Question 1

Match the characteristics with the market structure: (a) a firm has control over its output but must consider competitors reactions; (b) a firm chooses output to maximise profit. Which pairing is correct?

Accepted Answer

Introduction / Context: Market structures differ in the number of firms, product type and the degree of control each firm has over price and output. This matching question combines two specific descriptions and asks you to connect them with the appropriate market structures. Understanding these differences is important for analysing pricing strategies and competitive behaviour in microeconomics. Given Data / Assumptions: Characteristic (a): a firm has control over its own output, but must consider the reactions of competitors. Characteristic (b): a firm chooses its level of output to earn maximum profit. We need to match these characteristics with known market structures such as pure competition, monopolistic competition, oligopoly and pure monopoly. Firms are assumed to behave rationally to maximise profits when they have discretion over output. Concept / Approach: An oligopoly is a market structure with a few large firms, where each firm has some control over its output and price but must consider the reactions of rivals. Interdependence is a key feature of oligopoly. A pure monopoly is a single seller in the market. The monopolist has full control over output and price and typically chooses output where marginal revenue equals marginal cost in order to maximise profit. Pure competition involves many small firms that are price takers, so an individual firm does not consider rival reactions in the same strategic way. Step-by-Step Solution: 1. For characteristic (a), the mention of reacting to competitors clearly points to a market with a few firms that are interdependent. 2. This is the classic description of an oligopoly, where each firm must anticipate or react to the strategic decisions of its rivals. 3. For characteristic (b), choosing output to maximise profit applies most directly to a firm that has full control over price and quantity. 4. A pure monopolist is the sole seller and sets output and price to maximise profit by equating marginal revenue and marginal cost. 5. Therefore the correct pairing is (a) oligopoly and (b) pure monopoly. Verification / Alternative check: Pure competition does not fit characteristic (a) because individual firms are price takers and do not worry about individual rivals; they focus on market price. Monopolistic competition has many firms with differentiated products, but strategic interdependence is less intense than in oligopoly. For characteristic (b), monopoly is most strongly associated with output and price choice to maximise profit, whereas in pure competition firms have no power over price, only over quantity at the prevailing price. Why Other Options Are Wrong: Option A: Pure competition is not about strategic reaction to competitors, because there are many firms and each is too small to influence market conditions. Option B: Monopolistic competition does not show the same level of interdependence described in characteristic (a), and oligopoly is not uniquely linked to the second characteristic. Option C: A pure monopolist is not best matched with the idea of taking competitors reactions into account because by definition there are no close competitors. Option E: Pure competition again does not involve conscious reaction to competitors in the strategic sense and therefore does not match characteristic (a). Common Pitfalls: A frequent error is to assume that profit maximisation only applies to monopoly and not to other market structures. In fact, all rational firms aim to maximise profit, but the question highlights the situation where the firm has full control over output and price, which is most clearly associated with pure monopoly. Another confusion is between monopolistic competition and oligopoly, so always remember that interdependence and strategic behaviour are defining features of oligopoly. Final Answer: (a) Oligopoly, (b) Pure monopoly

Question 2

In short run cost analysis, what is the usual overall shape of the short run average cost (SAC) curve for a firm?

Accepted Answer

Introduction / Context: The short run average cost curve is a fundamental concept in microeconomics. It combines average fixed cost and average variable cost to show total cost per unit at different output levels. Understanding its shape helps to explain how firms experience economies and diseconomies of scale in the short run and how they decide on optimal output levels. Given Data / Assumptions: We are analysing a single firm in the short run. At least one factor, such as capital, is fixed, while others, such as labour, vary. Average cost per unit is calculated as total cost divided by quantity produced. The firm experiences increasing returns initially and diminishing returns later. Concept / Approach: In the short run, average fixed cost falls continuously as output increases because the fixed cost is spread over more units. Average variable cost falls at first due to better utilisation and specialisation but eventually rises due to diminishing marginal returns. The short run average cost curve is the sum of average fixed cost and average variable cost at each output level, and it typically falls at first, reaches a minimum, and then rises, forming a U shape. Step-by-Step Solution: 1. At low output levels, fixed cost is spread over very few units, so average cost is high. 2. As output increases, average fixed cost falls sharply and average variable cost also falls due to improved efficiency and specialisation. 3. This combined effect makes short run average cost decline in the initial range. 4. Beyond a certain level, diminishing marginal returns to the variable factor cause average variable cost to rise. 5. When the increase in average variable cost outweighs the decline in average fixed cost, short run average cost starts to rise, creating a U shaped curve. Verification / Alternative check: Standard diagrams in microeconomics textbooks always show the short run average cost curve as U shaped, with marginal cost intersecting it at its minimum point. Numerically, you can verify this by computing average cost at different output levels when fixed cost is constant and variable cost per unit first falls and then rises. Why Other Options Are Wrong: Option B and C: V and X shapes do not capture the initial fall and later rise of costs in a smooth pattern; they suggest different or abrupt behaviours. Option D: A W shape would mean costs fall, rise, fall and rise again, which is not the standard outcome described by the law of variable proportions. Option E: A horizontal line would imply that average cost is constant regardless of output, which is inconsistent with the underlying cost structure in the short run. Common Pitfalls: Students may confuse the short run average cost curve with the long run average cost curve, which may also appear U shaped but for different reasons related to economies and diseconomies of scale. Another mistake is to focus only on variable cost and ignore the effect of spreading fixed costs. Always remember that in the short run, the combination of falling average fixed cost and changing average variable cost gives the U shaped average cost curve. Final Answer: U shape

Question 3

In the Mid Term Review of the Foreign Trade Policy released in December 2017, incentive rates under the Merchandise Exports from India Scheme and the Services Exports from India Scheme were increased by how many percentage points each?

Accepted Answer

Introduction / Context: India uses various export promotion schemes to support goods and services exporters. The Merchandise Exports from India Scheme and the Services Exports from India Scheme provide incentives in the form of duty credit scrips. In December 2017, a Mid Term Review of the Foreign Trade Policy was released, and one of its key announcements was an increase in incentive rates under these schemes for certain sectors and products. Given Data / Assumptions: The Mid Term Review was released in December 2017. It focused on revising parts of the Foreign Trade Policy for the period 2015 to 2020. Incentive rates under Merchandise Exports from India Scheme and Services Exports from India Scheme were adjusted. The question asks specifically about the magnitude of increase in incentive rates for these schemes. Concept / Approach: The Merchandise Exports from India Scheme provides incentives to exporters of notified goods, while the Services Exports from India Scheme covers notified services. In the Mid Term Review, to support labour intensive and small and medium enterprises, the government announced an increase of 2 percentage points in existing incentive rates for many products and services under both schemes. Therefore, the correct answer is a 2 percent increase each, not a much larger jump such as 5 or 10 percent. Step-by-Step Solution: 1. Identify the policy document mentioned: Mid Term Review of the Foreign Trade Policy in December 2017. 2. Recognise that the question refers to revisions in incentive rates, not to entirely new schemes. 3. From government announcements, note that the main change was an increase of 2 percentage points in selected incentive rates. 4. These increases applied under both the Merchandise Exports from India Scheme and the Services Exports from India Scheme. 5. Therefore, the correct choice is a 2 percent increase for each scheme. Verification / Alternative check: Official press releases and summaries of the Mid Term Review highlight that the total additional incentive outlay was several thousand crore rupees due to a 2 percentage point increase in rate for a large number of labour intensive product groups and certain services. If the increase had been 5 percent or more, the financial impact and media coverage would have been much larger and significantly different from the figures commonly quoted. Why Other Options Are Wrong: Option A and B: Increases of 5 percent or 10 percent would have been unusually large and are not supported by the policy document. Option D: A 15 percent increase for each scheme would imply a radical change in export incentive structure, which did not occur in the Mid Term Review. Option E: The Mid Term Review did announce changes to incentive rates; it was not a case of leaving them unchanged. Common Pitfalls: A common mistake is to confuse the absolute incentive rate with the incremental increase. For example, some product groups moved from 5 percent to 7 percent, which is a 2 percentage point increase but might be mis remembered as 5 or 7 percent change. Always distinguish between the rate itself and the amount by which it is revised. Another error is mixing up this review with separate announcements for other schemes or later years. Final Answer: 2 percent increase for each scheme

Question 4

Market imperfections in an economy are reflected in which of the following conditions?

Accepted Answer

Introduction / Context: Real world markets rarely match the ideal conditions of perfect competition. Various imperfections prevent prices and resources from adjusting freely, which can lead to inefficiency and welfare losses. This question asks which features reflect such market imperfections in an economy. Given Data / Assumptions: Market imperfections refer to deviations from the conditions of perfect competition. Price rigidity means that prices do not adjust quickly to changes in demand or supply. Factor immobility means that labour and capital cannot easily move between regions or sectors. Lack of specialisation suggests that resources are not allocated to tasks where they are most efficient. Concept / Approach: Perfect competition assumes many buyers and sellers, free entry and exit, perfect information, homogeneous products and full mobility of factors. When these conditions fail, markets become imperfect. Price rigidity can prevent markets from clearing quickly. Factor immobility stops labour and capital from moving to where they are most productive. Lack of specialisation implies that comparative advantage is not fully exploited. Each of these factors is a sign of market imperfection. When all are present, the degree of imperfection is even greater. Step-by-Step Solution: 1. Compare each condition listed with the assumptions of perfect competition. 2. Price rigidity conflicts with the idea that prices adjust freely to balance demand and supply. 3. Factor immobility contradicts the assumption that resources move to their best paying uses. 4. Lack of specialisation means that economies of scale and comparative advantage are not fully realised. 5. Therefore all three conditions are indicators of market imperfections, so the answer is that all are correct. Verification / Alternative check: You can verify by thinking about labour markets where workers cannot easily move from low wage regions to high wage regions, or product markets where prices remain fixed for long periods despite demand changes. These situations clearly differ from the textbook model of a perfectly competitive market and show the presence of frictions and rigidities that economists describe as imperfections. Why Other Options Are Wrong: Option A, B and C: Each focuses on only one condition and ignores the fact that all the listed conditions are associated with market imperfections. Option E: It is incorrect to say that none of these conditions is related to market imperfections, because they are widely used examples of real world frictions in economic analysis. Common Pitfalls: Students sometimes equate market imperfection only with monopoly or oligopoly and forget that imperfections can arise from information problems, rigidities and institutional constraints. Another mistake is to think that if one assumption of perfect competition fails, the market is completely non functional, but in reality markets can function with varying degrees of imperfection. Exam questions often test your ability to recognise multiple sources of imperfection at the same time. Final Answer: All of these conditions together reflect market imperfections

Question 5

In the context of financial regulation in India, the Securities and Exchange Board of India is what type of body?

Accepted Answer

Introduction / Context: The Securities and Exchange Board of India is the main regulator for securities markets in India. Understanding its legal status is important for questions on Indian economy, governance and financial regulation. The type of body determines its powers, independence and relationship with other institutions. Given Data / Assumptions: The question refers specifically to the legal nature of the Securities and Exchange Board of India. Possible classifications include constitutional, statutory, advisory and non statutory. Constitutional bodies are created by the Constitution, for example the Election Commission. Statutory bodies are created by an Act passed by Parliament or a state legislature. Concept / Approach: The Securities and Exchange Board of India was originally set up in the late nineteen eighties and was later given statutory powers through the Securities and Exchange Board of India Act, nineteen ninety two. A statutory body is one that derives its powers and responsibilities from a specific law. This gives the regulator authority to frame regulations, conduct inspections, impose penalties and protect investor interests. Step-by-Step Solution: 1. Recall that constitutional bodies are mentioned explicitly in the Constitution of India, such as the Comptroller and Auditor General and the Union Public Service Commission. 2. The Securities and Exchange Board of India is not listed in the Constitution. 3. Instead, there is a separate law called the Securities and Exchange Board of India Act that defines its structure and powers. 4. A body created by such a specific Act of Parliament is called a statutory body. 5. Therefore, the Securities and Exchange Board of India is a statutory body established by an Act of Parliament. Verification / Alternative check: You can confirm this by noting that many exam guides group the Securities and Exchange Board of India together with other statutory regulators such as the Reserve Bank of India for banking, the Insurance Regulatory and Development Authority for insurance and the Pension Fund Regulatory and Development Authority for pension funds. They are all created and given powers by dedicated Acts, not by the Constitution. Why Other Options Are Wrong: Option A: The Securities and Exchange Board of India does not appear in any Article of the Constitution as a constitutional body. Option B: It is not merely advisory; it has binding regulatory powers and can take enforcement action. Option D: A non statutory body would lack formal legal authority, which is not true for a major market regulator. Option E: It is a permanent regulator, not a temporary committee, and plays an ongoing role in supervising capital markets. Common Pitfalls: Students sometimes assume that all powerful institutions are constitutional, which is not correct. Many important regulators are statutory bodies. Another confusion arises from mixing advisory councils, which may lack enforcement powers, with statutory regulators. Always check whether the body has a dedicated Act governing its powers and functions; if so, it is typically a statutory body. Final Answer: Statutory body established by an Act of Parliament

Question 6

According to official estimates, what was the real Gross Domestic Product growth rate of India in the financial year 2016 to 2017?

Accepted Answer

Introduction / Context: Real Gross Domestic Product growth rate is a widely used indicator of how fast an economy is expanding after adjusting for inflation. For India, annual growth figures are frequently asked in general knowledge and Indian economy examinations. This question focuses on the growth rate in the financial year 2016 to 2017. Given Data / Assumptions: The period under consideration is financial year 2016 to 2017. We refer to real GDP at constant prices, not nominal GDP. Official statistics from the Central Statistics Office reported the growth rate. The options list several possible percentage values close to each other. Concept / Approach: Real GDP growth measures the percentage change in the value of goods and services produced in the economy after adjusting for price changes. The financial year 2015 to 2016 saw a higher growth rate, while 2016 to 2017 recorded a slightly lower but still strong growth. Official data indicated that real GDP growth in 2016 to 2017 was around 7.1 percent. Therefore, among the options provided, 7.10 percent growth is the correct answer. Step-by-Step Solution: 1. Recall the trend in India growth during the mid twenty ten period, with growth above 7 percent. 2. For 2015 to 2016, real GDP growth was higher, at around 7.6 percent. 3. Due to various factors, including policy changes, the growth rate in 2016 to 2017 eased slightly. 4. Official data released by the Central Statistics Office reported growth of about 7.1 percent in that financial year. 5. Therefore, select 7.10 percent growth as the correct option. Verification / Alternative check: You can verify this by noting that economic surveys and budget documents from that period refer to real GDP growth moderating to about 7.1 percent in 2016 to 2017 after being higher in the previous year. Other figures such as 6.1 percent or 6.7 percent refer to different quarters or later years and should not be confused with the annual growth rate for 2016 to 2017. Why Other Options Are Wrong: Option A: 6.10 percent is lower than the figure widely reported for that year and typically corresponds to later periods. Option C: 8.10 percent would imply an exceptionally high growth rate which was not achieved in that particular financial year. Option D: 6.70 percent is closer but still not the official estimate for 2016 to 2017. Option E: 5.50 percent is too low in comparison with the actual recorded rate at that time. Common Pitfalls: Candidates often confuse growth rates for different years or mix quarterly and annual figures. Because many numbers are close, such as 7.2, 7.4 or 7.6, it is easy to mis remember. It helps to link each figure with major policy events or economic conditions to create a mental timeline and avoid such confusion. Final Answer: 7.10 percent growth

Question 7

If a firm in which market structure has zero costs or only fixed cost, the equilibrium quantity supplied is determined at the point where marginal revenue becomes zero?

Accepted Answer

Introduction / Context: This question combines the idea of cost structure with the condition for profit maximisation in different market forms. In general, firms choose output where marginal revenue equals marginal cost. However, if marginal cost is zero because there are no variable costs, the special case requires attention to where marginal revenue itself becomes zero. This reasoning is most straightforward in the context of a monopoly. Given Data / Assumptions: The firm has zero costs or only fixed costs, so marginal cost is effectively zero. The firm faces a downward sloping demand curve, so marginal revenue declines as quantity increases. We consider different market structures: perfect competition, monopoly, oligopoly and monopolistic competition. The question asks which structure fits the description that equilibrium quantity is determined where marginal revenue becomes zero. Concept / Approach: In monopoly, the firm is the sole seller and faces the entire market demand curve. It chooses output by setting marginal revenue equal to marginal cost. If marginal cost is zero, the profit maximising condition becomes marginal revenue equal to zero. At that quantity, any further increase in output would reduce total revenue while cost remains zero, so profit starts to fall. In perfect competition, each firm takes price as given and marginal revenue equals price, and zero marginal cost would lead to unbounded output in theory if there are no capacity limits. Therefore the special case described in the question fits a monopoly with zero marginal cost. Step-by-Step Solution: 1. Start from the general rule for profit maximisation: choose output where marginal revenue equals marginal cost. 2. In this question, marginal cost is zero because costs are either zero or only fixed costs with no variable component. 3. The condition becomes marginal revenue equal to zero for the profit maximising quantity. 4. A monopoly faces a downward sloping demand curve, so marginal revenue declines and eventually becomes zero at a certain quantity. 5. At that point, total revenue is at a maximum, and with zero marginal cost, profit is also maximised, so a monopolist will choose this quantity. Verification / Alternative check: Draw a simple linear demand curve with corresponding marginal revenue. If cost is zero, profit equals total revenue. Total revenue is maximised where marginal revenue is zero. Therefore the monopolist chooses that quantity. In contrast, under perfect competition, price equals marginal revenue which is constant for each firm. With zero marginal cost and no capacity limits, a competitive firm would try to expand output indefinitely, which is unrealistic and not the scenario described by the question. Why Other Options Are Wrong: Option A: In perfect competition, marginal revenue equals price, and with zero marginal cost, profit increases as long as more units can be sold at the given price, so marginal revenue does not go to zero in the same sense. Option C and D: In oligopoly and monopolistic competition, the analysis of marginal revenue exists, but the question uses a standard textbook reasoning most clearly applied to monopoly where a single firm faces all demand. Option E: Bilateral monopoly involves one buyer and one seller and is not the usual context for the simple marginal revenue equal to zero condition with zero marginal cost. Common Pitfalls: A typical confusion is to forget that marginal cost is zero and still try to set marginal revenue equal to a positive marginal cost. Another mistake is to think that the logic of marginal revenue equal to zero for total revenue maximisation only applies to revenue and not profit, but when costs are zero, revenue and profit maxima occur at the same point. Always carefully read the cost conditions given in the question before applying standard rules. Final Answer: Monopoly

Question 8

In short run cost analysis, what is the usual overall shape of the short run marginal cost (SMC) curve?

Accepted Answer

Introduction / Context: The short run marginal cost curve plays a central role in microeconomic analysis of firm behaviour. It shows the additional cost of producing one more unit of output. Its shape is linked to the law of diminishing marginal returns and is crucial for understanding how firms decide on output levels and how average cost behaves. Given Data / Assumptions: We consider a single firm in the short run with at least one fixed input. Marginal cost is the change in total cost when output is increased by one unit. The firm experiences rising marginal productivity initially and then diminishing marginal returns. Cost curves are smooth and continuous. Concept / Approach: When a firm begins production, adding more units of the variable input such as labour to a fixed amount of capital initially leads to more efficient use of resources and rising marginal product, so marginal cost falls. After a certain point, adding more units of the variable input leads to congestion and diminishing returns, so marginal product falls and marginal cost rises. This combination of initial decline and later increase in marginal cost gives the short run marginal cost curve a U shape. Step-by-Step Solution: 1. Marginal cost is inversely related to marginal product when input prices are constant. 2. At low levels of production, marginal product increases due to better utilisation of fixed inputs and division of labour. 3. Higher marginal product means more output from each additional unit of input, so the extra cost per unit of output falls and marginal cost declines. 4. Eventually, the law of diminishing marginal returns sets in and marginal product begins to decrease. 5. As marginal product falls, more input is needed to produce an extra unit, so the cost of that extra unit rises, and marginal cost increases, completing the U shape. Verification / Alternative check: If you plot marginal product and marginal cost together, marginal cost is falling when marginal product is rising and rising when marginal product is falling, provided the wage rate or variable input price is constant. This relationship is derived mathematically, but conceptually it follows from the idea that each extra worker adds less and less to total output beyond a certain point, which makes each additional unit of output more expensive to produce. Why Other Options Are Wrong: Option B and C: V and X shapes do not accurately represent the gradual fall and rise in marginal cost associated with the law of variable proportions. Option D: A W shaped marginal cost curve would imply multiple cycles of falling and rising marginal cost, which is not the standard assumption in basic microeconomic theory. Option E: A horizontal marginal cost curve would mean that each extra unit of output costs exactly the same, which does not reflect the usual effects of diminishing returns in the short run. Common Pitfalls: Students sometimes mix up the shapes of average and marginal cost curves, but it is important to know that both are typically U shaped in the short run for similar reasons related to diminishing returns. Another mistake is to think that marginal cost must start at zero or negative values, but in practice it starts at some positive level and then falls and rises as production expands. Final Answer: U shape

Question 9

In the Constitution of India, the subject \"Betting and gambling\" is placed in which list of the Seventh Schedule?

Accepted Answer

Introduction / Context: The Seventh Schedule of the Constitution of India divides legislative powers between the Union and the states. Some subjects are of national importance, while others are better handled by state governments. This question asks you to identify the list in which the subject of betting and gambling appears, which is relevant for understanding federal powers and law making in areas related to games of chance and lotteries. Given Data / Assumptions: We refer to the Seventh Schedule of the Constitution of India. There are three main lists: Union List, State List and Concurrent List. Each list allocates specific subjects to the Union or states or both. Betting and gambling is one of the subjects explicitly mentioned. Concept / Approach: The Union List covers matters on which only Parliament can legislate, such as defence and foreign affairs. The State List includes subjects like police, public order and local government, where states are considered better placed to legislate. The Concurrent List provides for shared legislative competence. Betting and gambling, including lotteries other than those run by the Union, are placed in the State List. This reflects the idea that such social and moral issues are often regulated differently in different states in accordance with local values and conditions. Step-by-Step Solution: 1. Identify that the question is about the constitutional allocation of legislative power, not about policy advantages or disadvantages. 2. Recall that law and order, police and social offences often fall in the State List. 3. Betting and gambling is grouped with such subjects as an area where state governments can pass laws according to local preferences. 4. The Union List deals with national issues like defence, currency and foreign trade, which are not directly related to betting and gambling at the state level. 5. Therefore, betting and gambling is placed in the State List of the Seventh Schedule. Verification / Alternative check: You can verify this by noting that different Indian states have different laws regarding lotteries, horse race betting and online gambling, which would not be possible if the subject were exclusively under the Union List. The presence of state specific laws and court cases confirms that this is a state subject under the Constitution. Why Other Options Are Wrong: Option A: If betting and gambling were in the Union List, only Parliament could legislate, but in practice states also pass their own laws on this subject. Option C: There is no such category as a Global List in the Indian constitutional framework. Option D: Concurrent List subjects can be legislated by both Union and state, but betting and gambling is specifically mentioned under the State List. Option E: Although some aspects of gambling may involve criminal law, there is no separate list in the Seventh Schedule solely for criminal law subjects. Common Pitfalls: Students sometimes guess Concurrent List because they believe Union and states both deal with gambling. However, the Constitution clearly lists betting and gambling under the State List, and any central law must usually rely on other entries or special provisions. Another pitfall is confusing betting and gambling with lotteries run by the Union, which can involve Union powers, but the general subject at state level remains under the State List. Final Answer: State List

Question 10

When the productive capacity of the economic system of a state is inadequate to create a sufficient number of jobs for all people who are willing and able to work, this situation is called _______.

Accepted Answer

Introduction / Context: Structural unemployment is an important concept in economics and Indian economy questions because it explains why joblessness can persist even when people are actively seeking work. This question tests whether the learner can correctly identify the type of unemployment that arises when the productive capacity and structure of an economy are not sufficient to create enough suitable jobs for everyone who wants to work. Understanding this concept is useful for interpreting long term unemployment, labour market reforms and development policies. Given Data / Assumptions: - The economic system of a state does not have adequate productive capacity. - There are not enough jobs for all willing and able workers. - The shortage of jobs is due to the structure and capacity of the economy, not just seasonal or temporary factors. - We are asked to name the type of unemployment that best describes this situation. Concept / Approach: Unemployment can be classified into several types such as structural, seasonal, disguised and cyclical unemployment. Structural unemployment arises when there is a mismatch between the skills of workers and the jobs available or when the economy is not capable of providing sufficient employment opportunities because of its underlying structure. Seasonal unemployment occurs only during a particular season, cyclical unemployment is linked to ups and downs in the business cycle, and disguised unemployment occurs when more people are employed than actually needed for a given level of output. Since the question clearly mentions inadequate productive capacity of the whole system, the relevant concept is structural unemployment. Step-by-Step Solution: Step 1: Focus on the phrase “productive capacity of the economic system of a state is inadequate”. This indicates a deep, long term limitation in the economy, not a short term or seasonal issue. Step 2: Recognise that when an economy cannot generate enough jobs for all willing and able workers because of its structure, the type of unemployment is typically called structural unemployment. Step 3: Compare this with seasonal unemployment, which only appears during particular seasons, such as off season in agriculture or tourism, and not because the entire economic system lacks capacity. Step 4: Compare it with disguised unemployment, where more people are employed than necessary, often in agriculture, but there are still jobs being done even if productivity per worker is low. Step 5: Compare it with cyclical unemployment, which appears during recessions and disappears during booms, whereas the question refers to inadequate capacity in general, not temporary downturns. Step 6: From these comparisons, it is clear that the correct term for unemployment due to inadequate productive capacity of the system is structural unemployment. Verification / Alternative check: A quick check is to see whether improving macroeconomic demand alone would solve the problem. If unemployment remains high even when demand is strong because the economy lacks the right industries, infrastructure or skills, then the situation is structural. In that case, policies like retraining workers, changing industrial structure, and building infrastructure are needed. This matches the situation described in the question, which is about inadequate productive capacity, so structural unemployment is confirmed as the correct choice. Why Other Options Are Wrong: Seasonal unemployment is wrong because it results from predictable seasonal patterns in jobs, such as harvesting periods, not from fundamental inadequacy of productive capacity. Disguised unemployment is wrong because it refers to surplus labour where some workers could be removed without reducing output, usually in agriculture, and not necessarily to a shortage of jobs overall. Cyclical unemployment is wrong because it is associated with recessions and booms in the business cycle, not with the long term structure and capacity of the economy. Common Pitfalls: Learners often confuse structural unemployment with disguised unemployment because both can be long term. However, disguised unemployment is about too many people sharing a given amount of work, while structural unemployment is about too few suitable jobs compared to the labour force. Another common mistake is to think of any long term unemployment as cyclical, forgetting that cyclical unemployment should disappear as the economy recovers, whereas structural unemployment persists until deeper reforms are made. Reading the phrase “productive capacity of the economic system is inadequate” carefully helps avoid these mistakes. Final Answer: The situation where the productive capacity of the economic system of a state is inadequate to create enough jobs is called structural unemployment.

Question 11

In India, the fiscal deficit target for the Financial Year 2017–18 was set at what percentage of Gross Domestic Product (GDP)?

Accepted Answer

Introduction / Context: Fiscal deficit is a key indicator of how much the government is borrowing in a given year to finance its expenditure. Competitive exams in India frequently ask the exact fiscal deficit targets announced in Union Budgets because they reflect the government policy stance on consolidation, borrowing and macroeconomic stability. This question focuses on the fiscal deficit target for the Indian Financial Year 2017–18, expressed as a percentage of Gross Domestic Product (GDP). Knowing this figure helps learners connect economic policy, fiscal discipline and exam oriented facts. Given Data / Assumptions: - The context is the Indian Financial Year 2017–18. - We are asked about the fiscal deficit target as a percentage of GDP. - Options include 4.20%, 3.20%, 2.20% and 4.00%. - We assume the question refers to the official Union Budget announcements for that year. Concept / Approach: Fiscal deficit is defined as total expenditure of the government minus the sum of its revenue receipts and non debt capital receipts. When expressed as a percentage of GDP it shows how large government borrowing is relative to the size of the economy. For several years India has followed a medium term plan to gradually reduce fiscal deficit. For 2017–18, the Union Budget set a specific target, which is a commonly tested static fact. The approach to answer the question is to recall or logically eliminate unlikely values based on recent trends in deficit reduction, which had brought the target close to 3% of GDP. Step-by-Step Solution: Step 1: Recall that in the period leading up to 2017–18 the government had been reducing the fiscal deficit gradually toward a target close to 3% of GDP. Step 2: Compare the options. Values like 4.20% and 4.00% are relatively high and do not match the policy of gradual consolidation in that phase. Step 3: A figure such as 2.20% appears too low for that period, because the government had not yet reached such a small deficit ratio. Step 4: The option 3.20% fits both the trend and the widely cited budget target for 2017–18. Step 5: Therefore, the correct answer is that the fiscal deficit target for 2017–18 was 3.20% of GDP. Verification / Alternative check: To verify, consider the general consolidation path: after some years of higher deficits above 4% following the global financial crisis and domestic slowdowns, the government moved to approximately 3.9%, then 3.5%, and then closer to around 3.2% of GDP. This trajectory is consistent with a policy goal under the Fiscal Responsibility and Budget Management framework. Since the number closest to this path in the choices is 3.20%, it provides an internal consistency check and supports the chosen answer. Why Other Options Are Wrong: 4.20% is wrong because it is higher than the deficit levels targeted in that period and would reflect more expansionary borrowing than what was planned. 2.20% is wrong because such a low fiscal deficit has not been the target in recent decades and would have required far more aggressive fiscal tightening than was actually undertaken. 4.00% is wrong because it again overstates the deficit compared with the gradual consolidation path, which had already brought the figure below 4% before 2017–18. Common Pitfalls: A common mistake is to confuse actual realised deficits in earlier years with the formal budget target for a particular year. Another error is to mix up targets for different financial years, for example, assuming 3.50% when that applied to a different year. Learners should remember that the path moved in small steps and that 3.20% is specifically associated with Financial Year 2017–18. Writing down a small timeline of fiscal deficit targets while revising Indian economy can help avoid this confusion in the exam hall. Final Answer: For the Financial Year 2017–18, the fiscal deficit target in India was set at 3.20% of GDP.

Question 12

The change in the optimal quantity of a good when its price changes and the consumer's income is adjusted so that she can still just afford the original bundle she was buying before the price change is called what?

Accepted Answer

Introduction / Context: In microeconomics, understanding how consumers react when prices change is fundamental. Economists split the total effect of a price change into two components: the substitution effect and the income effect. This question specifically describes a situation where the consumer's income is adjusted so that she can still just buy the original bundle after a price change. That phrasing is a classic textbook definition of the substitution effect. Recognising this type of wording is very important for answering theory questions on consumer behaviour correctly. Given Data / Assumptions: - The price of a good changes. - The consumer's income is hypothetically adjusted so that the original bundle remains just affordable after the price change. - We need to identify the term used for the resulting change in the optimal quantity demanded of that good. - We assume rational consumer behaviour and standard indifference curve analysis. Concept / Approach: When the price of a good changes, two things happen: the relative price between goods changes and the consumer's real purchasing power changes. The substitution effect captures the change in quantity demanded solely due to the change in relative price, holding the consumer at the same utility level by adjusting income so that the original bundle is still just affordable. The income effect then captures the change in quantity demanded due to the change in real income or purchasing power. The description in the question matches exactly the standard definition of the substitution effect given in consumer theory. Step-by-Step Solution: Step 1: Focus on the key phrase: the consumer's income is adjusted so that she can still just buy the original bundle after the price change. Step 2: This adjustment of income is a mental experiment used by economists to separate the impact of relative price change from the impact of a change in purchasing power. Step 3: When we keep the consumer on the same indifference curve by this income adjustment, any change in her chosen bundle comes only from the change in relative prices. Step 4: This change in the optimal quantity of the good due purely to the relative price change is called the substitution effect. Step 5: Therefore, the correct term for the phenomenon described is the substitution effect. Verification / Alternative check: An alternative way to verify is to recall the usual decomposition: Total effect of a price change = substitution effect + income effect. The hypothetical income adjustment that makes the original bundle just affordable again is the hallmark of the Hicksian definition of the substitution effect. No such adjustment is described when we talk about the law of demand in general form, or about the problem of choice, or about optimal choice by itself. Only the substitution effect is defined in precisely this way, so the match is exact and verifies the answer. Why Other Options Are Wrong: Law of demand is wrong because it states the general inverse relationship between price and quantity demanded, not the refined decomposition with income adjustment. Problem of choice is wrong because it refers broadly to the consumer deciding how to allocate limited income among many goods, and does not specifically describe income adjustments after a price change. Optimal choice is wrong because it is the final chosen bundle at given prices and income, without isolating the part due to relative price changes alone. The question requires the technical term substitution effect. Common Pitfalls: Students often confuse substitution effect and income effect because both arise from a price change. A typical mistake is to answer law of demand whenever a price change is mentioned. The trick in this question lies in the phrase that income is adjusted so that the consumer can still just buy the original bundle. This clause must automatically trigger recognition of the substitution effect. Practising a few numerical and diagram based examples of decomposing total effect into substitution effect and income effect can help to firmly fix the concept in memory. Final Answer: The described change in the optimal quantity of a good, when price changes and income is adjusted to keep the original bundle just affordable, is called the substitution effect.

Question 13

If the demand curve for roller skates is given by D = 23000 - 19P and the supply curve is given by S = 18000 + 6P, what is the equilibrium price (P) of roller skates in rupees?

Accepted Answer

Introduction / Context: This question tests the student's understanding of equilibrium in a simple linear demand and supply framework. In microeconomics, the equilibrium price is found where the quantity demanded equals the quantity supplied. Here, both demand and supply are expressed as linear functions of price. Solving such equations is common in Indian economy and basic microeconomics questions, and it reinforces algebra skills and conceptual clarity about market equilibrium. Given Data / Assumptions: - Demand function: D = 23000 - 19P. - Supply function: S = 18000 + 6P. - P represents price in rupees per pair of roller skates. - Equilibrium occurs where quantity demanded equals quantity supplied, that is D = S. - We assume a perfectly competitive market with no other distortions. Concept / Approach: The basic concept is that market equilibrium is reached when the quantity consumers wish to buy equals the quantity producers wish to sell. Mathematically, this means setting the demand equation equal to the supply equation and solving for the price P. Once the equilibrium price is obtained, one could also compute the equilibrium quantity, but the question asks only for the price level. This type of problem typically requires solving a pair of linear equations with one unknown. Step-by-Step Solution: Step 1: Write the equilibrium condition by setting demand equal to supply: 23000 - 19P = 18000 + 6P. Step 2: Bring all terms involving P to one side and constants to the other side. Subtract 18000 from both sides: 23000 - 18000 - 19P = 6P. Step 3: Simplify the constants: 5000 - 19P = 6P. Step 4: Add 19P to both sides to group P terms: 5000 = 6P + 19P = 25P. Step 5: Solve for P by dividing both sides by 25: P = 5000 / 25 = 200. Step 6: Therefore, the equilibrium price of roller skates is 200 rupees. Verification / Alternative check: To verify, substitute P = 200 into both the demand and supply equations. Demand at P = 200 is D = 23000 - 19 * 200 = 23000 - 3800 = 19200 units. Supply at P = 200 is S = 18000 + 6 * 200 = 18000 + 1200 = 19200 units. Since D and S are equal at 19200 units when P = 200, the condition for equilibrium is satisfied. No other given option leads to such equality, so Rs 200 is confirmed as the correct equilibrium price. Why Other Options Are Wrong: Rs 100 is wrong because substituting P = 100 would give demand and supply quantities that do not match, so the market is not in equilibrium. Rs 400 is wrong because at that price the demand would be much lower and supply much higher, again violating the equilibrium condition. Rs 50 is wrong for the same reason: it leads to a mismatch between quantity demanded and quantity supplied, with demand exceeding supply at a very low price. Common Pitfalls: Students often make algebraic errors when moving terms across the equality sign, especially with negative coefficients. Another common mistake is to forget that both demand and supply are functions of the same price variable, and therefore they must be equated, not added. It is also important to carefully check calculations like 23000 minus 3800 or 18000 plus 1200, since even small arithmetic mistakes can lead to a wrong answer despite correct method. Systematically writing each step and double checking the arithmetic helps avoid such errors in the exam. Final Answer: The equilibrium price of roller skates, where demand equals supply, is Rs 200.

Question 14

Match the following characteristics with the appropriate market structures: (a) Expand output until marginal cost (MC) equals marginal revenue (MR). (b) Elasticity of demand faced by the firm depends on the pricing policies of rival firms.

Accepted Answer

Introduction / Context: Market structure is a core topic in microeconomics. Different structures such as pure competition, monopoly, monopolistic competition and oligopoly have distinct features. Many exam questions ask candidates to match specific characteristics with the correct market form. In this question, one characteristic involves expanding output until marginal cost equals marginal revenue, and the other characteristic involves demand elasticity that depends on rivalry in pricing. Correctly identifying which market type each characteristic belongs to shows clear understanding of firm behaviour in different structures. Given Data / Assumptions: - Characteristic (a): Expand output until MC = MR. - Characteristic (b): Elasticity of demand depends on pricing policies of rival firms. - Options list different pairings with pure competition, pure monopoly, monopolistic competition and oligopoly. - We assume standard textbook definitions of these market structures. Concept / Approach: In all profit maximising market structures, the basic condition for choosing output is MC = MR. However, this condition is most commonly highlighted and discussed in the context of a firm under pure competition or imperfect competition. In pure competition a single firm is a price taker and still expands output until MC equals the constant market price (which equals MR). The second characteristic, that elasticity of demand depends on rivals' pricing policies, is a hallmark of oligopoly, where a small number of firms are interdependent. In oligopolistic markets, each firm's demand curve and elasticity depend heavily on how competitors respond to price changes. Step-by-Step Solution: Step 1: Consider characteristic (a): expand output until MC = MR. This is a general profit maximisation rule but is widely presented and derived in the context of competitive markets where firms adjust output until MC equals the given market price. Step 2: Under pure competition, the firm faces a perfectly elastic demand curve at the market price, so MR equals price. The firm chooses quantity where MC equals MR (and hence equals price). Step 3: Now consider characteristic (b): elasticity of demand depends on the pricing policies of rivals. This emphasises interdependence, which is central to oligopoly. In oligopoly, each firm's demand curve changes shape depending on how competitors react to its pricing. Step 4: Compare these observations with the options. The option that pairs (a) with pure competition and (b) with oligopoly is option (c). Step 5: Therefore, the correct matching is (a) pure competition, (b) oligopoly. Verification / Alternative check: An additional check is to note that monopolistic competition does not prominently rely on explicit rival pricing interdependence in the same way as oligopoly. While firms do compete, the textbook treatment of oligopoly uniquely stresses that demand elasticity faced by each firm depends on rival behaviour, with concepts such as kinked demand curves. Pure monopoly has no rivals, so its demand curve and elasticity are determined by the market, not by competitors. This cross checking confirms that characteristic (b) fits oligopoly, and that leaves pure competition as the most suitable linkage for characteristic (a) in the provided options. Why Other Options Are Wrong: Option (a) is wrong because it links characteristic (b) to pure monopoly, but a monopolist has no rivals, so its demand elasticity does not depend on others' pricing policies. Option (b) is wrong because it connects characteristic (a) with pure monopoly and (b) with monopolistic competition. While MC = MR holds for a monopolist, monopolistic competition does not emphasise interdependent pricing in the same specific way as oligopoly. Option (d) is wrong because it assigns characteristic (a) to monopolistic competition and (b) to oligopoly, but the question expects a clear, standard pairing, and the provided statement for (a) is more directly associated in exam style questions with pure competition, especially given the alternative options. Common Pitfalls: Students sometimes assume that MC = MR applies only to monopoly because they first encounter this condition in monopoly diagrams. In reality it is a universal profit maximisation condition, including under pure competition. Another common confusion is between monopolistic competition and oligopoly since both involve many real world brands. The key difference is that monopolistic competition involves many small firms with negligible strategic interdependence, whereas oligopoly involves few large firms whose pricing decisions directly affect each other. Remembering this difference will help match characteristics correctly in similar questions. Final Answer: The correct matching is (a) pure competition, (b) oligopoly.

Question 15

Stagflation is a macroeconomic period characterised by which combination of inflation and unemployment?

Accepted Answer

Introduction / Context: Stagflation is a classic macroeconomic term frequently asked in competitive examinations. It refers to a situation that is especially troublesome for policymakers, because it combines two problems that usually do not occur together: inflation and stagnation. Understanding what stagflation means helps students correctly interpret policy challenges and historical episodes where economies experienced rising prices without corresponding growth in jobs or output. Given Data / Assumptions: - The term in focus is stagflation. - The options provide different combinations of inflation (high or low) with unemployment (high or low). - We need to identify which combination best captures the definition of stagflation. - We assume standard macroeconomic definitions used in textbooks and exam syllabi. Concept / Approach: The word stagflation is formed from “stagnation” and “inflation”. Stagnation refers to low or zero growth and often high unemployment, while inflation refers to a sustained increase in the general price level. Therefore, stagflation means simultaneous high inflation and stagnation in economic activity, usually accompanied by high unemployment. This is different from normal inflationary booms where prices rise but unemployment falls, and from recessions where unemployment may be high but inflation is typically low. Step-by-Step Solution: Step 1: Break down the term stagflation into its components: “stag” from stagnation and “flation” from inflation. Step 2: Stagnation implies slow or no growth and usually means that unemployment is high because the economy is not creating enough jobs. Step 3: Inflation implies that prices are rising persistently, so purchasing power of money is falling. Step 4: Combining these meanings, stagflation is a period of high inflation plus high unemployment. Step 5: Compare this with the answer options and select the one that states persistent high inflation together with high unemployment. Verification / Alternative check: Historically, stagflation was observed in many countries during the 1970s when oil price shocks caused production costs and price levels to rise, while real output stagnated and unemployment remained elevated. Policymakers found it difficult to deal with because measures to reduce inflation could worsen unemployment and vice versa. This real world example aligns with the definition of stagflation as high inflation plus high unemployment, confirming that the chosen option accurately captures the concept. Why Other Options Are Wrong: Persistent high inflation combined with low unemployment is typical of a strong boom or overheating, not stagflation. Persistent low inflation combined with high unemployment describes a recession or depression scenario with weak demand and price stability, which is not stagflation. Persistent low inflation combined with low unemployment is a relatively healthy macroeconomic situation, sometimes targeted by stable policy frameworks, and again not stagflation. Common Pitfalls: A common mistake is to think that any period of high inflation is stagflation, even when growth is strong and unemployment is low. Another error is confusing stagflation with simple recession, where prices may actually be stable or falling. Students should always associate stagflation with the unusual coexistence of high inflation and high unemployment. Remembering the double problem faced by policymakers during stagflation helps in fixing the concept firmly for exam questions. Final Answer: Stagflation is a period of persistent high inflation combined with high unemployment.

Question 16

If the price of an article decreases from Rs P1 to Rs 190 and the quantity demanded increases from 5000 units to 5200 units, and if the point elasticity of demand is -0.8, what is the initial price P1?

Accepted Answer

Introduction / Context: This numerical question tests the application of the point elasticity of demand formula. Instead of directly giving prices and asking for elasticity, it gives elasticity and some changes in price and quantity and asks for the initial price. Such problems help students understand the relationship between percentage changes in quantity and price and the elasticity measure, which is very important for pricing decisions, tax analysis and competitive exam preparation in Indian economy. Given Data / Assumptions: - Initial price is P1 (unknown). - New price is 190 rupees. - Initial quantity demanded is 5000 units. - New quantity demanded is 5200 units. - Point elasticity of demand is -0.8. - Use the point elasticity formula based on initial price and initial quantity. Concept / Approach: For small changes, the point elasticity of demand can be approximated by the formula: elasticity (e) = (ΔQ / ΔP) * (P / Q), where ΔQ is the change in quantity, ΔP is the change in price, P is the initial price and Q is the initial quantity. Here elasticity and both quantities are known, and we must solve for P1. The sign of elasticity is negative for normal downward sloping demand curves, so we must handle the sign of ΔP carefully when substituting values. Step-by-Step Solution: Step 1: Compute the change in quantity: ΔQ = Q2 - Q1 = 5200 - 5000 = 200 units. Step 2: Express the change in price: ΔP = P2 - P1 = 190 - P1. Since we know only P2 and not P1, we keep this as an algebraic expression. Step 3: Write the point elasticity formula using initial values: e = (ΔQ / ΔP) * (P1 / Q1). Step 4: Substitute known values: -0.8 = (200 / (190 - P1)) * (P1 / 5000). Step 5: Simplify the fraction 200 / 5000 to 2 / 50 or 1 / 25. The equation becomes -0.8 = (1 / 25) * (P1 / (190 - P1)). Step 6: Multiply both sides by 25 to clear the denominator: -20 = P1 / (190 - P1). Step 7: Multiply both sides by (190 - P1): -20 * (190 - P1) = P1. Step 8: Expand the left side: -3800 + 20P1 = P1. Step 9: Bring P1 terms together: -3800 = P1 - 20P1 = -19P1, so P1 = 3800 / 19 = 200. Step 10: Therefore, the initial price P1 is 200 rupees. Verification / Alternative check: To verify, plug P1 = 200 back into the elasticity formula. Now ΔP = 190 - 200 = -10. Then elasticity e = (ΔQ / ΔP) * (P1 / Q1) = (200 / -10) * (200 / 5000) = (-20) * (0.04) = -0.8. This matches the given elasticity exactly, confirming that the calculated initial price is correct. Why Other Options Are Wrong: Rs 220, Rs 240 and Rs 250 all give different values when substituted back into the elasticity formula and do not produce -0.8. They either give a different magnitude or a different sign, so they cannot be correct initial prices given the data in the question. Common Pitfalls: A common mistake is to ignore the negative sign of elasticity or to mix up the direction of the price change. Another frequent error is using the midpoint (arc) elasticity formula when the question clearly expects a point elasticity around the initial price. Algebra errors while solving for P1 can also lead to wrong options even if the method is correct. To avoid these pitfalls, carefully write each step, maintain sign discipline, and always verify the final answer by substituting back into the original formula. Final Answer: The initial price P1 that satisfies the given elasticity condition is Rs 200.

Question 17

A beedi making workshop can hire 5 women by paying them Rs 300 per day each. The 6th woman demands Rs 350 per day, and if she is hired, all the other women must also be paid Rs 350 per day. What is the marginal resource (labour) cost of hiring the 6…

Accepted Answer

Introduction / Context: This question comes from the area of factor pricing and labour economics. It focuses on marginal resource cost, which is the additional cost incurred by a firm when it hires one more unit of a factor such as labour. In some labour markets, especially under conditions like wage setting for a group, hiring one additional worker can force the firm to raise wages for all existing workers, making the marginal resource cost higher than the wage of the extra worker alone. Understanding this concept is crucial for analysing firm decisions in imperfect labour markets. Given Data / Assumptions: - The workshop currently employs 5 women. - Each of these 5 women is paid Rs 300 per day. - A 6th woman demands Rs 350 per day. - If she is hired at Rs 350, then all 6 women must receive Rs 350 per day. - We need to find the marginal resource cost of hiring the 6th woman. Concept / Approach: Marginal resource cost (MRC) is defined as the additional cost to the firm when it employs one more unit of the input. In a simple case with a constant wage rate, MRC equals the wage. However, in this question the wage for all workers increases when one extra worker is hired. Therefore, MRC equals the change in total wage bill, not just the wage of the new worker. The approach is to calculate the total wage bill before hiring the 6th woman, calculate the total wage bill after hiring her, and find the difference. Step-by-Step Solution: Step 1: Compute the initial total wage bill when 5 women are employed at Rs 300 each. Initial wage bill = 5 * 300 = Rs 1500 per day. Step 2: If the 6th woman is hired, she must be paid Rs 350, and the wage of the original 5 women must also be raised to Rs 350 each. Step 3: Compute the new total wage bill with 6 women at Rs 350 each. New wage bill = 6 * 350 = Rs 2100 per day. Step 4: The marginal resource cost equals the increase in the total wage bill. MRC = new wage bill - old wage bill = 2100 - 1500 = Rs 600. Step 5: Therefore, the marginal resource cost of hiring the 6th woman is Rs 600 per day. Verification / Alternative check: Another way to see the result is to consider that the firm must pay an additional Rs 50 to each of the original 5 workers (from 300 to 350), which sums to 5 * 50 = Rs 250 extra. In addition, it pays the entire Rs 350 to the 6th worker. So total extra cost = Rs 250 (for existing workers) + Rs 350 (for new worker) = Rs 600. This matches the earlier calculation and confirms that the marginal resource cost is correctly computed as Rs 600. Why Other Options Are Wrong: Rs 50 is wrong because that is only the increment in wage rate per worker and does not consider the total effect on the wage bill for all workers. Rs 300 is wrong because it is close to the original wage per worker and ignores the wage rise for existing employees and the higher wage for the new worker. Rs 100 is wrong as it does not correspond to any relevant component of the cost calculation in this situation. Common Pitfalls: A very common mistake is to assume that marginal resource cost equals the wage rate of the additional worker, which would be Rs 350 here. Students may then try to match that with the given options and get confused. The correct method is to compute the total change in wage bill, because the wage of all existing workers also increases. Remember that marginal resource cost always refers to the change in total cost due to employing one more unit of input, and in imperfect labour markets this can be larger than the wage of that extra unit. Carefully computing before and after totals helps to avoid this trap. Final Answer: The marginal resource (labour) cost of hiring the 6th woman is Rs 600 per day.

Question 18

Stagflation is defined in macroeconomics as a situation with which combination of inflation, growth and unemployment?

Accepted Answer

Introduction / Context: Stagflation is a compound term combining stagnation and inflation. It is an important concept in macroeconomics because it describes a particularly difficult policy situation where an economy suffers from both rising prices and weak growth. This question asks you to choose the correct combination of inflation, growth and unemployment that best describes stagflation. Getting this right requires a clear conceptual picture of what happens during such a phase. Given Data / Assumptions: - The question focuses on the definition of stagflation. - It offers different combinations of inflation level, growth level and unemployment level. - We need to identify which combination fits stagflation. - We assume standard textbook usage of the term as used in Indian and international economy syllabi. Concept / Approach: Stagflation means stagnation plus inflation. Stagnation is associated with low or zero real growth and high unemployment, because firms are not expanding production or hiring enough workers. Inflation means a persistent rise in general price levels. Therefore stagflation is a situation in which there is high inflation together with low or stagnant growth and high unemployment. The correct option must reflect all three aspects simultaneously. Step-by-Step Solution: Step 1: Start with the meaning of inflation. In stagflation, prices are rising significantly, so inflation must be high, not low. Step 2: Consider growth. Because of stagnation, output growth is low or nearly zero, so the correct description should include low growth rather than high growth. Step 3: Think about unemployment. When there is stagnation and firms are not expanding, unemployment tends to be high because new jobs are not being created. Step 4: Combine these three dimensions: high inflation, low growth and high unemployment. Check which option matches this combination. Step 5: Option (b) states “high inflation, low growth, high unemployment,” which fits the definition precisely. Verification / Alternative check: Historically, the 1970s are often cited as an example of stagflation in several developed economies, where oil price shocks pushed inflation up while output growth slowed and unemployment remained high. Policymakers faced a dilemma because reducing inflation risked further reducing growth and increasing unemployment. This historical pattern aligns exactly with high inflation, low growth and high unemployment, confirming that option (b) is the correct description. Why Other Options Are Wrong: Low inflation, low growth, low unemployment is wrong because low unemployment does not match stagnation, and inflation is not high. High inflation, high growth, high unemployment is wrong because stagflation specifically involves low growth, not high growth, even if unemployment is elevated. Low inflation, high growth, low unemployment is wrong because this is closer to a healthy, growing economy with price stability, the opposite of stagflation. Common Pitfalls: Students sometimes think any combination involving high inflation is stagflation, without checking the growth and unemployment components. Others confuse stagflation with ordinary recession, which usually comes with low inflation or even deflation. To avoid these mistakes, remember that stagflation is unique because it combines the worst of both worlds: inflation and stagnation. Linking the word “stag” with weak growth and high unemployment and the word “flation” with high inflation creates a clear mental image for exam recall. Final Answer: Stagflation is defined as a situation of high inflation, low growth and high unemployment.

Question 19

Irfaan loves black coffee. A roadside stall sells a cup of black coffee for Rs 120 but offers a 25% discount to Irfaan. If Irfaan is actually willing to pay Rs 200 for this cup, what is his consumer surplus from this purchase?

Accepted Answer

Introduction / Context: Consumer surplus is a key concept in microeconomics that measures the extra benefit consumers receive when they pay less for a good than the maximum amount they are willing to pay. It is widely used to analyse welfare effects of price changes, taxes, subsidies and discounts. This question uses a simple everyday example of buying black coffee at a discount to test whether the learner can compute consumer surplus correctly using basic arithmetic. Given Data / Assumptions: - Marked price of one cup of black coffee is Rs 120. - Irfaan receives a 25% discount on this price. - Irfaan is willing to pay up to Rs 200 for the cup. - We assume he buys the coffee once at the discounted price. - We are asked to find his consumer surplus from this single purchase. Concept / Approach: Consumer surplus is defined as the difference between the maximum amount a consumer is willing to pay for a good and the amount actually paid. In this question, the maximum willingness to pay is given directly as Rs 200. The actual price paid is the discounted price, which must be calculated from the original price and the discount rate. Once both values are known, the consumer surplus is simply the difference between them. Step-by-Step Solution: Step 1: Compute the discount in rupees. A 25% discount on Rs 120 equals 0.25 * 120 = Rs 30. Step 2: Subtract the discount from the original price to get the actual price paid. Actual price paid = 120 - 30 = Rs 90. Step 3: Identify the maximum amount Irfaan is willing to pay. It is given as Rs 200. Step 4: Use the consumer surplus formula: consumer surplus = willingness to pay minus actual price paid. Step 5: Substitute values: consumer surplus = 200 - 90 = Rs 110. Step 6: Therefore, Irfaan's consumer surplus from this purchase is 110 rupees. Verification / Alternative check: As a quick check, note that paying Rs 90 for something valued at Rs 200 is clearly a good deal. The difference of Rs 110 represents the extra satisfaction or benefit over and above the amount paid. None of the other options produce this exact difference, which confirms that Rs 110 is the right answer. The units also make sense since both willingness to pay and price are in rupees. Why Other Options Are Wrong: 90 is wrong because it reuses the price paid, not the surplus. It confuses the benefit with the amount paid. 80 is wrong because it might come from mistakenly calculating discount plus some extra amount instead of directly subtracting price from willingness to pay. 30 is wrong because that is just the size of the discount, not the consumer surplus. Discount and surplus are different concepts. Common Pitfalls: Students sometimes confuse the discount received with consumer surplus. The discount is the difference between the original marked price and the discounted price, while consumer surplus compares the discounted price to the maximum willingness to pay. Another common mistake is to miscalculate the percentage discount, especially by subtracting 25 rupees instead of computing 25% of 120. Carefully separating these steps and applying the correct formula will help avoid such errors in similar questions. Final Answer: Irfaan's consumer surplus from this cup of black coffee is Rs 110.

Question 20

Which of the following items does not fall under the development expenditure of the government in India?

Accepted Answer

Introduction / Context: Public finance in India often classifies government expenditure into development and non development expenditure. Development expenditure is associated with creating social and economic infrastructure and improving welfare, while non development expenditure includes items that do not directly add to productive capacity or welfare but are still necessary. This question asks you to identify which item is not considered development expenditure, an important distinction that appears frequently in Indian economy questions. Given Data / Assumptions: - Options include expenditure on economic services, expenditure on social services, grants to states and defence expenditure. - We must pick the item that is not part of development expenditure. - We use conventional classifications used in Indian public finance discussions. Concept / Approach: Development expenditure generally includes spending on economic services (like agriculture, industry, transport), social services (like education, health, housing) and grants that support such programmes. These expenditures promote growth, productivity and social welfare. Non development expenditure typically includes defence, interest payments, pensions and administrative expenses. Defence expenditure, while essential for security, is usually not treated as development expenditure because it does not directly create productive assets or social services in the standard classification, even though it has indirect benefits. Step-by-Step Solution: Step 1: Identify which of the given options normally contribute to development in a direct way. Step 2: Expenditure on economic services is a classic example of development expenditure because it improves infrastructure, productivity and growth. Step 3: Expenditure on social services is also part of development expenditure because it raises human capital, health and education levels. Step 4: Grants to states can support state level development programmes, so they are normally counted as development expenditure when used for such purposes. Step 5: Defence expenditure, although important for national security, is conventionally classified as non development expenditure. Step 6: Therefore defence expenditure is the item that does not count as development expenditure. Verification / Alternative check: Standard textbooks on Indian public finance and economic surveys categorise defence spending under non plan or non development expenditure. In contrast, spending on roads, irrigation, power, schools and hospitals is clearly counted as development expenditure. Grants to states that finance such projects also fall under the development category. This consistent treatment across policy documents and teaching material confirms that defence expenditure stands out as the non development item in the list. Why Other Options Are Wrong: Expenditure on economic services is wrong as the answer because it directly creates productive capacity and is central to development expenditure. Expenditure on social services is wrong because these services improve quality of life and human capital, and are classic components of development spending. Grant to states is wrong because such grants often finance state level development projects and are typically recorded as development expenditure when used for those purposes. Common Pitfalls: Some learners assume that any large or important expenditure must be developmental. However, classifications are based on whether spending directly promotes growth and welfare in a measurable way. Defence, interest payments and pensions, although essential, are usually grouped as non development expenditure. Another pitfall is to think that grants to states are purely administrative transfers, but in the context of planning and federal finance, many grants are explicitly development oriented. Keeping these standard categories in mind helps avoid confusion in similar questions. Final Answer: The item that does not count as development expenditure is defence expenditure.

Indian Economy Questions