Question 1

For a price taking firm in a perfectly competitive market, average revenue is equal to what in relation to the market price?

Accepted Answer

Introduction / Context: Perfect competition is an important benchmark model in microeconomics. One of its key features is that individual firms are price takers and face a perfectly elastic demand curve at the market price. This has a direct implication for the relationship between average revenue, marginal revenue, and the market price. Examinations often test whether students know this equality. Given Data / Assumptions: The firm is a price taker in a perfectly competitive market. The market price is determined by overall demand and supply. The firm can sell any quantity at the given market price. Average revenue is defined as total revenue divided by quantity sold. Concept / Approach: In perfect competition, the firm sells each unit of output at the same market price. Total revenue is therefore equal to price multiplied by quantity. Average revenue is total revenue divided by quantity, which simplifies directly to the price. Marginal revenue, the revenue from selling one more unit, is also equal to the price. Thus, for a price taking firm, average revenue and marginal revenue are both exactly equal to the market price at all levels of output. Step-by-Step Solution: 1. Let P be the market price and Q be the quantity sold.2. Total revenue TR equals P * Q because each unit sells at price P.3. Average revenue AR is defined as TR divided by Q.4. Substituting TR, we get AR = (P * Q) / Q, which simplifies to AR = P.5. Therefore, average revenue for a price taking firm is equal to the market price at every output level. Verification / Alternative check: Take a numerical example. Suppose the market price is 10 units of currency and the firm sells 5 units. Total revenue is 10 * 5 = 50. Average revenue is 50 divided by 5, which equals 10. If the firm sells 8 units, total revenue is 80, and average revenue is 80 divided by 8, again 10. In each case, average revenue equals the market price. This simple calculation confirms the theoretical result. Why Other Options Are Wrong: Option A: Half of the market price would imply AR equals P/2, which contradicts the definition of revenue for a price taking firm. Option C: Double the market price would imply AR equals 2P, which is also inconsistent with the revenue formula. Option D: Less than the market price cannot be correct because total revenue divided by quantity when all units sell at price P is always exactly P, not less. Option E: Greater than the market price at low outputs is not correct; AR is equal to price at all positive outputs in perfect competition. Common Pitfalls: Students sometimes confuse the case of a price taking firm with that of a monopolist. For a monopolist, average revenue falls as output increases because price must be reduced to sell more units, and marginal revenue is less than price. For a perfectly competitive firm, average revenue and marginal revenue are constant and equal to the market price. Keeping these two contrasting cases clearly separated is important in exam preparation. Final Answer: For a price taking firm, average revenue is equal to the market price.

Question 2

Calculate the gross domestic product of a country if, in a given year, consumer spending is 400 million dollars, government spending is 150 million dollars, business investment is 80 million dollars, exports are 35 million dollars, and imports are 4…

Accepted Answer

Introduction / Context: This question tests the ability to apply the expenditure approach to calculating gross domestic product, commonly abbreviated as GDP. The expenditure method is a standard formula taught in macroeconomics, where GDP is computed as the sum of spending on final goods and services in an economy over a given period. Understanding which components to add and how to treat exports and imports is crucial for getting the correct total. Given Data / Assumptions: Consumer spending (C) is 400 million dollars. Government spending (G) is 150 million dollars. Business investment (I) is 80 million dollars. Exports (X) are 35 million dollars. Imports (M) are 40 million dollars. All values are for the same year and are measured in current prices. Concept / Approach: The expenditure approach to GDP uses the formula GDP = C + I + G + (X - M). The term (X - M) is called net exports, which adjusts for the fact that imports are included in C, I, and G but are not part of domestic production. Exports add to domestic production because they are produced at home and sold abroad, while imports represent foreign production and must be subtracted. Step-by-Step Solution: 1. Write down the expenditure formula for GDP: GDP = C + I + G + (X - M).2. Substitute the given values: C = 400, I = 80, G = 150, X = 35, and M = 40 (all in millions of dollars).3. First compute C + I: 400 + 80 = 480.4. Add government spending: 480 + 150 = 630.5. Compute net exports: X - M = 35 - 40 = -5.6. Add net exports to the previous subtotal: 630 + (-5) = 625.7. Therefore, GDP equals 625 million dollars. Verification / Alternative check: A quick check is to verify that imports have been correctly subtracted. If we ignored imports, we would mistakenly compute GDP as 400 + 80 + 150 + 35 = 665. However, this would count imported goods that are included in consumer or government spending as if they were domestic production. Subtracting imports of 40 brings the figure back down to 625, which is more accurate as a measure of domestic production. Both the step-by-step calculation and this quick logic check point to the same result of 625 million dollars. Why Other Options Are Wrong: Option B: 465 million is too low and likely results from leaving out one or more components such as government spending or investment. Option C: 475 million could come from adding some components incorrectly or miscalculating net exports. Option D: 635 million suggests that exports were added without subtracting imports, failing to adjust for foreign production. Option E: 515 million does not follow from the correct application of the expenditure formula and indicates a misstep in arithmetic or in including the wrong components. Common Pitfalls: Students often forget to subtract imports, or they mistakenly subtract exports and add imports. Always remember that exports represent domestic production sold abroad and should be added, while imports represent foreign production consumed domestically and should be subtracted. Another common mistake is to mix up business investment with financial investment like buying stocks, but in GDP accounting, investment refers to spending on new capital, inventories, and residential construction. Carefully identifying each component helps avoid these errors. Final Answer: The gross domestic product in this case is 625 million dollars.

Question 3

According to basic economic assumptions, what does economics say about human desires and the availability of resources?

Accepted Answer

Introduction / Context: The foundational problem in economics is the problem of scarcity. Nearly all introductory definitions of economics highlight the tension between unlimited human wants and limited resources. This question asks which statement captures that basic assumption. Recognising this assumption helps explain why choices, trade offs, and opportunity cost are central ideas in the subject. Given Data / Assumptions: The focus is on the general assumptions about human wants and resource availability. We refer to standard textbook definitions of economics. We are comparing several statements about desires and resources. We assume rational decision making under scarcity, not unlimited resources. Concept / Approach: Economics is often defined as the study of how society allocates scarce resources among alternative uses to satisfy unlimited wants. The idea is that resources such as land, labour, capital, and time are limited, but human desires for goods and services tend to expand as income and technology grow. This mismatch forces economies to make choices about production and consumption, leading to opportunity cost and trade offs. Step-by-Step Solution: 1. Identify the key pair of concepts the question is testing: human desires and resource availability.2. Recall the classical scarcity based definition of economics, which emphasises unlimited wants and limited means.3. Compare Option A, which states that people have unlimited desires but limited resources, with the standard textbook definition.4. Recognise that other options either reverse the relationship or introduce ideas not central to the basic assumption.5. Conclude that Option A is the correct statement of the basic economic assumption. Verification / Alternative check: Everyday experience confirms this assumption. As income rises, people often desire better housing, transportation, education, and leisure activities, so wants tend to expand. At the same time, individuals and societies face constraints in terms of time, money, natural resources, and production capacity. Because not all wants can be satisfied at once, choices must be made. This fits the idea of unlimited desires and limited resources much more closely than the alternative options. Why Other Options Are Wrong: Option B: Suggesting limited desires and unlimited resources contradicts reality and would eliminate the scarcity problem that economics is built upon. Option C: While unplanned allocation can cause inefficiency, this is not the core assumption about desires and resources and is more a statement about planning and efficiency. Option D: Behavioural economics studies deviations from rationality, but the traditional assumption in basic models is rational decision making under scarcity, not emotional decisions as a defining feature. Option E: This reverses the scarcity concept and would imply there is no need to study allocation of resources. Common Pitfalls: Some students focus too narrowly on money as the scarce resource and forget that time, skills, and natural resources are also limited. Others think that if a country is rich, scarcity does not apply, but even rich economies must choose between competing uses of resources. Remember that scarcity is a universal condition that arises from the interaction of desires and finite resources, which is why economics is relevant everywhere. Final Answer: Economics assumes that people have unlimited desires but limited resources.

Question 4

At the equilibrium price in a competitive market, what is the relationship between quantity demanded and quantity supplied?

Accepted Answer

Introduction / Context: Market equilibrium is a core concept in microeconomics. It explains how the interaction of demand and supply determines the price and quantity traded in a competitive market. The question asks what happens at the equilibrium price, a term that indicates a situation where there is no tendency for change in price under perfect competition. Given Data / Assumptions: We are considering a competitive market with many buyers and sellers. Demand and supply schedules determine how much buyers want to purchase and sellers want to sell at different prices. Equilibrium price is defined as the price at which the market settles. Other factors such as government intervention are assumed absent. Concept / Approach: The equilibrium price is the price at which quantity demanded equals quantity supplied. At this price, all buyers who are willing and able to buy at that price can purchase the good, and all sellers willing and able to sell at that price can sell their planned quantity. There is no excess demand or excess supply, and therefore no pressure for the price to move up or down. Step-by-Step Solution: 1. Draw or imagine a demand curve that slopes downward and a supply curve that slopes upward.2. The point where these two curves intersect represents the equilibrium price and equilibrium quantity.3. By construction, at this intersection point, the quantity on the demand curve equals the quantity on the supply curve.4. This means that at the equilibrium price, buyers and sellers are in balance and there is no unsold output or unsatisfied demand.5. Therefore, the correct relationship is that quantity demanded equals quantity supplied at the equilibrium price. Verification / Alternative check: Consider what happens if the price is above or below equilibrium. If price is set above equilibrium, quantity supplied exceeds quantity demanded, creating excess supply, and sellers lower price to clear stocks. If price is set below equilibrium, quantity demanded exceeds quantity supplied, creating excess demand, and buyers bid the price up. Only at the equilibrium price are these pressures absent, which confirms that equilibrium occurs where quantity demanded equals quantity supplied. Why Other Options Are Wrong: Option B: If quantity demanded is greater than quantity supplied, there is excess demand, which occurs when price is below equilibrium, not at equilibrium. Option C: A price elasticity of demand equal to one may occur at a certain point on the demand curve but is not a condition that defines equilibrium. Option D: Elasticities of demand and supply may or may not be equal at equilibrium; this is not a requirement for equilibrium. Option E: If quantity supplied is greater than quantity demanded, there is excess supply, which occurs when price is above equilibrium, not at equilibrium. Common Pitfalls: Students sometimes overcomplicate equilibrium by focusing on elasticity or other advanced topics, but the basic condition is simple: intersection of demand and supply. Another pitfall is thinking that equilibrium is always fair or optimal; in reality, equilibrium describes a state where the market clears, not necessarily one where outcomes are equitable. For exam purposes, focus on the balance of quantities as the defining feature of equilibrium price. Final Answer: At the equilibrium price, quantity demanded is equal to quantity supplied.

Question 5

Which of the following statements best defines the idea of free trade in international economics?

Accepted Answer

Introduction / Context: Free trade is a central topic in international economics and public policy debates. The term refers to the degree to which countries allow goods and services to cross their borders without government imposed barriers. Examination questions often test whether students can recognise a precise definition rather than vague phrases about trade being allowed. Given Data / Assumptions: We are dealing with trade between countries. Government policies can restrict trade through tariffs, quotas, and other regulations. Free trade refers to the absence or near absence of such restrictions. We assume standard textbook usage of the term free trade. Concept / Approach: Free trade means that goods and services can be exported or imported without artificial barriers such as high tariffs, quotas, or discriminatory regulations. It does not simply mean that some goods are duty free or that only exports are unrestricted. Instead, it implies that prices and trade flows are determined mainly by market forces rather than by trade policies. The best concise description is that there are no restrictions on exports and imports in the form of tariffs, quotas, or similar barriers. Step-by-Step Solution: 1. Identify that the question asks for a definition, not an example.2. Recall that under free trade, governments do not impose significant tariffs or quantitative limits on international trade.3. Evaluate Option B, which states that there are no restrictions on exports and imports, as closely matching this idea.4. Note that other options mention partial removal of duties or restrictions, which do not fully capture free trade.5. Conclude that Option B provides the best definition of free trade. Verification / Alternative check: Consider trade agreements often labeled as free trade agreements. They typically aim to remove or substantially reduce tariffs and quotas on a wide range of goods and services between member countries. The goal is to make trade conditions similar to those that would exist if there were no policy based barriers. This real world usage supports the definition that free trade involves the absence of restrictions on exports and imports, not just on one side of trade or on specific goods. Why Other Options Are Wrong: Option A: Saying imports are discouraged describes protectionism, not free trade. Option C: Removing duties only on exports does not address import barriers and therefore does not create free trade. Option D: Making imported goods duty free alone is not enough if there are other non tariff barriers such as quotas or licensing restrictions, and this option ignores how exports are treated. Option E: Controlling exports while freeing imports is also inconsistent with the idea of free trade, which requires minimal barriers on both flows. Common Pitfalls: Students may interpret free trade too narrowly as simply zero tariffs, ignoring non tariff barriers like quotas, subsidies, or complex regulations. In practice, many so called free trade arrangements still have some restrictions, but in theory, free trade means no artificial barriers at all. It is also easy to confuse free trade with fair trade, which is a different concept focused on ethical standards and distributional outcomes, not on the absence of trade barriers. Final Answer: Free trade is best defined as a situation where there are no restrictions on exports and imports through tariffs or quantitative limits.

Question 6

As per data released by the Income Tax Department in December 2017, approximately what percentage of India's total population paid income tax in the assessment year 2015–16?

Accepted Answer

Introduction / Context: Public finance and Indian economy sections in competitive examinations often include factual questions about the tax base and structure of the Indian tax system. One important indicator is the share of the population that actually pays income tax. The question refers to data released by the Income Tax Department in December 2017 for the assessment year 2015–16 and asks for the approximate percentage of the total population that paid income tax. Given Data / Assumptions: The reference is the Income Tax Department data released in December 2017. The period is the assessment year 2015–16. We consider the total population of India for that period. We look for the percentage of people who filed income tax returns or actually paid income tax. Concept / Approach: The percentage of population paying income tax is typically quite small because a large portion of the workforce operates in the informal sector, many individuals earn below the taxable threshold, and agricultural income is largely exempt. Official data and reports from that time highlighted that only a small fraction of the total population fell within the direct tax net. The widely cited figure for AY 2015–16 is about 1.7 percent of the total population paying income tax. Step-by-Step Solution: 1. Recall that the question is asking for a factual figure based on official data, not a calculated value.2. Note that the Income Tax Department's analysis for AY 2015–16 reported that the number of effective income tax payers was a small fraction of the population.3. The commonly reported share is around 1.7 percent of India's population paying income tax in that year.4. Compare this figure with the options given and identify Option A, 1.7 percent, as the correct match.5. Therefore, the approximate percentage of population paying income tax is 1.7 percent. Verification / Alternative check: To understand why the proportion is so low, consider the structure of the Indian economy. A significant portion of workers are in agriculture and informal sectors where incomes are low or not reported. Many small businesses are not in the formal tax net. In addition, the taxable threshold excludes a large number of low income earners. When the total number of effective tax payers is divided by India's large population, the resulting percentage is inevitably small. This reasoning supports the plausibility of a figure below 2 percent rather than one of the higher percentages listed. Why Other Options Are Wrong: Option B: 5.7 percent would imply more than three times the officially reported fraction and does not match the referenced data. Option C: 9.7 percent is even higher and unrealistic given the structure of employment and incomes in India. Option D: 11.7 percent greatly overstates the direct tax base and contradicts the findings emphasized in public discussions at that time. Option E: 0.7 percent is too low and does not correspond to the widely cited official estimate for AY 2015–16. Common Pitfalls: Examinees may be tempted to choose a higher percentage because they confuse the share of tax payers in the working population with the share in the total population. Remember that the question explicitly refers to total population, including children, non workers, and those outside the tax net. It is also easy to misremember the exact figure, so it helps to associate this statistic with the common observation that only about one to two percent of the population were direct income tax payers at that time. Final Answer: Approximately 1.7 percent of India's total population paid income tax in the assessment year 2015–16.

Question 7

The price of an article decreases from 100 rupees to 80 rupees, and quantity demanded increases from Q1 units to 4600 units. If the point elasticity of demand at the initial point is 0.75 in magnitude, what is the value of Q1?

Accepted Answer

Introduction / Context: This question examines understanding of point elasticity of demand and how to apply elasticity formulas to solve for an unknown initial quantity demanded. The information provided includes an initial and final price, a final quantity, and the value of point elasticity at the initial point. The task is to use the relationship between percentage changes in quantity and price to find the unknown initial quantity. Given Data / Assumptions: Initial price P1 is 100 rupees. New price P2 is 80 rupees. Initial quantity demanded is Q1 units (unknown). New quantity demanded Q2 is 4600 units. Point elasticity of demand at the initial point has magnitude 0.75. We interpret elasticity as percentage change in quantity divided by percentage change in price, using the initial values for approximation. Concept / Approach: Point elasticity of demand at the initial point is often approximated using the formula: elasticity (E) = (ΔQ / Q1) / (ΔP / P1), where ΔQ is the change in quantity and ΔP is the change in price. Here, we use the magnitude of elasticity, ignoring the negative sign that usually indicates an inverse relationship. We know E, P1, P2, and Q2 and must solve for Q1. Step-by-Step Solution: 1. Compute the change in price: ΔP = P2 - P1 = 80 - 100 = -20.2. Compute the percentage change in price based on the initial price: (ΔP / P1) = -20 / 100 = -0.20.3. Let ΔQ = Q2 - Q1 = 4600 - Q1.4. The formula for the magnitude of elasticity is |E| = (ΔQ / Q1) / |ΔP / P1|.5. Given |E| = 0.75 and |ΔP / P1| = 0.20, we have 0.75 = (ΔQ / Q1) / 0.20.6. Multiply both sides by 0.20: ΔQ / Q1 = 0.75 * 0.20 = 0.15.7. So 4600 - Q1 = 0.15 Q1, which implies 4600 = 1.15 Q1.8. Solve for Q1: Q1 = 4600 / 1.15 = 4000 units. Verification / Alternative check: We can check by recomputing elasticity with Q1 equal to 4000. The change in quantity ΔQ is 4600 - 4000 = 600 units. Percentage change in quantity is 600 / 4000 = 0.15. Percentage change in price in magnitude is 20 / 100 = 0.20. Elasticity magnitude is 0.15 divided by 0.20, which equals 0.75, exactly matching the given value. This confirms that the initial quantity demanded must have been 4000 units. Why Other Options Are Wrong: Option A: 5000 units would yield a negative change in quantity, which is inconsistent with demand increasing when price falls in this example. Option C: 3000 units would give a much larger percentage increase in quantity and therefore a larger elasticity value, not 0.75. Option D: 2000 units would yield an even larger percentage increase in quantity, and elasticity would be far above the given figure. Option E: 6000 units would imply that quantity fell in response to a price decrease, which contradicts normal downward sloping demand behaviour. Common Pitfalls: Learners may confuse point elasticity with arc elasticity and improperly use mid point formulas or plug values into the wrong places. Another common error is ignoring whether the percentage change is based on the initial or average value. Carefully writing the formula and clearly defining the initial values helps avoid these mistakes. It is also important not to lose track of signs; in magnitude based questions, working with absolute values simplifies the algebra while preserving the relationship. Final Answer: The initial quantity demanded Q1 is 4000 units.

Question 8

In macroeconomics, inflation is said to exist when which of the following situations occurs over time in an economy?

Accepted Answer

Introduction / Context: Inflation is one of the most important concepts in macroeconomics, affecting purchasing power, interest rates, and economic policy. Examination questions usually test whether students know that inflation refers to changes in the general price level rather than the price of a single good. The question here asks which description correctly captures the essence of inflation in an economy. Given Data / Assumptions: We are looking for a definition that applies to the overall price level, not just isolated goods. The time dimension is important, as inflation is about changes over a period. We assume a standard macroeconomic definition based on consumer price index or similar measures. We distinguish between price level changes and changes in output or purchasing power. Concept / Approach: Inflation is defined as a sustained or continuous increase in the general price level of goods and services in an economy over time. It means that on average, prices are rising, not that every single price is increasing. As prices rise, the purchasing power of money falls; that is, each unit of currency buys fewer goods and services. This is different from deflation, which is a sustained fall in the general price level, and from growth in real output, which is about quantities produced rather than prices. Step-by-Step Solution: 1. Identify that the question is about macro level behaviour of prices, not just a single market.2. Recall that inflation refers to a general rise in the overall price level across a broad basket of goods and services.3. Note that this rise must be persistent over time, not just a one time change.4. Compare Option A, which states that there is a general increase in the price level over time, with the standard definition.5. Recognise that this option matches the standard macroeconomic definition of inflation. Verification / Alternative check: Inflation is often measured using indices such as the consumer price index, wholesale price index, or GDP deflator. When these indices show a trend of rising values over months or years, economists say there is inflation. Each index is constructed from prices of a representative basket of goods and services, ensuring that the measure reflects a general price movement, not just one sector. This supports the idea that inflation is a broad, sustained increase in the overall price level. Why Other Options Are Wrong: Option B: Periodic decreases in the price level describe instances of deflation or disinflation, not inflation. Option C: Continuous increases in output refer to economic growth, which can occur with or without inflation. Option D: A rise in the purchasing power of money is associated with falling prices, which is closer to deflation rather than inflation. Option E: A completely constant price level would mean there is neither inflation nor deflation, which is not what the question is describing. Common Pitfalls: Students sometimes confuse relative price changes with inflation. If the price of one good, such as petrol, rises while others fall, that is not necessarily inflation unless the overall price level rises. Another error is to equate inflation with any high price level; inflation is about the rate of change of prices, not the absolute level. Remembering the distinction between level and change, and between general and specific price movements, helps to answer such questions correctly. Final Answer: Inflation exists when there is a general increase in the overall price level of goods and services over time.

Question 9

In the context of Indian public finance, in which year were the Railway Budget and the General Budget of India presented separately for the first time?

Accepted Answer

Introduction / Context: Knowledge of important dates in Indian economic history is frequently tested in general knowledge and competitive examinations. One such milestone is the separation of the Railway Budget from the General Budget, which reflected the growing importance and size of railway finances in colonial India. The question asks in which year the Railway Budget and the General Budget were first presented separately. Given Data / Assumptions: The focus is on the first year when the two budgets were presented separately in India. The options include years in the early twentieth century and the post independence period. We assume standard historical accounts used in Indian economy and polity textbooks. The question refers to the formal presentation of a distinct Railway Budget in the British era. Concept / Approach: The separation of the Railway Budget from the General Budget in India was based on recommendations of the Acworth Committee, which was appointed to examine railway finances and administration. The committee recommended distinct financial treatment for railways due to their scale and importance. Following these recommendations, the practice of presenting a separate Railway Budget started in the mid 1920s, with 1924 generally cited as the first year of separate presentation. Step-by-Step Solution: 1. Recognise that independence in 1947 and later years relate to other fiscal reforms, not the initial separation of budgets.2. Recall that the Acworth Committee on Indian Railways was appointed in the early 1920s and reported on the need for separate railway finances.3. Historical summaries typically state that the first separate Railway Budget for India was introduced in 1924.4. Among the options, 1924 is therefore the year that matches the standard historical record.5. Hence, the correct answer is the year 1924. Verification / Alternative check: Many standard reference books and examination guides on Indian polity and economy highlight that from 1924 onwards, the Railway Budget was presented separately from the General Budget every year until the practice was discontinued and the budgets were merged again in the twenty first century. This long standing practice starting in 1924 is a regular point in exam oriented study materials, confirming that 1924 is the correct historical date for the first separate presentation. Why Other Options Are Wrong: Option B: 1923 is close in time but does not match the documented year when the separate Railway Budget was first presented. Option C: 1947 marks India's independence but is not the starting year of separate Railway and General Budgets. Option D: 1952 is related to the period of early planned development after independence, not to the initial separation of the budgets. Option E: 1977 is associated with later political changes but not with the origin of the separate Railway Budget practice. Common Pitfalls: Students often confuse the year of separation with the year when the Railway Budget was later merged back into the General Budget in the twenty first century. Others remember only that the practice began in the colonial period and incorrectly choose a nearby year such as 1923. To avoid this, it is helpful to link the date to the Acworth Committee and to remember 1924 specifically as the year when the separate Railway Budget began to be presented in India. Final Answer: The Railway Budget and the General Budget of India were first presented separately in the year 1924.

Question 10

In a ceramic pottery unit, 8 craftsmen are each paid Rs 900 per day, and when a 9th craftsman is hired at Rs 950 per day, all 9 craftsmen must now be paid Rs 950 per day. Based on this wage change, what is the marginal resource (labour) cost of hiri…

Accepted Answer

Introduction / Context: This question tests the concept of marginal resource cost in labour markets, especially when a firm has some wage setting power and must pay a higher wage to all workers when it hires an additional worker. Such a situation is common in monopsony type labour markets where the firm faces an upward sloping labour supply curve and the cost of hiring one more worker is more than just that worker's own wage. Understanding this helps learners see why firms consider the extra cost of an additional employee rather than just the quoted wage. Given Data / Assumptions: The pottery unit initially employs 8 craftsmen. Each of the 8 craftsmen is paid Rs 900 per day. A 9th craftsman is willing to work only if the wage is Rs 950 per day. If the 9th craftsman is hired, all 9 craftsmen must be paid Rs 950 per day. Marginal resource cost is the increase in total wage cost due to hiring one extra worker. Concept / Approach: Marginal resource cost (also called marginal factor cost) is defined as the change in total wage cost when an additional unit of labour is hired. In a competitive labour market with a constant wage, marginal resource cost equals the wage. However, when wages rise for all existing workers after hiring one more worker, the marginal resource cost is much higher than the wage of just the last worker. The correct method is therefore to compute the total wage bill before and after hiring the 9th craftsman and then find the difference between these two totals. Step-by-Step Solution: Step 1: Calculate initial total wage cost when 8 craftsmen each earn Rs 900 per day. Total wage cost with 8 craftsmen = 8 * 900 = Rs 7,200. Step 2: After hiring the 9th craftsman, the wage for all 9 craftsmen becomes Rs 950 per day. New total wage cost = 9 * 950 = Rs 8,550. Step 3: Compute the marginal resource cost as the increase in total wage cost. Marginal resource cost = Rs 8,550 − Rs 7,200 = Rs 1,350. Step 4: Match this value with the closest option given in the question. Verification / Alternative check: Another way to check is to see how much extra the firm pays for each of the original 8 workers plus the wage of the 9th worker. The wage increase per existing worker is Rs 50 (from 900 to 950), which applied to 8 workers adds Rs 400. The 9th craftsman is paid Rs 950. So the extra cost becomes Rs 400 + Rs 950 = Rs 1,350, which matches the earlier calculation. This cross check confirms that our marginal resource cost calculation is correct. Why Other Options Are Wrong: Option A (Rs 1,530) is incorrect because it does not match the actual increase in total wage cost and likely comes from an incorrect calculation of wage differences. Option B (Rs 1,050) ignores either the extra payment to all previous workers or the correct total difference between wage bills. Option C (Rs 50) wrongly considers only the additional wage demanded by the 9th craftsman above the old wage, ignoring the increased payment to the original 8 workers. Only Rs 1,350 reflects the true rise in the firm's labour cost due to hiring the 9th worker. Common Pitfalls: A common mistake is to treat the marginal resource cost as only the wage of the last worker, which would be Rs 950, or to consider only the increase in wage of the 9th craftsman over the original wage, which is Rs 50. Students often forget that in monopsony like situations, a higher wage must be paid to all workers when one more worker is hired. Another pitfall is mixing up total wage and marginal wage and failing to compute total wage bills before and after hiring. Careful reading of the question and clear use of the definition of marginal resource cost help avoid these errors. Final Answer: The marginal resource (labour) cost of hiring the 9th craftsman is Rs 1,350.

Question 11

When an economy experiences a persistent rise in the general price level at the same time that overall economic activity is slowing down and growth is weak, this situation is referred to as which phenomenon?

Accepted Answer

Introduction / Context: This question examines knowledge of macroeconomic terminology, particularly the special case where an economy faces rising prices and weak growth at the same time. Such situations are not captured well by simple ideas like inflation or recession alone. The term that describes this combination of slow growth and rising prices is very important in economic policy discussions and in the history of modern macroeconomics. Given Data / Assumptions: The general price level in the economy is rising, so there is ongoing inflation. At the same time, economic activities are slowing down, indicating weak growth and often higher unemployment. We are asked to choose the correct macroeconomic term that describes this combination. Concept / Approach: Typical macroeconomic states include inflation, recession, deflation, depression, and stagflation. Inflation alone means rising prices but does not say anything about growth. Recession and depression refer to declines in output and employment but do not require high inflation. Stagflation is a special term that combines stagnation (weak or no growth, high unemployment) with inflation (rising prices). To answer the question, we match the description given to these standard definitions and identify which term clearly refers to rising prices along with slowing economic activity. Step-by-Step Solution: Step 1: Note that the question mentions a period of price rise, which indicates inflation is present. Step 2: The question also mentions that economic activities are slowing down, which means growth is weak and unemployment is likely higher. Step 3: Recession is a period of declining output and rising unemployment, but it usually does not require high inflation. Step 4: Deflation refers to a fall in the general price level, which is the opposite of what is described, so it cannot be correct. Step 5: Depression is a very severe, prolonged recession with deep declines in output and employment, but again it does not specifically describe price rises. Step 6: Stagflation by definition is a situation of stagnation combined with inflation, so it perfectly matches the description of rising prices and slowing activities. Verification / Alternative check: To verify, recall the historical example of stagflation in many economies during the 1970s when high oil prices contributed to both inflation and lower growth. Policymakers faced the difficulty of dealing with inflation without further hurting already weak output. This real world example fits the same pattern as the one described in the question. The combination of stagnation and inflation is precisely what economists call stagflation, reinforcing that this is the correct term here. Why Other Options Are Wrong: Option A, deflation, refers to a sustained fall in the general price level and is the opposite of price rise. Option C, recession, focuses on falling output and rising unemployment but does not require ongoing inflation. Option D, depression, is an extremely deep and prolonged recession and still does not specifically describe high inflation. Only option B, stagflation, captures both rising prices and slowing economic activity in one term. Common Pitfalls: Students may confuse stagflation with recession because both involve weak growth and unemployment. Another mistake is to focus only on inflation and ignore the stagnation side, leading to the choice of simple inflation instead of the special term. Some may also mix up deflation and stagflation because both words contain similar endings, but their meanings are opposite in terms of price movements. Always check both aspects mentioned in the question: if there is inflation plus stagnation, the term is stagflation. Final Answer: The situation described, with rising prices and slowing economic activity, is called Stagflation.

Question 12

A taxpayer's annual income increases from Rs 10 lakhs per year to Rs 11 lakhs per year, and over the same range the income tax paid rises from Rs 80,000 to Rs 92,500. Based on this change, what is the marginal tax rate on the additional income?

Accepted Answer

Introduction / Context: This question focuses on the concept of the marginal tax rate in the context of a progressive income tax system. In most modern tax systems, higher levels of income are taxed at higher rates, and the marginal tax rate measures the tax on each additional rupee of income earned. Understanding how to compute the marginal tax rate from changes in income and tax paid is important for both exam preparation and real life financial planning. Given Data / Assumptions: Initial income: Rs 10 lakhs per year. New income: Rs 11 lakhs per year. Initial tax paid: Rs 80,000 per year. New tax paid: Rs 92,500 per year. Marginal tax rate is defined as the change in tax divided by the change in income, expressed as a percentage. Concept / Approach: The marginal tax rate answers the question, "What percentage of the next rupee earned is paid in tax?" It is computed using the formula: marginal tax rate = (change in tax liability / change in taxable income) * 100. This is different from the average tax rate, which is total tax divided by total income. In a progressive system, the marginal tax rate on additional income is usually higher than the average tax rate because additional income may fall in a higher tax slab. Step-by-Step Solution: Step 1: Compute the change in income. Change in income = New income − Initial income = Rs 11,00,000 − Rs 10,00,000 = Rs 1,00,000. Step 2: Compute the change in tax paid. Change in tax = New tax − Initial tax = Rs 92,500 − Rs 80,000 = Rs 12,500. Step 3: Use the marginal tax rate formula. Marginal tax rate = (Change in tax / Change in income) * 100. Step 4: Substitute values: (12,500 / 1,00,000) * 100 = 0.125 * 100 = 12.5 percent. Step 5: Match this value with the closest option given in the question. Verification / Alternative check: To verify, consider that an increase of Rs 1,00,000 in income produced an extra tax liability of Rs 12,500. If the marginal tax rate were 10 percent, the change in tax would be only Rs 10,000, which is too low. If it were 15 percent, the change would be Rs 15,000, which is too high. Therefore, only Rs 12,500 fits, which corresponds exactly to 12.5 percent. This confirms that the marginal tax rate is 12.5 percent of the additional income. Why Other Options Are Wrong: Option B, 8 percent, would give a tax change of only Rs 8,000 on an extra Rs 1,00,000 of income, which does not match the actual change of Rs 12,500. Option C, 10 percent, would lead to a tax change of Rs 10,000 and is still too low. Option D, 15 percent, implies a tax increase of Rs 15,000, which is greater than the given difference. Only option A, 12.50 percent, matches the actual data precisely. Common Pitfalls: A typical mistake is to confuse marginal and average tax rates and to divide total tax by total income instead of using the change in tax and the change in income. Another error is to miscalculate the differences, especially when dealing with large numbers like lakhs, and to forget to convert fractions into percentages. Careful use of the formula and stepwise calculation avoids these mistakes. Final Answer: The marginal tax rate on the additional income is 12.50%.

Question 13

In taxation theory, what is the name of the tax that is entirely borne by the entity on which it is levied and cannot be shifted to any other person, consumer, or firm?

Accepted Answer

Introduction / Context: This question tests understanding of the basic distinction between direct and indirect taxes in public finance. A key issue in taxation is who legally pays the tax and who actually bears the burden. The tax that cannot be shifted and is paid by the same entity on which it is legally imposed is central to the definition of a direct tax, which is widely discussed in economics and competitive exams. Given Data / Assumptions: The tax is levied on a particular entity such as an individual or a firm. The entire burden of the tax remains on the same entity. The tax cannot be shifted to consumers or any other party through higher prices or other means. We need to identify what such a tax is commonly called in economics. Concept / Approach: In basic public finance, taxes are classified mainly into direct and indirect taxes. A direct tax is one where the impact and incidence fall on the same person. In other words, the person who is legally responsible for paying the tax also bears the economic burden. Income tax and wealth tax are classic examples. In indirect taxes like goods and services tax, the seller collects the tax but shifts the burden to consumers through higher prices. The question describes a tax that cannot be shifted, which matches the definition of a direct tax. Step-by-Step Solution: Step 1: Read the description carefully: the tax is entirely borne by the entity on which it is levied. Step 2: Recall that in direct taxes, the taxpayer and the bearer of the tax burden are the same. Step 3: Recall that in indirect taxes, the seller or intermediary collects the tax but recovers it from consumers, so the burden is shifted. Step 4: Match the description to the correct category of tax: a tax that cannot be shifted corresponds to a direct tax. Step 5: Confirm that no other option matches this description as precisely as direct tax. Verification / Alternative check: Take income tax as an example. The law requires the individual or company that earns income to pay tax directly to the government. Even if this cost influences business decisions, there is no legal mechanism by which the company can label the tax separately and bill it directly to another party. By contrast, a consumption tax such as GST is added to the price of goods and services and is clearly passed on to buyers. Thus, income tax is a direct tax and fits the description given in the question. Why Other Options Are Wrong: Option B, indirect tax, is designed so that the person who pays the tax to the government (for example, a shopkeeper) recovers it from consumers. Therefore, its burden is shifted. Option C, straight tax, is not a standard technical term in public finance and does not represent a standard category. Option D, advance tax, refers to the timing of payment of income tax and not to whether the tax can be shifted. The only correct concept for a tax whose burden cannot be shifted is a direct tax. Common Pitfalls: Students sometimes confuse direct and indirect taxes on the basis of who collects them rather than who finally bears the burden. Another common confusion is to think that if a firm raises prices after a tax, the tax automatically becomes indirect, which is not correct for classification. The classification is based on the general nature of the tax, not individual business responses. Keeping the impact and incidence idea clear helps avoid such confusion. Final Answer: A tax that is entirely borne by the entity on which it is levied and cannot be passed on to others is called a Direct tax.

Question 14

A candle factory has fixed costs of Rs 20,000. It sells candles at Rs 30 per dozen, and the variable cost is Rs 1.50 per candle. Based on these cost and price figures, what is the break even quantity of candles that the factory must sell to cover it…

Accepted Answer

Introduction / Context: This question is about break even analysis in cost and management accounting. Break even analysis helps a firm determine the number of units it must sell so that total revenue exactly equals total cost, resulting in zero profit and zero loss. It is a key tool for pricing decisions, capacity planning, and understanding the viability of a business. Here, the factory produces candles and we are given fixed cost, selling price, and variable cost, from which we must compute the break even quantity of candles. Given Data / Assumptions: Fixed cost of the factory: Rs 20,000. Selling price: Rs 30 per dozen candles. Variable cost: Rs 1.50 per candle. We assume that all candles produced are sold. We are asked for the break even quantity in terms of number of candles. Concept / Approach: Break even quantity is computed using the formula: break even quantity = fixed cost / contribution per unit. Contribution per unit is the selling price per unit minus the variable cost per unit. In this question, the data are partly given per dozen and partly per candle, so the first step is to convert everything into the same unit, either per candle or per dozen. Working per candle is convenient because the variable cost is already given per candle, so we convert the selling price per dozen into selling price per candle and then compute the contribution per candle. Step-by-Step Solution: Step 1: Compute the selling price per candle. Selling price per dozen = Rs 30, so selling price per candle = Rs 30 / 12 = Rs 2.50. Step 2: Note the variable cost per candle. Variable cost per candle = Rs 1.50. Step 3: Compute contribution per candle. Contribution per candle = Selling price per candle − Variable cost per candle = 2.50 − 1.50 = Rs 1.00. Step 4: Use the break even formula. Break even quantity in candles = Fixed cost / Contribution per candle = 20,000 / 1.00 = 20,000 candles. Step 5: Match this figure with the options given. Verification / Alternative check: We can also work in dozens. Variable cost per dozen = 12 * 1.50 = Rs 18. Contribution per dozen = Selling price per dozen − Variable cost per dozen = 30 − 18 = Rs 12 per dozen. Break even quantity in dozens = 20,000 / 12 ≈ 1,666.67 dozens. Multiplying back, 1,666.67 dozens times 12 candles per dozen gives 20,000 candles, which confirms the figure obtained earlier. This cross check shows that our calculation is internally consistent whether we work per candle or per dozen. Why Other Options Are Wrong: Option B (10,000) would be correct only if the contribution per candle were Rs 2, but it is only Rs 1, so it understates the break even level. Option C (15,000) and option D (12,000) similarly fail to satisfy the relationship fixed cost = contribution per unit * quantity. None of these quantities multiplied by the actual contribution per candle of Rs 1 produces the fixed cost of Rs 20,000. Only 20,000 candles give the correct coverage of fixed costs. Common Pitfalls: One common mistake is mixing units, for example subtracting the variable cost per candle directly from selling price per dozen without conversion, which leads to an incorrect contribution figure. Another pitfall is using total revenue divided by total cost instead of the proper formula based on contribution. Students may also forget that fixed costs are not affected by the level of output and so must be fully covered by contribution. Careful attention to units and formula avoids these errors. Final Answer: The factory must sell 20000 candles to break even and cover its fixed costs.

Question 15

In the context of market structures, the demand curve faced by an individual firm under perfect competition has which of the following shapes?

Accepted Answer

Introduction / Context: This question examines understanding of the basic properties of a perfectly competitive market and the demand curve faced by an individual firm operating in such a market. Perfect competition is a standard model in microeconomics in which there are many buyers and sellers, identical products, and free entry and exit. The shape of the firm's demand curve reflects its inability to influence the market price and is a central feature of this model. Given Data / Assumptions: The firm operates under perfect competition. The output of the firm is homogeneous with that of other firms in the industry. Each firm is a price taker, not a price maker. We must identify the shape of the demand curve for this individual firm. Concept / Approach: In perfect competition, the market determines a single equilibrium price through the intersection of industry demand and industry supply. Each firm is small relative to the whole market and cannot influence this price by its own actions. As a result, from the firm's perspective, it can sell any quantity it wants at the prevailing market price. This means that the firm faces a perfectly elastic demand curve at that price level, represented graphically by a horizontal line. The firm's average revenue and marginal revenue are constant and equal to price. Step-by-Step Solution: Step 1: Recall the definition of a perfectly competitive firm: many firms, identical products, and no market power. Step 2: Because the product is identical across firms, buyers are indifferent among suppliers and will buy from any firm charging the market price. Step 3: If the firm raises its price even slightly above the market price, it will lose all its customers, because buyers can easily switch to many other sellers. Step 4: If the firm reduces its price below the market price, it is unnecessary because it can already sell any amount at the prevailing price. Step 5: This behaviour means that the individual firm faces a demand curve that is perfectly elastic at the market price, represented by a horizontal line. Verification / Alternative check: A simple numerical example can help. Suppose the market price for the product is Rs 100 per unit. The firm can sell 10 units, 100 units, or 1,000 units at Rs 100 because its output is tiny relative to the whole market. The revenue per unit remains constant at Rs 100 and its marginal revenue is also Rs 100 for every extra unit sold. This constant price at all output levels, from the firm's point of view, is exactly what a perfectly elastic demand curve means. As soon as the firm attempts to charge more than the market price, quantity demanded for that firm drops to zero, confirming the horizontal demand curve shape. Why Other Options Are Wrong: Option A, a downward sloping demand curve, describes the market demand curve, not the demand curve for an individual firm in perfect competition. Option B, perfectly inelastic demand, would be a vertical line and implies that quantity demanded does not change with price, which is not the case here. Option C, a concave curve, is a generic shape and does not correspond to the special property of perfect competition. Only option D, perfectly elastic, matches the horizontal demand curve that a perfectly competitive firm faces at the prevailing market price. Common Pitfalls: Students often confuse the market demand curve with the individual firm's demand curve. The market demand is indeed downward sloping, but once price is determined, each firm takes it as given and faces a horizontal demand curve at that price. Another pitfall is to assume that all firms always have downward sloping demand, which is not true in this idealised model. Remember to distinguish between industry level and firm level analysis. Final Answer: The demand curve faced by an individual firm under perfect competition is perfectly elastic.

Question 16

A firm earns total revenues of Rs 35 crores in a year. Its explicit costs (such as wages, rent, and materials) are Rs 7 crores, and its implicit costs (such as the opportunity cost of the owner's time and capital) are Rs 10 crores. Based on these fi…

Accepted Answer

Introduction / Context: This question distinguishes between accounting profit and economic profit, two key concepts in microeconomics and business decision making. Accounting profit considers only explicit costs, while economic profit also accounts for implicit or opportunity costs. Economic profit is very important because it tells us whether the firm is earning more than it could in its next best alternative use of resources. Given Data / Assumptions: Total revenue (TR) of the firm: Rs 35 crores. Explicit costs: Rs 7 crores. Implicit costs: Rs 10 crores. Economic profit is defined as total revenue minus the sum of explicit and implicit costs. Concept / Approach: Accounting profit is computed as total revenue minus explicit costs. However, economists are also interested in whether the firm covers the opportunity costs of all resources used, including the owner's time and capital. Economic profit is therefore defined as total revenue minus the sum of explicit and implicit costs. A positive economic profit means the firm is doing better than its next best alternative, while zero economic profit means the firm is just covering all opportunity costs. Negative economic profit suggests that resources could earn more elsewhere. Step-by-Step Solution: Step 1: Identify total revenue. Total revenue (TR) = Rs 35 crores. Step 2: Identify explicit costs. Explicit costs = Rs 7 crores. Step 3: Identify implicit costs. Implicit costs = Rs 10 crores. Step 4: Compute total economic cost. Total economic cost = Explicit costs + Implicit costs = 7 + 10 = Rs 17 crores. Step 5: Compute economic profit using the formula. Economic profit = Total revenue − Total economic cost = 35 − 17 = Rs 18 crores. Step 6: Match this value with the given options. Verification / Alternative check: We can first compute accounting profit to see the difference. Accounting profit = Total revenue − Explicit costs = 35 − 7 = Rs 28 crores. Economic profit accounts for implicit costs, so we subtract Rs 10 crores further: 28 − 10 = Rs 18 crores. This matches the earlier calculation. This comparison also illustrates that economic profit is always less than or equal to accounting profit because it includes more categories of cost. Why Other Options Are Wrong: Option A (Rs 32 crores) would arise if someone mistakenly subtracted only the implicit cost from total revenue and ignored explicit costs. Option B (Rs 52 crores) is impossible because it exceeds total revenue, showing a misunderstanding of the concept. Option D (Rs 38 crores) also exceeds total revenue and is clearly incorrect. Only option C (Rs 18 crores) correctly uses the formula for economic profit and matches the calculations using both direct and indirect methods. Common Pitfalls: Students often confuse accounting and economic profit and forget to subtract implicit costs when asked specifically about economic profit. Another common error is to add costs instead of subtracting them from revenue. Some may also misread crores and treat them as smaller units. Being careful with the definitions and units ensures accurate calculations and better conceptual understanding. Final Answer: The firm's economic profit, after accounting for both explicit and implicit costs, is Rs. 18 crores.

Question 17

Who was the first Indian to be awarded the Nobel Prize in Economics for his contributions to welfare and development economics?

Accepted Answer

Introduction / Context: This question belongs to the general knowledge and Indian economy category and focuses on important awards and recognitions. The Nobel Prize in Economics is one of the most prestigious awards in the world. Knowing which Indian economist received this honour and in which field he worked is useful for competitive exams and for understanding India's contribution to global economic thought. Given Data / Assumptions: The question asks about the first Indian Nobel laureate in economics. The name of the laureate must be selected from the options provided. We assume standard recognition of the Nobel Prize in Economics presented by the Royal Swedish Academy of Sciences. Concept / Approach: The Nobel Prize in Economics, officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, has been awarded to several economists worldwide. India has had one Nobel laureate in economics so far, known for pioneering work in welfare economics, social choice theory, and development economics. To answer, we match the names in the options with the known list of Indian Nobel laureates and identify the economist among them. Step-by-Step Solution: Step 1: Recall that Amartya Sen is a famous Indian economist who received the Nobel Prize in Economics in 1998. Step 2: Recognise that C V Raman was a Nobel laureate in Physics, not in Economics. Step 3: Note that Mihir Sen was known as a long distance swimmer and is not associated with the Nobel Prize. Step 4: Arun Shourie is known as a journalist and politician and is also not a Nobel laureate in Economics. Step 5: Therefore, the only option that fits the description is Amartya Sen. Verification / Alternative check: To verify, recall the subject areas that led to the Nobel Prize. Amartya Sen worked extensively on welfare economics, social choice theory, measurement of poverty and inequality, and the capability approach to human development. These contributions were widely recognised and led to the Nobel Prize in Economics in 1998. None of the other individuals listed contributed to economics at this Nobel Prize level, which confirms the answer. Why Other Options Are Wrong: Option B, C V Raman, won the Nobel Prize in Physics in 1930 for his work on light scattering, known as the Raman effect, not for economics. Option C, Mihir Sen, is famous as an Indian swimmer and has no connection to the Nobel Prize in Economics. Option D, Arun Shourie, is a journalist, writer, and former minister, but has never received a Nobel Prize. These options test whether the student can distinguish between different fields and personalities, reinforcing that the correct answer is Amartya Sen. Common Pitfalls: A common error is to confuse different Nobel laureates or to pick an Indian Nobel winner in any subject, not specifically economics. Another pitfall is to misremember the year or the field and guess incorrectly. To avoid such errors, students should connect names with their specific disciplines: C V Raman with Physics, Amartya Sen with Economics, and so on. Remembering a few key contributions also helps fix the name in memory. Final Answer: The first Indian to receive the Nobel Prize in Economics was Amartya Sen.

Question 18

In the year 2015, the real rate of interest in a country was 6% and the inflation rate was 3%. Based on these values, what was the approximate nominal rate of interest in that year?

Accepted Answer

Introduction / Context: This question checks understanding of the relationship between nominal interest rates, real interest rates, and inflation, concepts that are central to macroeconomics and financial planning. Lenders and borrowers are interested in the real return on loans after adjusting for changes in the price level, while the nominal rate is the stated interest rate. The famous Fisher equation links these three measures in a simple way that is frequently tested in exams. Given Data / Assumptions: Real rate of interest (r) = 6%. Inflation rate (i) = 3%. We are asked to find the nominal rate of interest (n) for the same period. We assume moderate inflation so that the commonly used approximate formula is valid. Concept / Approach: The approximate relationship between nominal interest rate, real interest rate, and inflation is given by the Fisher equation: nominal rate ≈ real rate + inflation rate. This is usually accurate when inflation is not extremely high. The exact Fisher equation also includes a product term, but for small percentages, the approximation works very well. With a real rate of 6 percent and inflation of 3 percent, the nominal rate should be roughly the sum of these two figures. Step-by-Step Solution: Step 1: Write down the Fisher equation in approximate form. Nominal rate ≈ Real rate + Inflation rate. Step 2: Substitute the given values. Nominal rate ≈ 6% + 3%. Step 3: Add the two rates. Nominal rate ≈ 9%. Step 4: Compare this result with the options provided and select the matching value. Verification / Alternative check: The exact Fisher equation is: 1 + nominal rate = (1 + real rate) * (1 + inflation rate). Substituting decimal values, 1 + n = (1 + 0.06) * (1 + 0.03) = 1.06 * 1.03 = 1.0918. Therefore, n = 0.0918, or about 9.18 percent. This exact calculation is very close to 9 percent, confirming that 9 percent is a suitable nominal rate using either the approximate or the exact formula. In multiple choice questions, such small differences are rounded. Why Other Options Are Wrong: Option A (3%) would correspond to a situation where nominal and inflation rates are equal and real rate is zero, which does not match the given data. Option B (6%) would imply zero inflation, contradicting the stated 3 percent inflation rate. Option D (12%) would imply a much higher nominal rate than required by the Fisher equation and does not follow from adding 6 and 3 percent. Therefore, only 9 percent is consistent with the definitions and formulas. Common Pitfalls: Students sometimes subtract inflation from nominal interest when they should be adding it to the real rate to get nominal. Others may confuse the real rate with the nominal rate and forget the adjustment for inflation altogether. A further mistake is to multiply rates or mix up the exact and approximate formulas. Remembering that real rate is roughly nominal minus inflation and that nominal is real plus inflation is the key to avoid such errors. Final Answer: The nominal rate of interest in 2015 was approximately 9%.

Question 19

In price theory, a price floor is defined as which of the following in relation to the legally allowed price for a good or service?

Accepted Answer

Introduction / Context: This question checks your understanding of government intervention in markets through price controls. A price floor is one of the two common forms of price control, the other being a price ceiling. Knowing the correct definition of a price floor and how it differs from equilibrium price and other concepts is important for analysing agricultural support prices, minimum wages, and similar policies. Given Data / Assumptions: The term under consideration is "price floor". The options mention maximum or minimum legal prices and other equilibrium related descriptions. We need to identify the correct definition that matches standard microeconomic terminology. Concept / Approach: A price floor is a legally imposed minimum price below which a good or service cannot be sold. Governments often set price floors to protect producers, such as minimum support prices for crops or minimum wages for labour. Unlike the equilibrium price determined by supply and demand, a price floor is an administrative measure. If the price floor is set above the equilibrium price, it can lead to excess supply or surplus. It is the opposite of a price ceiling, which is a maximum legal price. Step-by-Step Solution: Step 1: Recall the definition of a price ceiling: a maximum legal price. Step 2: Recall the definition of a price floor: a minimum legal price that cannot be undercut. Step 3: Compare this with the options. Option A describes a maximum legal price, which is actually a price ceiling. Step 4: Option B describes a minimum legal price, which fits the definition of a price floor. Step 5: Option C refers to the equilibrium price where demand equals supply and is not a government imposed floor. Step 6: Option D refers to a condition on elasticities and is not related to the legal minimum price concept. Verification / Alternative check: Consider the example of minimum wage. The government may set a minimum wage that employers are legally prohibited from paying below. This is a price floor in the labour market. Similarly, a minimum support price for farmers' produce is a price floor in the agricultural market. In all such cases, the key idea is a minimum legal price, not a maximum. This real world understanding confirms that a price floor is indeed a minimum legal price. Why Other Options Are Wrong: Option A is the definition of a price ceiling, which is a maximum legal price set to protect consumers from high prices, such as in rent control. Option C describes the equilibrium price where the free market without intervention sets the price that clears the market, but this is not a price control. Option D involves elasticities of demand and supply, which describe sensitivity to price changes, not the legal limit on price levels. Only option B matches the standard definition of a price floor. Common Pitfalls: Students often mix up price ceilings and price floors due to the similarity of the words. A good way to remember is that a ceiling is above you and limits how high you can go, while a floor is below you and sets the lowest point you can go. Another pitfall is confusing equilibrium price with controlled prices. Carefully distinguishing between market determined and government set prices helps avoid mistakes. Final Answer: A price floor is a minimum legal price set by the government or a regulating authority.

Question 20

If the price of an article decreases from Rs 40 to Rs 30 and, as a result, the quantity demanded increases from an initial level of Q1 units to 7,500 units, and the point price elasticity of demand over this change is given as −1, what is the origin…

Accepted Answer

Introduction / Context: This question tests the application of the point elasticity of demand formula to find an unknown original quantity demanded. Point elasticity relates small percentage changes in quantity demanded to small percentage changes in price at a specific point on the demand curve. It is very commonly tested in microeconomics questions involving demand analysis and pricing decisions. Given Data / Assumptions: Initial price P1 = Rs 40. New price P2 = Rs 30. Initial quantity Q1 is unknown. New quantity Q2 = 7,500 units. Point price elasticity of demand (Ep) = −1. We use the usual point elasticity formula based on the initial price and quantity. Concept / Approach: The point elasticity of demand using the initial values is given by: Ep = (dQ / dP) * (P1 / Q1). In discrete form for small changes, we approximate: Ep ≈ (ΔQ / ΔP) * (P1 / Q1), where ΔQ = Q2 − Q1 and ΔP = P2 − P1. The sign of Ep is negative for a normal downward sloping demand curve because price and quantity move in opposite directions. In this question, Ep is given as −1, so we substitute and solve for the unknown Q1. Step-by-Step Solution: Step 1: Compute the change in quantity demanded. ΔQ = Q2 − Q1 = 7,500 − Q1. Step 2: Compute the change in price. ΔP = P2 − P1 = 30 − 40 = −10. Step 3: Write the point elasticity formula. Ep ≈ (ΔQ / ΔP) * (P1 / Q1). Step 4: Substitute Ep = −1, P1 = 40, ΔQ, and ΔP. −1 = [(7,500 − Q1) / (−10)] * (40 / Q1). Step 5: Simplify the expression. (7,500 − Q1) / (−10) = (Q1 − 7,500) / 10. So −1 = [(Q1 − 7,500) / 10] * (40 / Q1) = (4 * (Q1 − 7,500)) / Q1. Step 6: Multiply both sides by Q1 to solve for Q1. −Q1 = 4(Q1 − 7,500). −Q1 = 4Q1 − 30,000. Step 7: Bring like terms together. −Q1 − 4Q1 = −30,000, so −5Q1 = −30,000. Step 8: Divide both sides by −5 to get Q1. Q1 = 30,000 / 5 = 6,000 units. Verification / Alternative check: We can verify by plugging Q1 = 6,000 back into the elasticity formula. Then ΔQ = 7,500 − 6,000 = 1,500. ΔP = −10. So (ΔQ / ΔP) = 1,500 / (−10) = −150. P1 / Q1 = 40 / 6,000 = 1 / 150. Therefore Ep ≈ (−150) * (1 / 150) = −1, which matches the given elasticity value. This confirms that the original quantity demanded was 6,000 units. Why Other Options Are Wrong: Option A (9,000 units) would produce a different elasticity and would not give Ep equal to −1. Option B (4,500 units) and option C (10,500 units) similarly fail when substituted back into the elasticity formula. Only Q1 = 6,000 makes the computed elasticity exactly −1, which is required by the question. Thus, the other options do not satisfy the mathematical relationship. Common Pitfalls: Common mistakes include using the wrong price or quantity as the base in the elasticity formula, forgetting the negative sign in the change in price, or using an arc elasticity formula where the question expects point elasticity. Another error is doing algebraic manipulation incorrectly when solving for Q1. Writing each step clearly and checking the result by substitution can help avoid these errors. Final Answer: The original quantity demanded before the price change was 6000 units.

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