a) Increase in equilibrium income by 500 MUC(b) Increase in equilibrium income by 1,000 MUC(c) Increase in equilibrium income by 1,500 MUC(d) Increase in equilibrium income by 1,875MUC(e) No affect on the equilibrium income. (2 marks)

<Answer>

61. In a hypothetical economy, the nominal income increased by 8%. If the prices increased by 5%, the real income increases by

(a) 1.6%(b) 2.0%(c) 3.0%(d) 5.0%(e) 13.0%. (1 mark)

<Answer>

62. The consumption function in a hypothetical economy is given as C = 70 + 0.50Y. If the investment and government expenditure are 80 MUC and 10 MUC respectively, the equilibrium output of the economy is

(a) 90 MUC(b) 125 MUC(c) 160 MUC(d) 320 MUC(e) 800 MUC. (1 mark)

<Answer>

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63. Consumption function for an economy is estimated to be

C = 2,000 + 0.50 Yd

Which of the following is true if Yd is zero?

(a) Savings are zero(b) Savings are Rs.2,000(c) Dissavings are Rs.2,000(d) Consumption is zero(e) Income must be greater than taxes. (1 mark)

<Answer>

64. Consider the following information:

Multiplier 1.25Import function 0.16YTax function 0.40Y

What is the marginal propensity to consume?(a) 0.30(b) 0.40(c) 0.60(d) 1.00(e) 1.25. (2 marks)

<Answer>

65. The following data pertains to a hypothetical economy:

Particulars MUCPrivate final consumption expenditure 10,500Fixed capital formation 3,150Increase in inventories 700Government final consumption expenditure 2,240Exports 560Imports 150Money supply 4,250

The velocity of money in the economy is

(a) 3(b) 4(c) 5(d) 6(e) 7. (2 marks)

<Answer>

66. The monetary liabilities of a Central bank are estimated as 5,950 MUC and government money is 50 MUC. If the Currency/Deposit ratio is 0.2 and the Central Bank has imposed a reserve ratio of 10%, the money supply in the economy is

(a) 6,000 MUC(b) 20,000 MUC(c) 22,000 MUC(d) 24,000 MUC(e) 30,000 MUC. (2 marks)

<Answer>

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67. The following are the excerpts from the balance sheet of the Reserve Bank of India.

Particulars Rs. croreNotes in circulation 400Other deposits 200Other non-monetary liabilities 400Statutory and contingency reserves 1,680Credit to Central Government 4,480Shares & loans to financial institutions 2,200Central bank claims on Commercial banks 1,400Net foreign exchange assets 600Other assets 200

If the government money is Rs.100 crore, the high powered money in the economy is

(a) Rs.6,600 crore(b) Rs.6,800 crore(c) Rs.6,850 crore(d) Rs.6,900 crore(e) Rs.7,000 crore. (2 marks)

<Answer>

68. The following are the indicators of financial development of an economy for the year 2006:

Finance Ratio 0.25

Intermediation Ratio 0.50

If the Net Physical Capital Formation and the new issues for the year 2006 are 30,000 MUC and 40,000 MUC respectively, the financial interrelation ratio is (a) 1.0(b) 1.5(c) 2.0(d) 3.0(e) 6.0. (2 marks)

<Answer>

69. Budget Estimate for the year 2006 is given below:

(Rs. crore)

Tax Revenue (net to Centre) 14,73,352Non-tax revenue 5,58,128Recoveries of Loans 1,44,184Other Receipts 1,05,600Borrowings and other Liabilities 12,29,096Non-plan Expenditure On Revenue Account (of which Interest Payments is Rs.9,85,784.) 23,15,072On Capital Account 2,27,496Plan ExpenditureOn Revenue Account 6,14,744On Capital Account 3,53,048

The estimated revenue deficit for the year 2006 was

(a) Rs.5,45,288 crore(b) Rs.9,54,336 crore(c) Rs.8,76,656 crore(d) Rs.9,06,336 crore(e) Rs.8,98,336 crore. (2 marks)

<Answer>

70. The consumption function for a two sector economy C = 1,600 + 0.5Y and investment is an autonomous component. If equilibrium income is 4,400 MUC, what is the investment?

(a) 200 MUC(b) 600 MUC(c) 2,000 MUC(d) 4,400 MUC(e) 7,200 MUC. (1 mark)

<Answer>

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71. A consumption survey conducted for an economy revealed the following statistics:

Particulars Estimates

Tax rate (as % of total income) 25%Aggregate tax collected 2,500 MUCTransfer payments 1,000 MUCAutonomous consumption 20 MUCMarginal propensity to consume 0.6

The estimated consumption for the economy amounts to

(a) 5,000 MUC(b) 5,120 MUC(c) 6,130 MUC(d) 5,690 MUC(e) 3,450 MUC. (2 marks)

<Answer>

72. India’s overall Balance of Payments for the year 2006 is given below:

(Rs. in million)

Items Credit DebitMerchandise 5,30,000 6,54,740Services 2,49,860 1,87,800Transfers 1,52,250 3,670Income 28,260 77,080Foreign Direct Investment 47,900 11,790Portfolio Investment 75,350 65,910External Assistance 27,730 52,330Commercial Borrowings (MT & LT) 27,370 44,350Commercial Borrowings (Short Term) 81,890 72,100Commercial Banks 1,69,260 89,730Others 5,360 2,460Rupee Debt Service - 4,740Other Capital 64,020 29,090Errors and Omissions 6,340 -

During the year 2006, over all Balance of Payments position for India was

(a) Rs.1,72,800 million (deficit)(b) Rs.1,72,800 million (surplus)(c) Rs.1,82,800 million (surplus)(d) Rs.1,69,800 million (deficit)(e) Rs.1,69,800 million (surplus). (2 marks)

<Answer>

73. On 31st March 2007, Amar, a stockbroker, collects Rs.40,000 towards his commission. Over the day, the value of his office equipments depreciated by Rs.3,000. Of the remaining Rs.18,000, he paid Rs.1,000 to the government as service taxes; retains Rs.7,000 in his business and took home the remaining amount as his wages. From his personal income, he pays Rs.3,000 as income tax. What is the contribution made by Rajesh to national income?

(a) Rs.36,000(b) Rs.37,000(c) Rs.20,000(d) Rs.17,000(e) Rs.16,000. (1 mark)

<Answer>

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Suggested AnswersEconomics (CFA520): January 2008

Answer REASON

1. D The demand for a product increases when the price of its substitute product increases < TOP >

2. E Q = 8,000 – 20P

Q = 4,000 (given)

4,000 = 8,000 – 20P

20P = 8,000 – 4,000

P = 4,000/20 =Rs.200

< TOP >

3. E

Income elasticity of demand (EI) =

% change in quantity demanded

% change in Income

% change in Income = -4

EI = 3

% change in quantity demanded = -4 3

= -12%

Therefore decrease in per capita income caused the sales to decrease by 12%.

Cross price elasticity of demand:

Exy =

% change in quantity demanded of X

% change in price of Y

% change in price of Y = 15

Exy = –0.25

% change in quantity demanded = – 0.25 15 = –3.75

Increase in price of Y caused the sales to decline by 3.75%.

Total decline in sales of X = 30%

Decline caused by decrease in per capita income and increase in price of Y = 12 + 3.75 = 15.75%

Balance 30 – 15.75 = 14.25% decline in sales

Is caused by an increase in price of X

Price elasticity of demand (Ep) =

% change in quantity demanded

% change in price

Ep =

14.25

6

= – 2.375

Price elasticity of demand is – 2.375.

< TOP >

4. E When a sales tax of Rs. 22.50 per unit is imposed

QS = 7,400 + 4 (P – 22.50)

= 7,400 + 4 P – 90 = 7,310 + 4 P

7,310 + 4p = 11,000 – 5P

9P = 3690

P = 410

Tax Imposed = Rs. 10

Change in price = 410 – 400 = 10

Proportion of tax borne by customers =

10100

22.50

= 44.44%

Proportion of tax borne by producers = (100 – 44.44) = 55.56%.

< TOP >

5. A The cross elasticity of demand for perfect substitutes is infinity. The smallest change in the price of one good will cause infinitely large change in the quantity demanded of the other good.

< TOP >

16

6. B Rent control is a form of price ceiling. < TOP >

7. A1

MR=AR 1

pe

So when ep = 1, MR will be zero.

< TOP >

8. A MRSxy = Y/X = –2/2 = – 1 < TOP >

9. C

Slope of the budget line =

x

y

P

P

If the prices of both the goods are the same, slope of the budget line will be 1.

< TOP >

10. B The consumer will be in equilibrium, when

X

Y

MU

MU =

X

Y

P

P

U = 10X0.5 Y0.5

MUX =

U

X

= 5X–0.5 =

5

X

MUY =

U

Y

= 5Y–0.5 =

5

Y

PX = 10

PY = 5

X

Y

MU

MU =

X

Y

P

P

5 Y

5X

=

10

5

Y

X =

10

5

Y

X =

100

25

Y

X = 4

4X = Y

or, X = 0.25Y

Given the budget of Rs.750,

X Y

P .X P .Y 750

10 0.25Y 5Y 750

7.5Y 750

Y 100

X 0.25Y 25

Hence the optimum allocation is X = 25 units and Y = 100 units

< TOP >

11. A Consumer surplus = (180 – 40) + (155 – 40) + (120 – 40) = 335. < TOP >

17

12. E

The slope of isoquant is the same as the MRTS, hence in the given case its equal to

6K

4L

< TOP >

13. B When K = L = 1, 4K + 2L + 4KL = 10

When K = L = 2, 4K + 2L + 4KL = 28

Hence, the function is increasing returns to scale

When K = L = 1, 2K/L2 = 2

When K = L = 2, 2K/L2 = 1

Hence, the function is decreasing returns to scale

When K = L = 1, 20K0.5L = 20

When K = L = 2, 20K0.5L = 56.56

Hence, the function is increasing returns to scale.

< TOP >

14. C The production function for a firm Q = 100L – 0.02L2

APL =

2Q 1000L 0.2L

L L

= 1000 – 0.2L.

When L = 100, APL = 1000 – 0.2 (100) = 1000 – 20 = 980 units.

< TOP >

15. E Total product (TPL) = APL x L

When L = 10, TPL = 6 x 10 = 60

L = 11, TPL = 7 x 11 = 77

MP of 11th unit of labor = 77 – 60 = 17 units

< TOP >

16. C Fixed costs are those costs which do not vary with level of production < TOP >

17. D Average variable costs are increasing when marginal costs are higher than average variable costs . It is a true statement.

< TOP >

18. D Average cost = TC/Q = (20Q – 90Q2 + 10Q3)/Q

= 20 – 90Q + 10Q2

Average variable cost will be minimum when 0

AC

Q

= – 90 + 20Q = 0

Q = 4.5 units.

< TOP >

19. E At break-even, TR = TC

TR = P x Q = 5Q

Thus, 5Q = 3150 + 3.5Q

Or, 1.5Q = 3150

Or, Q = 3150/1.5 = 2100 units.

< TOP >

20. A Fixed cost is Rs. 200

Average variable function = TVC/Q = (15Q – 0.25Q2 + 3Q3)/Q = 15 – 0.25Q + 3Q2

< TOP >

18

21. B LTC = 18Q + 4Q2 – Q3

In the long run, the firm would optimize by producing at the lowest average cost.

When AC = MC, the AC will be lowest.

LAC =

218 4LTC

Q QQ

LMC

218 8 3LTC

Q QQ

18 + 4Q – Q2 = 18+ 8Q – 3Q2

2Q2 – 4Q = 0

Q = 2 units

Therefore, when the output is at 2 unit, the LAC is at the lowest which an optimum output is in the long run.

< TOP >

22. C At third unit of output the average fixed cost is Rs. 34 which implies that the total fixed cost is Rs.102. Now the average variable cost at that level of output is 350, so the total variable cost is Rs. 1050. Hence total cost of producing 3rd unit of output is Rs. 1152. The marginal cost is equal to increase made in the total cost by producing an extra unit of output. So we need to know the total cost of producing 2nd unit of output. The total cost of producing 2nd unit of output is equal to Rs.300 + Rs.102 = Rs. 402. The marginal cost of 3rd unit is equal to Rs.1152 – Rs.402 = Rs.750

< TOP >

23. A In the given cost function variable cost is equal to Q3 – 12Q2 + 240Q.

Average variable cost = Q2 – 12Q + 240, at Q = 6 AVC = 36 – 72 + 240 = Rs. 204

< TOP >

24. E The price in perfect competition is always equal to the marginal revenue because as the price is given to the firm they have sell every additional unit at the same price.

< TOP >

25. B E2 indicates shut down point. Beyond this point the firm will not operate < TOP >

26. D If the industry is an constant cost industry then the supply curve will be a horizontal straight line < TOP >

27. C A perfectly competitive firm maximizes its profits when P = MC

P (= AR) = MC

3200 – 80Q = 800

80Q = 2400

Q = 30 units.

< TOP >

28. B In monopoly the rate of decline of marginal revenue is twice the rate of decline of price. < TOP >

29. D In case monopoly even if the marginal cost curve is horizontal the equilibrium is determinate because the MR and AR curves are downward sloping.

< TOP >

19

30. B Qx=2,000 – 100Px

Qy=1,600 – 50Py

TC=500 + 10Q.

If the monopolists does not practice price discrimination, then

Qx = 2,000 – 100Px

Qy = 1,600 – 50Py

Q = 3,600 – 150P

or, 150P = 3,600 – Q

or, P = 24 –

Q

150

TR = 24Q –

2Q

150

MR = 24 –

2Q

150

Sales maximization is possible, when MR = 0

24 –

2Q

150 = 0

2Q

150 =24

Q = 1,800

P = 24 –

Q

150

P = 24 –

1800

150 = 24 – 12 = Rs.12.

< TOP >

31. E Q = 200 – 20P and MR = 4; Differentiating q / p = -20

And rearanging, we have 20P = 200 – Q

or P = 10 – 0.05Q;

TR=PQ = 10Q – 0.05Q2 ;

Given MR = 4 , 10 – 0.10Q = 4

or Q = 60

When Q = 60, we get P = 10 – 0.05 ( 60 ) = 7;

Elasticity = -20 ( 7/60) = 2.33

< TOP >

32. B A monopolist attains equilibrium when MR = MC

P = 220 – 8Q

TR = 220Q – 8Q2

MR = 220 – 16Q

MC = 60

MR = MC

220 – 16Q = 60

160 = 16Q

Q = 10

Qm = Qp x n/(n + 1)10 = Qp x ½

Qp = 10x 2 = 20 units.

Additional output to be produced = 20 – 10 = 10 units.

< TOP >

20

33. C Demand function of the monopolist are given as

P = 800 – 10Q

TC = 300Q + 2.5Q2

TR = P Q = 800Q – 10Q2

MR = 800 – 20Q.

Profit maximizing output for the monopolist can be determined, where,

MR = MC

MC =

(TC)

Q

= 300 + 5Q

MR = MC

800 – 20Q = 300 + 5Q

– 25Q = – 500

Q = 20

P = 800 – 10 (20) = 800 – 200 = Rs.600.

< TOP >

34. D The equilibrium output in the short run is determined where

MR = MC

TR = 1000Q - Q2

MR = 1000 - 2Q

1000 - 2Q = 20

2Q = 980, Q = 490

< TOP >

35. D Oligopolistic markets are characterized by high market concentration. < TOP >

36. D In an oligopoly market the demand curve faced by a firm is indeterminate this is due to difference in reaction pattern of the rival.

< TOP >

37. D By solving the reaction functions of the firms, the industry output can be derived.Q1

= 360 – 2Q2(I)

Q2=190 – Q1(II)

Putting the equation (II) in (I)

Q1=360 – 2 (190 – Q1)

or, Q1=360 – 380 + 2Q1

or, – Q1 = – 20

or, Q1 = 20

. Q2 = 190 – 20 = 170.

The equilibrium output for the industry Q = Q1 + Q2 = 20 + 170 = 190.

P = 500 – 1(190) = Rs.310.

< TOP >

38. D There are two interdependent firms selling homogenous goods

There are large number of buyers in the market

Both the duopolists have identical cost curves

Each duopolist makes an output plan during a period which cannot be reversed during that period

Neither duopolist set price for his product but accepts.

< TOP >

39. E Imports are subtracted from exports to calculate net exports, which is used to calculate GDP. When imports are more, it decreases GDP.

< TOP >

40. A The periodic fluctuations in real GDP are called as business cycles. < TOP >

41. D Classical economics believe that the economy moves to full employment in the long run. < TOP >

42. A Keynesian model uses spending in explaining economic fluctuations < TOP >

43. E When the Reserve Bank of India buys government bonds, it is a case of open market purchase. < TOP >

21

44. A The Reserve Bank of India actions that could decrease money supply are making open market sales, increasing the required reserve ratio, and increasing the discount rate.

< TOP >

45. D When there is an increases in government purchases, investment spending, autonomous consumption, or the money supply, the aggregate demand curve shift to the right.

< TOP >

46. C Lowers the demand for goods and leads to a leftward shift of the IS curve which lowers both equilibrium income and interest rates.

< TOP >

47. C In the long run, increasing the budget deficit will raise interest rates leading to lower investment and hence lower output.

< TOP >

48. D When the economy is in boom, taxes should be increased and Government spending should be decreased.

< TOP >

49. D Merchandise imports and invisible imports and a capital outflow or lending abroad are considered the debit entry of Balance of Payment accounts.

< TOP >

50. A In an open economy, an increase in the domestic willingness to save should reduce net foreign borrowing.

< TOP >

51. C The GDP deflator is defined as the ratio of nominal GDP which is measured in current prices to GDP measured in constant prices.

< TOP >

52. B A Governments’ mandated change in the level of government spending or net tax revenues is an example of a discretionary fiscal policy

< TOP >

53. D There is a multiplier effect from changes in investment spending because Consumer spending is positively related to the level of output.

< TOP >

54. E In long run the economy will tend towards output which is referred to as natural rate of output.

a. True, because long equilibrium is characterized by tendency towards natural rate of output

b. In long run output of an economy does not depend on the price level, but on labour, import cost, capital stock, technological progress etc. hence true.

c. True, input costs play a greater role in the determination of equilibrium output.

d. At natural rate the aggregate supply is vertical as it is insensitive to price hence true.

e. Since price doesn’t have any impact of output in long run, unanticipated price also has no role. Hence this option is not true.

< TOP >

55. E NDPat market price = NDP at factor cost + Indirect taxes

NDPat factor cost = wages paid to domestic residents + wages paid to foreigners + Interest payment on loans taken + Retained profits + Corporate tax

= 2,600+ 720 + 30 + 60 + 30

= 3,440

NDPat market prices = 3,440 + 45

= Rs.3,485 cr.

< TOP >

56. D Personal Income = National Income – Undistributed corporate profit – corporate tax + Transfer payments

National Income = GNP at market price – Depreciation – Indirect taxes + Subsidies

= 5100 – 570 – 519 + 60

= 4,071

4488 = 4,071 – undistributed corporate profits – 225 + 726

Undistributed corporate profits = Rs.84 crore.

< TOP >

57. B Personal disposable income = National Income – Undistributed corporate profit – corporate tax + Transfer payments – personal taxes

Personal Income = 13,570–280–750+2,420–2,030

= Rs. 12,930cr.

< TOP >

58. B Corporate profits = Corporate profit tax + Dividends + Retained earnings

= 350 + 105 + 140 = 595 MUC

< TOP >

22

59. C Personal income = National income – (corporate taxes + retained earnings) + Transfer payments =1,00,000 – (2,880+ 6,000) + 2,780= 93900

Personal disposable income = personal income – personal taxes

= 93900 – 8,100= 85800

Personal savings in the economy

= Personal disposable income – Consumption expenditure

= 85800– 80,000 = 5800 MUC.

< TOP >

60. D

Multiplier =

1 1 1

1 MPC(1 t) 1 0.40(1 0.50) 0.80

= 1 .25

Y =1.25 1500 = 1875 MUC

< TOP >

61. C Growth rate of Real income = Nominal income - price level = 8% - 5% = 3%. < TOP >

62. D At equilibrium, Y = C + I + G = 70 + 0.50Y + 80 + 10 = 160 + 0.5Y

0.5Y = 160

Y = 160/0.5 = 320 MUC.

< TOP >

63. C If Yd is zero, consumption is Rs. 2000, which is autonomous consumption. This consumption is financed by dissavings or borrowing. Hence dissavings are Rs.2000.

< TOP >

64. C

Multiplier =

1

1 t

Where = mpc.

t = 0.40

= 0.16

1.25 =

1

1 0.40 0.16

Or, 1.25 =

1

1.16 0.60

Or, 1.45 – 0.75 = 1

Or, 0.75 = 0.45

Or, = 0.60

mpc = 0.60

< TOP >

65. B Velocity of money = Y/MS

Y = C+ I + G +E –M

10,500 + 3,150 + 700 + 2,240+ 560 – 150 =17000

Velocity of money = 17000/ 4250 =4.

< TOP >

66. D

Money supply in the economy, M =

rC

C1H

u

u

H = High powered money

r = reserve ratio

Cu = currency to deposit ratio.

H = Monetary liabilities of RBI + Government money

Monetary liabilities of RBI = 5950 MUC

Government money = 50 MUC

Hence, H = 5950 + 50 = 6000MUC

M =

1 0.2

0.2 0.1

6000 = 4 × 6000= 24 ,000 MUC.

< TOP >

23

67. D High powered money = Monetary liabilities of central bank + Government money

Monetary liabilities of central bank = Financial Assets + Other assets – Non-monetary liabilities

Financial Assets = Credit to government + claims on commercial banks + credit to commercial sectors + foreign exchange assets

= 4,480+ 1,400 + 2,200+ 600 = 8680

Non-monetary liabilities = 400 + 1,680 = 2080

Monetary liabilities of central bank = 8680 + 200 –2080

High powered money = 6800 + 100 = Rs. 6,900 crore

< TOP >

68. C Intermediation Ratio = Secondary issues/New issues

Or, secondary issues = Intermediation ratio x New issues = 0.5 x 40,000 = 20,000 MUC

Total issues = New issues + Secondary issues = 40,000 + 20000 = 60,000 MUC

Financial Interrelations Ratio = Total issues/Net Physical Capital Formation (NPCF)

= 60000 /30000 = 2.0

< TOP >

69. E Revenue deficit = Revenue expenditure – Revenue receipt

Revenue Expenditure = Non plan revenue expenditure + Plan revenue expenditure

= 23,15,072+6,14,744 = 2929816

Revenue receipts = Tax revenue + Non. Tax revenue

= 14,73,352+5,58,128= 2031480

Revenue Deficit = 2929816 – 2031480= Rs. 8,98,336 cr.

< TOP >

70. B Y = C + I

Y = 1600 + 0.5 Y + I

0.5 x 4400 = 1600 + I

I = 600.

< TOP >

71. B We have C = a+b (Y-T+J) where C is the aggregate consumption, a is the autonomous consumption, b is the marginal propensity to consume, Y is the income level, T refers to absolute amount of tax and J refers to transfer payments

Substituting, we have

C =20 + 0.6 (10000-2500 + 1000 ) = 20 + 0.6(8500) = 5,120 MUC

[Total tax collected = 2500 MUC which is 25 % of total income. So total income

= 10,000 MUC].

< TOP >

72. E Overall balance of payment = Total Credit of the Bop – Total debit of the Bop

= 1465590–1295790

= Rs. 1,69,800million (surplus)

< TOP >

73. A Contribution to National income = Contribution to GNP at market prices – depreciation – indirect taxes = 40,000 – 3,000 – 1,000 =Rs.36,000.

< TOP >

< TOP OF THE DOCUMENT >

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