CA Foundation

Economics
MCQs

Prof. Sandip Sengupta

 Index
Sl. No. Chapter Name Page No.

1. Nature & Scope of Business Economics 01 – 10

2. Theory of Consumer Behavior 11 – 16

3. Theory of Demand 17 – 26

4. Elasticity of Demand 27 – 35

5. Demand Forecasting 36 – 36

6. Theory of Supply 37 – 40

7. Equilibrium 41 – 45

8. Theory of Production 46 – 57

9. Theory of Cost 58 – 68

10. Price Determination in Different Market 69 – 70

11. Behavioral Principles 71 – 77

12. Monopoly 78 – 81

13. Monopolistically Competitive Market 82 – 83

14. Oligopoly 84 – 87

15. Business Cycle 88 – 91

 Nature and Scope of Business Economics

Chapter – 01 – Nature and Scope of Business Economics

Questions

1. The term “Economics’ owes its origin to the Greek word

a) Aikonomia b) Wikonomia c) Oikonomia d) None of the above
2. Oikonomia means
a) Industry b) Household c) Services d) None of the above
3. “Economics is a study of in the ordinary business of life.” Alfred Marshall
a) Human b) Wealth c) Mankind d) Agriculture
4. The term Economics is derived from
a) Greek words OIKOU and NOMOS c) Greek words Eco and nomos
b) Marshall’s Principles of Economics d) Adam Smith’s Wealth of Nations
5. The meaning of Greek words “OIKOU & NOMOS”
a) Micro and macroeconomics c) Household Management
b) The rule of economics d) The Law of Management
6. Economics concerns
a) With how a nation allocates its various scarce resources
b) With only infrastructure
c) With how a nation allocates its human resources
d) With Law of household
7. Economics is called of social sciences
a) Branch b) Queen c) King d) None
8. Who is the father of Economics?
a) Lionel Robbins b) Alfred Marshall c) Adam Smith d) Paul Samuelson
9. The analysis of how a society utilizes its scarce resources of manpower, raw materials &
capital to satisfy the material wants of its member comes under
a) Economics c) Microeconomics
b) Microeconomics d) Public & Private Sectors
10. What is the “Fundamental Premise of Economics?
a) Natural resources will always be scarce
b) Individuals are capable of establishing goals & acting in a manner consistent with
achievement of those goals
c) Individuals choose the alternative for which they believe the net gains to be the greatest
d) No matter what the circumstances, individual choice always involves a trade-off
Bhagwati Education Institute Page 1
 Nature and Scope of Business Economics

11. Our economy is characterized by –

a) Unlimited wants & needs c) No energy resources
b) Unlimited material resources d) Abundant productive Labour
12. Economics is the study of –
a) How society manages its unlimited resources
b) How to reduce our wants until we are satisfied
c) How society manages its scarce resources
d) How to fully satisfy our unlimited wants
13. The meaning of the word ‘Economics’ is most closely connected with the word –
a) Extravagant b) Scarce c) Unlimited d) Restricted
14. Economics provides certain which can be used for solving various business problems?
a) Tools b) Methods c) Principles d) Laws
15. Wealth is?
a) Stock b) Flow c) Both (a) & (b) d) Neither (a) or (b)
16. Income is:
a) Stock b) Flow c) Both (a) & (b) d) Neither (a) or (b)
17. The classical economists defined Economics as
a) The science of welfare c) The science of wealth
b) The science of scarcity d) the science of wealth and welfare
18. Business Economics implies:
a) Combination of manufacturing activity & applied economics.
b) Combination of business & trading.
c) Combination of business & profit.
d) All of the above
19. Business Economics is:
a) Abstract & applies the tools of Microeconomics.
b) Practical application of economic theory in business decision making.
c) Incorporates tools from multiple decisions
d) Both b & c
20. Which one is not within the scope of Business Economics?
a) Capita budgeting c) Business Cycle
b) Risk analysis d) Accounting Standards

Bhagwati Education Institute Page 2

 Nature and Scope of Business Economics

21. One of the following is merit of socialism

a) Private Property c) Works automatically
b) Incentive to hard work d) Ensures right to work
22. Business Economics is:
a) Branch of general economics
b) Comprising pure economics
c) Combination of “consumption & production units
d) Both b & c
23. Business Economics comprises of:
a) Micro economic in nature c) Quantitative analysis
b) Pragmatic in nature d) All of the above
24.Scarcity of resources means.
a) Non –existence of resources c) Both a& b
b) Limited resources d) None
25. The Law of scarcity-
a) Does not apply to rich/developed countries
b) Applies only to the less developed countries
c) Implies that Consumer’s wants will be satisfied in a socialistic system
d) Implies that consumer; wants will never be completely satisfied
26.Which of the following can be regarded as law of economics?
a) Ceteris Paribus, if the price of a commodity raises the quantity demanded falls
b) Higher the income, greater is the expenditure.
c) Taxes have no relation to the benefits which a person derives from the state
d) None of these
27. Economics may be defined as the science that explains...
a) The choices that we make as we cope with scarcity
b) The decision made by politicians
c) The decisions made by households
d) All human behavior
28.Scarcity is a situation in which.......
a) Wants exceed the resources available to satisfy
b) Something is being wasted
c) People are poor
d) None of the above

Bhagwati Education Institute Page 3

 Nature and Scope of Business Economics

29.Unlimited ends lead to:

a) Resource allocation c) Use on priority basis
b) Alternative use d) All
30. Economic goods are goods which
a) Obey the laws of Economics c) Are limited in supply and are scarce
b) Are tangible d) Are intangible
31. Which of the following is not one of the four central questions that the study of economics is
supposed to answer?
a) What to produce? c) Who consumes what?
b) When are goods produced? d) How are goods produced?
32. The Central Economic problem is –
a) What to produce? c) For whom to produce?
b) How to produce? d) All of above
33. Economic problem arises when:
a) Wants are unlimited c) Alternative uses of resources
b) Resources limited d) All of the above
34. The central problem in economics is that of –
a) Comparing the success of command versus market economies
b) Guaranteeing that production occurs in the most efficient manner
c) Guaranteeing a minimum level of income for every citizen
d) Allocating scarce resources in such a manner that a society’s unlimited Needs or wants
are satisfied as well possible.
35. Larger production of …………. goods would lead to higher production in future
a) Consumer goods c) Agricultural goods
b) Capital goods d) Public goods
36. Microeconomics is connected with......
a) Consumer’s Behavior c) Factor Pricing
b) Product Pricing d) All of these
37. When we are studying how a producer fixes prices of products we deal with:
a) Macro Economics c) Both a& b
b) Microeconomics d) None
38.Microeconomics is also known as
a) Public economics c) Income theory
b) Price theory d) Demand theory

Bhagwati Education Institute Page 4

 Nature and Scope of Business Economics

39. Microeconomics is concerned with:

a) Consumer Behavior c) Factor pricing
b) Product pricing d) All of the above
40. The branch of Economic theory that deals with the problem of allocation of re-sources is –
a) Microeconomics c) Econometrics
b) Macro Economics d) None of these
41. Right of private property is found in –
a) Socialism b) capitalism c) mixed economy d) none of these
42.Which of the following is a study of particular units rather than all the units combined?
a) Macro Economics c) Welfare Economics
b) Microeconomics d) None of these
43. Which of the following refer to the micro economic aspects from a national an-gle-
a) Per capita income of the country c) Income from the railways
b) Capital-output ratio in steel industry d) Both b), &(c)
44.State which refers to micro economic approaches from a national angle:
a) Unemployment among the educated people
b) Inflation in the Economy
c) Lockout in Indian Airlines
d) Distribution of coal in the country
45. Which of the following falls under Microeconomics?
a) National Income c) Factor Pricing
b) General Price level d) National Saving and investment
46.Which of the following is not a micro Economic subject matter?
a) The price of mangoes
b) The cost of producing a fire truck for the fire department of Delhi, India
c) The quantity of mangoes produced for the mango market
d) The national Economy’s annual rates of growth
47. Price theory is also known as
a) Positive Economics c) Microeconomics
b) Normative Economics d) Macro Economics
48. Macro Economics is the study of....
a) All aspects of scarcity
b) The national Economics and the global economy as a whole
c) Big businesses

Bhagwati Education Institute Page 5

 Nature and Scope of Business Economics

d) The decisions of individual businesses and people

49.When we study why saving rates are high or low, we are studying
a) Macro Economics b) Microeconomics c) Econometrics d) Both a) &b)
50.Identify the correct statement –
a) In the deductive method logic proceeds from the particular to the general
b) Micro and macro Economics are interdependent
c) In a capitalist economy economic problem are solved by Planning Commission
d) Higher the prices, lower is the quantity of a product is a normative statement
51. Economics considered with welfare propositions are called economics:
a) Socialist b) Capitalist c) Positive d) Normative
52. Which of the following refer to the macroeconomic approaches a national angle?
a) Per capita income of the country c) Income from the railways
b) Capital-output ratio in steel industry d) Both (a) and (b)
53. An example of positive Economic analysis would be-
a) An analysis of the relationship between the price of food and the quantity.
b) Determining how much income each person should be guaranteed
c) Determining the fair price for food
d) Deciding how to distribute the output of the Economy
54. Economics as a positive science should be between ends.
a) Unique c) Neutral
b) Socially responsible d) Inspiring
55. Normative aspect of Economics is given by:
a) Marshall b) Robbins c) Adam Smith d) Samuelson
56. Which of the following is an example of normative science?
a) Rich people should be taxed more
b) Free education should be given to the poor
c) India should spend more money on defense
d) All of the above
57. Normative aspect of Economics is given by:
a) Marshall b) Robbins c) Adam Smith d) Samuelson
58. Positive statements concern what is Normative statements concern
a) What was c) What will be
b) What is the normal situation d) What ought to be

Bhagwati Education Institute Page 6

 Nature and Scope of Business Economics

59. The objective of macro-economics is to study about—

a) Problems, principles and policies relating to full employment of available re-sources
b) Problems, principles and policies relating to optimum allocation of resources
c) Growth of resources
d) Both a and c
60. A mixed economy to solve its central problem relies on-
a) Economic planning c) Price fixing
b) Price mechanism d) Both a and b
61. The interference of the government is very limited in---
a) Socialist economy c) Mixed economy
b) Capitalist economy d) All of the above
62.A dual system of pricing exists in---
a) Capitalist economy c) Mixed economy
b) Socialist economy d) None of these
63. “A government deficit will reduce unemployment and cause an increase in price‟ this
statement is-
a) Positive b) Normative c) Incomplete d) None of these
64.Social insurance, sickness benefits, old age pension, etc. are some social benefits provided
by-
a) State in capitalist economy c) State in mixed economy
b) State in socialist economy d) Both b and c
65. Price-mechanism is an important feature of
i) Market economy
ii) Regulated economy
iii) Mixed economy
iv) Capitalist economy
a) 1 and 2 only b) 3 and 4 only c) 1 and 3 only d) 1 and 4 only
66.Capital intensive technique would be chosen in a
a) Labour surplus economy where the relative price of capital is lower
b) Capital surplus economy where the relative price of capital is lower
c) Developed economy where technology is better
d) Developed economy where technology is poor

Bhagwati Education Institute Page 7

 Nature and Scope of Business Economics

67. Which of the following is considered as a dis-advantage of allocating re-sources in a

capitalist economy?
a) Income will tend to be unevenly distributed
b) People do not get goods of their choice
c) Men of initiative and enterprise are not rewarded
d) Profits will tend to be low
68. The problem of what goods and services are produced and how much, is covered by the
general term
a) Resource allocation c) Distribution
b) Choice of technique of production d) Macro-economics
69.Consumers and Producers make their choices based on the market forces of demand and
supply in
a) Socialist (command) Economy c) Capitalist Economy
b) Mixed Economy d) Closed Economy
70. Framing suitable policies to solve inequalities of income denotes that economics is –
a) A science c) Both a science and an art
b) An art d) Neither a science nor an art
71. Which of the following is not correct about capitalist system?
a) Too much of waste due to cutthroat competition
b) There is right of private property
c) Conditions are not favorable for equitable distribution of wealth
d) There is central planning authority
72. “During the boom periods when aggregate demand, national income and price are high,
entrepreneurs tend to make high profit”. This statement shows-
a) Effect of micro-economic variables on macro variable
b) Effect of macro-economic variables on micro variable
c) Inter-dependence of micro and macro economics
d) Both b and c
73. Which of the following statements would you consider to be a normative one?
a) Faster economic growth should result if economy has a higher level of investment.
b) Changing the level of interest rates is a better way of managing the Economy than using
taxation and government expenditure.
c) Higher level of unemployment will lead to higher level of inflation.
d) The average level of growth in the Economy was faster in the 1990s than the 1980s.

Bhagwati Education Institute Page 8

 Nature and Scope of Business Economics

74. Which of the following statements is normative?

a) Large government deficits cause an Economy to grow more slowly
b) People work harder if the wage is higher
c) The unemployment rate should be lower
d) Printing too much money cause inflation
75. Which of the following statement is incorrect?
a) Business Economics is normative in nature.
b) Business Economics has a close connection with Statistics
c) Business Economists need not worry about macro variable
d) Business Economics is also called Managerial Economics
76. Scope of Business Economics includes:
a) Demand analysis: c) Pricing Policies
b) Production & Cost analysis d) All of the above
77. Which of the following is not the subject matter of Business Economics?
a) Should our firm be in this business?
b) How much should be produced & at what price should be kept?
c) How will the product be placed in the market?
d) How should we decrease unemployment in the economy?
78. The difference between positive & normative economics is:
a) Positive economics explains the performance of the economy while normative economics
finds out the reasons for poor performance
b) Positive economics describes the facts of the economy while normative economics
involves evaluating whether some of these are good or bad for the welfare of the people
c) Normative Economics describes the facts of the economy while positive eco-nomics
involves evaluating whether some of these are good or bad for the welfare of the people
d) Positive economics prescribes while normative economics describes
79. An example of ‘positive economics’:
a) An analysis of the relationship between the price of food & the quantity purchased
b) Determining how much income each person should be guaranteed
c) Determining the fair price level.
d) Deciding how to distribute output of economy
80. Economic goods are considered scarce resources because they:
a) Cannot be increased in quantity.
b) Do not exist in adequate quantity to satisfy requirement of society.

Bhagwati Education Institute Page 9

 Nature and Scope of Business Economics

c) Are the primary importance in satisfying social requirement?

d) Are limited to man made goods.
81. Exploitation & inequality are minimal under:
a) Socialism b) Capitalism c) Mixed economy d) None
82.Who gave the positive aspect of science:
a) Marshall b) Robbins c) Adam Smith d) Samuelson
83.Economic problems arise when:
a) Wants are unlimited c) There are alternative uses of resources.
b) Resources are limited d) All
84. Inequality of income does not perpetuate in:
a) Socialism b) Capitalism c) Mixed economy d) None
85. In which economic system all the means of production are owned and controlled by private
individuals for profit:
a) Socialism b) Capitalism c) Mixed economy d) Communism
86. Freedom of choice is the advantage of
a) Socialism b) Capitalism c) Mixed economy d) Communism
87. A developed economy uses technique in production
a) Labour intensive b) Capital intensive c) Home-based d) Traditional
88. In which type of economy do consumers and producers make their choices based on the
market forces of demand and supply?
a) Open b) Controlled c) Command d) Market Economy
89. In a free market economy, when consumers increase their purchase of a goods and the level
of exceeds then prices tend to rise:
a) Demand, Supply b) supply, Demand c) Prices, Demand d) Profit, Supply
90. A Free Market economy solves its central problems through
a) Planning authority c) Both
b) Market mechanism d) None

Bhagwati Education Institute Page 10

 Theory of Demand

Chapter – 02 – Theory of Demand

Questions

1. Which equation shows Law of demand?

a) Qd = a + bP c) Qd = 80 – 2P
b) Qd = 40 + 3P d) a & c.
2. Expansion of demand is the result of:
a) Increase in price c) Increase in income
b) Decrease in income d) None
3. Contraction of demand shows:
a) Downward shift in demand curve c) Movement on dd curve towards vertically
b) Upward shift in demand curve. d) None.
4. The demand function of a Product ‘X’ is Dx = 12 – 2Px. If there 2000 customers in the
market, find out aggregated demand corresponding to price `2.
a) 8000 b) 1600 c) 16000 d) None
5. Conspicuous goods are also known as:
a) Prestige goods b) Snob Goods c) Veblen goods d) All.
6. The good which cannot be consumed more than once is known as:
a) Durable good c) Producer good
b) Non-durable good d) None.
7. Demand is the:
a) Limited and unlimited wants of consumers.
b) Willingness to pay for a good.
c) Ability to pay for a good.
d) Entire relationship between the quantity demanded and the price of a good.
8. The Law of demand, with ceteris paribus establishes relationship between:
a) Income & consumer demand: c) Price & its quantity demand
b) Price & its substitutes d) Price & its complementary
9. When price of tomato increases and people by tomato puree. How are they related?
a) Complementary to each other. c) Nothing can be said.
b) Competitive to each other. d) Inferior good.
10. Motton & beef are substitutes. If the price of motton increases, the demand for beef will.
a) Increase and the demand curve for beef will shift leftwards.
b) Increase and the demand curve for beef will shift rightwards.
Bhagwati Education Institute Page 11
 Theory of Demand

c) Decrease and the demand curve for beef will shift leftwards.
d) None.
11. With fall in price when total demand for a commodity increases we get.
a) Substitution effect; c) Price effect;
b) Income effect; d) None.
12. Consumer’s real income decreases:
a) When price of the good decreases. c) When price of the commodity increases.
b) When money income decreases. d) None.
13. Demand is a
a) Stock concept. c) Neither a flow nor a stock concept.
b) Flow concept. d) Partially a flow concept.
14. In economics, demand refers to:
a) Quantity demanded at a particular time
b) Quantity demanded backed by ability to pay.
c) Quantity demanded for normal & inferior goods.
d) Quantity demanded at a specific price during a particular period of time.
15. What effect does an increase in the price of a product have on the purchasing power of the
consumer?
a) Increases c) No effect
b) Decreases d) Decreases initially, but increases after
some time
16. When price of petrol goes up, demand for automobiles decreases, it implies that petrol &
automobiles are –
a) Substitutes c) Inferior goods
b) Complementary d) Normal goods.
17. Change in demand, as a result of the factors other than price is known as–
a) Demand fluctuation c) Demand Shrinking
b) Contraction / extension of demand d) Shift in demand
18. When price of z rises it causes an increase in demand for good x. x & z are:
a) Complementary goods. c) Substitute goods
b) Inferior goods. d) Necessities.
19. Market demand is derived from individual demand curve by:
a) Vertical summation. c) Vertical & horizontal summation
b) Horizontal (or lateral summation) d) None

Bhagwati Education Institute Page 12

 Theory of Demand

20. When price of related goods or income changes, it brings about:

a) Change in demand c) Increase in demand
b) Change in quantity demanded d) Decrease in demand
21. Potato Chips and Popcorn are substitutes. A rise in the price of Potato Chips will ________
the demand for Popcorn & Quantity demanded for Popcorn will _______.
a) Decrease, decrease. c) Increase, decrease.
b) Increase, increase. d) None.
22. If price of Pepsi decreases relative to the price of Coke & 7-up, the demand for:
a) Coke will decrease c) Coke & 7-up will increase
b) 7-up will decrease d) Coke and 7-up will decrease
23. A relative price is:
a) Price expressed in terms of money.
b) What you get paid for babysitting your cousin.
c) The ratio of one money price to another.
d) Equal to a money price.
24.If two goods are complements this means that a rise in the price of one commodity will
induce.
a) An upward shift in demand for the other commodity.
b) A rise in the price of the other commodity.
c) A downward shift in demand for the other commodity.
d) No shift in the demand for the other commodity.
25. Consider demand function Q = 100 – 0.5 P. The inverse function is:
100 - 0.5P
a) P = 200 – 2Q c)
Q
1
b) d) None
100 - 0.5P
26.Price of blue jeans and demand for black jeans are shown by diagram as
a) Downward sloped c) Upward sloped
b) Parallel to horizontal axis d) None
27. A change in climatic conditions resulting in hot weather, prices remaining the same, would
cause a consumer of cold drinks.
a) To move to lower demand curve c) To move up the same demand curve
b) To move to a higher demand curve. d) To move lower down the demand curve.

Bhagwati Education Institute Page 13

 Theory of Demand

28.Situation where an increase in price of commodity may increase the quantity demanded may
be due to:
a) Normal Law at demand c) Better quality of the product.
b) Expectations at further rise in prices d) Both (b) and (c)
29.As price of oranges rises:
a) The quantity demanded for oranges increases.
b) The demand curve for oranges shifts to the right.
c) The quantity demanded for oranges decreases.
d) The demand curve for orange shifts.
30. Market demand curve, normally, would
a) Be a horizontal straight line c) Slope downwards.
b) Be a vertical straight line. d) Slope upwards.
31. ‘Ceteris Paribus’ clauses in the Law at demand does not mean.
a) The price of the commodity does not change.
b) The price of its substitutes does not change.
c) The income of the consumer does not change.
d) The price of complementary goods does not change.
32. Which one of the following is true in case of normal goods?
a) When price increases, demand decreases
b) When price increases, demand also increases
c) When price remains constant, demand falls down
d) When price falls down, demand remain constant
33. An exceptional demand curve is one that slopes:
a) Upwards to the right c) Upwards to the left
b) Downwards to the right d) Horizontally.
34. When there is decrease is demand the demand curve
a) Moves downward towards the axis c) Remains unchanged
b) Moves upwards away from the axis d) None of the above.
35. The goods have to be consumed simultaneously are
a) Identical b) Complementary c) Substitute d) None of these
36. Which of the following pairs of commodities is an example of substitutes?
a) Coffee and Milk c) Pen and Ink
b) Diamond and Cow d) Mustard Oil and Coconut Oil

Bhagwati Education Institute Page 14

 Theory of Demand

37. If the price of Orange Juice increases, the demand for Apple Juice will ___________.
a) Increase c) Decrease
b) Remain the same d) Become negative
38.Ceteris Paribus, a change in price of a commodity causes the quantity purchased of its
complements to move.
a) In the same direction c) In the opposite direction
b) In an insignificant manner d) None.
39. If two commodities are substitutes a change in the price of one, ceteris parivus, causes a
change in the quantity purchased of the other.
a) In the same direction. c) In the opposite direction
b) In an insignificant manner d) None
40. What was Robert Giffen’s observation in relation to price & quantity demanded.
a) A commodity whose price & quantity demanded vary in different direction.
b) A commodity whose price & quantity demanded vary in same direction.
c) A commodity whose price & quantity demanded is always constant.
d) Both a & b are correct.
41. The demand for factors of production is:
a) Fundamental demand c) Market demand
b) Derived demand d) Joint demand
42.Which of the following is not determinant of demand?
a) Consumer’s tastes & preferences; c) Income of the consumers;
b) Quantity supplied of a commodity; d) Price of related goods
43. Bricks for houses is an example of which kind of demand?
a) Composite b) Competitive c) Joint d) Derived
44.Which of the following would cause the demand curve for automobiles to shift to the left?
a) An increase in the price of the automobiles
b) An increase in the interest rate paid to borrow money to pay for the automobiles
c) An increase in buyer’s income
d) An increase in cost of production of automobiles
45. What will happen in rice market if buyers are expecting higher price in near future
a) The demand for rice will decrease
b) The Quantity demanded and price will increase
c) The demand for rice remains unaffected
d) The demand for rice will increase

Bhagwati Education Institute Page 15

 Theory of Demand

46.Chicken & Fish are substitutes; if the price of chicken increases, the demand for fish will
a) Increase or decrease but the demand curve for chicken will not change
b) Increase & the demand curve for fish will shift rightwards.
c) Not change but there will be a movement along the demand curve for fish;
d) Decrease and the demand curve for fish will shift leftwards
47. With a fall in price of a commodity, consumer’s
a) Real income increases; c) No change in real income
b) Real income decreases; d) None
48. In Economics, when demand for a commodity increases with fall in price it is:
a) Contraction c) No change in demand
b) Expansion of demand d) None
49.If regardless of changes in price, quantity demanded remains same, dd curve is:
a) Horizontal b) Vertical c) Positively sloped d) None
50. The substitution effect takes place due to change in:
a) Income of consumer c) Relative price of commodity
b) Prices of commodity d) All
51. If number of uses of any good is more demand curve will:
a) Remain same b) Shifts rightward c) Shifts leftward d) All
52. Demand for producer’s goods depends on:
a) Profitability of industry c) Disposable income of consumer
b) Growth prospects of industry d) Both a & b.

Bhagwati Education Institute Page 16

 Theory of Consumer Behavior

Chapter – 03 – Theory of Consumer Behavior

Questions

1. The other name of equi-marginal utility is:

a) Ordinal Theory c) Hicksian Theory
b) Marshallian Theory d) All
2. Marginal utility approach to demand is given by:
a) J.R. Hicks c) A.C. Pigou
b) Alferd Marshall d) None
3. Name the economists who develop marginal utility theory & indifference curve theory:
a) Hicks, Samuleson, c) Marshall, Hicks
b) Marshall, Robins d) Hicks & Allen
4. ‘Cardinality’ means utility can be:
a) Measured b) Ranked c) Not measured d) Qualitative
5. When there is no consumption, what value total utility and marginal Utility takes?
a) TU is Zero & MU is (+ve) c) TU is Zero and MU is maximum.
b) TU is zero and MU is (-ve) d) TU is max, MU is Zero.
6. The 2nd glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of
a) Law of Demand c) Law of Diminishing utility
b) Law of diminishing returns d) Law of Supply.
7. Marginal Utility is calculated as
ΔTU
a) TUn - 1 - TU n b) TU n - TU n - 1 c) d) Both b & c
ΔQ
8. Total utility is maximum when:
a) Marginal utility is maximum c) Marginal utility is nil
ΔTU
b) =0 d) Both b & c
ΔQ
9. Marginal utility curve of a consumer is also his:
a) Indifference curve c) Supply curve
b) Total utility curve d) Demand curve
10. When economists speak of the utility of a certain good, they are referring to:
a) The demand for the good.
b) The usefulness of the good in consumption

Bhagwati Education Institute Page 17

 Theory of Consumer Behavior

c) The satisfaction from consuming the good.

d) The rate at which consumer wants to exchange
11. Comforts lies between the:
a) Inferior goods & necessaries. c) Necessaries & Luxuries
b) Luxuries & inferior goods d) None
12. The total area under the demand curve of good measures:
a) Marginal utility c) Consumers surplus
b) Total utility d) Producer surplus
13. Which is not the assumption of marginal utility analysis?
a) Cardinal measurability of utility c) Rationality of human behavior
b) Constancy of the marginal utility of money d) Ordinal measurability of utility
14. Law of diminishing marginal utility may not apply to:
a) Money b) Butter c) Pepsi, Coke etc. d) Ice cream
15. The total utility, which a consumer derives from nth units of a commodity minus the total
utility, he derives from (n – 1) units is:
a) The marginal utility of the nth unit. c) Elasticity of the consumer’s demand.
b) Consumer’s surplus of n units. d) Consumer’s equilibrium’s demand
16. When marginal utility is decreasing it means that the total utility is:
a) Increasing c) Increasing & MU is positive
b) Decreasing d) None
17. The falling part of a TU curve shows.
a) Increasing marginal utility. c) Zero marginal utility
b) Decreasing marginal utility d) Negative marginal utility.
18. The sum of the utility derived from the consumption of each unit of a commodity consumed
is known as:
a) Total utility c) Marginal utility
b) Average utility d) All
19. The total utility divided by the number of units consumed is known as:
a) Marginal utility c) Total utility
b) Average utility d) None
20. What is called the point of satiety?
a) The point where marginal utility becomes greater than zero.
b) The point where marginal utility becomes less than zero.
c) The point where marginal utility becomes zero.

Bhagwati Education Institute Page 18

 Theory of Consumer Behavior

d) None
21. The statement A = B = 80 utility implies:
a) An ordinal approach c) Both a & b.
b) A cardinal approach d) None
22. Marginal utility of each commodity is measurable in terms of:
a) Price of the commodity
b) Quantity of commodity purchased
c) Price paid for last unit purchased.
d) None
23. Which is not an assumption of law of diminishing marginal utility?
a) Rational consumer c) Cardinal utility
b) Short period d) Substitution of goods.
24.The total utility that Amit derives after having 4 oranges is 10, whereas the total utility on
consuming 5 oranges is 9. What is the marginal utility for 5th orange?
a) 1 b) 0 c) -1 d) None
25. Mr Bean recently bought a shirt worth `1,500. Eventually, Mr. Bean bought five more shirts
at the same price & then he decided not to buy any more. Why?
a) The supply curve for shirt is downward sloping.
b) He minimizes his satisfaction with the 5th shirt.
c) Because of his budget constraint.
d) The Law of diminishing marginal utility starts operating.
26.Find out Total Utility for 4 units of goods when qty. demanded are 1,2,3,4 ,5 with respective
Marginal utilities as 5,4,3,2,1
a) 4 units b) 14 units c) 15 units d) None
27. Assume that utility can be measured in rupees. From the utility schedule, find how many
cakes the consumer would consume at the price of `9 per cake:
Cakes. 1 2 3 4 5
Total Utility 30 45 54 59 59
a) 4 b) 3 c) 2 d) 5
28.Consumer attains equilibrium for a single commodity x, where:
ΔTU
a) MU x > Px b) MU x = Px c) = Price of 'x' d) Both b & C
ΔX

Bhagwati Education Institute Page 19

 Theory of Consumer Behavior

29.While analyzing Marshall’s measure of consumer’s surplus one assumes:

a) Imperfect competition c) Monopoly
b) Perfect competition d) Monopsony
30. The law of equi-marginal utility considers price of money as:
a) Zero b) Less than one c) More than one d) One
31. Marginal utility curve is _____________ concept.
a) Cardinal b) Both c) Ordinal d) None
32. Cardinal approach is related to:
a) Indifference curve c) Law of diminishing returns
b) Equi-marginal utility d) None
33. The Law of equi-marginal utility is one of the laws within whose parameters marginal utility
analysis is framed. The other one is
a) Law of diminishing marginal utility c) Law of consumer surplus
b) Law of proportion d) Law of increasing returns
34. Total utility starts decreasing when ____________.
a) Marginal utility is positive c) Marginal utility becomes zero
b) Marginal utility is negative d) None

Questions on Consumer’s Surplus:

35. Consumer’s surplus is:

a) What is the price before discount minus what a consumer actually pays?
b) What a consumer is ready to pay minus what he actually pans.
c) Free gifts received by consumers on purchase of any commodity.
d) None.
36. Maximum consumer surplus arises on _______ of the commodity consumed.
a) First unit b) 2nd unit c) All units d) All except last unit
37. Consumer has no consumer surplus on _________ of the commodity consumed.
a) First unit b) 2nd unit c) All units d) Last unit
38.Consumer surplus arises because:
a) Consumer has lot of money
b) Quality of different units of the same commodity differs.
c) Consumer receives more than what he pays for.
d) None

Bhagwati Education Institute Page 20

 Theory of Consumer Behavior

39. Consumer surplus is the difference between:

a) Price demanded & price paid.
b) Price Quoted & price actually paid.
c) Price that a consumer is willing to pay & the price actually paid.
d) None.
40. Consumer surplus is best described as:
a) Extra Utility c) Sacrifice & commodities.
b) Price paid d) All of the above.
41. Consumer’s surplus is the highest in the case of:
a) Necessities c) Luxuries
b) Comforts d) Conventional necessities.
42.The concept consumer surplus is useful:
a) In monetary policy c) In fixing remuneration of the fac-tors.
b) In investment policy. d) In tax policy
43. Consumer surplus is based on which concept
a) Diminishing Marginal Utility c) Indifferent curve approach
b) Law of demand d) None
44.The satisfaction which a consumer derives in the consumption of a commodity is equal to
`320. The price of that commodity is `180. What will be his consumer surplus?
a) 180 b) 200 c) 140 d) 500
45. If total utility of a commodity is 5 & marginal utility is 1, a person consumes 3 units. What is
the consumer surplus?
a) 4 b) 2 c) 4 d) 6
46.When total utility is 212, consumer spends 100, the consumer surplus is:
a) 122 b) 112 c) 100 d) 312
47. If a buyer’s willingness to pay for a new car is `2,00,000 & he actually buys it by `1,80,000.
The buyer’s surplus is:
a) `18,000 b) `2,000 c) `3,80,000 d) None
48. Consider demand function P = 20 – 0.5Q. When P = 4, consumer surplus is:
a) 32 b) 240 c) 256 d) None
49.Consider demand function P = 100 – 0.5Q
Find out buyer’s surplus when P = 10
a) 180 b) 2400 c) 1000 d) None

Bhagwati Education Institute Page 21

 Theory of Consumer Behavior

Questions of Indifference Curve:

50.Indifference curve is:

a) Cardinal approach c) Marshallian approach
b) Ordinal approach d) All
51. Which of the following is a property of an indifference curve for X & y goods?
a) The MRS x for y is constant as we move along IC.
b) MUx & MUy are constant at each point on IC
c) Total utility is greatest where the 45-degree line cuts the IC
d) It is convex to the origin.
52. Indifference curve between income & leisure for an individual are generally:
a) Concave to the origin. c) Negatively sloped straight line.
b) Convex to the origin. d) Positively sloped straight line.
53. In case of right angled indifference curve the goods are:
a) Perfect complements c) Inferior goods
b) Perfect substitutes d) Giffen goods
54. Indifference curves never intersect each other due to:
a) Different levels of satisfaction c) Convex to the origin
b) Same levels of satisfaction d) Concave to the origin
55. A budget constraint line is a result of
a) Market price of commodity X c) Income of the consumer
b) Market price of commodity Y d) All of these
56. Which equation shows budget shows budget line for two commodities A & B.
a) M = Px .x + Py .y c) M = PA . A + PB .B

b) M = Px A + Py . B d) All

57. The slope of price line for two commodities with Px = 20, Py = 5
20 5
a) b) − c) – 4 d) 5
5 20
58. Constraints on which budget line is made are:
a) Given income & prices c) Given income & tastes
b) Given prices & tastes d) Given prices & govt. policy
59. An IC slopes down towards right since more of one commodity & less of another results in:
a) Greater satisfaction c) Maximum satisfaction
b) Lesser satisfaction d) Same satisfaction
Bhagwati Education Institute Page 22
 Theory of Consumer Behavior

60. If the consumer prefers A to B & B to C, then he prefers A to C. It is called property of

a) Transitivity c) Both (a) & (b)
b) Consistency d) All of above
61. A series of indifference curve is called:
a) Indifference structure c) Indifference graph
b) Indifference Map d) All of the above
62.Convexity means slope is
a) Increasing b) Decreasing c) Constant d) Zero
63. Convex IC is explained by
a) Diminishing MRS c) Constant MRS
b) Increasing MRS d) None
64.Consumer’s equilibrium occurs when:
P P P P
a) MRS > X b) MRS < X c) MRS = X d) MRS = Y
PY PY PY PX
65. For consumer’s equilibrium to be stable for normal goods, the requirement is:
a) Constant MRS c) Diminishing MRS
b) Increasing MRS d) None
66.When IC is downward linear, goods are:
a) Complementary c) Perfect Substitutes
b) Substitutes d) Perfect Complements
67. When MRS is increasing the shape of IC is
a) Horizontal b) Vertical c) Concave d) Convex
68. Which assumption implies the consumer aims at utility maximization?
a) Rationality b) Ordinality c) Cardinality d) None
69.At the point of consumer’s equilibrium indifference curve & budget line are:
a) Intersecting each other c) Tangent
b) Passing through each other d) None
70. The consumer is in equilibrium when the following condition is satisfied:
MUX MU Y MUX MU Y MUX MU Y PX P
a) > b) = c) < d) = Y
PX PY PY PY PX PY MUX MU Y
71. What shows all possible combinations of two goods that can be bought by the consumer?
a) Marginal utility curve c) Budget line
b) Indifference curve d) None

Bhagwati Education Institute Page 23

 Theory of Consumer Behavior

72. Odd one out with regard to indifference curve

a) Convex to the origin c) Moves from right to left
b) Moves left to right d) Never intersect each other.
73. A locus of constant utility is called the:
a) Expansion path c) Indifference curve
b) PP Curve d) Demand Curve
74. At the point of tangency, the slope of the IC is:
a) Greater than the price line. c) Same as the price line
b) Lesser than the price line d) All
75. MRSx for y & MRSy forx both will be zero where the commodity X & y are:
a) Complements c) Perfect complements
b) Substitutes d) Perfect substitutes
76. A movement along given indifference curve is known as:
a) Income effect c) Substitution effect
b) Price effect d) None
77. Which of these is not a characteristics of an IC?
a) Cannot intersect each other c) U Shaped
b) Convex to origin d) Negatively sloped
78. The slope of indifference curve indicates:
a) Price ratio between two commodities c) Factor substitution
b) Marginal rate of substitution d) Level of indifference.
79. Given constant price, the consumer is said to be in equilibrium with respect to purchase of
different commodities when he has:
a) Further tendency to substitute one commodity for another.
b) No tendency to substitute one commodity for another.
c) Obtained minimum possible satisfaction from the commodities.
d) None.
80. For perfect substitutability between X and Y
a) MRSxy should be increasing c) MRSxy should be constant
b) MRSxy should be decreasing d) None of the above.
81. The slope of IC for normal good is:
a) Downward b) Upward c) Straight line d) Can be all above

Bhagwati Education Institute Page 24

 Theory of Consumer Behavior

82.The substitution effect of fall in the price of the commodity will lead to:
a) Upward movement in IC c) Downward movement in IC
b) Movement from lower IC to a higher d) None of these

Each of the following questions are based on figure F.1, F.2, F.3 and F.4. as
given under. The figures depict Indifference curves
83.Figure F.4 here shows
a) Increasing MRSxy c) Constant MRSxy
b) Decreasing MRSxy d) None of the above

84. Which of the given figures of an indifference curve is most relevant to the consumer?
a) Figure F.1. b) Figure F.3. c) Figure F.2. d) Figure F.4.
85. The indifference curve given in Figure F.2. represents
a) Perfect substitutability c) No substitutability
b) Perfect complementarity d) No complementarity
86. Figure F.3. here shows
a) Increasing MRSxy c) Constant MRSxy
b) Decreasing MRSxy d) None of the above.

Mathematical of Indifference Curve:

87. A consumer is indifferent between the combinations A & B

Combination Good X Good Y
A 10 14
B 12 13
Absolute value of MRS x for y is:
a) 1.00 b) 0.50 c) 1.50 d) 2.00

Bhagwati Education Institute Page 25

 Theory of Consumer Behavior

88. Additional Utility of A & B are 300 & 450. When price of product B is `Rs 60. Price of
product A at equilibrium is
a) 45 b) 40 c) 90 d) 50
89. MUx = 15, Px = 40, Py = 30, value of MUy is
a) 125 b) 11.25 c) 200 d) 225
90. Slope of budget line is – 0.25. If a consumer with an income of `100 purchases equal
quantity of two goods x & y. What would be the amount spent on good x?
a) `75 b) `20 c) `40 d) `60
91. A consumer with an income of `100 can buy 10 units of good x & 15 units of goods y. If price
of both goods is same, absolute value of slope of budget line is
a) 0.67 b) 1.00 c) 1.50 d) 6.67
92.Marginal utilities of goods A & B are 600 & 900 and the price of good B is `120. If the
consumer is in equilibrium the price of good A is:
a) `60 b) `70 c) `80 d) `90
93. MUx = 300, Px = `12, Py = `30, MUy ______________
a) 350 b) 700 c) 550 d) 750

Bhagwati Education Institute Page 26

 Elasticity of Demand

Chapter – 04 – Elasticity of Demand

Questions

1. In the case of a straight - line demand curve meeting the two axes, the price-elasticity of
demand at the mid-point of the line would be:
a) 0 b) 1 c) 1.5 d) 2
2. Identify the factors, which generally keeps Ep for a good low:
a) Variety of uses for that good. c) Close substitutes for that good.
b) Its low price. d) High proportion of the income spent on
it.
3. The price elasticity of demand is defined as the responsiveness of:
a) Price to a change in quantity demanded.
b) Quantity demanded to a change in price.
c) Price to a change in income.
d) Quantity demanded to a change in income
4. The price elasticity of demand for cake is:
a) The change in the quantity demanded of cake when cake increases by 60 paise per rupee.
b) The percentage increase in the quantity demanded of cake when the price of cake falls by
a percent per rupee.
c) The increase in the demand for cake when the price of cake falls by 10 percent per rupee.
d) The decrease in the quantity demanded of cake when the price of cake falls by 1 percent
per rupee.
5. If regardless of changes in its price, the quantity demanded of a good remaining unchanged,
then the demand curve for the good will be:
a) Horizontal b) Vertical c) Positively slopped d) Negatively slopped
6. If electricity demand is inelastic & electric rates increase, which of the following is likely to
occur?
a) Quantity demanded will fall by a relatively large amount.
b) Quantity demanded will fall by a relatively small amount.
c) Quantity demanded will rise in the short run, but fall in the long run.
d) Quantity demanded will fall in the short run, but rise in the long run.
7. When the number of uses of the purchased good is less, price elasticity of demand is:
a) High b) Low c) Zero d) Infinity

Bhagwati Education Institute Page 27

 Elasticity of Demand

8. When elasticity of demand is measured in terms of its substitutes & complements, it is

called.
a) Cross elasticity c) Income elasticity
b) Price elasticity d) Elasticity of supply
9. Suppose the demand for meals at a medium-priced restaurant is elastic. If the management
of the restaurant is considering raising prices, it can expect a relatively:
a) Large fall in quantity demanded. c) Small fall in quantity demanded.
b) Large fall in demand. d) Small fall in demand.
10. Demand for a good will tend to be more inelastic if it exhibits which of the following
characteristics:
a) The good has many substitutes c) The good occupies a small part of income
b) The good is a luxury d) None.
11. What is the significance of income elasticity - 0.2?
a) Goods are superior c) Goods are Qualitatively inferior
b) Goods are Luxury d) None.
12. When income increases the money spent on necessaries of life may not increase in the same
proportion. This means:
a) Income elasticity of demand is zero.
b) Income elasticity of demand is one
c) Income elasticity of demand is greater than one
d) Income elasticity of demand is lesser than one.
13. The luxury goods like jewelry, leads & fancy articles will have:
a) Low income elasticity of demand c) Zero elasticity of demand
b) Negative elasticity of demand d) High income elasticity of demand
14. A vertical demand curve shows elasticity of demand for the goods:
a) Greater than one c) Equal to one
b) Lesser than one d) None
15. The upper portion of straight line demand curve shows value of elasticity of demand
a) Greater than one c) Equal to one
b) Lesser than one d) None
16. When cross elasticity of demand is positive, goods are:
a) Complementary b) Competitive c) Both a & b d) None

Bhagwati Education Institute Page 28

 Elasticity of Demand

17. If the demand for a goods is inelastic, an increase in its price will cause the total expenditure
of the consumer of the goods:
a) Remains the same c) Decrease
b) Increase d) Any of these
18. Point elasticity is useful for which of the following situations?
a) The bookstore is considering doubling the price of notebooks.
b) A restaurant is considering lowering the price of its most expensive dishes by 50%.
c) An auto producer is interested in determining the response of consumers to the price of
cars being lowered by Rs.100.
d) None.
19. A decrease in price will result in an increase in total revenue if:
a) The percentage change in quantity demanded is less than the percentage change in price.
b) The percentage change in quantity demanded is greater than the percentage change in
price.
c) Demand is inelastic.
d) The consumer is operating along a linear demand curve at a point at which the price is
very low & the quantity demanded is very high.
20. An increase in price will result in an increase in total revenue if:
a) The percentage change in quantity demanded is less than the percentage change in price.
b) The percentage change in quantity demanded is greater than the percentage change in
price.
c) Demand is elastic.
d) The consumer is operating along a linear demand curve at a point at which the price is
very high & the quantity demanded is very low.
21. Demand for a good will tend to be more elastic if it exhibits which of the following
characteristics.
a) It represents a small part of the consumer’s income.
b) The good has many substitutes available.
c) It is a necessity (as opposed to a luxury)
d) There is a little time for the consumer to adjust to the price change.
22. When quantity purchased remains constant irrespective of the change in income:
a) Negative income elasticity of demand
b) Income elasticity of demand is less than one.
c) Zero income elasticity of demand.

Bhagwati Education Institute Page 29

 Elasticity of Demand

d) Income elasticity of demand is greater than one.

23. As income increases, the consumer will go in for superior goods & consequently the
demand for inferior goods will fall. This means:
a) Income elasticity of demand less than one. c) Zero income elasticity of demand.
b) Negative income elasticity of demand. d) Unitary income elasticity of
demand.
24. Demand for electricity is elastic because …………….
a) It is very expensive. c) It has alternative uses.
b) It has a less number of close substitutes. d) None of the above.
25. If the elasticity of demand for a commodity is a perfectly inelastic then which of the
following is incorrect?
a) The commodity must be essential to those who purchase it.
b) The commodity must have many substitutes.
c) The commodity will be purchased regardless of increases in its price.
d) The elasticity of demand for this commodity must be equal to zero.
26. If a good has price elasticity greater than one, then:
a) Demand is unit elastic & change in price does not effect seller revenue.
b) Demand is elastic & a change in price causes sellers’ revenue to change in opposite
direction.
c) Demand is inelastic & change in price causes sellers’ revenue to change in the same
direction.
d) None of the above is correct.
27. When a result of decrease in the price of a good, the total expenditure made on it increases,
we say that price elasticity of demand is
a) Less than unity. c) Zero
b) Unity d) Greater than unity
28. Which of the following elasticities measure a movement along a curve rather than a shift in
curve?
a) The price elasticity of demand c) The cross elasticity of demand
b) The income elasticity of demand d) All of the above.
29. The concept of elasticity of demand was developed by:
a) Alfred Marshall c) Paul-A. Samuelson
b) Edwin Cannon d) Fredric Banham

Bhagwati Education Institute Page 30

 Elasticity of Demand

30. Income elasticity of demand will be zero when given change in income brings:
a) A less than proportionate change in quantity demanded.
b) A more than proportionate change in quantity demanded.
c) The same proportionate change in demand
d) No change in demand.
31. A straight line, downward-sloping demand curve implies that, as price falls, the elasticity of
demand.
a) Increases c) Remaining the same
b) Decreases d) Is zero.
32. In the longer period permitting adjustment demand is likely to be:
a) Inelastic c) Unit elastic
b) Elastic d) Cannot be known.
33. A demand curve, which takes the form of a horizontal line parallel to the quantity axis
illustrates elasticity, which is:
a) Zero c) Greater than one
b) Infinite d) Lesser than one
34. Which of the following does not have a uniform elasticity of demand at all point:
a) A rectangular hyperbola demand curve c) A horizontal demand curve
b) A vertical demand curve d) A downward sloping demand curve
35. If there were no changes in the quantity of food sold, even when its price falls: we would
know that:
a) Demand was entirely inelastic c) Demand was more elastic than one
b) Demand was entirely elastic d) Demand was unit elastic
36. Which of the following is the method of measuring elasticity of demand when change in the
price of a commodity is substantial.
a) Percentage method c) Arc method
b) Point method d) None
37. Ed > 1 denotes:
a) Perfectly elastic demand c) Inelastic demand
b) Elastic demand d) Less than unit elastic.
38. Elastic demand is also known as
a) Greater than one c) Equal to zero
b) Less than one d) None.

Bhagwati Education Institute Page 31

 Elasticity of Demand

Consider the fig & answer 79 & 80

39. Elasticity of demand at point M is:
Q1Q2 MR M1 R Q1Q2
a) b) c) d)
OQ1 SM M1 S P1P2

40. Elasticity at Point M1

Q2R M1R MR
a) b) c) d) None
OQ1 M1S SM

Consider the fig & answer question 81 & 82

41. Which range shows elasticity of demand less than one.
a) Region AB b) Region BC c) Region CD d) None
42. Which point shows entirely elastic point?
a) Point B b) Point C c) Point D d) None

NUMERICAL PROBLEMS
Sums on Point or Percentage Methods

43. The price of pizza increases by 26% & quantity demanded falls by 23%, this indicates that
demand for pizza is:
a) elastic b) perfectly elastic c) less elastic d) unit
44. If income of a household rises by 30% & demand rises by 10% then value of income
elasticity of demand is:
a) + 0.33, normal c) 3
b) - 0.33, inferior d) 1.
45. If the quantity demanded for mutton increases by 10% when the price of chicken increases
by 20%, the cross-price elasticity of demand between mutton & chicken is:
a) - 0.25 b) 0.25 c) .5 d) .4

From the following table answer 46,47,48

Items %ch in price % ch in Qty dd Elasticity
Demand for salt 20 -1 X
Demand for bananas 15 y -3
Supply of chicken Z 14 1

Bhagwati Education Institute Page 32

 Elasticity of Demand

46. The value of x:

a) – 20 b) – 0.05 c) – 1 d) None
47. The value of y:
a) – 5 b) 15 c) – 45 d) – 3
48. The value of z:
a) 14 b) 1 c) 0.07 d) 5
49. The price of air conditioner increases from `30,000 to `30,010 & resultant change in
demand is negligible, we use the measure of _________ to measure elasticity.
a) Point elasticity c) Perfect inelasticity
b) Perfect elasticity d) Price elasticity
50. A business currently selling 10,000 units of its product per month plans to reduce the retail
price from Re 1 to Re 0.90. It knows from previous experience that the price elasticity of
demand for the product is 1.5. Assuming no other changes, the sales, the business firm can
now expect as ………….
a) 8,500 units b) 10,500 units c) 11,000 units d) 11,500 units
51. If the price of ‘X’ rises by 10% & the quantity demanded falls by 10%, ‘X’ has:
a) Inelastic demand c) Zero elastic demand
b) Unit elastic demand d) Elastic demand.
52. A business firm recently decreased price by 50%, assuming no other change & if elasticity of
demand is unitary, total revenue will —
a) Double c) Remain unchanged.
b) Increase by 50% d) Decrease by 50%
53. 5-rupee increase in price of commodity ‘X’ causes quantity to decrease by 20 units.
Elasticity of demand is:
a) 5 c) 4
b) 20 d) Nothing can be concluded
54. If the price of air conditioner increases from `30,000 to `30,010 and resultant change in
demand is negligible, we use the measure of _________ to measure elasticity:
a) Point elasticity c) Perfect inelasticity
b) Perfect elasticity d) None of these
55. When price of tomatoes is `12 per kg, a person spends 60/- per week. Calculate ep if
household expenditure increase to `90 per week when price falls to `9 per kg.
a) 2 b) 8 c) 4 d) None of these

Bhagwati Education Institute Page 33

 Elasticity of Demand

56. If consumer always spends 20% of his income on food, then income elasticity of demand for
food.
a) 1.50 b) 1.00 c) 1.15 d) 0.15
57. The price of a commodity rose by 20%, as a result of which its demand declined from 20
units to 15 units. Calculate price elasticity of demand.
a) 1 b) 1.25 c) 1.66 d) None

Sums on ARC Methods

58. Suppose the price of movies seen at a theatre rises from .120 per person to .200 per person.
The theater manager observes that the rise in price causes attendance at a given movie to
fall from 300 persons to 200 persons. Price elasticity of demand for movies:
a) .5 b).8 c) .10 d) 1.2
59. Suppose a departmental store has a sale on its silverware. If the price of a plate - setting is
reduced from `300 to `200 and the quantity demanded increases from 3,000 plate setting
to 5000 plate-setting, what is the price elasticity of demand for silverware?
a) 0.8 b) 1.25 c) 1.0 d) 1.50
60. A store offers discount on x commodity. It reduces price from `150 to `100. Quantity
demanded increases from 700 units to 1300 unit. Price elasticity of demand is
a) 0.8 b) 1.0 c) 1.25 d) 1.50
61. When price of patties rises from `12 per piece to `18 per piece as a result of which the daily
sales decreases from 300 to 150 pieces per day. The price elasticity of demand is:
a) 1 b) 1.66 c) 0.8 d) 0.25
62. A bookseller estimates that if she increases the price of book from `60 to ` 67 the quantity
for books demanded will decrease from 2035 to 1946. The book’s price elasticity of demand
is approximately.
a) 0.4 b) 0.8 c) 1.0 d) None
63. If the quantity of blankets demanded increases from 4600 to 5700 in response to a decrease
in their price from `220 to `190, the price elasticity of demand for blankets is:
a) 0.69 b) 1.0 c) 1.46 d) 2.66
64. The cross elasticity of monthly demand for gel pen when the price of refills increases by
20% & demand for gel pens falls by 30% is equal to:
a) – 0.71 b) 0.25 c) 0.19 d) -1.5

Bhagwati Education Institute Page 34

 Elasticity of Demand

65. The cross el of dd for ink pen when the price of gel pen increases by 25% & demand for ink
pen increases by 50% is equal to:
a) 2.00 b) -2.00 c) – 2.09 d) 2.09
66. The price elasticity of a commodity decreases from `6 to `4 & quantity demanded
increases from `10 units to 15 units, find coefficient of price elasticity (Use point method)
a) 1.5 b) 2.5 c) -1.5 d) 0.5

Bhagwati Education Institute Page 35

 Demand Forecasting

Chapter – 05 – Demand Forecasting

Questions

1. ________ of demand is an art is science of predicting the probable demand for a product.
a) Detecting b) Forecasting c) Reviewing d) None
2. Forecasts offer information for ________ planning and ________ control.
a) Present; Price b) Budgetary; Cost c) Future; Revenue d) All of the above
3. It is said that no forecast is completely ________ and correct.
a) Statistical b) Empirical c) Full-proof d) None
4. The scope of forecasting task depends on area of operation of the firm in the ________as
well as in ________.
a) Future; Present b) Present; Future c) Past; Present d) None
5. Macro-level, industry-level, firm level are the ________ of forecasting.
a) Methods b) Types c) Scope d) None
6. Complete enumeration method is also known as ________.
a) Collective opinion method c) Statistical opinion method
b) Expert opinion method d) Survey of Buyer’s intention
7. Grass-roots or force-opinion method is:
a) Survey of Buyer’s intention c) Expert opinion method
b) Collective opinion method d) None
8. Delphi – Technique is known as:
a) Collective opinion method c) Statistical method
b) Expert opinion method d) All of the above
9. Trend – Projection method is done by
a) Time Series data c) Fitting – Trend
b) Graphical method d) None
10. To find out turning point of business cycle we need to apply:
a) Barometric method c) Collective opinion
b) Controlled Experiment d) None

Bhagwati Education Institute Page 36

 Theory of Supply

Chapter – 06 – Theory of Supply

Questions

1. The supply of a good refers to

a) Amount of production of good.
b) Running stock of the good.
c) Amount of the good offered for sale at a particular price per unit of time.
d) Stock available for sale.
2. Contraction of supply is the result of:
a) Decrease in the number of producers c) Increase in the price of other goods
b) Decrease in the price of the goods d) Decrease in the outlay of sellers
3. An increase in the supply of a good is caused by:
a) Improvements in its technology c) Fall in the prices of inputs
b) Fall in the prices of other goods d) Both a & c
4. The Quantity supplied of a good or service is the amount that:
a) Producers wish they could sell at a higher price.
b) Is actually bought during a given time period at a given price.
c) Producers plan to sell during a given time period at a given price.
d) People are willing to buy during a given time period at given price.
5. Supply is the:
a) Cost of producing good.
b) Entire relationship between the quantity supplied & the price of good.
c) Willingness to produce a good if the technology to produce it becomes available.
d) Limited resources that are available with the seller.
6. An increase in the number of seller of cars will increase the
a) Price of cars c) Supply of cars
b) Demand for cars d) Demand for car accessories
7. Supply is
a) Stock concept c) Both stock & flow
b) Flow concept d) None
8. When state of technology improves supply will:
a) Fall b) Contract c) Increase d) Not change

Bhagwati Education Institute Page 37

 Theory of Supply

9. When the Govt. imposes taxes, supply will

a) Expand b) Contract c) Increase d) Decrease
10. If the producer expects an increase in price of goods in the near future, then current supply
will:
a) Fall b) Rise c) Not changed d) Become zero
11. When supply price increases in the short-run, the profit of the producer ––
a) Increases b) Decreases c) Remains constant d) Decreases
marginally
12. In a very short period the supply:
a) Can be changed rapidly c) Can be increased
b) Cannot be changed d) None
13. A lower supply curve indicates:
a) Smaller supply c) Constant supply
b) Larger supply d) None.
14. When supply curve moves to right it means:
a) Supply increases c) Supply remains constant
b) Supply decreases. d) None
15. Which of the following statements is correct?
a) When the price falls the quantity demanded falls.
b) Seasonal changes do not affect the supply of a commodity.
c) Taxes & subsidies do not influence the supply of the commodity.
d) With lower cost, it is profitable to supply more of the commodity.
16. Supply of a commodity rises with increase in price, if …………………. remain same.
a) Cost of production c) Price of other goods.
b) Technique of production. d) All of the above
17. Consider supply function Qs = 50 + 2P. Find out amount of supply when price = 5.
a) 40 b) 60 c) 50 d) None
18. If the supply curve of a product is Sx = 20 + 1.5Px. Find the supply corresponding to market
price of Rs.4 per unit:
a) 16 b) 26 c) 18 d) None
19. When the supply curve of a product is Sx = 10 + 1.5Px. Find the aggregate market supply
corresponding to market price of Rs.4 per unit if there are 1000 suppling in the market.
a) 10,000 b) 18,000 c) 16,000 d) 15,000

Bhagwati Education Institute Page 38

 Theory of Supply

CLASSROOM QUESTIONS (Elasticity of Supply)

1. The elasticity of supply in defined as the:

a) Responsiveness of the Quantity supplied of a good without change in its price.
b) Responsiveness of the quantity supplied of a good to a change in its price.
c) Responsiveness of the quantity demanded of good to change in price.
d) None.
2. Es is measured by dividing the percentage change in quantity supplied of a good by:
a) Percentage change in income. c) Percentage change in price.
b) Percentage change in taxes d) Percentage change in tastes.
3. If the percentage change in supply is less than the percentage change in price it is called
a) Unit elasticity of supply c) More elastic supply
b) Less elastic supply d) Perfectly Inelastic supply
4. Elasticity of supply as zero & infinite imply respectively:
a) Perfectly elastic supply & es = 0 c) Imperfectly inelastic supply & es = 1
b) Perfectly inelastic supply & es = ∞ d) None.
5. A horizontal supply curve parallel to the quantity axis implies Es:
a) Zero c) Equal to one
b) Infinite d) Greater than zero but less than one
6. Commodities which are perishable in nature have …………………. Elastic supply.
a) Less b) more c) Perfectly d) None
7. The supply curve for perishable commodity is ………………………….
a) Elastic b) Inelastic c) Perfectly elastic d) Perfectly inelastic
8. Es for a positively sloped supply curve that starts from price axis:
a) Zero c) Lesser than one
b) Greater than one d) Equal to one
9. Any straight-line supply curve, which cuts the x-axis, will have:
a) An elasticity greater than one. c) An elasticity less than one.
b) Unitary elasticity of supply d) Zero elasticity of supply.
10. If the quantity supplied is exactly equal to the relative change in price then Es:
a) Less than one c) one
b) Greater than one d) None

Bhagwati Education Institute Page 39

 Theory of Supply

11. Elasticity of supply is greater than one when:

a) Proportionate change in quantity supplied is more than the proportionate change in
price
b) Proportionate change in price is more than the proportionate change in quantity
supplied.
c) Change in price & quantity supplied are equal.
d) None
12. As time period is more, the value of elasticity of supply is
a) Less b) More c) No effect d) Both (a) and (b)
13. For portraits & paintings of eminent artists the value of elasticity of supply is
a) e s = 1 b) e s > 1 c) e s < 1 d) None

(Questions on Numerical Problems)

14. If price of computers increases by 10% & supply increases by 25%. The elasticity of supply is
a) 2.5 b) 0.4 c) 3.5 d) 0.4
15. If the supply of a commodity falls by 20% due to decrease in price of the commodity by 10%,
then elasticity of supply will be:
a) Elastic c) Perfectly elastic
b) Unit elastic d) None
16. The supply function is Qs = – 100 + 10 P. find the Es by point method when price 15
a) 4 b) – 3 c) – 5 d) 3
17. The supply function is given as Qs = - 500 + 20P. Find out elasticity using point method,
When P = 30.
a) 3 b) 6 c) -6 d) None

Bhagwati Education Institute Page 40

 Equilibrium

Chapter – 07 – Equilibrium
Questions
1. With ceteris paribus, income increases & the price of a factor of production also increases.
Initial point is ‘1’ The new equilibrium is

a) Point 9 b) Point 5 c) Point 2 d) Point 3

2. The price of complement good ‘y’ declines & at the same time, there is a technological
progress in the production of good x. The new equilibrium is:
a) Point 4 b) Point 5 c) Point 8 d) Point 7
3. Due to natural calamities production of good ‘x’ is affected.
The new equilibrium is:
a) Point 6 b) Point 3 c) Point 7 d) Point 8
4. Consumers expect that in near future price of good ‘x’ will increase. The new equilibrium is:
a) Point 6 b) Point 5 c) Point 3 d) Point 8
5. When the demand & supply function of a good are Qd = 100 – 3P & Qs = 2p – 20, the
equilibrium output is
a) 22 Units b) 24 Units c) 28 Units d) 30 Units
6. The demand & supply function of a good are Qd = 100 – 3P & Qs = 2P – 20. If the price is 20,
there would be surplus (deficit) of
a) 25 Units b) 20 Units c) 30 Units d) 35 Units
7. Demand & Supply function are Qd = 13500 – 500P Qs = 3000 + 200P The market clearing
price
a) 12 b) 13 c) 15 d) 16
8.
Price per kg 9 8 7 6 5 4 3
Quantity dd per week 30 35 41 45 49 53 57
Quantity ss per week 62 60 57 53 49 45 41

Bhagwati Education Institute Page 41

 Equilibrium

The market is in equilibrium with price as ______________.

a) ` 7 b) ` 5 c) ` 9 d) None

Consider the following figure as initial equilibrium point 1 for Perk Chocolate and answer 9,
10, 11, 12 and 13.

9. Find out the new equilibrium if there is an increase in price of Dairy Milk Chocolate
a) Point 3 b) Point 5 c) Point 4 d) Point 2
10. Find out the new equilibrium if there is economic growth but cost of labour producing Perk
also rises
a) Point 3 b) Point 9 c) Point 2 d) Point 6
11. Find out the new equilibrium if there is health scare about the effect of Chocolate
a) Point 2 b) Point 9 c) Point 3 d) Point 6
12. Find out the new equilibrium if there is new technology for producing Perk Chololate
a) Point 8 b) Point 9 c) Point 3 d) Point 6
13. Find out the new equilibrium if there is an increase in productivity an at the same time price
of 5 Star Chocolate falls:
a) Point 2 b) Point 9 c) Point 3 d) Point 6
14. Price is the value of good in terms of:
a) Quality b) Money c) Substitutes value d) None of the above
15. When demand & supply both increase in a same proportion
a) Equilibrium quantity remains unchanged c) Equilibrium price remains same
b) Price slightly increases d) Quantity slightly decreases
16. When equilibrium of market takes place we get
a) Excess demand > Excess supply c) Excess supply = Excess demand = one
b) Excess supply = Excess demand = zero d) None
17. With a given supply curve, a decrease in demand causes:
a) An overall decrease in price but an increase in equilibrium quantity.
b) An overall increase in price but a decrease in equilibrium quantity.

Bhagwati Education Institute Page 42

 Equilibrium

c) An overall decrease in price & a decrease in equilibrium quantity

d) No change in overall price but a reduction in equilibrium quantity.
18. When consumer’s incomes & the number of sellers in the market for good ‘X’ both decrease.
Based upon this information it can be observed that equilibrium:
a) Price will increase but quantity remains same
b) Price will decrease & quantity increases
c) Quantity will increase & price remains same
d) Quantity will decrease & price increases
19. Consider supply of cameras increases due to an increase in foreign imports. Which of the
following will most likely occur?
a) The equilibrium price of cameras will increase
b) The equilibrium quantity of cameras exchanged will decrease.
c) The equilibrium price of camera film will decrease.
d) The equilibrium quantity of camera film exchanged will increase.
20. Assume that in the market for good ‘X’ there is a simultaneous increase in demand & the
quantity supplied. The result will be:
a) An increase in equilibrium price & quantity
b) A decrease in equilibrium price & quantity
c) A decrease in equilibrium price & increase in equilibrium quantity.
d) An increase in equilibrium quantity & uncertain effect on equilibrium price.
21. A decrease in demand for camera, ceteris paribus:
a) Increase in number of camera bought
b) Decrease the price but increase the number of camera bought
c) Increase the price of cameras
d) Decrease the price & decrease in the number of cameras bought
22. In book market, supply of books will decrease if any of the following occurs except
a) A decrease in the number of book publishers
b) A decrease in the price of the book
c) An increase in the future expected price of the book
d) An increase in the price of paper used
23. An increase in the number of sellers of bikes will increase the
a) The price of a bike c) The supply of bikes
b) Demand for bikes d) Demand for helmets

Bhagwati Education Institute Page 43

 Equilibrium

24.If the supply of bottled water decreases, the equilibrium price _______ and the equilibrium
quantity _________
a) Increases, decreases c) Decreases, decreases
b) Decreases, increases d) Increases, increases
25. A decrease in the demand for cameras, other things remaining the same will
a) Increase the number of cameras bought
b) Decrease the price of cameras
c) Increases the price of cameras
d) Decrease the price and the number of cameras bought
26.If good growing conditions increases the supply of strawberries and hot weather increases
the demand for strawberries, the quantity of strawberries bought
a) Increases and the price might rise, fall or not change
b) Doesn’t change but the price rises
c) Doesn’t change but the price falls
d) Increases and the price rises
27. In a very short period market;
a) The supply is fixed c) Demand & supply are fixed
b) The demand is fixed d) All of the above.
28.Time element was conceived by
a) Prof. Pigou c) Prof. Alfred Marshall
b) Prof. Adam Smith d) Prof. Robinson
29. The term ‘market’ refers to:
a) Place where buyer & seller bargain a product or service for a price.
b) Place where buyer does not bargain
c) Place where all products are produced
d) All
30. Generally, market for perishable like butter, fish, egg, vegetables etc. will have:
a) Regional market c) National market
b) Local market d) None
31. Durable goods & industrial items exist in:
a) Local market c) National market
b) Regional market d) Secular market

Bhagwati Education Institute Page 44

 Equilibrium

32. Secular period is also known as:

a) Very short period. c) Very long period
b) Short period d) Long Period
33. Stock exchange market is the example for:
a) Unregulated market c) Spot market
b) Regulated market d) None
34. The market for the ultimate consumers is known as:
a) Whole sale market c) Unregulated market
b) Regulated market d) Retail market
35. If price is forced to stay below equilibrium price:
a) Excess demand exists c) Either a or b
b) Excess supply exists d) Neither a nor b
36. Yesterday, seller A supplied 400 units of a good X at Rs10 per unit. Today, seller A supplies
the same quantity at Rs5 per unit. Based on this, seller A has experienced a(an):
a) Decrease in supply c) Increase in quantity supply
b) Increase in supply d) Decrease in quantity supplied

Bhagwati Education Institute Page 45

 Theory of Production

Chapter – 08 – Theory of Production

Questions

1. Which of the following is considered production in Economics?

a) Singing a song before friends
b) Preventing a child from falling into a manhole on the road.
c) Painting a picture to sell.
d) Tilling of soil to grow crop for self-consumption.
2. Which of the following is considered production in Economics?
a) Tilling of soil.
b) Singing song before friends
c) Preventing a child falling into a manhole on the road.
d) Painting a picture for pleasure
3. If labour is an active factor land is:
a) Secondary factor. c) Passive factor
b) Also active factor d) None of the above.
4. Which is not a feature of labour?
a) It is not perishable c) It is an active factor
b) It is mobile d) It is not a machine but a man.
5. Capital is
a) Money c) Produced means of production
b) Wealth d) None
6. Which capital includes durable consumer goods, inventories & intermediate goods?
a) Human Capital c) External Capital
b) Physical Capital d) Floating Capital
7. Which capital includes education, training & skill of the worker?
a) Human Capital c) External Capital
b) Physical Capital d) Floating Capital
8. The other name for capital formation is:
a) Saving c) Wealth formation
b) Capital output ratio d) Investment.
9. Who has given the concept of Innovative Entrepreneurship?
a) Prof. Robbins. c) Prof. Schumpeter.
b) Prof. Adams Smith d) Prof. Sweezy.
Bhagwati Education Institute Page 46
 Theory of Production

10. The second stage of capital formation is

a) Creation of savings. c) Investment of savings.
b) Mobilization of savings. d) Distribution of savings.
11. Individual’s saving level depends on:
a) Income c) Ability & willingness to save
b) Inflation d) Govt. Policy
12. Which production function shows short run feature?

a) Q = K 2 +L2 c) Q = 2K +3L +4L2

b) Q = K 2 + L2 d) None
13. Corporate savings depend on.
a) Income Level b) Production Level c) Loans Level d) Profit level
14. Which of the following is not a characteristic of land?
a) Its supply for the economy is limited. c) Its usefulness depends on human effort.
b) It is immobile. d) It is produced by our forefathers.
15. Which of the following statements is true.
a) Accumulation of capital depends solely on income.
b) Saving can also be affected by the state
c) External economies go with size & internal economies with location.
d) The Supply is only dpendent on price.
16. In the production of wheat all of the following are variable factors that are used by the
farmer except.
a) The seed & fertiliser used when the crop is planted
b) The field that has been cleared off trees & in which that crop is planted
c) The tractor used by the farmer in planting & cultivating not only wheat but also corn &
barley.
d) The number of hours that the farmer spends in cultivating the wheat fields.
17. To economists. the main difference between the short run & the long run is that
a) In the short run all inputs are fixed, while in the long run all inputs are variable.
b) In the short run the firm varies all of its inputs to find the least-cost combination of
inputs.
c) In the short-run, at least one of the firm’s input levels is fixed.
d) In the long run, the firm is making a constrained decision about how to use existing plant
& equipment efficiently.

Bhagwati Education Institute Page 47

 Theory of Production

18. Which of the following statements is true?

a) The services of a doctor are considered production.
b) Man can create matter.
c) The services of a housewife are production.
d) when a man creates a table, he creates matter.
19. Which of the following is a function of an entrepreneur?
a) Initiating business enterprise c) Innovating
b) Risk bearing d) All
20. The production process is:
a) technical relationship between physical inputs & physical output.
b) Relationship between fixed factor of production & variable factors of production.
c) Relationship between a factor of production & the utility created by it.
d) Relationship between quantity of output produced & time taken to produce the output.
21. Laws of production does not include ………….
a) Returns to scale c) Law of variable proportion
b) Law of diminishing returns to a factor. d) Least cost combination of factors.
22. Which of the following statements is correct?
a) Supply of land is perfectly elastic
b) Fertility of land cannot change.
c) Land does not yield any result unless human efforts are employed.
d) Supply of land can be increased.
23. Labour is defined as ……………………….
a) Any work done without remuneration.
b) Any exertion of mind or body to get some reward.
c) Helping mother
d) Helping friends
24.The most important function of an entrepreneur is to —
a) Innovate c) Finance
b) Bear the sense of responsibility d) Earn profit
25. Which of the following is correct?
a) Land is produced by man’s efforts. c) Capital in not a result of savings
b) The supply of land is not constant. d) Capital refers to the produced means of
production

Bhagwati Education Institute Page 48

 Theory of Production

26.Which one of the following is incorrect?

a) Land has original & indestructible power to Produce.
b) Labour has poor bargaining power.
c) Risk is a business concern and can be insured.
d) The supply of land is not constant.
27. Which of the following activities cannot take place in the short run.
a) Changing the quantity of labour employed
b) Changing the input combination
c) Regular maintenance of the plant to ensure efficient production.
d) Installation of an additional plant to meet requirements.
28.The short run, as economists use the phase, is characterised by:
a) At least one fixed factor of production & firms neither leaving & not entering the
industry.
b) A period where the law of diminishing returns does not hold good.
c) No variable inputs – that is all of the factors of production are fixed
d) All inputs being variable.

Questions on Law of Variable Proportions

29.The law of variable proportions is drawn under all of the assumptions mentioned below
except the assumption that:
a) The technology is changing.
b) There must be some inputs where quantity is kept fixed.
c) We consider only physical inputs & not economically profitability in monetary terms
d) The technology is given & stable.
30. Average product of labour is defined as
a) TPL divided by the total cost. c) TPL divided by the variable input.
b) TPL divided by marginal product. d) MPL divided by the variable input
31. Change in the total product resulting from a change in a variable input is.
a) Average cost. c) Marginal product cost.
b) Average product d) Marginal product.
32. Marginal product, mathematically, is the slope of the
a) Total product curve c) Marginal product curve.
b) Average product curve d) Implicit product curve.

Bhagwati Education Institute Page 49

 Theory of Production

33. The law of diminishing marginal returns indicates that marginal return.
a) Always diminish c) Always diminish before increasing
b) Eventually diminish d) Never diminish before increasing
34. If marginal product is equal to average product, then:
a) Marginal product is increasing c) Average product is decreasing
b) Marginal product is decreasing d) Average product is not changing.
35. In describing a given production technology, the short-run is best described as tasting
a) Up to six months from now. c) As long as all inputs are fixed.
b) Up to five years from now d) As long as at least on input is fixed.
36. If the MPL is below the average product of labour, it must be true that.
a) The marginal product is negative. c) The average product is falling
b) The marginal product is zero. d) The average product is negative
37. The average product of labour is maximised when marginal product of labour:
a) Equals the APL c) Is maximized
b) Equals zero d) None of the above.
38.The marginal, average & total product curves encountered by the firm producing in the short
run exhibit all of the following relationship except:
a) When total product is rising, average & marginal product may be either rising or falling.
b) When marginal product is negative total product and average product is falling.
c) When average product is at a maximum, marginal product equals average product, &
total product is rising.
d) When marginal product is at a maximum, average product equal marginal product, and
total product is rising.
39. When total product is maximum, marginal product is:
a) Falling b) Zero c) Rising d) Negative.
40. When average product is maximum, marginal product is equal to:
a) Average Product b) Total Product c) Zero d) One
41. A rational producer will operate in which stage of Law of variable proportion?
a) Increasing returns c) Constant returns
b) Diminishing returns d) Negative returns
42.First stage of Law of Variable proportion ranges from origin till the point where:
a) AP is maximum c) TP is max
b) MP is maximum d) Point of inflexation

Bhagwati Education Institute Page 50

 Theory of Production

43. In the stage of diminishing returns, both AP & MP are falling and:
a) Negative b) Positive c) Equal to one d) None.
44.The third stage of law of variable proportion is called:
a) Increasing returns c) Diminishing returns
b) Negative returns d) Unchanged returns
45. At what point is the MP max
a) Turning point c) Focal Point
b) Equilibrium point d) Point of inflexion
46.Which of the following is not an assumption of the law of variable proportions.
a) Only one factor is variable
b) Technique of production remaining constant.
c) Proportion of factors of production remains same.
d) Units of variable factors are homogeneous
47. The law of variable proportions operates when ……………
a) There are only two variable factors. c) All factors are variable.
b) There is a fixed & a variable factor. d) Variable factors yield less.
48. The MP of a factor
a) Is always positive c) Can be positive, zero or negative
b) Is either positive or negative d) Is always negative.
49.In short run the law of variable proportions is also known as the
a) Law of increasing returns. c) Law of constant returns.
b) Law of diminishing returns d) Law of returns to scale
50.Which of the stages is relevant for a firm which aims at maximum economic efficiency in the
law of variable proportion:
a) Stage I b) Stage II c) Stage III d) Stage IV
51. Marginal cost is the mirror image of:
a) Marginal product c) Average cost
b) Average product d) None
52. In the short run analysis, MP = 0 at the level in which:
a) Marginal product is maximum. c) Total product is maximum
b) Average product is maximum d) Total profit is maximum
53. In the case of very short period ……………………… is variable.
a) Land b) Labour c) Capital d) None

Bhagwati Education Institute Page 51

 Theory of Production

Mathematical Questions on Law of variable proportion

54. Suppose the first four units of a variable input generate corresponding total outputs of 200,
350, 450, 500. The marginal product of the third unit of input is:
a) 50 b) 100 c) 150 d) 200
55. Diminishing marginal returns for the first four units of a variable input is exhibited by the
total product sequence:
a) 50, 50, 50, 50 c) 50, 100, 150, 200
b) 50, 110, 180, 260 d) 50, 90, 120, 140

Use table and answer question 56, 57

Hour of Labour Total output Marginal output
0 - -
1 300 300
2 - 240
3 720 -

56. What is the total output when 2 hours of labour are employed?
a) 160 b) 200 c) 360 d) 540
57. What is the marginal product of the third hour of labour?
a) 120 b) 160 c) 200 d) 180
58. The following table exhibits.
No. of workers : 0 1 2 3
Output : 0 23 40 50
a) Increasing MP of labour. c) Increasing returns to scale.
b) Diminishing MP of labour. d) Diminishing returns to scale.

Use table & answer Q.59 to 62

Hour of Labour Total output Marginal output
0 - -
1 100 100
2 - 80
3 240 -

59. What is total output when 2 hours of labour are employed

a) 80 b) 100 c) 180 d) 200

Bhagwati Education Institute Page 52

 Theory of Production

60. What is marginal product of the third hour of labour?

a) 60 b) 80 c) 100 d) None
61. AP of three hours of labour is
a) 60 b) 80 c) 100 d) None
62.The above table shows: –
a) Law of returns c) Law of diminishing returns
b) Law of increasing returns d) All

Use table & answer 63 & 64

Hour of Labour TP MP
0 - -
1 200 200
2 - 160
3 480 -

63. Total product when 2 hours of labour are employed….

a) 160 b) 200 c) 360 d) 400
64.Marginal product of the third hour labour?
a) 120 b) 160 c) 200 d) None
65. What will be the total product when two labourers are hired according to the table given
below:
Hour of Labour TP MP
0 - -
1 350 350
2 - 230

a) 680 b) 580 c) 350 d) None

Questions on Long Run Production:

66.Returns to scale is in operation when quantity of:

a) All inputs are changed
b) All inputs are changed in already established proportion
c) All inputs are not changed
d) One input changes while other inputs remain unchanged

Bhagwati Education Institute Page 53

 Theory of Production

67. In a production process, the input combination has 30 per cent of fixed assets, 40 per cent
raw material and 10 per cent labour. The quantity of all other inputs except fixed assets has
been doubled. The production process would be subjected to:
a) Law of variable proportions c) Decreasing returns
b) Returns to scale d) Increasing returns
68. Returns to scale have been classified as constant, increasing and decreasing depending
upon the
a) Inputs required to produce a given level of output
b) Amount of output produced out of a given amount of inputs
c) Response of output to change in scale
d) All of the above
69.The returns to scale will be said to exhibit when a proportional change in input combination
caused proportionate change in output.
a) Increasing returns c) Constant returns
b) Decreasing returns d) All of the above
70. Which of the following defines the ‘long run’ best?
a) A period of more than 3 years
b) A period in which existing plant and machinery could be completely the dismantled and
replaced by new plant and machinery
c) A period sufficient to put into operation a method which will produce a given output at
the lowest possible cost.
d) A period necessary to pass the teething trouble and to start earning a profit
71. When a substantial increase is made in the plant capacity of a firm, this is known as
a) A short run adjustment c) A temporary adjustment
b) A long run adjustment d) None of the above
72. When there was increase demand for its goods in the market a firm took a bank overdraft
bought raw materials with the amount and increased production, this is case of
a) A short run adjustment c) A financial adjustment
b) A long run adjustment d) None of the above
73. Increasing returns to a factor is because of
a) Division of work c) Internal economy
b) Specialisation d) All

Bhagwati Education Institute Page 54

 Theory of Production

74. In the long run

a) All factors can be used in different proportions.
b) Management can be re-organised.
c) A firm can experience returns to scale.
d) All
75. In electricity generation plants, When the plant grows too large, risks of plant failure with
regards to output increases disproportionately. This leads to
a) Constant Returns to Scale c) Diminishing Returns to Scale
b) Increasing Returns to Scale d) Balanced Returns to scale.
76. Diminishing returns occur:
a) When units of a variable input are added to a fixed input & total product falls
b) When units of a variable input are added to fixed input & marginal product falls.
c) When the size of plants is increased in the long run.
d) When the quantity of the fixed input is increased & returning to the variable input falls.
77. If one unit of labour & one unit of capital give 200 units of output, two units of labours & two
units of capital give 400 units of output & 5 units of labour & five units of capital give 1000
units of output then this is a case of:
a) CRS b) IRS c) DRS d) None
78. Production function Q = 20k 0.6L 0.5 signifies
a) Decreasing returns to scale c) Constant returns to scale
b) Increasing returns to scale d) Law of diminishing marginal product
79. In which production function CRS is applicable
2 2
a) Q = 2k +3L c) Q = K + L

b) Q= KL d) All
2
80. Find out average product from production. function Q = 40L + 30L

40 2
a) c) 40L +30L
L
b) 30L d) None.
 1-
81. Consider Cobb-Douglas production function: Q = AK L , which complies
a) Increasing returns to scale. c) Constant returns to scale.
b) Diminishing returns to scale d) None.

Bhagwati Education Institute Page 55

 Theory of Production

82.Consider production function Q=K2 + L2, which complies

a) Increasing returns to scale. c) Constant returns to scale.
b) Diminishing returns to scale d) None.
83.If as a result of 40% increase in all inputs, the output increases by 25%, this is a case of
a) IRS b) DRS c) CRS d) None
84. When output responds uniformly with increase in input combination 60%, this is a case
of:
a) IRS b) DRS c) CRS d) None
85. Isoquant is:
a) Indifference curve c) Production Indifference curve
b) Equal product curve d) Both (b) & (c)
86. Slope of Isoquant is:
MPL MPL
a) c) -
MPK MPK
w
b) d) Both (a) and (c)
r
87. Slope of cost line C = wL + r.K is:
MPL K
a) − c)
MPK L
w r
b) − d) −
r w
88. Producer’s equilibrium can be obtained at:
a) Slope of IQ = slope of cost line c) IQ is tangent to Iso-costline
MPL w
b) = d) All
MPK r
89. Least cost combination of input is also known as:
a) Output maximisation c) Product optimisation
b) Cost minimisation d) None
90. Output maximization is known as:
MPL w
a) Product optimisation c) =
MPK r
b) Producer’s equilibrium d) All
91. An Isoquant is ___________ to an Isocost line at equilibrium point:
a) Convex b) Concave c) Tangent d) Perpendicular

Bhagwati Education Institute Page 56

 Theory of Production

92.Consider the following combinations of inputs & outputs:

This production technology shows:
Labour Capital Output
5 10 1
6 12 2
7 14 3
8 16 4
9 18 5
a) IRS b) DRS c) CRS d) None
93. Law of diminishing return is applicable in __________
a) Only manufacturing industries c) Neither in agriculture nor in industries
b) Only agriculture d) In all economic activities after a limit
94.Isoquants are equal to:
a) Product lines b) Cost line c) Total Utility lines d) Revenue lines

Bhagwati Education Institute Page 57

 Theory of Cost

Chapter – 09 – Theory of Cost

Questions

1. Payment made to outsiders for their goods & services are called
a) Opportunity cost b) Real cost c) Explicit cost d) Implicit cost
2. Direct cost is also known as
a) Indirect cost b) Traceable cost c) Opportunity cost d) Accounting cost
3. Fixed cost is known as _________ cost
a) Prime b) Supplementary c) Overhead d) Direct
4. Implicit cost may be defined as the:
a) Costs which do not change over a period of time.
b) Costs which the firm incurs but does not disclose
c) Payment to the non-owners of the firm for the resources.
d) Money payment which the self-employed resources could have earned in their best
alternative employment.
5. Opportunity cost is:
a) Direct cost c) Accounting cost
b) Total cost d) Cost of foregone opportunity.
6. Which of the following is an example of an ‘explicit cost’?
a) The wages a proprietor could have made by working as an employee of a large firm.
b) The income that could have been earned in alternative uses by the resources owned by
the firm.
c) The payment of wages by the firm.
d) The normal profit earned by a firm.
7. Which of the following is an example of an ‘implicit cost’?
a) Interest that could have been earned on retained earning used by the firm to finance.
b) The payment of rent by the firm for the building in which it is housed.
c) The interest payment made by the firm for funds borrowed from a bank.
d) The payment of wages by the firm.
8. Which of the following is a variable cost in the short run?
a) Rent of the factory
b) Wages paid to the factory labour
c) Interest payments on borrowed financial capital
d) Payment on the lease for factory equipment.
Bhagwati Education Institute Page 58
 Theory of Cost

9. The cost which is never zero even when production is stopped is called:
a) Fixed cost b) Prime cost c) Variable cost d) Implicit cost
10. The costs which are prime cost & can be changed with changes in level of output are called
a) Fixed cost b) Explicit cost c) Variable cost d) None
11. Explicit cash payments made by an entrepreneur to the suppliers of various factors of
production
a) Accounting cost c) Economic cost
b) Total cost d) Direct cost
12. Total cost is given in short-run as summation of
a) AVCXQ and AFC c) AFCXQ and AVCXQ
b) TFC & AVC d) None
13. The shape of AFC curve is
a) Downward sloped c) Rectangular Hyperbola
b) Convex to the origin d) All of the above
14. Shape of TVC curve is
a) Upward sloped c) Inverted ‘S’ shaped
b) Inverted ‘U’ shaped d) None
15. The reason behind the slope of TC & TVC curve is
a) Production structure c) Returns to scale
b) The objective of minimizing cost d) Law of variable proportion
16. Addition made to total cost due to change in output by one more unit is called.
a) Average cost c) Average variable cost
b) Total cost d) Marginal cost
17. With which of the following is the concept of marginal cost closely related?
a) Fixed cost c) Variable cost
b) Opportunity cost d) Overhead cost
18. Which of the following is true of the relationship between the marginal cost function & the
average cost functions is
a) If MC is greater than ATC, then ATC is falling.
b) The ATC curve intersects the MC curve at minimum MC
c) The MC curve intersects the ATC curve at minimum ATC.
d) If MC is less than ATC, then ATC is increasing

Bhagwati Education Institute Page 59

 Theory of Cost

19. Which of the following is not a determinant of the firms cost function
a) The production function c) Taxes
b) The price of labour d) The price of firms output
20. With a given plant size, an increase in the output cannot produce an increase in
a) Total cost c) Average total cost
b) Average fixed cost d) Average variable cost
21. Which of the following statements is false?
a) Marginal cost is equal to the rate of change in variable costs.
b) MC is the same whether it is computed from TVC or from TC.
c) If AC is above MC, MC must be rising.
d) Marginal cost is ‘U’ shaped due to Law of variable proportion.
22. The average profit is equal to the difference between
a) AC & TC b) AC & VC c) AR & AC d) AC & TR
23. Which of the following curves never touch any axis but is downward?
a) Marginal cost curve c) Average fixed cost curve
b) Total cost curve d) Average variable cost curve
24.Suppose output increases in the short run. Total cost will:
a) Increase due to an increase in fixed costs only.
b) Increase due to an increase in variable cost only.
c) Increase due to an increase in both fixed & variable costs.
d) Decrease if the firm is in the region of diminishing returns.
25. Which of the following statements is true of the relationship among the average cost
functions?
a) ATC = AFC – AVC c) AFC = ATC + AVC
b) AVC = AFC + ATC d) AFC = ATC – AVC
26.The following are some of the costs of a clothing manufacture. State which among them will
you consider as fixed cost?
a) Cost of cloth c) Depreciation on machine owing to time
b) Price wages paid to workers d) Cost of electricity for running machines
27. The cost, “what has to be paid to retain it in its present use” is called
a) Nominal cost c) Opportunity cost of a factor
b) Social cost of factors of production d) Economic cost of a factor of production
28.Any expansion in output by a firm in the short period will always reduce the
a) AVC b) AFC c) Both AFC & AVC d) None

Bhagwati Education Institute Page 60

 Theory of Cost

29.With the expansion of output the short run average cost curve, beyond a point, starts rising
because
a) AFC increase sharply
b) More production yields lower per unit price
c) The Law of variable proportion applies to the short run period
d) None
30. The AFC of a firm
a) Is independent of the output
b) Depends on the output & increases with increase in it
c) Depends on the output & decreases with increase in it
d) None
31. Marginal cost is found with the help of changes in
a) Total fixed cost c) Total explicit cost
b) Total variable cost d) Total implicit cost
32. Marginal cost is
a) Always less than the average cost c) Equal to the AC at its minimum point
b) Always more than the AC d) Never equal to average cost
33. As long as the average cost curve is rising
a) Marginal cost is more than average cost c) Marginal cost is equal to average cost
b) Marginal cost is less than average cost d) MC has no relation with AC
34. When average cost is constant, marginal cost
a) Is equal to average cost c) May be constant
b) May be rising d) May be falling
35. Both marginal and average costs are equal to each other when,
a) Marginal cost is minimum
b) Average cost is minimum
c) Both marginal and average costs are minimum
d) None of the above
36. A firm’s fixed inputs include –
a) Its cash deposits at the bank c) Its work force
b) Its plant and machinery d) Raw material purchased from other firms
37. The lowest point of the ATC curve is
a) The left of the lowest point of the AVC curve
b) The right of the lowest point of the AVC curve

Bhagwati Education Institute Page 61

 Theory of Cost

c) The same as the lowest point of AVC curve

d) None of these
38.Which one of the following would be a variable cost to a firm?
a) Mortgage payments on the factory c) Depreciation of machines owing to age
b) The cost of raw materials d) Interest on debentures
39. The general average cost curve is also known as
a) Total unit cost curve c) Total marginal unit cost curve
b) Average total unit cost curve d) Total variable unit cost curve
40. All money costs can be regarded as:
a) Social costs c) Explicit costs
b) Opportunity costs d) Real costs
41. The firm producing at the minimum point of the AC curve is said to be:
a) Operating under diminishing cost c) Operating at excess capacity
b) Making optimum use of plant capacity d) Operating under increasing costs
42.The vertical distance between TC & TVC is equal to:
a) MC b) TFC c) AVC d) None
43. Which is an inverted ‘S’ shaped curve?
a) AC b) MC c) TVC d) AFC
44.Marginal cost curve
a) Has the shape of a rectangular hyperbola c) Has the shape of the inverted U
b) Has the shape of the alphabet U d) All of these
45. “Steps downwards at first and then upwards” it is the movement of
a) AVC curve b) TVC curve c) TFC curve d) TC curve
46.AFC Curve is
a) Convex and downwards sloping c) Convex and upwards sloping
b) Concave and downwards sloping d) Concave and upwards sloping
47. “U” shaped AC Curve is based on
a) Law of increasing cost c) Law of constant returns to scale
b) Law of diminishing cost d) Law of variable proportion
48. At which point does the MC intersect the short run average variable cost and short run
average total cost curve
a) At equilibrium points c) At their optimum points
b) At their lowest points d) They don’t intersect at all

Bhagwati Education Institute Page 62

 Theory of Cost

49.Which of the following curve is never “U” shaped

a) Average variable cost c) Average fixed cost
b) Average cost d) All

Questions on long run cost:

50.Which of the following curve is known as “Envelope Curve”
a) Marginal cost c) Long run average cost
b) Average fixed cost d) Total fixed cost
51. The normal long-run average cost curve is influenced by the
a) Principle of diminishing returns
b) Economies and diseconomies of large scale production
c) Principle of constant returns to scale
d) All of the above
52. The point on which the long run average cost is minimum in a firm, short run average cost
curve will also be the minimum cost point on the firm’s long run average cost curve. This is
a) Always true
b) Never true
c) True when LAC is falling
d) True only at that level of output when LAC is minimum
53. The long-run average cost is based on the fact that
a) None of the factors are variable in the long-run
b) All factors are perfectly divisible in the long-run
c) None of the factors is divisible
d) Management factor is indivisible while all other factors are divisible and can be varied in
the long-run
54. The firm producing at the minimum point of the LAC curve is said to be
a) Operating under diminishing costs c) Operating at excess capacity
b) Making optimum use of plant capacity d) Operating under increasing costs
55. If the LAC curve falls as output expands, this fall is due to:
a) Economics of scale c) Diseconomies of scale
b) The law of diminishing scale d) Any of the above
56. Long run average cost curves are broadly
a) U-shaped c) L-shaped
b) Inverted U-shaped d) Saucer shaped

Bhagwati Education Institute Page 63

 Theory of Cost

57. The cost assigned to factors of productions that the firm neither hires nor purchases is
called:
a) Social costs c) Economic costs
b) Opportunity costs d) Implicit costs
58. Each short-run average cost curves coincides with long-run cost curve:
a) At upper point c) At middle point
b) At lower point d) No permanent position
59. The negatively sloped (i.e. falling) part of the long run average total cost is due to which of
the following
a) Diseconomies of scale.
b) Diminishing returns.
c) The difficulties encountered in coordinating many activities of a large firm.
d) The increase in productivity that results from specialisation.
60. The positively sloped (i.e., rising) part of the long run average total cost is due to which of
the following?
a) Diseconomies of scale
b) Increasing returns.
c) The firm being able to take advantage of large-scale production techniques as it expands
its output.
d) The increase in productivity that results from specialisation.
61. A distinguishing characteristic of the long run period is that
a) All costs are fixed costs
b) All costs are variable cost.
c) Fixed costs tend to be greater than variable costs.
d) Fixed costs tend to be less than variable costs.
62.In the long run, if a very small factory were to expand its scale of operations, it is likely that it
would initially experience:
a) An increase in pollution level. c) Economies of scale
b) Diseconomies of scale d) Constant returns to scale
63. Under constant returns to scale the shape of LAC is:
a) Upward rising c) Parallel to vertical axis
b) Downward falling d) Parallel to horizontal axis

Bhagwati Education Institute Page 64

 Theory of Cost

64.External economies of scale leads to:

a) Increasing returns to scale c) LAC is downward
b) LAC is upward d) Both a & c
65. Long run does not have:
a) Average cost c) Fixed cost
b) Total cost d) Variable cost

Mathematical Questions on Cost:

66.Which of the following equation shows short run cost function:

a) C= 30Q + 40Q2 + 30Q3 c) C=500+3Q + 4Q2
b) C= 4Q3+5Q4 d) None
67. For cost function C = 64 + 24Q – 4Q2 + Q3 AVC & AFC are

a) 64 / Q+24- 4Q+Q2 & 64 / Q c) 24 - 4Q+ Q2 & 64 / Q

b) 24 - 4Q+Q3 & (64+24) / Q d) None

68. An auto driver can operate for `600 per week which is fixed. The variable cost of taking
passengers is Q3 – 12Q2. AVC & AFC are
a) 600 / Q & Q2 - 12Q2 c) Q3 - 12Q & 600 / Q

b) Q2 - 12Q & 600 d) None

69. The total cost schedule of a firm is
Output 1 2 3 4 5
Total Cost 100 150 190 250 340
Marginal cost of third unit is
a) `30 b) `40 c) `60 d) `90
70. Cost function TC = 500 + 100Q – 0.25Q3.
If the current output is 100 unit, AFC is
a) `500 b) `10 c) `5 d) `100
71. The following is the marginal cost schedule for a good
Output 1 2 3 4 5
Marginal Cost 6 5 4 5 7
If the firm produces four units of output, the Average cost of production would be
a) 6 b) 5 c) 4 d) None

Bhagwati Education Institute Page 65

 Theory of Cost

72. Consider cost function

TC = 1000 + 200Q - 9Q2 + 0.25Q3
Which of the following statements is/ are true
a) The Average variable cost function is 200 – 9Q + 0.25Q2
b) Fixed cost is 1000
c) Variable cost function 200 – 9Q2 + 0.25Q2
d) a & b
73. For a firm, the Average cost function is AC = 100/Q + 20 + 4Q.
The total variable cost for the firm at an output of 15 units
a) `100 b) `1200 c) `750 d) `1340
74. A firm’s average total cost is Rs. 300 at 5 units of output & Rs. 320 at 6 units of output. The
marginal cost of producing the 6th unit is:
a) `20 b) `120 c) `320 d) `420
75. A firm producing 7 units of output has an average total cost of `150 & has to pay `350 to its
fixed factors of production whether it produces or not. How much of the average total cost is
made up of variable costs?
a) `200 b) `50 c) `300 d) `100
76. A firm’s average fixed cost is Rs. 20 at 6 units of output what will it be at 4 units of output?
a) `60 b) `30 c) `40 d) `20
77. What is the total cost of production of 20 units, if fixed cost is `5000 & variable cost `2 per
unit?
a) 5400 b) 5040 c) 4960 d) 5020
78. A firm’s average fixed cost is Rs. 40 at 12 units. What will be the average fixed cost at 8 units.
a) `60 b) `80 c) `70 d) `90
79. From the following detail find out average variable cost of 10 units
Output 0 10 20
Total cost 200 400 800
a) 40 b) 200 c) 20 d) 400
80. Find out AFC of three units
Output 0 1 2 3
Total cost 15 25 35 45
a) 5 b) 10 c) 15 d) 45

Bhagwati Education Institute Page 66

 Theory of Cost

81. Find out TVC for two units

Output 0 1 2
Total cost 20 37 50
a) 15 b) 17 c) 5 d) 30
82.Total cost of 10 units is Rupees two hundred when production increases to 20 units total cost
becomes `600. Find out its marginal cost.
a) 400 b) 40 c) 4 d) 30
83.Find out AFC of two units
Output 0 1 2
Total cost 580 689 850
a) 105 b) 135 c) 235 d) 290
84. For 20 units total cost `400 and for 40 units total cost `1200. Find out MC.
a) 50 b) 40 c) 30 d) None
85. AFC = `20, Quantity produced = 10 units. What will be the AFC of 20th Units?
a) 10 b) 20 c) 5 d) None
86. Find out Marginal cost of 67 units of production.
Output 0 10 25 37 67
Total cost 160 200 300 500 1400
a) 10 b) 20 c) 30 d) 50
87. The table shows
Output 0 1 2 3 4 5
Total Cost 5 20 33 45 56 60
a) Decreasing returns to scale c) Increasing returns to scale
b) Constant returns to scale d) Positive fixed cost
88. The marginal cost for a firm of producing the 9th unit of output is `20. Average cost at the
same level of output is `15. Which of the following must be true?
a) MC & AC are both falling
b) MC & AC are both rising
c) MC is rising & AC is falling
d) It is impossible to tell if either of the curves are rising.
Use the table & answer 24 & 25
Output 0 1 2 3 4 5 6
TC 240 330 410 480 540 610 690

Bhagwati Education Institute Page 67

 Theory of Cost

89. The average fixed cost of 2 units of output is:

a) `80 b) `85 c) `120 d) `205
90. The marginal cost of the sixth unit of output is:
a) `133 b) `75 c) `80 d) `450
91. Diminishing marginal return starts to occur between units:
a) 2 & 3 b) 3 & 4 c) 4 & 5 d) 5 & 6

Bhagwati Education Institute Page 68

 Price Determination in Different Market

Chapter – 10 – Price Determination in Different Market

Questions

1. Marginal revenue becomes zero when

a) TR is minimum c) Price elasticity is less than one
b) AR is maximum d) None
2. When firm is price taker, shape of TR is
a) Upward convex c) Upward linear from origin
b) Dome shaped d) None of these
3. When firm is price maker, shape of TR is
a) Upward convex c) Upward linear from origin
b) Dome shaped d) None of these
4. Given the relation MR = P(1 – 1/eP), if eP<1 then
a) MR >0 c) TR increases at decreasing rate
b) MR = 0 d) None
5. Marginal revenue is equal to
a) Change in price divided by change in output.
b) Change in quantity divided by change in price
c) Change in PxQ due to oneunit change in output
d) Price but only if the firm is a price searcher.
6. Average curve is the:
a) Demand curve of firm c) Both a & b
b) Supply curve of firm d) None of these
7. When firm accepts price from industry the shape of TR curve is
a) Dome shaped c) Upward linear started from origin
b) Upward convex d) None of these
8. Under imperfect competition MR Curve cuts horizontal line between Y axis & DD curve into
a) Two unequal parts c) Two equal parts
b) May be equal or unequal parts d) None
9. When industry determines price & firm accepts price, the slope of MR is:
a) Positive b) Negative c) Zero d) None
10. Average revenue is the revenue earned
a) Per unit of input c) Different units of input
b) Per unit of output d) Different units of output
Bhagwati Education Institute Page 69
 Price Determination in Different Market

11. AR can be symbolically written as:

a) MR/Q b) Price × Quantity c) TR d) None

12. Find out MR for price Rs. 10 and Price elasticity of demand 0.2
a) -30 b) -40 c) 40 d) None of these
13. Find out price in imperfect competition when MR = 10 Price elasticity of demand 6
a) 6 b) 20 c) 12 d) None of these
14. AR is also known as
a) Price b) Income c) Revenue d) None of the above

Bhagwati Education Institute Page 70

 Behavioral Principle

Chapter – 11 – Behavioral Principle

Questions

1. Under Perfect competition the number of firms:

a) Is very large b) Is limited c) Is about 10 d) Are very limited
2. Firm under Perfect Competition in the short run can earn only:
a) Abnormal profit b) Normal profit c) Loss d) Any of the above
3. In Perfect Competition since the firm is a price taker, the __ curve is a linear
a) Total Cost b) Total Revenue c) Marginal Cost d) Average Cost
4. A Perfectly Competitive firm is operating at an output level where price is greater than
marginal cost. Which of the following is/are true?
a) The firm should increase its output so as to maximize profit.
b) The firm should reduce its output so as to maximize profit.
c) The firm is neither making profit nor loss.
d) The firm is incurring loss
5. Perfectly elastic demand curve signifies that
a) The firm does not exercise any control over the price of the product.
b) The firm can sell any amount of the product as it likes at the ruling price.
c) Both a & b
d) None
6. A Perfectly Competitive firm can earn, in the short run.
a) Normal profit c) Can incur loss
b) Super normal profit d) All of the above
7. If under Perfect Competition, the price line lies below the average cost curve, the firm would.
a) Make only normal profit c) Make abnormal profit
b) Incur loss d) Profit cannot be determined
8. The concept of supply curve is relevant only for
a) Perfect Competition c) Monopolistic competition
b) Monopoly d) Oligopoly
9. The short-run supply curve of a firm under Perfect Competition is the same as:
a) Average variable costs c) Marginal cost above average variable cost
curve.
b) Marginal cost curve d) Average total cost curve.

Bhagwati Education Institute Page 71

 Behavioral Principle

10. Profit maximizing firm will stop production in the short run if price is
a) Less than average cost c) Less than average variable cost
b) Below the marginal cost d) Equal to average cost
11. Which of the following is not correct about Perfect Competition?
a) In the long run the firms always earn only normal profit.
b) The firm could incur losses in the short run.
c) The individual firm is a price taker.
d) The demand curve being faced by a firm is unit elastic.
12. The average revenue curve of Perfect Competitive firm is:
a) U-shaped b) L shaped c) Vertical d) Horizontal
13. In a perfectly competitive firm when TR curve is a straight line started from origin:
a) Price exceeds MR c) Total cost equals Total Revenue
b) Price equals to MR d) None
14. Efficient allocation of resources is likely to occur under:
a) Monopoly c) Perfect Competition
b) Monopolistic Competition d) None
15. Under perfect competition a firm will be in equilibrium when its AC is:
a) At a maximum c) Covering only prime cost
b) At a minimum d) Covering wages & salaries
16. Profit of the firm will be more at:
a) MR = MC
b) Additional revenue from extra unit equals its additional cost
c) Both a & b
d) None
17. What should firm do when marginal revenue is greater than marginal cost?
a) Firm should expand output c) Effect to be made to make them equal
b) Firm should decrease output d) Al
18. Total revenue is a straight positively sloping line from origin under:
a) Monopoly c) Monopolistic competition
b) Perfect Competition d) Oligopoly.
19. Total revenue minus total explicit cost is called:
a) Profit c) Super – Normal Profit
b) Economic Profit d) Accounting Profit.

Bhagwati Education Institute Page 72

 Behavioral Principle

20. Under Perfect Competition, slope of MR is

a) Negative b) Falling c) Zero d) Rising
21. What is that point called where, P = minimum SAC
a) Super- normal Profit c) Shut-down Point.
b) Loss- making point d) Break-Even Point.
22. Under Perfect Competition when price line becomes tangent to the minimum point of AVC,
it is called.
a) Minimum Profit c) Shut Down Point
b) Minimum Loss d) Break-even Point.
23. A competitive firm in the short run incurs losses. The firm continues production, if
a) P > Min AVC b) P = Min AVC c) P > = Min AVC. d) P > AVC.
24.If under Perfect Competition, the price line lies below the average cost curve, the firm would:
a) Make only normal profit c) Incur Loss.
b) Makes super-normal profits. d) None.
25. A PC firm in short run, incurs loss but continues production because the price covers:
a) MC c) AFC & some part of AVC
b) AVC & some part of AFC d) None of the above
26.What is the formula for calculating loss per unit?
a) TC – TR c) MC – MR
b) AC – AR d) AVC – AR
27. Which of the following markets would most closely satisfy the requirements for a perfectly
competitive market ?
a) Electricity c) Milk
b) Cable television d) Cola
28.In Perfect Competition, necessary condition of short run equilibrium is:
a) SMC=MR c) Slope of SMC > Slope of MR
b) SMC>MR d) All
29.A market structure which has large number of firms producing & selling homogeneous
product & the customers have full knowledge about the equilibrium price is:
a) Perfect Competition c) Monopolistic Competition
b) Monopoly d) Oligopoly
30. Which of the following statements is false?
a) Economic costs include opportunity costs of the resources owned by the firm:
b) Accounting costs include only explicit costs

Bhagwati Education Institute Page 73

 Behavioral Principle

c) Economic profit will always be less than accounting profit if resources owned & used by
firm has any opportunity costs
d) Accounting profit is equal to total revenue less implicit costs
31. Price-taking firms, i.e., firms that operate in a perfectly competitive market, are said to be
“small” relative to the market. Which of the following best describes this smallness?
a) The individual firm must have fewer than 10 employees.
b) The individual firm faces a downward sloping demand curve.
c) The individual firm has assets of less than Rs 20 lakhs.
d) The individual firm is unable to affect market price through its output decisions.
32. The firm in a perfectly competitive market is a price taker. This designation as a price taker
is based on the assumption that:
a) The firm has some, but not complete control over its product price.
b) There are so many buyers & sellers in the market that any individual firm cannot affect
the market.
c) Each firm produces a homogeneous product.
d) There is free entry & exit
33. A firm encounters its shut down point when:
a) ATC is equal to price at the profit maximising output:
b) AVC is equal to price at the profit maximising output:
c) AFC is equal to price at the profit – maximising output:
d) MC is equal to price at the profit maximising output.
34. When a firm finds at the profit maximising output market price is less than ATC but grater
than AVC. Which h of the following is correct:
a) The firm should shut down in order to minimise its losses:
b) The firm should raise its price enough in order to cover its losses:
c) The firm should move its resources to another industry:
d) The firm should continue in order to minimise its losses:
35. When price is less than AVC at the profit maximising output, a firm should:
a) Produce where MR=MC in the short run:
b) Produce where MR=MC in the long run:
c) Shut down, since it will lose nothing in that case
d) Shut down since it cannot cover its variable costs if it stays in business

Bhagwati Education Institute Page 74

 Behavioral Principle

36. When ___, we know that firm must be producing at the minimum point of AC & so there
will be productive efficiency:
a) AC=AR b) MC=AC c) MC=MR d) AR=MR
37. Agricultural goods markets depict features close to:
a) Monopoly c) Oligopoly
b) Perfect Competition d) None
38.Which of the following is accurate regarding a perfectly competitive firm:
a) Demand curve is downward sloped:
b) Demand curve always lies above MR:
c) AR need not be equal to price:
d) Price is given & is determined by the equilibrium in the entire market
39. In the long run equilibrium of a competitive market, firms operate at:
a) The intersection of the MC & MR: c) Zero economic profit:
b) Their efficient scale: d) All of these are correct
40. If a competitive firm doubles its output, its total revenue:
a) Doubles c) Less than doubles
b) More than doubles d) Cannot be determined as price of good may rise
or fall

Numerical Problems of Perfect Competition:

41. When AR = 10, AC = 8 perfectly competitive firm makes:

a) Normal profit c) Loss
b) Super normal profit d) None
42.The equilibrium price from the following table is
Price 1 2 3 4 5 6 7 8
Demand 1000 900 800 700 600 500 400 300
Supply 400 500 600 700 800 900 1000 1100
a) `2 b) `3 c) `4 d) `5
43. When price is 20, quantity demanded is 9 units, and when price is ` 19, quantity demanded
is 10 units. Based on this information, find out marginal revenue for increase in output from
9 units to 10 units.
a) `20 b) `19 c) `10 d) `1

Bhagwati Education Institute Page 75

 Behavioral Principle

44.When price is 20, quantity demanded is 15 units, & when price is `18, quantity demanded is
16 units. Based on this information find out marginal revenue from an increase in output
from 15 units to 16 units
a) `18 b) `16 c) `12 d) `28
Consider table and answer 45,46,47
Quantity Price Total Cost
1 200 109
2 190 123
3 180 147
4 170 385
5 160 541

45. At the profit maximizing level, what price should be charged?

a) `190 b) `180 c) `170 d) None
46.Find out amount of profit for five unit
a) ` 91 b) `251 c) `259 d) None
47. Find out total revenue for three units output
a) ` 380 b) `540 c) `590 d) None
Consider table & answer 48-52
Production Price Total Cost
0 130 45
1 124 88
2 118 125
3 112 159
4 106 193
5 100 230
6 94 273
7 88 325

48. When production = 6 units, the firm’s:

a) Fixed cost is zero and variable cost is 273
b) Fixed cost is zero and variable cost is 228
c) Fixed cost is 45 and variable cost is 273
d) Fixed cost is 45 and variable cost is 228

Bhagwati Education Institute Page 76

 Behavioral Principle

49.When production = 5 units, total revenue is:

a) `100 b) `230 c) `500 d) None
50.When production = 6 units, the firm’s marginal revenue is:
a) `384 b) `94 c) `64 d) `2
51. On production = 7 units, the firm’s profit is:
a) 0 b) `41.57 c) `291 d) None
52. To maximize profit the firm’s should produce:
a) 0 unit b) 3 units c) 5 units d) 7 units
53. Suppose that a sole proprietorship is earning TR Rs 1 lakh & is incurring explicit cost of
`75,000. If the owner could work for another company for `30,000 a year, we would
conclude that:
a) The firm is incurring an economic loss:
b) Implicit costs are `25,000
c) The total economic costs are `1 Lakh
d) The individual is earning an economic profit of `25,000

Read the following & answer 54-56

Suppose that a sole proprietorship is earning TR `10 lakh & is incurring explicit cost of
`7,50,000. If the owner could work for another company for `3,00,000 a year, we would
conclude that:
54. The implicit cost is:
a) `3,00,000 b) `7,50,000 c) `2,50,000 d) Insufficient data
55. The above mentioned firm is earning:
a) Accounting profit of `2,50,000 c) Both a & b are correct
b) Economic loss of `50,000 d) None is correct
56. Suppose in the above mentioned question, the owner had invested `500,000 by
withdrawing from his saving accounts on which he was earning 5% interest per annum, the
economic profit or loss:
a) Economic profit of `75,000 c) Economic profit of `2,50,000
b) Economic loss of `75,000 d) Economic loss of `2,50,000

Bhagwati Education Institute Page 77

 Monopoly

Chapter – 12 – Monopoly
Questions

1. The market which has single seller no-substitutes for the product & freedom to entry of new
firms is completely blocked is the case of:
a) Perfect Competition c) Duopoly
b) Oligopoly d) Monopoly
2. The firm & the industry are one & the same in ______________.
a) Perfect Competition c) Duopoly
b) Monopolistic competition d) Monopoly
3. Which of the statements is correct?
a) Price rigidity is an important features of monopoly.
b) Selling costs are possible under Perfect Competition.
c) Under Perfect Competition factors of production do not move freely as there are legal
restrictions.
d) An industry consists of many firms.
4. Which of the following statements is incorrect?
a) Under Monopoly there is no difference between a firms an industry.
b) A Monopolist may restrict the output & raises the price.
c) Commodities offered for sale under a Perfect Competition will be heterogeneous.
d) Product differentiation is peculiar to Monopolistic Competition.
5. A firm can sell as much as its at the market price. The situation is related to
a) Perfect Competition c) Monopolistic competition
b) Monopoly d) Oligopoly
6. Which of the following is likely to confirm the presence of Monopoly power in the market?
a) An industrial concentration ratio whereby the three largest firms account for 80% of
sales.
b) Firms are producing where the average revenue exceeds the marginal cost of production.
c) All firms are producing at less than optimum output.
d) All the firms are selling their products at one price.
7. Monopolist can fix:
a) Both price & output c) Neither price and output
b) Either price or output d) None

Bhagwati Education Institute Page 78

 Monopoly

8. The strength of Monopoly may be assessed by

a) The size of his total revenue c) The size of consumer’s surplus accruing
to him.
b) The gap between AR & MR d) The long term price of his product.

9. Monopoly power refers to the firm’s ability to:

a) Earn economic profit c) Set prices above marginal cost.
b) Restrict entry into the industry. d) Posses economies of scale.
10. A Monopoly producer has:
a) Control over production but not price c) Control neither on production nor on
price.
b) Control over production as well as price d) Control over production, price &
consumers.
11. All of the following are characteristics of monopoly except:
a) There is a single firm c) The firm produces a unique product
b) The firm is a price taker d) The existence of some advertising
12. What is the formula for calculating profit per unit?
a) TC – TR b) AR – AC c) MC – MR d) AVC – AR
13. When a monopoly maximizes profit, we know that it is
a) Producing in the short run. c) Producing at an output where MR = MC
& P> ATC.
b) Producing in the long run. d) Producing at an output where MR = MC
& TC = TR.
14. Under monopoly, degree of control over price is:
a) None b) Some c) Very considerable d) None
15. A circumstances in which it might pay a Monopolist to cut the price of his product is where.
a) MC is falling. c) His advertising costs are increasing
b) MR is greater than MC d) Average costs are increasing
16. Under Monopoly & Imperfect Competition MC is:
a) More than the price. c) Equal to the price
b) Less than the price d) Anyone
17. Equilibrium of Monopolist will never lie below the middle point of the AR curve because
below the middle point.
a) Elasticity of demand is less than one c) Both a & b

Bhagwati Education Institute Page 79

 Monopoly

b) MR is negative d) Market laws cease to be operated.

18. The essential conditions for price discrimination is/are:
a) It is not possible to transfer any unit of the goods from one market to another.
b) It is not possible for the buyers in the dealer market to transfer themselves into the
cheaper market
c) Both a & b
d) None
19. In the case of price discrimination price will be higher in the market where:
a) Demand is perfectly elastic. c) Demand is unitary elastic.
b) Demand is highly elastic. d) Demand is less elastic.

20. Price discrimination is undertaken with the aim of:

a) Increasing sales & maximizing profits. c) Minimising cost & maximizing revenue.
b) Reducing sales & raising prices d) Serving the markets without earning
profits.
21. A firm practicing price discrimination will be:
a) Charging different prices for different qualities of a product.
b) Buying in the cheapest & selling in the dearest markets
c) Charging different prices in different markets for a product.
d) Buying only from firm selling in bulk at a distance.
22. One important condition for successful price discrimination about elasticity of demand is:
a) Elasticity of demand must be same in different market.
b) Elasticity of demand must be different in different markets.
c) Elasticity of demand must be one in different market
d) Elasticity of demand must be infinite in different markets.
23. Why is first degree discrimination is termed as the extreme form of price discrimination?
a) All the industry discriminate in price for almost all the products they are producing.
b) Firms in the industry discriminate in price for almost all the products they are
producing.
c) Firms earn the least profit in this type of discrimination, they are just able to cover it.
d) In this type of discrimination firms charge the consumers the maximum price.
24.Which of the following statements regarding first degree price discrimination is not true?
a) This is the most extreme form of price discrimination.
b) This pricing scheme involves charging a consumers the maximum he is willing to pay.

Bhagwati Education Institute Page 80

 Monopoly

c) This is the most profitable pricing scheme.

d) There is a big consumer surplus.
25. Under ________ the monopolist will fix a price which will take away the entire
consumer surplus.
a) 1st degree discrimination c) 3rd degree discrimination
b) 2nd degree discrimination d) None.
26.If the monopolist’s price = 20, elasticity of demand is 1.6. Its marginal revenue.
a) 6.4 b) 3.2 c) 1.6 d) 7.5
Consider the following fig & answer 26, 27
27. In this monopoly market, at equilibrium output ‘e’, it:
a) Incurs loss.
b) Enjoys profit.
c) Incurs loss but continues production.
d) All.
28.For a rational monopolist, choose the suitable option from the following:
a) Monopolist shuts down production.
b) Monopolist continues production till point ‘e’ is reached.
c) Monopolist continues production till ‘M’ point is reached.
d) None.
29.Monopoly has no closed substitutes goods and therefore AR is:
a) Parallel b) Downward c) Upward d) None

Bhagwati Education Institute Page 81

 Monopolistically Competitive Market

Chapter – 13 – Monopolistically Competitive Market

Questions

1. A market structure in which many firms sell products that are similar but not identical is
knows as:
a) Monopoly c) Perfect Competition
b) Monopolistic competition d) Oligopoly
2. Advertisement costs are
a) Not required under Perfect Competition c) Required under Perfect
Competition
b) Not required under duopoly d) None
3. Which of the following is not a feature of monopolistic competition?
a) Large number of sellers c) Different prices
b) Differentiated products d) No single seller has control over
the market
4. Consider the monopolistically competitive industry alone. We know that
a) It has innumerable barriers to firm entry.
b) It has differentiated products.
c) Some of its firms are monopolists, while others are competitive.
d) It has a small number of very large firms, & each faces a horizontal demand curve.
5. One difference between oligopoly & monopolistic competition is that
a) The monopolistically competitive industry has fewer firms.
b) Goods are differentiated in oligopoly not in monopolistic competitive firm.
c) Both have barriers to firm entry, but barriers in oligopoly are impossible to overcome.
d) Fewer firms compete in oligopoly than in monopolistic competition.
6. Under monopolistic competition in the long run, what will the firm earn?
a) Super normal profits. c) Break even.
b) Normal profits. d) Any one of the above.
7. The difference between least cost output & profit maximising output is called
a) Reserve capacity. c) Normal capacity.
b) Excess capacity. d) Abnormal capacity.
8. Cigarette industry must closely related to
a) Perfectly competitive model. c) Monopolistic model.
b) Imperfectly competitive model. d) None.
Bhagwati Education Institute Page 82
 Monopolistically Competitive Market

9. Which of the following is not a characteristic of a monopolistically competitive market

a) Free entry & exit c) Many sellers
b) Abnormal profits in the long run d) Differentiated products
10. Under which market condition though the firms earn normal profits in the long run, there is
always excess capacity with them.
a) Perfect Competition c) Oligopoly
b) Monopoly d) Monopolistic competition
11. A firm in long run equilibrium under Monopolistic Competition makes only:
a) Normal Profits c) Super normal profits
b) Monopoly profits d) Losses
12. Monopolistic competition differs from Perfect Competition due to:
a) Large number of firms & heterogeneous product.
b) Large number of firms & homogeneous product.
c) Small number of firms & differential products.
d) Only a few firms & similar products.
13. Selling costs are incurred under Monopolistic Competition to:
a) Attract more customers.
b) Prevent its customers from going to others.
c) Establish superiority of its product vis-à-vis the others.
d) All of the above.
14. The sale of ‘branded’ articles is common in a situation of:
a) Excess capacity c) Monopoly
b) Monopolistic competition. d) Pure Competition.
15. Under Monopolistic Competition there can be freedom of entry in the sense of a freedom to
produce:
a) Close substitutes. c) Complementary goods.
b) Perfect substitutes d) Perfect complementary goods.
16. The structure of soap industry in India is best described as:
a) Perfectly competitive c) Monopoly
b) Monopolistic Competition d) Oligopoly
17. In the long run, Monopolistic Competition differs from Perfect Competition in that
monopolistically competitive firms has:
a) Excess profits c) Zero fixed cost
b) Excess capacity d) All of the above.

Bhagwati Education Institute Page 83

 Oligopoly

Chapter – 14 – Oligopoly
Questions

1. Pure oligopoly or perfect oligopoly is based on products.

a) Differentiated (eg. Talcum powder) c) Unrelated
b) Homogeneous (eg. Aluminium Industries) d) None
2. Differentiated oligopoly is based on
a) Differentiated (eg. Talcum powder) c) Unrelated
b) Homogeneous (eg. Aluminium Industries) d) None
3. Open and closed Oligopoly implies
a) Entry and competition with existing; Entry is restricted
b) Barriers to competition; Free entry
c) Entry; Competition with new firms
d) All
4. When few firms of the Oligopolist come to a common understanding in fixing price and
output
a) Collusive oligopoly c) Partial oligopoly
b) Non-collusive oligopoly d) None
5. When there is absence of any understanding among oligopoly firms in fixing price & output:
a) Collusive c) Partial Oligopoly
b) Competitive oligopoly d) None
6. In Oligopoly, when industry is dominated by one large firm which is considered as leader of
the group:
a) Collusive oligopoly c) Partial oligopoly
b) Non-collusive oligopoly d) None
7. When the products are sold through a centralized body, Oligopoly is known as:
a) Organised oligopoly c) Partial Oligopoly
b) Syndicated Oligopoly d) None
8. In Oligopoly we observe “Competition among ___________.
a) 20 to 30 firms c) The few
b) 30 to 50 firms d) Infinite numbers.
9. Interdependence, importance of advertising & selling group behavior are features of:
a) Perfect competition c) Monopolistic competition
b) Monopoly d) Oligopoly
Bhagwati Education Institute Page 84
 Oligopoly

10. Oligopolistic industries are characterized by:

a) A few dominant firms & substantial barriers to entry
b) A few large firms & no entry barriers
c) A large number of small firms & no entry barriers.
d) One dominant firm & low entry barriers
11. When an oligopolist individually chooses its level of production to maximize its profits, it
charges a price that is:
a) More than the price charged by either monopoly or a competitive market.
b) Less than the price charged by either monopoly or a competitive market
c) More than the price charged by a monopoly & more than the price charged by a
competitive market.
d) Less than the price charged by a monopoly & more than the price charged by a
competitive market
12. If firms in the toothpaste industry have the following market shares, which market structure
would best describe the Industry?
Market Share (% of market)
Toothpaste 18.7
DentiPaste 14.3
Shinibright 11.6
I can’t believe it’s not toothpaste 9.4
Brighter than white 8.8
Pastystuf 7.4
Others 29.8
a) Perfect Competition c) Oligopoly
b) Monopolistic d) Monopoly
13. One characteristic not typical of oligopolistic industry is
a) Horizontal demand curve
b) Too much importance to non-price competition
c) Price leadership
d) A small number of firms
14. The structure of cold drink industry in India is best described as:
a) Perfectly competitive c) Monopoly
b) Monopolistic competition d) Oligopolistic

Bhagwati Education Institute Page 85

 Oligopoly

15. Which of the following statements is incorrect?

a) Even monopolistic can earn losses
b) Firms in perfectly competitive market are takers
c) It is always beneficial for a firm in a perfectly competitive market to discriminate prices.
d) Kinked demand curves is related to an Oligopolsitic market.
16. The kinked demand curve model of oligopoly assumes that:
a) Response to a price increase is more than the response to a price decrease.
b) Response to a price decrease is more than the response to a price increase.
c) Elasticity of demand is constant regardless of whether price increases or decreases.
d) Elasticity of demand perfectly elastic if price increase & perfectly inelastic if price
decreases.
17. The kinked demand hypothesis is designed to explain in the context of Oligopoly:
a) Price & output c) Price rigidity
b) Price leadership d) Collusion among rivals.
18. In the ‘Kinked – demand curve’ model the upper portion of the demand curve is:
a) Elastic b) Inelastic c) Perfectly elastic d) Unitary
elastic
19. Behavioural assumption of Sweezy’s kinked demand curve model is:
a) Oligopolists recognise mutual dependent
b) Oligopolists match price cuts but not price increases.
c) Oligopolists match price increases but not price cuts.
d) Oligopolists do not match price cuts & price increases.
20. The length of discontinuity of MR under kinked demand model depends on:
a) Same elastic c) AR curve
b) Difference in elasticity at ‘kink’ point. d) None.
21. Under oligopoly the ‘Kinked demand’ curve model explains:
a) Price fluctuations c) Normal Price.
b) Price rigidity d) Price & Output determination.
22. Firm aims at maximisation of which profits?
a) Super-normal profit. c) Total profit.
b) Normal-profit. d) Average profit.
23. At point kink of Oligopoly
a) Elasticity’s are same c) Differences in elasticity take place
b) Slopes are same d) None.

Bhagwati Education Institute Page 86

 Oligopoly

24.Cartel and price leadership are the features of:

a) Monopoly c) Oligopoly
b) Monopolistic Competition d) None

Bhagwati Education Institute Page 87

 Business Cycle

Chapter – 15 – Business Cycle

Questions

1. Expansion is characterised by:

a) Increase in national output c) Downswing of Trade Cycle
b) Upswing of Trade Cycle d) Both A and B
2. Peak or Boom refers to:
a) Lowest of Trade Cycle c) Middle point of Trade Cycle
b) Turning Point of Trade Cycle d) None of the above
3. Contraction is characterised by:
a) Decrease in national output c) Upswing of Trade Cycle
b) Downswing of Trade Cycle d) Both A and B
4. Depression occurs when:
a) Process of recession on its way c) Severe contraction in economic activities
b) Process of recession is complete d) Both B & C
5. Economists use changes in variety of activities to measure Business Cycle, which are called:
a) Variables b) Parameters c) Indicators d) All
6. Variables that change after real output changes are called:
a) Lagging variables c) Lagging parameters
b) Lagging indicators d) All
7. According to Keynes, fluctuations in economic activities are due to fluctuations in aggregate
_________
a) Market Demand c) Volatile Demand
b) Effective Demand d) None
8. According to Hawtrey, Trade Cycle is purely ________ phenomenon.
a) Fiscal b) Monetary c) Business d) All
9. Macroeconomic policies which causes Business Cycle are:
a) Price and market policies c) Business policies
b) Monetary and fiscal policies d) All
10. According to Professor __________ modern business activities are based on anticipating
of business community and are affected by waves of optimism or pessimism
a) Samuelson b) Marshall c) Hicks d) Pigou
11. According to Professor __________ Trade Cycles occur as a result of innovations which
take place in the system from time to time:
Bhagwati Education Institute Page 88
 Business Cycle

a) Samuelson b) Marshall c) Schumpeter d) Allen

12. The term business cycle refers:
a) The ups and downs in production of commodities
b) The fluctuating levels of economic activity over a time period
c) Decline in economic activities over a prolonged period of time
d) Increasing unemployment rate and diminishing rate of savings
13. A significant decline in general economic activity extending over a period of time is:
a) Business Cycle c) Recession
b) Contraction phase d) Recovery
14. The trough of business cycle occurs when ________ hits its lowest point:
a) Inflation in economy c) Aggregate economic activity
b) The money supply d) The unemployment rate
15. The lowest point in the business cycle is known as:
a) Expansion b) Boom c) Peak d) Trough
16. Which of the following is not a characteristic of Business cycle:
a) Business cycles have serious consequences on the wellbeing of the society
b) Business cycles occur periodically although they do not exhibit the same regularity
c) Business cycle have uniform characteristics and causes
d) Business cycles are contagious and unpredictable.
17. Which of the following is not an example of coincident indicator
a) Industrial production c) Retail sales
b) Inflation d) New orders for plant and equipment
18. When aggregate activity is declining the economy is said to be in:
a) Contraction b) Expansion c) Trough d) Turning point
19. During recession unemployment rate _______ and output _______
a) Rises, falls b) Rises, rises c) Falls, rises d) Falls, falls
20. Peaks and troughs of business cycle are known collectively as:
a) Volatility c) Equilibrium points
b) Turning points d) None
21. Rampant unemployment is found in:
a) Boom b) Recovery c) Contraction d) Depression
22. Greatest depression suffered by economy in:
a) 1924 b) 1930 c) 1945 d) 2008

Bhagwati Education Institute Page 89

 Business Cycle

23. Last stage of recession is called:

a) Depression b) Recovery c) Shutdown d) All
24.In the long run, a reduction in labour supply would cause output ______ and ________
the aggregate price level.
a) Fall, rise b) Fall, fall c) Rise, fall d) Rise, rise
25. Which of the following macro-Economic variable would you include in an index of leading
economic indicators.
a) Employment c) Real interest rate
b) Inflation d) Residential investment
26.Industries that are extremely sensitive to the business cycle are the
a) Durable goods c) Capital goods and non-durable goods
b) Non-durable goods, service sector d) Capital goods and durable goods sector
27. An economic variable that moves in the opposite direction as aggregate economic activity
down in expansions, up in contractions is called:
a) Pro cyclical c) Cyclical
b) Counter cyclical d) A leading variable
28.Business cycle is contagious and ________ in character.
a) Local b) Regional c) National d) International
29.Which external factor affects business cycle:
a) Population growth c) Money supply
b) Variation in government supply d) Macro Economic policies
30. Which internal factor affect the business cycle:
a) Fluctuations in investment c) Technology shocks
b) Natural factor d) Population growth
31. Fashion retailer
a) Cyclical business c) Sluggish business
b) Sunrise business d) None
32. Features of business cycle include:
a) Discuss periodically c) Originate in free market economy
b) Have 4 different phases d) All
33. Internal causes of depression include:
a) Fluctuating in investment3 c) Psychological factors
b) Money supply d) All

Bhagwati Education Institute Page 90

 Business Cycle

34. Whose statement out of these is false?

a) Hawtrey - “Trade cycle is purely monetary phenomenon
b) Keynes - “Fluctuations in aggregate demand
c) Pigou - “Fluctuations in investment
d) Schumpeter – “Innovations”

Bhagwati Education Institute Page 91