Professional Documents
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(a) Both (I) and (II) above (b) Both (II) and (III) above
(c) Both (II) and (IV) above (d) (I), (II) and (III) above
(e) (II), (III) and (IV) above.
(1 mark)
<
Answer
14. Engineers working at a car manufacturing plant have determined that a 15% increase in all inputs will
>
increase the output by 15%. Assuming that the prices of inputs remain constant, which of the following
costs will change as the output increases?
(a) Average variable cost (b) Fixed cost
(c) Marginal cost (d) None of the above
(e) Both (a) and (c) above.
(1 mark)
< Answ
15. The horizontal demand curve for a firm is one of the characteristic features of
(a) Oligopoly (b) Monopoly (c) Monopolistic competition
(d) Perfect competition (e) Duopoly.
(1 mark)
< Answ
16. In the long-run, a perfectly competitive firm earns only normal profits because of
(a) Product homogeneity in the industry
(b) Large number of sellers and buyers in the industry
(c) Free entry and exit of firms in the industry
(d) Both (a) and (b) above
(e) Both (b) and (c) above.
(1 mark)
< Answ
17. Which of the following is true of a perfectly competitive firm in equilibrium?
(a) P = MR = MC (b) P = MR, but MR > MC
(c) P = MC, but MR < MC (d) MR = MC and P < MR
(e) MR = MC and P > MR.
(1 mark)
< Answ
18. A firm realizes least-cost in production, if it substitutes the factors until their
(a) Prices are equal
(b) Marginal physical products are equal
(c) Marginal physical products are equal to their factor prices
(d) Marginal physical products are equal to zero
(e) Marginal physical product to the factor price ratio is equal for all factor inputs.
(1 mark)
< Answ
19. The frequent formation of cartels by firms in the cement industry in India indicates that the cement
industry in the country is
(a) A monopoly (b) Perfectly competitive
(c) An oligopoly (d) A monopsony (e) An oligopsony.
(1 mark)
< Answ
20. In India, which of the following industries best illustrates monopoly?
(a) Agriculture (b) Automobile industry
(c) Atomic energy (d) Cola drinks (e) Television industry.
(1 mark)
< Answ
21. Which of the following is a stock variable?
(a) Gross Domestic Product (b) Inventory of a firm
(c) Inflation (d) National Income
(e) Both (a) and (d) above.
(1 mark)
< Answ
22. The net factor income earned within the domestic territory of a country must be equal to
(a) Net Domestic Product at factor cost
(b) Net Domestic Product at market price
(c) Net National product at factor cost
(d) Net National Product at market price
(e) Personal income.
(1 mark)
< Answ
23. Which of the following would not be included in GDP?
(a) Bobby purchases a new suit to wear at work
(b) Amok purchases a new Ford car
(c) Community Bank purchases new computers for its loan office
(d) Margaret grows tomatoes in her home garden
(e) Ford India produces but could not sell 100 cars.
(1 mark)
< Answ
24. Consumption demand does not depend upon the level of
(a) Income (b) Propensity to consume
(c) Propensity to save (d) Wealth
(e) Marginal efficiency of investment.
(1 mark)
< Answ
25. When the addition to capital goods in an economy is less than the capital consumption allowance, the
economy experiences
(a) Negative net investment (b) Zero net investment
(c) Positive net investment (d) Negative gross investment
(e) Zero gross investment.
(1 mark)
< Answ
26. If the average propensity to save (APS) is negative, then the average propensity to consume (APC) is
(a) Negative (b) Zero (c) Positive but less than one
(d) One (e) Greater than one.
(1 mark)
< Answ
27. The unemployment in the Keynesian model is caused by
(a) Demand deficiency (b) Supply deficiency
(c) Excess demand (d) Excess supply (e) Both (a) and (b) above.
(1 mark)
< Answ
28. An important difference between the approaches of the Classical economists and Keynesian economists
to achieve a macroeconomic equilibrium is that
(a) Keynesian economists actively promote the use of fiscal policy while the classical economists do
not
(b) Keynesian economists actively promote the use of monetary policy to improve aggregate
economic performance while classical economists do not
(c) Classical economists believe that monetary policy will certainly affect the level of output while
Keynesians believe that money growth affects only prices
(d) Classical economists believe that fiscal policy is an effective tool for achieving economic stability
while Keynesians do not
(e) None of the above.
(1 mark)
< Answ
29. Which of the following is not true if the central bank imposes a reserve ratio of 100%?
(a) The banking system can no longer affect the supply of money in the economy
(b) Change in the foreign exchange reserves will result in an equal change in the money supply
(c) The lending capacity of banks would narrow down to zero
(d) A rupee deposited in a bank reduces the money supply in the economy by one rupee
(e) Money supply in the economy will be equivalent to the high-powered money.
(1 mark)
< Answ
30. A contractionary fiscal policy combined with a tight monetary policy results in
I. A lower level of output.
II. A higher level of output.
III. A lower interest rate.
IV. A higher interest rate.
V. A lower or higher interest rate depending on the relative magnitude of fiscal and monetary
policies.
(a) (I) and (III) above (b) (I) and (IV) above
(c) (II) and (V) above (d) (II) and (IV) above
(e) (I) and (V) above.
(1 mark)
< Answ
31. Stagflation is a period of
I. High inflation. II. High growth of real GDP.
III. High unemployment. IV. High aggregate demand.
(a) Both (I) and (III) above (b) Both (III) and (IV) above
(c) (I), (II) and (III) above (d) (II), (III) and (IV) above
(e) All (I), (II), (III) and (IV) above.
(1 mark)
< Answ
32. Which of the following statements is/are true about the impact of inflation in the economy?
(a) Unanticipated inflation hurts the fixed income earners most
(b) Higher than expected inflation hurts creditors but benefits debtors
(c) Inflation creates inefficiency in the economy because it forces people to search for prices when
they could be doing something else
(d) Inflation can lead to a misallocation of resources because people tend to make mistakes when
there is inflation in the economy
(e) All of the above.
(1 mark)
< Answ
33. Monetized deficit refers to
(a) Fiscal deficit minus interest payments
(b) Borrowings and other liabilities of the Central Government
(c) Increase in the net RBI credit to the Central Government
(d) Fiscal deficit minus Primary deficit
(e) RBI’s credit to the commercial banks.
(1 mark)
< Answ
34. If a Government is running surplus in its budget, we can expect that public debt will be
(a) Rising (b) Falling
(c) Constant (d) Falling if there are tax cuts
(e) Falling if the government uses the surplus to repay its past debts.
(1 mark)
< Answ
35. Commercial banks create money through credit creation. Which of the following statements is true
with regard to credit creation?
(a) Credit creation by commercial banks is limited by CRR
(b) Commercial banks can create as much credit as they want
(c) RBI has no control over the credit created by Commercial banks
(d) CRR has no impact on credit creation
(e) None of the above.
(1 mark)
< Answ
36. Which of the following is a liability for a commercial bank?
(a) Reserves with the RBI (b) Loans to PSUs
(c) Credit to the Central Government (d) Deposits from the public
(e) Discounted commercial bills.
(1 mark)
<
Answer
37. All entries in the balance of payments statement should collectively sum to
>
(a) GDP of the country (b) GNP of the country
(c) Foreign exchange reserves of the country (d)
Zero
(e) Exports of the country.
(1 mark)
< Answ
38. Which of the following is true if, for a given period, there is no change in the foreign exchange
reserves of a country?
(a) Balance in the current account is equal to the balance in capital account
(b) Surplus (deficit) in the current account is equal to Deficit (surplus) in the capital account
(c) Current account balance is zero
(d) Trade balance is zero
(e) Capital account balance is zero.
(1 mark)
< Answ
39. Refer to the figure below:
During which of the following periods of the business cycle is the economy in a recovery stage?
(a) The period from A to B (b) The period from C to D
(c) The period from C to E (d) The period from A to C
(e) The period from B to C.
(1 mark)
< Answ
40. Which of the following is most likely to happen during a recession?
(a) Decrease in inventory (b) Producers will be cautiously optimistic
(c) Capacity under utilization (d) Expansion in bank credit
(e) Increasing income levels.
(1 mark)
< Answ
41. Which of the following indicates the same level of total output for any combination of inputs?
(a) Indifference curve (b) Isoquant
(c) Production possibility frontier (d) Isocost line (e) Marginal product curve.
(1 mark)
< Answ
42.In a monopoly, price is
(a) Lesser than the marginal revenue (b) Greater than the average revenue
(c) Greater than the marginal revenue (d) Equal to the total revenue
(e) Both (b) and (c) above.
(1 mark)
< Answ
43. Which of the following can result in formation of a natural monopoly?
(a) Government regulation (b) Product differentiation
(c) Economies of large scale production (d) Ownership of critical raw materials
(e) Licenses.
(1 mark)
< Answ
44. Which of the following statements is true when marginal utility is negative?
(a) Total utility is increasing (b) Total utility is at its minimum
(c) Total utility is at its maximum (d) Total utility is decreasing
(e) None of the above.
(1 mark)
< Answ
45. Which of the following cost curves is not ‘U’ shaped?
(a) Long run average cost curve (b) Long run marginal cost curve
(c) Short run average cost curve (d) Average variable cost curve
(e) Average fixed cost curve.
(1 mark)
< Answ
46. Which of the following is true if the RBI increases Cash Reserve Ratio (CRR)?
(a) Monetary liabilities of the RBI increases
(b) High-powered money in the economy decreases
(c) The value of money multiplier decreases
(d) Aggregate demand in the economy increases
(e) Price level in the economy increases.
(1 mark)
< Answ
47. Immediately following a depression,
(a) Unemployment rate increases moderately
(b) Aggregate demand decreases further because of recession
(c) There will be rapid increase in wages but less than the increase in prices of goods and services
(d) The cost of production will gradually increase because of gradual increase in wages
(e) Output will decrease rapidly.
(1 mark)
< Answ
48. The long run Phillips curve is
(a) An upward sloping curve (b) A downward sloping curve
(c) A horizontal straight line (d) A vertical straight line
(e) Indeterminable.
(1 mark)
< Answ
49. The difference between personal disposable income and personal income is
(a) Residential investment (b) Indirect taxes
(c) Subsidies (d) Transfer payments
(e) Personal taxes.
(1 mark)
< Answ
50. Monetary policy will be more effective when
(a) The economy is facing recession
(b) The private investment is more sensitive to interest rate
(c) The private investment is less sensitive to interest rate
(d) The economy is suffering from liquidity trap
(e) The economy is in boom.
(1 mark)
< Answ
51. The demand function for a product is P = 20 – 2Q. If the current market price is Rs.10, what is the price
elasticity of demand?
(a) 1 (b) 2 (c) 1.5 (d) 3
(e) None of the above.
(1 mark)
< Answ
52. Supply and demand functions for a product are
Qs = 400P – 500
Qd = 1500 – 100P
Equilibrium output for the product is
(a) 1,000 units (b) 1,100 units (c) 1,200 units (d) 1,300 units
(e) 1,400 units.
(2 marks)
< Answ
53. A major flood in India wiped out 20% of the entire world's tea production. As a result, if the price of
tea rises by 150%, the elasticity of demand for tea is
(a) – 1.33 (b) – 13.33 (c) – 3.00 (d) – 7.50
(e) None of the
above.
(1 mark)
< Answ
54. When the price is Rs.75 per unit, demand for the good is 10 units and when the price is Rs.70 per unit,
demand is 12 units. Assuming that the demand function for the good is linear, what is the theoretical
maximum possible quantity of the good that can be demanded?
(a) 100 units (b) 25 units (c) 5 units (d) 40 units
(e) 76 units.
(2 marks)
< Answ
55. A consumer with an income of Rs.100 can buy 10 units of good X and 15 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) 0.67 (b) 1.00 (c) 1.50 (d) 6.67 (e)
10.00.
(1 mark)
< Answ
56. Marginal utility of good X is 300 utils and its price is Rs.12. If price of good Y is Rs.30, the marginal
utility of good Y at equilibrium is
(a) 350 utils (b) 700 utils (c) 750 utils (d) 550 utils
(e) 600 utils.
(1 mark)
< Answ
57. Refer to the graph below. If price of good Y is Rs.2, income of the consumer is
L K L K
(a) 0.3 K (b) 0.3 L (c) K (d) L (e)
K –L.
(2 marks)
< Answ
59. If sales of VCD players increase from 20,000 to 28,000 per month as per capita income increases from
Rs.30,000 to Rs.40,000, which of the following is true?
(a) Demand for VCD players is income inelastic
(b) VCD player is a Giffen good
(c) VCD player is an inferior good, but not a Giffen good
(d) VCD player is a luxury
(e) VCD player is a necessity.
(1 mark)
< Answ
60. Production function for a firm is Q = 100L – 0.2L2. If 10 units of labor are used, average productivity
of labor is
(a) 100 units (b) 96 units (c) 98 units (d) 102 units
(e) 80 units.
(1 mark)
< Answ
61. Cost function of a firm is TC = 500 + 10Q – 0.25Q3. If the current output is 100 units, average fixed
cost is
(a) Rs.500 (b) Rs.10 (c) Rs.5 (d) Rs.100
(e) Re.0.25.
(1 mark)
< Answ
62. Long run cost function of a firm is TC = Q3 – 40Q2 + 450Q.
What is the minimum possible average cost?
(a) Rs.20 (b) Rs.60 (c) Rs.10 (d) Rs.50 (e)
Rs.30.
(2 marks)
< Answ
63. If the total cost function is TC = 200 – 4Q + 6Q2 and the output is 4 units, the marginal cost is
(a) Rs.24 (b) Rs.32 (c) Rs.44 (d) Rs.35 (e)
Rs.41.
(2 marks)
< Answ
64. For a firm operating under a perfectly competitive market, total cost at various levels of output is given
below:
Quantity (units) Total Cost (Rs.)
100 506
101 508
102 511
103 515
104 520
105 526
If the market going price of the product is Rs.5, equilibrium output for the firm is
(a) 101 units (b) 102 units (c) 103 units (d) 104 units
(e) 105 units.
(2 marks)
< Answ
65. A firm in a perfectly competitive industry is producing 100 units, its profit-maximizing quantity. The
market price of the good is Rs.2, and total fixed costs and total variable costs are Rs.50 and Rs.40
respectively. The firm's economic profit is
(a) Rs.200 (b) Rs.80 (c) Rs.100 (d) Rs.110 (e)
Rs.90.
(2 marks)
< Answ
66. Demand and cost functions of a monopolist are
P = 800 – 10Q
TC = 300Q + 2.5Q2
Profit maximizing price for the monopolist is
(a) Rs.300 (b) Rs.20 (c) Rs.600 (d) Rs.800 (e)
Rs.400.
(2 marks)
< Answ
67. The cost function of Amar & Co. is TC = 2,850 + 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) 1,750 units.
(2 marks)
< Answ
68. In a two-sector economy the consumption function (C) is equal to 8 + 0.7Y and autonomous investment
is equal to 22 MUC. The equilibrium level of income in the economy is
(a) 21 MUC (b) 30 MUC (c) 43 MUC (d) 100 MUC
(e) None of the above.
(2 marks)
< Answ
69. From the following information, compute personal savings.
Particulars Rs.
Personal income 10,000
Personal taxes 3,000
Dividends 200
Consumption 6,000
(a) Rs.4,000 (b) Rs.4,200 (c) Rs.7,000 (d) Rs.1,200
(e) Rs.1,000.
(1 mark)
< Answ
70. GDP of a country is 8,000 MUC. Value of output produced in domestic country by foreign factors of
production is 200 MUC and value of the output produced by domestic factors of production in foreign
countries is 100 MUC. GNP of the country is
(a) 7,700 MUC (b) 7,800 MUC (c) 7,900 MUC (d) 8,100 MUC
(e) 8,200 MUC.
(2 marks)
< Answ
71. Savings function of an economy is S = – 300 + 0.25 Yd. Break-even disposable income for the
economy is
(a) 75 MUC (b) 300 MUC (c) 900 MUC (d) 1,200 MUC
(e) 1,500 MUC.
(1mark)
< Answ
72. Domestic savings for a year is 1,500 MUC. If the government budget deficit is 500 MUC, private
savings for the year is
(a) 500 MUC (b) 1,000 MUC (c) 1,500 MUC (d) 2,000 MUC
(e) 2,500 MUC.
(1 mark)
< Answ
73. The consumption schedule for a two sector economy is given below:
Consumption (C) (MUC) Disposable Income (Yd) (MUC)
475.0 500
400.0 400
287.5 250
250.0 200
If savings in the economy is 100 MUC, the equilibrium income in the economy is
(a) 750 MUC (b) 700 MUC (c) 800 MUC (d) 950 MUC
(e) 1,050 MUC.
(2 marks)
< Answ
74. Given the following data, compute the current account balance for the country.
Particulars MUC
Earnings on loans and investments from abroad 500
Earnings on loans and investments to abroad 2,500
Import of services 4,000
Private remittances to abroad (transfers) 500
Private remittances from abroad (transfers) 500
Exports of services 2,000
Merchandize exports 15,000
Merchandize imports 12,000
(a) 1,000 MUC (Surplus) (b) 1,000 MUC (Deficit)
(c) 500 MUC (Surplus) (d) 500 MUC (Deficit) (e) Zero.
(2 marks)
< Answer
75. The following information is extracted from the Union Budget for the year 2003-04: >
2003-2004
Particulars Budget Estimates
(Rs. crore)
Tax revenue (net to center) 1,84,169
Non-tax revenue 69,766
Recoveries of loans 18,023
Other receipts 13,200
Borrowings and other liabilities 1,53,637
Non-plan expenditure
On revenue account (of which interest
payments is Rs.1,23,223) 2,89,384
On capital account 28,437
Plan Expenditure
On revenue account 76,843
On capital account 44,131
The Revenue Deficit for the year 2003-04 is
(a) Rs.2,53,935 cr. (b) Rs.1,12,292 cr.
(c) Rs.1,53,637 cr. (d) Rs.4,38,795 cr. (e) Rs.1,02,932 cr.
(2 marks)
< Answer
76. The following information is available with respect to an economy: >
Particulars MUC
Monetary liabilities or central bank 3,300
Government money 100
High-powered money in the economy is
(a) 3,000 MUC (b) 3,100 MUC (c) 3,200 MUC (d) 3,300 MUC
(e) 3,400 MUC.
(1 mark)
< Answer
77. Refer to the graph below: >
Particulars Rs.cr.
GDP at factor cost 2,000
Net factor income from abroad 200
Indirect taxes 542
Subsidies 450
(a) Rs.1,740 cr. (b) Rs.1,658 cr. (c) Rs.2,292 cr. (d) Rs.2,342 cr.
(e) Rs.3,002 cr.
(1 mark)
END OF QUESTION PAPER
Suggested Answers
Economics (MB141) : April 2004
1. Answer : (b) < TOP >
Reason : I. When a local rent control ordinance establishes a ceiling of Rs.3500 per room, which is
much higher than the equilibrium rent, it will not affect the equilibrium rent and quantity of
rooms available.
II. If the government announces a minimum support price of Rs.9, which is more than the
equilibrium price of wheat, the support price reduces quantity demanded and increases
quantity supplied. This will result in a surplus in the market.
III. When a minimum wage is enforced which is below the prevailing market equilibrium wage
of Rs.100 per day, it will have no effect on labor hours.
(a) Is not the answer because in I above
(b) Is the answer because there is a surplus in the market in II above
(c) Is not the answer because there is a surplus in II, but no surplus in I above
(d) Is not the answer because there is no surplus in I and III above
(e) Is not the answer because there is a surplus in the market II but no surplus in III above.
2. Answer : (b) < TOP >
Reason : The law of demand is directly derived from the law of diminishing marginal utility. When the
price of the good falls, the consumer buys more of the good so as to equate the marginal utility to
the lower price. The downward sloping marginal utility curve can be converted into the downward
sloping demand curve.
(a) Is not the answer because indifference curve doesn’t resemble the demand curve of a
consumer. An indifference curve depicts the various alternative combinations of the goods,
which provide same level of satisfaction to the consumer.
(b) Is the answer because marginal utility curve resembles the demand curve of a consumer.
(c) Is not the answer because budget line is not same as the demand curve of a consumer. Budget
line represents all the combinations of the two commodities, which the consumer can buy by
spending his entire income for the given prices of the two commodities.
(d) Is not the answer because total utility curve is not same as the demand curve of a consumer.
Total utility curve is a curve representing the sum of all the utilities derived from the total
number of units consumed.
(e) Is not the answer because average utility curve is not same as the demand curve of a
consumer.
3. Answer : (c) < TOP >
Reason : Consumer surplus is the excess of the price that a consumer is willing to pay for the commodity
over and above what he actually pays for it.
(a) Is not the answer because Parma is offered a job below the price what she expected. So, this
doesn’t reflect the consumer surplus.
(b) Is not the answer because Raju refused to buy the same shirt at Rs.180,but he pays for the
same shirt a sale price of Rs.150. So, this doesn’t reflect the consumer surplus.
(c) Is the answer because Tendulkar is ready to pay Rs.8 for a pepsi, but he gets it free. This is a
case of consumer surplus.
(d) Is not the answer because the price of the burgers has reduced by 50 percent. This is not a
case of consumer surplus.
(e) Is not the answer because Rajesh has a marginal cost of Rs. 500 for a unit of output and sells
that unit at Rs.600.This is not the excess of the price that a consumer is willing to pay for the
commodity over and above, what he actually pays for it. So this is not a case for a consumer
surplus.
4. Answer : (c) < TOP >
Reason : When the prices of consumer electronics have dropped, while consumer spending on these
electronic goods has increased, the demand for consumer electronic goods is relatively elastic. In
this case the percentage change in quantity demanded is greater than the percentage change in price
and the value of price elasticity of demand will be greater than one.
(a) Is not the answer because in case of a perfectly inelastic demand, if the price of a good
decreases, consumer spending on these goods has to be decreased.
(b) Is not the answer because in case of a relatively inelastic demand, if the price of a good
decreases, consumer spending on these goods has to be decreased.
(c) Is the answer because in case of a relatively elastic demand, if the price of a good decreases,
consumer spending on these goods has to be increased.
(d) Is not the answer because in case of a unitary inelastic demand, if the price of a good
decreases, consumer spending on these goods remain constant.
(e) Is not the answer because in case of a perfectly elastic demand, if the price of a good
decreases, consumer spending on these goods undetermined.
5. Answer : (d) < TOP >
Reason : Since Coke and Pepsi are perfect substitutes, (i.e. gives same amount of satisfaction) Ramesh
would consume the one that is available at a cheaper price. With the increase of price of Pepsi,
Coke becomes cheaper. Hence, Ramesh would spend his entire income on Coke. Hence the correct
answer is (d).
6. Answer : (b) < TOP >
Reason : When the price of good X doubles, the consumer can buy less of the good X with the given
income, but can buy same quantity of another good. Hence, the the Y-intercept remains the same but the
X-intercept falls.
(a) Is not the answer because the budget line will not shift towards left
(b) Is the answer because the Y-intercept remains the same but the X-intercept falls
(c) Is not the answer because the Y-intercept remains the same but the X-intercept does not increase
(d) Is not the answer because the budget line will not shift towards right
(e) Is not the answer because the budget line will be affected.
(e) Is not the answer because none of the above cannot be the answer.
Px
Reason : Slope of the budget line = Py
If the prices of both the goods is the same, slope of the budget line will be 1.
56. Answer : (c) < TOP >
Reason : MUx/Px = MUy/Py
300/12 = MUy/30
9000/12 = 750.
57. Answer : (b) < TOP >
Reason : Budget =Px x Qx + Py x Qy = 0 + 2Qy = Rs.20.
58. Answer : (d) < TOP >
Reason : The MRTS is equal to the ratio of the marginal productivities of the two products –
MPL/MPK
6K0.3L-0.7/6K-0.7L0.3
K0.3L-0.7/K-0.7L0.3
K/L
59. Answer : (d) < TOP >
Reason : When income increases by 33.33%, demand for VCD players increase by 40%. Therefore, income
elasticity of demand for VCD players is 1.20.
(a) Is not the answer since the demand is elastic as the income elasticity is 1.20.
(b) Is not the answer since the VCD player is a normal good as income elasticity is
positive.
(c) Is not the answer since the VCD player is a normal good as income elasticity is
positive.
(d) Is the answer since income elasticity is positive and greater than one.
(e) Is not the answer since income elasticity is greater than one. For necessities income
elasticity of demand is positive but less than one.
60. Answer : (c) < TOP >
∂ ( Q 2 − 40Q + 450 )
=0
Or, ∂Q
or, 2Q – 40 = 0
or, 2Q = 40.
40
= 20
or, Q = 2
When Q = 20, LAC = (20)2 – 40 (20) + 450
= 400 – 800 + 450
= 50.
63. Answer : (c) < TOP >
Reason : When Q = 4, MC = 12Q – 4 = 12(4) – 4 = 44.
64. Answer : (d) < TOP >
Reason :
Quantity Marginal Cost (Rs.)
100 --
101 2
102 3
103 4
104 5
105 6
A firm would be maximizing profits when MR = MC. Under perfect competition MR is equal
to P. Therefore, the firm would maximize profits by producing 104 units where MR = MC.
65. Answer : (d) < TOP >
Reason : C = α + βYd
Where, α = autonomous consumption and β = marginal propensity to consume (MPC)
β = ∆C/∆Yd = (475 – 400)/100 = 0.75
If MPC = 0.75, autonomous consumption:
475 = a + 0.75(500)
Or, a = 100.
Thus, C = 100 + 0.75Yd
Or, S = – 100 + 0.25Yd
When S = 100, 100 = –100 + 0.25Yd
or, 200 = 0.25Yd
or, Yd = 800
Since the economy is a two sector economy, Y = Yd (disposable income).
Reason :
% ∆Q
EP = % ∆ P
%∆Q = EP × %∆P
= –3 × 5 = –15%
∴ Impact on sales of luxury car = –15%
Sales in the next year = 1000 × (1 – 0.15)
= 850 units.