Question 1

According to the law of demand in microeconomics, how does the quantity demanded of a good change when its price increases, other things remaining equal?

Accepted Answer

Introduction / Context: The law of demand is one of the most fundamental principles in microeconomics. It describes the inverse relationship between the price of a good and the quantity demanded by consumers, assuming that all other influencing factors remain constant. Many exam questions test understanding of this definition and require learners to distinguish carefully between the terms demand and quantity demanded. This question focuses on the correct statement of how quantity demanded changes when price increases under ceteris paribus conditions. Given Data / Assumptions: • We are dealing with the law of demand in its standard form. • Only the price of the good changes; other factors like income and preferences remain constant. • The question is conceptual and no numerical data is given. • We must choose the correct statement among four alternatives. Concept / Approach: The law of demand states that, ceteris paribus, as the price of a good rises, the quantity demanded falls, and as the price falls, the quantity demanded rises. This inverse relationship is due to substitution and income effects. It is important to note that demand refers to the entire relationship between price and quantity demanded, represented by the demand curve, while quantity demanded refers to a specific point on that curve at a given price. Therefore, changes in price cause movement along the demand curve, changing quantity demanded, but not shifting the entire demand curve itself. Step-by-Step Solution: Step 1: Recall the core statement of the law of demand. When price increases, quantity demanded decreases, other factors remaining equal. Step 2: Focus on the phrase quantity demanded rather than demand, because a change in price moves us along the same demand curve. Step 3: Among the given options, identify which one correctly uses the term quantity demanded and describes the inverse relationship. Step 4: Option C states that if the price of a good increases, the quantity demanded of that good decreases, which matches the textbook definition. Step 5: Conclude that option C correctly expresses the law of demand in this context. Verification / Alternative check: You can think of a simple example with a normal everyday product such as tea. If the price of tea doubles while your income and tastes remain unchanged, you will likely buy less tea or switch partly to substitutes like coffee. This illustrates that as price rises, quantity demanded falls. Graphically, on a standard demand curve with price on the vertical axis and quantity on the horizontal axis, a movement upward along the curve corresponds to a movement leftward to a smaller quantity, confirming the inverse relationship. Why Other Options Are Wrong: Option A says that demand decreases when price increases. In standard terminology, demand refers to the whole curve and does not change due to price variation alone. Therefore this wording is imprecise and misleading for exam purposes. Option B claims that demand increases when price increases, which contradicts the basic law of demand and would only arise in exceptional cases like Giffen goods, which are not the norm. Option D says that quantity demanded increases when price increases, which is the opposite of the typical behaviour described by the law of demand. Common Pitfalls: A common error is to mix up demand with quantity demanded and write that demand rises or falls when price changes. Another pitfall is to be confused by the language if options use the word demand loosely. In competitive exams, the standard expectation is to reserve the word demand for shifts of the demand curve caused by non price factors and to use quantity demanded for movements along the curve due to price changes. Keeping this distinction clear helps select the correct statement quickly. Final Answer: According to the law of demand, when the price of a good increases, the quantity demanded of that good decreases, other things remaining equal.

Question 2

If the average total cost of a firm is Rs 54, the average variable cost is Rs 36, and the firm produces 2500 units of output, what is the total fixed cost of the firm?

Accepted Answer

Introduction / Context: Understanding the relationship between total fixed cost, total variable cost, average total cost and average variable cost is essential in cost analysis. Many examination questions present two of these averages along with the quantity produced and ask the candidate to compute either total cost or total fixed cost. This question requires using the identity that average total cost equals average fixed cost plus average variable cost and then working backward to total fixed cost using multiplication by quantity. Given Data / Assumptions: • Average total cost (ATC) is Rs 54 per unit. • Average variable cost (AVC) is Rs 36 per unit. • Quantity of output (Q) is 2500 units. • We must find the total fixed cost (TFC) in rupees. Concept / Approach: The key cost relationships are as follows. Average total cost equals total cost divided by quantity. Average variable cost equals total variable cost divided by quantity. Average fixed cost equals total fixed cost divided by quantity. Also, average total cost is the sum of average variable cost and average fixed cost. Using this last identity, we can first find average fixed cost by subtracting average variable cost from average total cost. Once we know average fixed cost, we multiply it by the quantity to obtain total fixed cost. Step-by-Step Solution: Step 1: Use the identity ATC equals AVC plus AFC, where AFC is average fixed cost. Step 2: Rearrange the identity to obtain AFC equals ATC minus AVC. Step 3: Substitute the given values. ATC is 54 and AVC is 36, so AFC equals 54 minus 36. Step 4: Compute 54 minus 36, which equals 18. Therefore, average fixed cost is Rs 18 per unit. Step 5: Use the formula TFC equals AFC multiplied by Q to find total fixed cost. Step 6: Multiply 18 by 2500. Dividing 2500 into 25 * 100, 18 * 25 equals 450, and 450 * 100 equals 45000. Step 7: Therefore, total fixed cost of the firm is Rs 45000. Verification / Alternative check: To verify, we can compute total cost directly from average total cost and quantity and then subtract total variable cost. Total cost equals ATC multiplied by Q, which is 54 * 2500 or 135000. Total variable cost equals AVC multiplied by Q, which is 36 * 2500 or 90000. Subtracting total variable cost from total cost gives TFC equals 135000 minus 90000, which equals 45000. This matches our previous calculation using average fixed cost and confirms that the answer is correct. Why Other Options Are Wrong: Rs 30000 would correspond to an average fixed cost of 12, which would make average total cost equal to AVC plus 12, that is 48, not the given 54. Rs 15000 implies an average fixed cost of 6, again inconsistent with the given average total cost value. Rs 60000 would imply average fixed cost of 24, which would make average total cost equal to 36 plus 24, that is 60, not the given 54. Common Pitfalls: Students sometimes confuse total and average costs and attempt to subtract average variable cost directly from total cost or make arithmetic errors when working with the large quantity figure. Another common mistake is to forget that average fixed cost declines as output increases and therefore misjudge whether the computed average fixed cost looks reasonable. Writing out the formulas clearly and checking each calculation step prevents such errors. Final Answer: Given the data, the total fixed cost of the firm is Rs 45000.

Question 3

Unemployment that arises when there is a general downturn or recession in overall business activity is known as which type of unemployment?

Accepted Answer

Introduction / Context: Macroeconomic analysis distinguishes between different types of unemployment in order to understand their causes and possible policy responses. These types include frictional, structural, cyclical and sometimes disguised unemployment. During recessions or periods of general slowdown in business activity, output falls and firms reduce hiring or even lay off workers. This question focuses on identifying the correct term for unemployment that arises mainly due to such economy wide cyclical downturns. Given Data / Assumptions: • The economy experiences a general downturn or recession in business activity. • Firms reduce production and employment due to lower demand. • The question asks for the type of unemployment associated with this cyclical decline. • We must choose among structural, frictional, cyclical and disguised unemployment. Concept / Approach: Cyclical unemployment is the type of unemployment that rises during recessions and falls when the economy recovers. It results from insufficient aggregate demand for goods and services, which leads firms to cut back production and employment. Structural unemployment arises from mismatches between worker skills and job requirements or geographical mismatches. Frictional unemployment occurs when workers are between jobs or are searching for better opportunities. Disguised unemployment refers to surplus labour with zero marginal productivity, often in agriculture. The approach is to match the description of a general downturn in business activity with the correct macroeconomic term, which is cyclical unemployment. Step-by-Step Solution: Step 1: Note that the question explicitly mentions a general downturn in business activity, which indicates an economy wide phenomenon rather than an individual or sector specific issue. Step 2: Recall that cyclical unemployment is directly linked to the ups and downs of the business cycle, increasing in recessions and decreasing in booms. Step 3: Recognise that structural unemployment is about long term changes in technology or industry structure, not short term cyclical fluctuations. Step 4: Recall that frictional unemployment refers to short periods when workers are voluntarily changing jobs or entering the labour market, not general downturns. Step 5: Remember that disguised unemployment involves surplus workers whose removal does not reduce output, often in agriculture, which is a different concept. Step 6: Based on these definitions, identify cyclical unemployment as the correct term for unemployment due to a broad fall in business activity. Verification / Alternative check: You can cross check by thinking about what happens in a severe recession, such as a global financial crisis. Many industries experience declining sales, factories operate below capacity, and firms lay off workers or freeze recruitment. When the economy recovers, many of these workers are rehired and the unemployment rate falls. This pattern of unemployment rising and falling with the business cycle is precisely what economists label as cyclical unemployment. This check confirms the answer. Why Other Options Are Wrong: Structural unemployment is linked to more permanent changes in the economy, such as the decline of certain industries or adoption of new technologies that make some skills obsolete. It persists even when the overall economy is doing well. Frictional unemployment arises from normal job search and matching processes in the labour market, such as when recent graduates look for their first job or workers shift voluntarily between jobs. Disguised unemployment refers to situations where there are more workers engaged in a job than are actually needed, and some workers have marginal productivity close to zero, which is common in traditional agriculture but not specifically tied to recessions. Common Pitfalls: Learners sometimes confuse structural and cyclical unemployment because both can coexist. However, structural unemployment does not necessarily decline when the economy moves into a boom, while cyclical unemployment does. Another pitfall is to associate any unemployment in rural areas with disguised unemployment, even when the question clearly describes a business cycle downturn. Paying close attention to whether the question speaks about economy wide demand conditions or about sector specific or skill related issues helps in selecting the right term. Final Answer: Unemployment that arises due to a general downturn in business activity is called Cyclical unemployment.

Question 4

The set containing all possible combinations of goods and services that can be produced from a given amount of resources and a given level of technology is called what in economics?

Accepted Answer

Introduction / Context: Production possibility analysis is a foundational topic in microeconomics. It helps explain concepts such as scarcity, choice and opportunity cost by considering all the different combinations of goods and services that an economy can produce with its available resources and technology. The collection of these combinations is represented as a set, and its boundary is often drawn as the production possibility frontier. This question asks for the correct name for that full set of feasible production combinations. Given Data / Assumptions: • We consider a fixed amount of resources in an economy, such as labour, capital and land. • Technology is given and does not change during the analysis. • The set includes all possible combinations of goods and services that can be produced with these resources and technology. • We must choose the correct term for this set among four similar sounding options. Concept / Approach: In economic theory, the collection of all feasible output combinations for given resources and technology is called the production possibility set. The boundary of this set, where resources are fully and efficiently used, is called the production possibility frontier. The term resource possibility set is not standard; nor is the phrase resource probability or production probability set. Although some textbooks may use slightly different notation, the widely accepted term for the full feasible set is production possibility set, sometimes also called the production possibilities set. Step-by-Step Solution: Step 1: Recall that production possibility diagrams show different combinations of goods that an economy can produce, such as guns and butter, at full and efficient use of resources. Step 2: Understand that there is an entire set of feasible combinations, including those inside the frontier, which correspond to under use of resources. Step 3: Recognise the term production possibility set as the name for the collection of all such feasible combinations. Step 4: Note that resource possibility set is not a standard term; economists usually focus on production combinations, not directly on resource combinations, in this context. Step 5: Observe that expressions like resource probability set or production probability set are not commonly used in economic theory and therefore are likely distractor options. Step 6: Conclude that the correct term is production possibility set. Verification / Alternative check: You can confirm by remembering how textbooks describe the production possibility frontier. They often define it as the boundary of the production possibility set, which consists of all output bundles that the economy can feasibly produce. This direct link between the frontier and the set name makes it clear that production possibility set is the correct technical term. None of the other options appear together with the familiar phrase production possibility frontier in standard exam material. Why Other Options Are Wrong: Resource probability set is not a standard phrase in microeconomics. Probability relates to chance or likelihood, which is not the focus of basic production possibility analysis. Production probability set again misuses the idea of probability. In this topic we are concerned with feasibility given resources and technology, not with random events. Resource possibility set might sound reasonable but is not the usual label. The emphasis is on output combinations, so economists refer to production possibilities rather than resource possibilities in this context. Common Pitfalls: The main pitfall in this type of question is to be misled by options that sound similar to familiar terms. Because many students know about the production possibility frontier, they may hesitate between production possibility set and production probability set. Remembering that the focus is on feasible production, not on probabilities, helps to avoid this confusion. Another possible error is to overlook the subtle but important difference between resources and outputs; production possibility analysis is about the outputs that can be produced with a given resource base, not about the set of resources themselves. Final Answer: The collection of all possible output combinations that can be produced with given resources and technology is called the Production possibility set.

Question 5

In microeconomic production theory, the relationship between the quantities of inputs used and the quantity of output produced by a firm is called what?

Accepted Answer

Introduction / Context: Production theory in microeconomics studies how firms transform inputs such as labour, capital and raw materials into outputs of goods and services. A central concept in this area is the production function, which formally describes the relationship between inputs and output. The terms total product, marginal product and average product refer to specific measurements of output behaviour and are derived from the production function. This question checks whether the learner can correctly name the overall relationship between inputs and output for a firm. Given Data / Assumptions: • We are analysing the behaviour of a firm that uses certain inputs to produce output. • The question asks for the term describing the relationship between quantities of inputs and the resulting quantity of output. • Four related concepts are provided as options: marginal product, production function, total product and average product. • The question is conceptual and requires knowledge of definitions. Concept / Approach: The production function is a mathematical or conceptual representation of how inputs are combined to produce output. It can be written in a simple form such as Q equals f of L and K, where Q is output, L is labour input, K is capital input and f is the function that captures technology. Total product refers to the total quantity of output produced given particular input levels. Marginal product measures the extra output gained by adding one more unit of an input, holding other inputs constant. Average product is the ratio of total output to the quantity of one input, such as output per worker. Step-by-Step Solution: Step 1: Recall the formal definition of a production function as the relationship between input quantities and output quantity under a given technology. Step 2: Recognise that total product is simply the value of output for a particular combination of inputs and does not capture the full relationship over all possible combinations. Step 3: Recall that marginal product is defined as the change in total product when an extra unit of an input is employed, with other inputs fixed. Step 4: Remember that average product is defined as total product divided by the quantity of a specific input. Step 5: Conclude that the only option which refers to the general relationship between inputs and output is the production function. Verification / Alternative check: You can verify by thinking of a simple numerical example. Suppose a firm uses units of labour and capital to produce bicycles. If we list the output produced for each different combination of labour and capital, we are effectively describing the production function. Total product at any given combination is just a single value from this list. Marginal and average product are derived by comparing how total product changes as one input changes. This confirms that production function is the overarching concept that best fits the wording of the question. Why Other Options Are Wrong: Marginal product focuses only on the additional output associated with small changes in one input, not on the entire mapping from all possible input combinations to output. Total product gives the total quantity of output for a specific combination of inputs and does not describe how output varies as inputs change systematically. Average product is a ratio of total output to the quantity of one input and again does not present the full input output relationship that defines the production function. Common Pitfalls: Students sometimes confuse the production function with total product because both involve discussions of output. Another pitfall is to believe that marginal product and average product are synonymous with the production function, whereas they are simply additional measures derived from it. Keeping the hierarchy clear, where the production function is the main relationship and other measures are derived from it, helps in answering questions of this kind accurately. Final Answer: The relationship between inputs used and output produced by a firm is called the Production function.

Question 6

A deficit that is financed by net capital flows from the rest of the world, and therefore corresponds to a surplus on the capital account, is known as which type of deficit?

Accepted Answer

Introduction / Context: The balance of payments of a country records all economic transactions between residents and the rest of the world. It is divided into the current account, which records trade in goods and services and income flows, and the capital and financial account, which records capital flows such as foreign investment and borrowing. When one part of the balance of payments is in deficit, another part must adjust so that the overall balance of payments still balances. This question focuses on recognising that a deficit financed by net capital inflows is a current account deficit. Given Data / Assumptions: • There is a deficit that is being financed by net capital flows from the rest of the world. • These net capital flows show up as a surplus on the capital and financial account. • We must identify which type of deficit corresponds to this situation. • The options include current account deficit and various other account deficits. Concept / Approach: In the balance of payments, a current account deficit occurs when the value of imports of goods and services plus net income and transfers paid to the rest of the world exceeds the value of exports and net receipts. This deficit must be financed either by drawing down foreign exchange reserves or by net capital inflows, such as foreign direct investment, portfolio flows or external borrowing. When it is financed by net capital inflows, the capital and financial account shows a corresponding surplus. Thus, a deficit that is matched by a capital account surplus is by definition a current account deficit. Step-by-Step Solution: Step 1: Recall that the balance of payments identity requires that the sum of the current account, capital and financial account and changes in reserves must equal zero. Step 2: If there is a surplus on the capital and financial account due to net capital inflows, this means that net foreign investment into the country is positive. Step 3: These inflows must finance either a current account deficit or an increase in foreign exchange reserves or a combination of both. Step 4: The question states that the deficit is financed by net capital flows, suggesting that the capital account surplus is offsetting the deficit in another part of the balance of payments. Step 5: The relevant deficit in this context is the current account deficit, which is the standard term used when a country imports more goods, services and income than it exports and makes up the difference through borrowing or investment inflows. Step 6: Therefore, the correct term for the deficit described is current account deficit. Verification / Alternative check: Consider a simple example. Suppose a country has a current account deficit equal to 3 per cent of its gross domestic product. If it attracts net foreign investment equal to 3 per cent of gross domestic product, then the capital account records a surplus of that amount, and the balance of payments overall balances without needing significant changes in reserves. This is exactly the situation described in the question, where net capital inflows finance a deficit and the relevant term used in policy discussions is current account deficit. Why Other Options Are Wrong: Savings account deficit is not a standard term in balance of payments analysis. Although national saving is related to current account balance, the phrase itself is not used in this context. Capital account deficit refers to the opposite situation, where there is a net outflow of capital rather than a net inflow. In that case, the capital account would be in deficit and would need to be financed by a current account surplus or reserve drawdown. Asset account deficit is again not a conventional term in balance of payments statistics and does not accurately describe the relationship between current account and capital account flows. Common Pitfalls: Learners sometimes confuse the terms current account and capital account because both involve international transactions. Another pitfall is to think that any deficit financed by foreign funds must be a capital account deficit, ignoring the fact that capital flows themselves are part of the capital account. Keeping in mind the basic identity that a current account deficit is equal to net capital inflows minus changes in reserves helps in correctly identifying such situations in questions and in real world policy debates. Final Answer: A deficit that is financed by net capital flows from the rest of the world and corresponds to a capital account surplus is a Current account deficit.

Question 7

In production theory, which concept is defined as the output produced per unit of a variable input, such as output per worker?

Accepted Answer

Introduction / Context: Within the framework of production theory, economists define several key measures that describe how output responds to changes in inputs. These include total product, marginal product and average product. Understanding the difference between these measures helps in analysing concepts like returns to a factor and productivity of labour or capital. This question asks specifically for the name of the measure that captures output per unit of a variable input, for example output per worker when labour is the variable factor. Given Data / Assumptions: • The focus is on a variable input, such as labour. • The concept is defined as output per unit of that variable input. • Four related terms are given as options: marginal product, production function, total product and average product. • We must recall which term matches the definition. Concept / Approach: Average product of an input is defined as total output divided by the quantity of that input. For labour, average product of labour equals total output divided by the number of workers, which is effectively output per worker. Marginal product of an input, by contrast, is the additional output produced when one extra unit of the input is employed, holding other inputs constant. Total product refers simply to the total quantity of output produced at a given combination of inputs. The production function is the overall relationship between inputs and output. Thus, the concept that directly matches output per unit of a variable input is average product. Step-by-Step Solution: Step 1: Recall the formula for average product of an input. It is total product divided by the number of units of that input. Step 2: Recognise that this formula expresses output per unit of the input, for example output per worker when labour is variable. Step 3: Compare this with marginal product, which measures only the extra output due to a small increase in the input. Step 4: Note that total product is a total level of output, not output per unit. Step 5: Remember that the production function is the relationship between all inputs and total output, not a per unit measure. Step 6: Conclude that average product is the correct term for output per unit of a variable input. Verification / Alternative check: Consider a numerical illustration. Suppose a firm employs 10 workers and produces 100 units of output. Total product is 100 units. Average product of labour equals 100 divided by 10, which is 10 units per worker. If an eleventh worker raises total output to 108 units, marginal product of the eleventh worker is 8 units, not 10. This example clearly shows that average product corresponds to output per worker, whereas marginal product corresponds to extra output from one more worker. This confirms that the name we seek is average product. Why Other Options Are Wrong: Marginal product measures incremental output from an additional unit of input, not the average output per unit of input. Total product is the overall output level and does not convey any per unit information about the productivity of individual units of input. The production function describes how output depends on various input quantities but is not itself a per unit measure like output per worker. Common Pitfalls: Many students initially confuse average product and marginal product because both involve changes in output and are often plotted on the same diagram. A helpful memory aid is to associate average with the usual idea of total put over number of units and to associate marginal with the idea of extra or additional. Another pitfall is to treat the term production function as a catch all answer whenever inputs and outputs are mentioned. Keeping these concepts clearly differentiated improves accuracy in exam questions and in understanding how firms measure and improve productivity. Final Answer: The concept defined as output produced per unit of a variable input is the Average product of that input.

Question 8

Disguised unemployment generally refers to a situation in which which of the following statements about labour productivity is true?

Accepted Answer

Introduction / Context: Disguised unemployment is a concept widely discussed in the context of developing economies, including India. It describes a situation where more people are employed in a job than are actually needed to produce a given level of output. Although these people appear employed, their contribution to output is negligible or zero. Understanding this concept is important in development economics and labour economics, and exam questions often require you to connect disguised unemployment with marginal productivity of labour. Given Data / Assumptions: • The question is about the general meaning of disguised unemployment. • Several statements describe different situations related to unemployment and labour productivity. • We are asked to identify which statement correctly captures the essence of disguised unemployment. • The context is usually rural or informal sectors where surplus labour is common. Concept / Approach: Disguised unemployment exists when a part of the labour force is employed but its marginal productivity is zero or extremely close to zero. If these workers were removed from the job, total output would remain unchanged. This is different from open unemployment, where people are visibly without jobs. It is also different from low productivity, where workers contribute something but at a low level. The classic example in Indian context is a small plot of land cultivated by many family members; if some of them leave for other work, farm output does not fall. Step-by-Step Solution: Step 1: Look for the statement that refers directly to marginal productivity of labour, because disguised unemployment is closely linked with this concept. Step 2: Recognise that disguised unemployment is not primarily about a large number of people being openly unemployed; rather, they are apparently employed. Step 3: Observe that the key feature is that some workers do not add to total output, so their marginal productivity is zero. Step 4: Note that the absence of alternative employment is not part of the strict definition of disguised unemployment, although it may be true in some situations. Step 5: Distinguish between low but positive productivity and zero marginal productivity; disguised unemployment refers to the latter situation. Step 6: Conclude that the statement that marginal productivity of some labour is zero is the one that correctly reflects disguised unemployment. Verification / Alternative check: Consider a small farm where six family members work on tasks that can easily be handled by three people. If three of them migrated to a town and took up non farm jobs, the farm output would remain almost the same because the remaining three workers can still perform all necessary tasks. This means the marginal productivity of the extra three workers was zero, even though they were counted as employed. This is exactly what economists refer to as disguised unemployment. This simple example confirms that zero marginal productivity is the key feature. Why Other Options Are Wrong: The statement about a large number of people remaining openly unemployed describes open unemployment, not disguised unemployment, because disguised unemployment workers are technically employed in some activity. The statement that alternative employment is not available focuses on job opportunities rather than on the productivity of those already employed, so it does not capture the essence of disguised unemployment. The statement that productivity of workers is low but still positive does not match the strict definition, which emphasises zero marginal productivity for some part of the labour force. Common Pitfalls: A common pitfall is to equate disguised unemployment with any situation where wages are low or where people are underemployed in terms of hours. While these can be related issues, the technical definition relies on the concept of marginal productivity being zero. Another mistake is to mix up disguised unemployment with structural or cyclical unemployment in theoretical discussions. Keeping in mind the specific example of surplus labour in agriculture or informal family enterprises helps in understanding and remembering the correct description. Final Answer: Disguised unemployment generally refers to a situation where the marginal productivity of some labour is effectively zero.

Question 9

According to official data for India, what was the approximate debt to gross domestic product (GDP) ratio for the financial year 2016–17?

Accepted Answer

Introduction / Context: The debt to gross domestic product ratio is a widely used indicator of the sustainability of a country’s public debt. It measures the stock of government debt as a proportion of the size of the economy and is closely watched by policymakers, credit rating agencies and investors. In the Indian context, the debt to gross domestic product ratio is often discussed in relation to fiscal responsibility targets and the overall health of public finances. This question asks specifically for the value of this ratio in the financial year 2016–17, which is a factual recall item based on official economic survey and government reports. Given Data / Assumptions: • The question focuses on India’s debt to gross domestic product ratio in the financial year 2016–17. • Four close numerical options are given: 60.40 per cent, 49.40 per cent, 50.40 per cent and 55.40 per cent. • The ratio refers to general government debt as a percentage of gross domestic product for that year. • We must recall or infer the correct approximate figure from standard exam oriented sources. Concept / Approach: Certain competitive examinations and economic surveys highlight that India’s debt to gross domestic product ratio during the financial year 2016–17 was just under fifty per cent, around 49.4 per cent. The other values in the options are distractors that are fairly close but not correct. For exam purposes, the official figure rounded to two decimal places is 49.40 per cent. The approach is therefore to remember that the ratio was around one half of gross domestic product, and to select the option that most closely matches the documented figure. Step-by-Step Solution: Step 1: Recall that the Indian Economic Survey and various exam prep materials often mention that the debt to gross domestic product ratio in 2016–17 was approximately 49.4 per cent. Step 2: Compare this remembered figure with the numerical options provided in the question. Step 3: Option B lists 49.40 per cent, which matches the remembered figure exactly. Step 4: The other options, 60.40, 50.40 and 55.40 per cent, differ from the known approximate value and would represent either much higher or slightly different ratios. Step 5: Conclude that 49.40 per cent is the correct approximate debt to gross domestic product ratio for India in the financial year 2016–17. Verification / Alternative check: A quick sense check is to recall that India has often discussed a target of keeping general government debt near or below 60 per cent of gross domestic product under fiscal responsibility frameworks. In 2016–17, the actual ratio was slightly below this threshold and closer to fifty per cent, rather than being in the mid fifties or above sixty. Exam oriented summaries and question banks consistently quote 49.40 per cent for this specific year, which aligns with the official data. This cross check supports the selection of the 49.40 per cent option as the correct answer. Why Other Options Are Wrong: 60.40 per cent would imply that the debt level was significantly above the half of gross domestic product mark, which does not match the official figure for that period. 50.40 per cent is close but still not equal to the widely cited 49.40 per cent value and appears as a distractor created by adding one percentage point. 55.40 per cent would place the debt ratio much closer to the sixty per cent fiscal target and is not consistent with the reported ratio for 2016–17. Common Pitfalls: Because the options are numerically close, candidates may misremember whether the figure was “just under fifty per cent” or slightly over fifty. Another source of confusion is mixing up different fiscal years, since debt ratios can change gradually over time. Reading economic survey summaries carefully and associating key figures like 49.40 per cent with specific years such as 2016–17 helps to retain them for examination and general awareness. Final Answer: For the financial year 2016–17, India’s debt to gross domestic product ratio was approximately 49.40 per cent.

Question 10

In Indian indirect taxation, CENVAT (Central Value Added Tax) is primarily related to which type of tax levied on the manufacture of goods?

Accepted Answer

Introduction / Context: CENVAT, which stands for Central Value Added Tax, was an important element of the indirect tax structure in India before the introduction of the Goods and Services Tax (GST). It was designed to avoid cascading of taxes by allowing manufacturers to take credit of certain duties paid on inputs. This question checks whether you know which specific central tax CENVAT was most directly linked to in the context of the manufacturing sector. Given Data / Assumptions: CENVAT stands for Central Value Added Tax. It formed part of the pre GST indirect tax regime in India. It was intended mainly for manufacturers of goods. The options include different types of taxes: sales tax, excise duty, customs duty and service tax. Concept / Approach: Under the old tax regime, the central government mainly levied central excise duty on the manufacture of goods and service tax on the provision of services, while states levied sales tax or value added tax on the sale of goods. CENVAT was a system that allowed manufacturers and certain service providers to take credit of the excise duty paid on inputs and capital goods, and of service tax paid on input services, and use that credit to pay their output excise duty or service tax. In common exam usage, CENVAT is most directly associated with central excise duty on manufactured goods, because manufacturers used CENVAT credit against their excise duty liability. Step-by-Step Solution: Step 1: Note that the question asks what CENVAT is related to, focusing on the main tax connection. Step 2: Recall that CENVAT credits were primarily used to offset central excise duty on goods produced by manufacturers. Step 3: Recognize that sales tax was a state level tax and not directly linked with central CENVAT credit. Step 4: Customs duty applies to imports and exports at the border, which is not the main focus of the CENVAT mechanism on domestic manufacture. Step 5: Conclude that the most accurate textbook answer is that CENVAT is related to central excise duty. Verification / Alternative check: A quick way to confirm is to remember that the older system was sometimes called MODVAT (Modified Value Added Tax) on excise, which later evolved into CENVAT. Manufacturers spoke of “CENVAT credit” in relation to excise duty payments on their finished goods. Although the CENVAT Credit Rules eventually covered both excise and service tax, competitive exam questions usually link CENVAT with excise duty on manufactured goods, making excise duty the correct choice here. Why Other Options Are Wrong: Sales tax: This was a state level levy on sale of goods within the state and was not directly described as CENVAT. CENVAT was a central mechanism, not a state sales tax system. Customs duty: Customs duty is charged on imports and exports at ports and airports. While input duties on imports can sometimes be credited, CENVAT as tested in basic GK questions is not defined as a customs duty scheme. Service tax: Later CENVAT credit rules did cover service tax, but in standard exam framing, CENVAT is primarily identified with central excise duty on manufactured goods, not service tax by itself. Common Pitfalls: A common confusion is to mix up all indirect taxes and think that CENVAT is a generic term for any value added tax. Another pitfall is to overlook the word “Central” in CENVAT and incorrectly connect it with state level sales taxes. Remember that in traditional exam questions, CENVAT is directly associated with central excise duty and the credit mechanism used by manufacturers before GST was introduced. Final Answer: CENVAT is primarily related to excise duty levied by the central government on the manufacture of goods.

Question 11

In development economics, which of the following is commonly used as a key parameter or indicator of economic development for comparing living standards across countries?

Accepted Answer

Introduction / Context: Economic development is a broad concept that refers to improvements in the standard of living, reduction of poverty, and expansion of opportunities for people. To compare the level of development across countries, economists often use specific measurable indicators. This question asks you to identify which of the given options is commonly treated as a key parameter of economic development, especially for comparing living standards between nations. Given Data / Assumptions: We need an indicator that reflects average material well being of people. The indicator should allow comparison between different countries or regions. National income measures total output or income of the country. Per capita measures divide a total by the population. The focus is on development, not just size of the economy. Concept / Approach: National income by itself tells us the total size of the economy, but a very large national income could be spread over a very large population, leaving people on average still quite poor. Therefore, economists usually look at per capita income, which is national income divided by population, to get an average income per person. Per capita monetary income (often expressed as per capita income or per capita GDP) is a widely used indicator of economic development and living standards. It is not a perfect measure, because it ignores income distribution, non monetary aspects of welfare and environmental factors, but it remains a central parameter in basic comparisons of development. Step-by-Step Solution: Step 1: Identify that we want an indicator of development, not just size of the economy. Step 2: Recall that development comparisons are usually based on per capita figures, such as per capita income or per capita GDP. Step 3: Recognize that national income alone does not adjust for population size and therefore is not sufficient to reflect average standards of living. Step 4: Note that per capita rural income focuses only on the rural population and is not the standard global indicator. Step 5: Conclude that per capita monetary income is the correct parameter commonly used for measuring economic development. Verification / Alternative check: You can cross check by recalling how international organizations like the World Bank classify countries as low income, lower middle income, upper middle income or high income. These classifications are based on per capita gross national income, not on total national income. Similarly, when textbooks compare development levels of India, USA or Japan, they usually refer to per capita income. This confirms that per capita monetary income is the appropriate answer for this question. Why Other Options Are Wrong: National income: This measures the total output or total income of a country but does not reflect how much income is available per person. A large, populous country can have high national income but low per capita income, so it is not the preferred parameter for development comparisons. Per capita rural income: This is a partial indicator focusing only on rural areas, and while it is useful for specific studies, it is not the general global parameter used to compare overall development across countries. Population: Population size alone tells us nothing about income levels or living standards. A large population can be associated with either high or low levels of development. Common Pitfalls: Students sometimes confuse economic growth with economic development and think that a higher national income automatically means higher development. Another pitfall is ignoring the importance of dividing by population to capture average well being. Remember that per capita monetary income is the traditional exam friendly parameter used to represent the level of economic development, even though more comprehensive indices like the Human Development Index also exist. Final Answer: A commonly used parameter for economic development is per capita monetary income.

Question 12

In basic macroeconomics, saving is defined as that portion of money income which is ________ by households.

Accepted Answer

Introduction / Context: Saving and consumption are two key concepts in macroeconomics that describe how households use their income. Understanding the precise definition of saving is important for analysing investment, growth and financial stability in an economy. This question asks you to identify how saving is defined in terms of money income and household spending behaviour. Given Data / Assumptions: Households receive a certain amount of money income in a period. They can either spend that income on consumption or keep it aside as saving. Consumption includes spending on all goods and services used to satisfy current needs and wants. Saving is the part of income not used for current consumption. Concept / Approach: In simple macroeconomic models, the identity is often written as: Income = Consumption + Saving This means that once taxes and transfers are accounted for, whatever is not spent on consumption becomes saving. Saving can be held as cash, bank deposits, financial assets or invested in physical capital, but the key point is that it is not spent on current consumption goods and services. The definition does not restrict saving to any particular purpose such as industrial development or education; it simply focuses on the part of income that is not consumed now. Step-by-Step Solution: Step 1: Recall the basic macroeconomic identity linking income, consumption and saving. Step 2: Understand that consumption refers to actual spending on goods and services for current use. Step 3: Recognize that saving is defined residually as income minus consumption. Step 4: Match this understanding to the option that describes saving as the portion of income not spent on consumption. Verification / Alternative check: You can verify by thinking of a simple numerical example. Suppose a household has a monthly income of 30,000 rupees and spends 24,000 rupees on food, rent, transport, clothing and other consumption. The remaining 6,000 rupees is saving, regardless of whether it is later used to buy shares, fixed deposits or future education. This clearly fits the definition “not spent on consumption”, confirming the correct option. Why Other Options Are Wrong: Spent for development of industries: Funds used to directly develop industries are usually called investment, not saving by itself. Saving may finance investment, but saving is defined more broadly as what is not consumed. Spent on health and education only: Spending on health and education is typically treated as consumption or at most human capital investment, but it is still spending, so it is not saving in the strict macroeconomic sense. Spent for consumer durables: Buying consumer durables like TVs, refrigerators or vehicles is categorised as consumption expenditure on durable goods. It does not match the definition of saving, which is income not spent. Common Pitfalls: A common misunderstanding is to treat any expenditure that seems “useful” or “productive” as saving. However, saving is not about whether spending is wise or foolish; it is about whether income is spent now or kept aside for the future. Another pitfall is to confuse saving with investment; saving provides the funds that can be invested, but the two concepts are not identical in macroeconomic accounting. Final Answer: Saving is that portion of money income which is not spent on consumption.

Question 13

In the context of local taxation in India, what is meant by an octroi?

Accepted Answer

Introduction / Context: Octroi was a type of local tax that many municipal bodies in India used to levy on goods entering their limits. Although in many places it has been replaced or abolished, the term still appears frequently in general knowledge and competitive examinations. Understanding what octroi means helps you better grasp India's older system of local taxation and movement of goods. Given Data / Assumptions: Octroi is a form of tax connected to the movement of goods. It was traditionally collected by local bodies such as municipalities or municipal corporations. The question asks for the basic meaning of octroi. Options mention tax itself and different types of centres or offices. Concept / Approach: Octroi is a type of entry tax. It is levied by local authorities on goods that are brought into a city or municipal area for use, consumption or sale. The primary purpose is to raise revenue for local bodies. Historically, octroi was collected at check posts on the borders of cities, where goods vehicles were stopped, assessed and charged. It is therefore a tax, not merely a place or office. The key element is that it is imposed on the entry of goods into a local area, not on income, services or general information. Step-by-Step Solution: Step 1: Focus on the core question “What is an octroi?” rather than on where it is collected. Step 2: Recall that octroi refers to a local tax imposed on goods as they enter municipal limits. Step 3: Note that, although octroi was collected at specific check posts or collection centres, the term itself refers to the levy, not the physical office. Step 4: Choose the option that explicitly describes octroi as a tax on goods entering a local area. Verification / Alternative check: You can recall news about some states replacing octroi with entry tax or integrating it into GST related systems. In those discussions, octroi is always described as a levy on goods entering local jurisdictions, confirming that its basic meaning is that of a tax, not a building or a processing centre. This serves as an additional check that the correct description is as a tax itself. Why Other Options Are Wrong: A tax collection centre: This describes a place or office where taxes are collected but does not define octroi itself. Octroi is the tax, not just the place where it is collected. A tax processing centre: This refers to an administrative office that handles paperwork or processing for taxes, which is different from the nature of the levy called octroi. A tax information centre: This would be a place where information about taxes is provided to the public, again different from the actual tax on goods entering a local area. Common Pitfalls: Candidates sometimes confuse the tax with the booth or gate at which it is collected and think that octroi means a collection centre. Another pitfall is to forget that octroi is specifically connected with the entry of goods into a city, not with general tax administration. Keeping in mind that octroi is essentially an entry tax on goods helps avoid these confusions. Final Answer: An octroi is a tax levied on goods entering a local area for use, consumption or sale.

Question 14

In financial markets, which of the following activities is carried out at a stock exchange?

Accepted Answer

Introduction / Context: A stock exchange is a key institution in modern financial systems. It is often mentioned in news about share prices, market indices and corporate listings. For competitive exams, you must know the basic function of a stock exchange and what is traded there. This question checks your understanding of what is actually bought and sold on a stock exchange as opposed to ordinary commodity markets. Given Data / Assumptions: The question is about the role of a stock exchange. Options distinguish between commodities and securities. Stock exchanges are usually associated with financial instruments. We assume a standard organised stock market, such as the BSE or NSE in India. Concept / Approach: A stock exchange is an organised marketplace where securities such as equity shares, preference shares, debentures, bonds and sometimes derivatives are traded. Companies list their securities on the exchange so that investors can buy and sell them easily. Commodity markets exist separately for trading physical goods like wheat, metals or crude oil, often through commodity exchanges. Prices at stock exchanges are determined by demand and supply for financial securities, not ordinary wholesale or retail trade in physical commodities. Step-by-Step Solution: Step 1: Recall that the primary function of a stock exchange is to facilitate trading of financial securities. Step 2: Recognize that commodities such as grains, metals or oil are usually traded on commodity exchanges, not on stock exchanges. Step 3: Examine the options and identify which one mentions securities being bought and sold. Step 4: Select the option that refers to trading in securities such as shares and debentures as the correct activity of a stock exchange. Verification / Alternative check: Think of common names like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). News reports always talk about share prices, market capitalization and index movements, which are all related to securities trading. They do not talk about wholesale or retail prices of physical goods being traded there. This everyday observation confirms that securities trading is the defining activity of a stock exchange. Why Other Options Are Wrong: Commodities bought and sold at wholesale price: This describes a wholesale commodity market, such as a mandi, not a stock exchange which deals in financial securities. Commodities bought and sold at retail price: This fits a retail market where final consumers purchase goods, not an organised financial market like a stock exchange. None of these: This is incorrect because one of the options clearly describes the correct function of a stock exchange, namely buying and selling securities. Common Pitfalls: A common mistake is to think that the word “stock” refers to physical stock of goods rather than financial instruments such as stocks or shares. Another pitfall is not distinguishing between commodity exchanges and stock exchanges. Remember that stock exchanges specialise in securities, while commodity markets focus on physical goods or commodity derivatives. Final Answer: At a stock exchange, securities such as shares and debentures are bought and sold.

Question 15

According to demand theory, the demand for an inferior good tends to change in what way when the income of the consumer changes?

Accepted Answer

Introduction / Context: In microeconomics, goods are often classified as normal goods and inferior goods depending on how their demand responds to changes in consumer income. Understanding this distinction is important for analysing consumption patterns and the impact of economic growth or recession on different markets. This question asks you to recall how the demand for an inferior good behaves when the consumer's income changes. Given Data / Assumptions: We are dealing with inferior goods in the economic sense, not in terms of quality judgement alone. Consumer income is changing, while prices are assumed constant. We want the direction of change in demand as income rises or falls. Other factors like tastes and preferences are assumed unchanged. Concept / Approach: An inferior good is defined as a good for which demand moves inversely with income, holding other factors constant. When consumer income rises, people tend to shift their consumption towards better quality substitutes and away from inferior goods, so demand for the inferior good falls. Conversely, when income falls, consumers cut back on more expensive goods and may buy more of the cheaper inferior good, so demand for the inferior good rises. This is opposite to the behaviour of normal goods, for which demand increases with income. Step-by-Step Solution: Step 1: Recall the formal definition of an inferior good: demand decreases when income increases, and demand increases when income decreases. Step 2: Focus on the wording in the question about demand changing with a change in consumer income. Step 3: Identify the option that correctly states that demand for the inferior good increases when the consumer income decreases. Step 4: Confirm that this inverse relationship matches the standard microeconomic definition. Verification / Alternative check: A simple example is low quality staple food or very cheap public transport in some contexts. When people become poorer, they may buy more of the cheapest staple or use more low cost transport because they can no longer afford better alternatives. When their income rises, they shift away to higher quality or more convenient options. This real world pattern of substitution fits the theoretical definition and confirms that demand for an inferior good increases when income declines. Why Other Options Are Wrong: It increases when the consumer income increases: This describes normal goods, not inferior goods. It remains constant regardless of income changes: Very few goods have demand completely unaffected by income; this does not define inferior goods. It doubles whenever income doubles: This suggests a proportional positive relationship between income and demand, which again describes some normal goods, not inferior goods. Common Pitfalls: Many learners confuse “inferior” in the everyday sense of low quality with the precise economic definition related to income elasticity of demand. A good may be low quality but not necessarily inferior in the economic sense if its demand still rises with income. The key for exams is to remember the inverse relationship between income and demand for inferior goods, which leads to the correct option in this question. Final Answer: For an inferior good, demand increases when the consumer income decreases and falls when income rises.

Question 16

Which writ is issued by a court when it finds that a particular public office holder is not performing a legal duty and is thereby infringing upon the right of an individual?

Accepted Answer

Introduction / Context: In constitutional law, especially in India, higher courts like the Supreme Court and High Courts have the power to issue various types of writs to protect fundamental rights and ensure that public authorities act within the law. This question focuses on identifying the correct writ that is used when a public official or authority fails to perform a mandatory legal duty, resulting in a violation of someone's rights. Given Data / Assumptions: A court has determined that a public office holder is not performing a legal duty. This failure is infringing the right of an individual. The question refers to one of the traditional writs like Habeas Corpus, Mandamus, Prohibition and Quo warranto. We assume the context of Indian constitutional practice, where these writs are commonly discussed. Concept / Approach: The writ of Mandamus literally means "we command". It is issued by a court to a public authority, including a public office holder, directing them to perform a legal duty that they are bound to perform but have failed or refused to carry out. Habeas Corpus deals with illegal detention, Prohibition is issued to lower courts or tribunals to stop them from exceeding jurisdiction, and Quo warranto is issued to question the authority by which a person holds a public office. Therefore, when a legal duty is not performed and rights are affected, Mandamus is the appropriate writ. Step-by-Step Solution: Step 1: Identify from the question that a legal duty exists and is not being performed by a public official. Step 2: Recall the purpose of the writ of Mandamus: compelling performance of public duties by authorities. Step 3: Distinguish Mandamus from other writs by matching its function with the situation described. Step 4: Select Mandamus as the correct writ for enforcing performance of a legal duty. Verification / Alternative check: You can cross check by remembering typical examples: If a public authority is required by law to issue a licence, grant a benefit or consider an application, but fails to do so without justification, a court may issue Mandamus directing the authority to act according to law. This is different from ordering release from custody (Habeas Corpus), preventing a lower court from acting beyond jurisdiction (Prohibition), or questioning the legitimacy of a person holding office (Quo warranto). This comparison confirms that Mandamus fits the situation in the question. Why Other Options Are Wrong: Habeas Corpus: This writ protects personal liberty against illegal detention and is used to secure the release of a person unlawfully detained, not to compel performance of general public duties. Prohibition: This writ is directed at lower courts or quasi judicial bodies to prevent them from exceeding their jurisdiction. It does not address failure to perform administrative duties. Quo warranto: This writ is used to challenge the legality of a person's claim to a public office, asking "by what authority" they hold that office. It is not used to force them to perform a particular duty. Common Pitfalls: Students sometimes mix up Mandamus with Quo warranto because both relate to public offices. The key difference is that Mandamus compels performance of a duty, while Quo warranto questions the right to hold the office at all. Another pitfall is to pick Habeas Corpus for any rights violation, forgetting that it is specific to unlawful detention. Keeping the distinct purposes of each writ clear helps in answering such questions correctly. Final Answer: The writ used in this situation is Mandamus, which commands a public authority to perform its legal duty.

Question 17

“The General Equilibrium Analysis”, which studies the simultaneous equilibrium of multiple markets in an economy, was developed by which economist?

Accepted Answer

Introduction / Context: In economic theory, general equilibrium analysis examines how multiple markets in an economy can be in equilibrium at the same time. Instead of studying one market in isolation, it looks at the interdependence of prices and quantities across all markets. This question asks you to identify the economist credited with developing this systematic general equilibrium framework. Given Data / Assumptions: The focus is on “The General Equilibrium Analysis” in economics. It involves simultaneous equilibrium across many markets. The options list several classical and neoclassical economists. We must recall which economist is historically linked to this analysis. Concept / Approach: Léon Walras, a French economist, is widely recognized as the founder of general equilibrium theory. He developed mathematical models showing how supply and demand in multiple markets could be balanced simultaneously through a system of equations and a hypothetical auctioneer adjusting prices. Marshall is famous for partial equilibrium analysis focusing on individual markets. Ricardo contributed to classical theories of value and distribution, and Adam Smith laid foundations of modern economics with ideas on the invisible hand and division of labour. Among the options given, Walras is clearly associated with general equilibrium analysis. Step-by-Step Solution: Step 1: Understand that the question is about the economist who developed the formal general equilibrium approach. Step 2: Recall that Walras introduced a system of simultaneous equations to represent all markets in an economy. Step 3: Recognize that Marshall's work focuses more on partial equilibrium in a single market, not general equilibrium across all markets. Step 4: Choose Walras as the economist who developed general equilibrium analysis. Verification / Alternative check: To verify, think of the term “Walrasian general equilibrium”, which is standard in microeconomics textbooks. The term itself directly links Walras to the general equilibrium concept, and many models are called Walrasian models. No similar direct association exists between general equilibrium and the other economists listed, confirming that Walras is the correct answer. Why Other Options Are Wrong: Marshall: Known for partial equilibrium analysis using supply and demand curves for individual markets, consumer surplus and elasticity concepts, not for the full general equilibrium system. Ricardo: Associated with theories of comparative advantage and distribution, but not with general equilibrium analysis in the Walrasian sense. Adam Smith: Famous for foundational ideas in economics including the invisible hand and division of labour, but he did not develop formal general equilibrium analysis. Common Pitfalls: A common mistake is to see the word “equilibrium” and automatically associate it with Marshall, given his work on supply and demand curves. However, the phrase “general equilibrium” is a strong clue pointing specifically to Walras. Remembering the phrase “Walrasian general equilibrium” helps you quickly identify the correct economist in such questions. Final Answer: “The General Equilibrium Analysis” was developed by Walras.

Question 18

The closest example of a centrally planned economy for the major part of the 20th century was which of the following countries?

Accepted Answer

Introduction / Context: Economic systems can be broadly classified into market economies, centrally planned economies and mixed economies, depending on who makes the key decisions about production and distribution. In a centrally planned economy, the government or central authority makes most of these decisions through plans rather than relying on market forces. This question asks you to identify which country was the closest example of such a centrally planned economy for most of the 20th century. Given Data / Assumptions: We are focusing on the major part of the 20th century. Centrally planned economy means state planning dominates over market forces. Options include the USA, India, Soviet Union and Japan. We assume typical textbook classification of economic systems during that period. Concept / Approach: The Soviet Union (USSR) is the classic example of a centrally planned economy. Production targets, prices, investment decisions and allocation of resources were largely determined by central plans, often in the form of Five Year Plans directed by the state. The USA and Japan were predominantly market economies with private ownership and price signals guiding decisions. India followed a mixed economy model with planning and a large public sector, but substantial private enterprise and market activity continued, so it was not as strictly centrally planned as the Soviet Union. Step-by-Step Solution: Step 1: Recall the defining features of a centrally planned economy: state ownership, central planning and limited role for market prices. Step 2: Examine each country in the context of the 20th century. Step 3: Recognize that the Soviet Union is widely cited in textbooks as the main example of a centrally planned socialist economy. Step 4: Conclude that the Soviet Union is the correct answer out of the options provided. Verification / Alternative check: Consider how these economies were described during the Cold War era. The Soviet Union was often called a command or centrally planned economy. In contrast, the USA was championed as a capitalist market economy. Japan, especially after World War II, developed as a market oriented economy with some government guidance. India adopted planning but retained significant private sector activity, leading to its classification as a mixed economy. This comparative view confirms that the Soviet Union best fits the description of a centrally planned economy throughout much of the 20th century. Why Other Options Are Wrong: United States of America: The USA is a classic example of a capitalist market economy, with decisions largely driven by prices and private enterprise. India: India followed a mixed economy model with planning and public sector dominance in some areas, but it was not as fully centrally planned as the Soviet Union. Japan: Post war Japan developed as a market based economy, albeit with strong state industrial policies, but it did not operate under a full central plan like the Soviet system. Common Pitfalls: Some students may confuse planning in general with complete central planning and therefore think of India as centrally planned because it had Five Year Plans. The key difference is that centrally planned economies like the Soviet Union had much more extensive state ownership and control over all major economic decisions, with very limited private sector activity. Remembering this helps distinguish between mixed and fully centrally planned systems. Final Answer: The closest example of a centrally planned economy for most of the 20th century was the Soviet Union.

Question 19

In production theory, the short run relationship between a variable input and the resulting level of output, while all other inputs are held constant, is referred to as what?

Accepted Answer

Introduction / Context: Production theory in microeconomics studies how inputs are transformed into outputs. In the short run, some inputs are fixed while others are variable. The relationship between a single variable input, such as labour, and the level of output, when other inputs are held fixed, is important for understanding concepts like total product, marginal product and average product. This question asks you to identify which term describes this basic relationship between the variable input and output. Given Data / Assumptions: We are in the short run, where at least one input is variable and others are fixed. The relationship is between the quantity of the variable input and total output. All other inputs are held constant. Options include total product, average product, isoquant and the long run. Concept / Approach: Total product (also called total physical product) of a variable input is the total quantity of output produced by the firm for different levels of that input, given that all other inputs are fixed. It is a function that shows how output changes as the variable input changes. Average product is the output per unit of variable input and is derived by dividing total product by the quantity of the input. Marginal product, although not listed here, is the change in total product resulting from a one unit change in the variable input. An isoquant shows combinations of two inputs that produce the same level of output and is not just a simple relationship between one variable input and output. Step-by-Step Solution: Step 1: Identify that the question describes output as a function of a single variable input, with other inputs fixed. Step 2: Recall that total product measures the total amount of output produced as the variable input changes. Step 3: Distinguish total product from average product, which is total product divided by input units, and from isoquants, which involve two inputs. Step 4: Conclude that the relationship described is best named total product. Verification / Alternative check: Visualising the typical total product curve can help. As more units of the variable input are employed, total product initially increases at an increasing rate, then at a diminishing rate, and may eventually decline. This curve directly represents how output depends on the variable input, with other inputs fixed. The question wording about the relationship between variable input and output matches this concept exactly, confirming total product as the correct term. Why Other Options Are Wrong: Average product: This is defined as total product divided by the quantity of the variable input and represents output per unit, not the full relationship between input and total output. Isoquant: An isoquant shows combinations of two inputs that yield the same output level, and is used in long run multi input analysis, not simply the one variable input short run relationship described in the question. The long run: The long run is a time period concept in which all inputs are variable, not a specific function linking one variable input to output. Common Pitfalls: Students sometimes confuse the definitions of total, average and marginal product because they are closely related. A useful approach is to remember that total product is the basic function of output versus input, average product divides total output by input units, and marginal product focuses on the change in output. Recognising this hierarchy helps avoid mistakes and makes it easier to match definitions to the correct term in exam questions. Final Answer: The relationship between a variable input and output, with other inputs held constant, is called total product of that input.

Question 20

Gross Domestic Product (GDP) of a country is generally derived from which of the following sectors of the domestic economy, and which listed sector is not usually treated as a separate producing sector for GDP calculation?

Accepted Answer

Introduction / Context: Gross Domestic Product (GDP) is a measure of the total value of final goods and services produced within a country's borders in a given period. For understanding the structure of an economy, GDP is usually broken down into broad sectors. This question asks you to identify which option does not represent a standard domestic producing sector from which GDP is directly derived. Given Data / Assumptions: GDP is calculated from production within the domestic territory of a country. Standard sectoral breakdown uses agriculture, industry and services. International transactions are handled separately in national accounts. We are asked which listed sector is not a primary domestic production sector for GDP. Concept / Approach: In national income accounting, GDP by origin is typically divided into three broad sectors: the primary sector (agriculture and allied activities), the secondary or industrial sector (manufacturing, mining, construction, utilities) and the tertiary or service sector (trade, transport, finance, administration and other services). While international trade (exports and imports) affects the expenditure side of GDP through net exports, there is no separate “international sector” considered as a domestic producing sector in the same way as agriculture, industry and services. International transactions relate to flows between residents and non residents, not to a distinct production sector located outside domestic territory. Step-by-Step Solution: Step 1: Recall the three main domestic sectors used when we break down GDP by production: agriculture, industry and services. Step 2: Recognise that GDP measures output produced within the domestic territory of the country. Step 3: Understand that international transactions like exports and imports appear in the GDP identity as net exports, but are not a separate domestic producing sector. Step 4: Identify “international sector” as the option that does not fit the usual list of GDP origin sectors. Verification / Alternative check: Consider the commonly used GDP composition charts in textbooks and reports, which show contributions from agriculture, industry and services. There is typically no bar or slice labelled “international sector” because exports are produced by domestic sectors and imports are foreign produced goods and services. International trade affects how output is used and who buys it, but does not form a separate domestic production sector, confirming that “international sector” is not counted in the same way. Why Other Options Are Wrong: Agricultural sector: This is part of the primary sector and clearly contributes to GDP through production of crops, livestock and related activities. Industrial sector: This includes manufacturing, mining, construction and utilities, all of which produce goods and services counted in GDP. Service sector: This includes a wide range of services such as trade, transport, communication, finance, education, health and public administration, all of which contribute directly to GDP. Common Pitfalls: One common confusion is between the expenditure approach and the production approach to GDP. Because net exports (exports minus imports) appear in the expenditure identity, some students think of an “international sector” as a separate producing sector. Remember that net exports adjust for the fact that some domestic output is sold abroad and some domestic expenditure falls on foreign output, but they do not represent a separate sector of domestic production. Keeping this distinction in mind helps avoid errors in such questions. Final Answer: GDP is derived from the agricultural, industrial and service sectors, and not from a separate international sector as a domestic producing sector.

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