UGC NET Paper 2 Economics Mock Test - 3 - UGC NET MCQ

Herfindahl Index deals with the issue of seller’s concentration in a particular market.

Key Points

•  The term “HHI” means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers.
• A market with an HHI of less than 1,500 is considered a competitive marketplace, an HHI of 1,500 to 2,500 is moderately concentrated, and an HHI of 2,500 or greater is highly concentrated.
• The primary disadvantage of the HHI stems from the fact that it is such a simple measure that it fails to take into account the complexities of various markets.

Zero Sum Game.

Key Points

• The question is based on the Game Theory− a situation in which game players compete for the
  given total pay−off, so that gains by one player are at the direct expense of the other player/players.
• Game theory is a theoretical framework to conceive social situations among competing players.
• The intention of game theory is to produce optimal decision-making of independent and competing actors in a strategic setting.

Additional Information

• Using game theory, real-world scenarios for such situations as pricing competition and product releases (and many more) can be laid out and their outcomes predicted. 
• Scenarios include the prisoner's dilemma and the dictator game among many others.
  Different types of game theory include cooperative/non-cooperative, zero-sum/non-zero-sum, and simultaneous/sequential.

Engel's Law refers to this phenomenon. 

Key Points

• Engel's Law is a 19th-century observation that as household income increases, the percentage of income that a household spends on food will decline.
• In part, this is because the amount and quality of food that a family can consume is fairly limited.
• As food spending declines on a relative basis, households spend a greater portion of their income on other things, such as education and recreation.
• The idea was suggested in 1857 by the Russian statistician Ernst Engel.

The correct answer is Pareto-superior.

Key Points

• Pareto efficiency or Pareto-superior in an economic state where resources cannot be reallocated to make one individual better off without making at least one individual worst off.
• It is a major pillar of welfare economics.
• It is named after an Italian economist and political scientist Vilfredo Pareto (1848-1923).
• It is used as a benchmark to judge the efficiency of the real market.
• Pure Pareto efficiency exists only in theory.

 International trade theories are simply different theories to explain international trade. Trade is the concept of exchanging goods and services between two people or entities. International trade is then the concept of this exchange between people or entities in two different countries.

Different International Trade Theories are as follow:

Thus, option 2 is the correct answer.

The correct answer is All of the above.

In News

• The Union Budget seeks to complement macro-economic level growth with a focus on micro-economic level all-inclusive welfare.
• The Union Minister for Finance & Corporate Affairs, Smt Nirmala Sitharaman tabled the Union Budget 2022-23 in Parliament.
• The key highlights of the budget are as follows:
• ​India’s economic growth is estimated at 9.2% to be the highest among all large economies.
• 60 lakh new jobs to be created under the productivity linked incentive scheme in 14 sectors.
• PLI Schemes have the potential to create an additional production of Rs 30 lakh crore.
• Entering Amrit Kaal, the 25 year-long lead up to India @100, the budget provides the impetus for growth along with four priorities:
  • PM GatiShakti
  • Inclusive Development
  • Productivity Enhancement & Investment, Sunrise opportunities, Energy Transition, and Climate Action
  • Financing of investments

Key Points

• Railways:
  • One Station One Product concept to help local businesses & supply chains.
  • 2000 Km of the railway network to be brought under Kavach, the indigenous world-class technology, and capacity augmentation in 2022-23.
  • 400 new generation Vande Bharat Trains to be manufactured during the next three years.
  • 100 PM GatiShakti Cargo terminals for multimodal logistics to be developed during the next three years.
• Ken Betwa project:
  • 1400 crore outlay for implementation of the Ken – Betwa link project.
  • 9.08 lakh hectares of farmers’ lands to receive irrigation benefits by Ken-Betwa link project.
• Health:
  • ​An open platform for National Digital Health Ecosystem to be rolled out.
  • ‘National Tele Mental Health Programme’ for quality mental health counselling and care services to be launched.
  • A network of 23 tele-mental health centres of excellence will be set up, with NIMHANS being the nodal centre and the International Institute of Information Technology- Bangalore (IIITB) providing technical support.

 Demand function is usually perceived as downward-sloping, and the supply function is upward-sloping, reflecting time lags in production.

Key Points

•  Cobweb theory is the idea that price fluctuations can lead to fluctuations in supply which cause a cycle of rising and falling prices.
• In a simple cobweb model, we assume there is an agricultural market where supply can vary due to variable factors, such as the weather.
• Assumptions of Cobweb theory
  • ​In an agricultural market, farmers have to decide how much to produce a year in advance – before they know what the market price will be. (supply is price inelastic in short-term)
  • A key determinant of supply will be the price from the previous year.
  • A low price will mean some farmers go out of business. Also, a low price will discourage farmers from growing that crop in the next year.
  • Demand for agricultural goods is usually price inelastic (a fall in price only causes a smaller % increase in demand)

• The cob-web model, often used in agricultural economics, takes into account time lags in production. In simple terms, this model reflects how farmers base their decision on how much to produce in the next period on the current price level, which leads to cyclical price and production behaviors, often represented by a cob-web like pattern on a price-quantity model.

• Generally, the demand function in these markets is seen as downward-sloping, indicating that as prices increase, the quantity demanded decreases. Likewise, the supply function is represented as upward-sloping, demonstrating that as prices rise, producers are incentivized to supply more.

• The description in Option A accurately represents these characteristics of the cob-web model. Options B and C misrepresent the general orientation of demand and supply curves in such a model. Option D incorrectly suggests that the demand function remains constant, which isn't typically the case in the cob-web model as demand can shift leading to different equilibria. Furthermore, it's the interaction of demand and supply that creates the cob-web pattern, not just the supply function's response to demand.

The correct answer is N. Kaldor

• The stock adjustment principle was given by The Kaldor.
• Before this The Accelerator Theory of Investment was proposed.

 Key Points

1. The acceleration principle held that the demand for capital goods is a derived demand and that changes in the demand for output lead to changes in the demand for capital stock and, hence, lead to investment.
2. The flexible accelerator theory removes one of the major weaknesses of the simple acceleration principle that the capital stock is optimally adjusted without any time lag.
3. In the flexible accelerator, there are lags in the adjustment process between the level of output and the level of capital stock.
4. This theory is also known as the capital stock adjustment model.

Additional Information

1. The flexible accelerator included both demand and supply allowing for lags in the adjustment of the actual capital stock towards the optimal level.
2. The theory of flexible accelerator has been developed in various forms by Chenery, Goodwin, Koyck and Junankar. But the most accepted approach is by Kock.

Hence, The correct answer is N. Kaldor.

The correct answer is Both players choose a high effort level (H, H).
Key Points 

• The Nash Equilibrium is a concept within game theory where the optimal outcome of a game is one where no player has the incentive to deviate from their chosen strategy after considering an opponent's choice. Essentially, no player can benefit from changing strategies while the other player keeps theirs unchanged. 
• The payoff matrix provided shows the outcomes for each combination of choices. Each cell in the matrix shows two numbers, the first one represents the payoff for Player 1, and the second represents the payoff for Player 2. 

Now let's consider each possible scenario:

• Both players choose a high effort level (H, H).
  • The payoff for both players is 5. However, either player could increase their payoff by unilaterally changing their strategy to L, as they would get a payoff of 7 (for Player 1) or 2 (for Player 2).
  • Therefore, (H, H) cannot be a Nash equilibrium.
• Both players choose a low effort level (L, L).
  • The payoff for both players is 6. However, either player could increase their payoff by unilaterally changing their strategy to H, as they would get a payoff of 7 (for Player 1) or 2 (for Player 2).
  • Therefore, (L, L) cannot be a Nash equilibrium either.
• Player 1 chooses a high effort level, Player 2 chooses a low effort level (H, L).
  • The payoff is 7 for Player 1 and 2 for Player 2. Neither player could increase their payoff by unilaterally changing their strategy.
  • Therefore, (H, L) can be a Nash equilibrium.
• Player 1 chooses a low effort level, Player 2 chooses a high effort level (L, H).
  • The payoff is 2 for Player 1 and 7 for Player 2. Neither player could increase their payoff by unilaterally changing their strategy.
  • Therefore, (L, H) can be a Nash equilibrium as well.

So, a strategy set {H, H} is a Nash equilibrium because none of the players can improve their payoffs by unilaterally deviating from their strategy while the other keeps their strategy unchanged. Hence, the Nash equilibrium for this game is (H, H) i.e. (5,5)

• Payments Regulatory Board of India (PRBI) was recommended by Ratan Watal committee on Digital Payments. Hence, Statement 1 is correct.
• The government, keen on promoting digital payments, has proposed to form the separate regulator, by overhauling the Payment and Settlements Act 2007, to resolve disputes, ensure customer protection, check any foul play by dominant players, look at interoperability of digital transactions etc. Hence, Statement 2 is correct.
• The board would be under the Reserve Bank of India (RBI). Hence, Statement 3 is correct.
• The proposed board will have the Reserve Bank governor as the chairperson, along with a deputy governor in charge of payments as member. Hence, Statement 4 is correct.
• Besides an RBI officer nominated by the RBI Board, it will also have 3 members nominated by the central government.

Thus, D is the Correct Answer.

The correct answer is Option 2.

In News

• Down To Earth: Indian farmers taxed $169 bn via export bans or restrictions in 2022: OECD report.

Key Points 
Organization for Economic Co-operation and Development (OECD):

• The Organization for Economic Co-operation and Development (OECD) is an international, intergovernmental economic organization of 38 countries.
• OECD was founded in the year 1961 to stimulate world trade and economic progress.
• Most OECD members are high-income economies with a very high Human Development Index (HDI) and are regarded as developed countries. Hence, Statement  1 is incorrect.
• India is one of the many non-member economies with which the OECD has working relationships in addition to its member countries. The OECD has been co-operating with India since 1995. Hence, Statement 2 is correct.
• OECD members are democratic countries that support free-market economies.
• They are represented by ambassadors at the OECD Council, which defines and oversees the work, as set out in the OECD Convention.
• OECD provides a platform for its member countries to compare policy experiences, seek answers to common problems, identify and share best practices, and coordinate domestic and international policies of its member nations.
• OECD is an official Permanent observer to the United Nations and is referred to as a think-tank or as a monitoring group.
• The OECD’s headquarters are at the Château de la Muette in Paris, France.
• The OECD member states collectively comprised 62.2% of global nominal GDP (US$49.6 trillion) and 42.8% of global GDP (Int$54.2 trillion) at purchasing power parity in 2017.
• The most recent countries to join the OECD were Colombia, in April 2020, and Costa Rica, in May 2021.
• On 25 January 2022, the Council decided to take the first step in accession discussions with six candidate countries for OECD Membership – Argentina, Brazil, Bulgaria, Croatia, Peru, and Romania.
• Accession Roadmaps for Brazil, Bulgaria, Croatia, Peru, and Romania were adopted at the Council meeting at the Ministerial level on 10 June 2022. 

The correct answer is (a)-(1), (b)-(4), (c)-(3), (d)-(2).
Key Points

• Pigouvian tax - (1) Market-based approach: 
  • This is a tax levied on any market activity that generates negative externalities (costs not internalized in the market). The tax is intended to correct the market outcome to account for the social costs. 
• Tradable permits - (4) Quantity-based approach: 
  • Tradable permits, often used in cap-and-trade systems, involve setting a maximum allowable level of pollution (the cap) and issuing permits up to this level. These permits can be traded between firms. This is a quantity-based approach because it directly limits the total amount of pollution.
• Command and control regulations - (2) Fixed standards and regulations:
  • Command and control regulations involve direct regulation by the government where the rules, standards, or limits are set and penalties are imposed for non-compliance. These are fixed standards and regulations, as they do not typically allow for flexibility in meeting the objectives. 
• Voluntary agreements - (3) Negotiated agreements:
  • Voluntary agreements involve commitments voluntarily taken on by private parties or sectors, often in negotiation with the government, to achieve specific environmental goals or improvements. These are negotiated agreements, as the terms are typically arrived at through some process of negotiation rather than being imposed by regulation.

In conclusion, understanding the characteristics of various environmental policy instruments like Pigouvian taxes, tradable permits, command and control regulations, and voluntary agreements is vital in crafting effective strategies to manage and mitigate the environmental externalities of economic activities. 

 The correct answer is Vigil on foreign investments to curb black money inflows in the country.

Key Points

• Participatory Notes are offshore/overseas derivative instruments (ODIs) issued by registered foreign institutional investors (FII) to overseas investors.
• P-Notes are issued to overseas investors who wish to invest in the Indian stock markets without registering themselves (anonymous) with the market regulator SEBI.
• P-Notes are used by money launderers. They first take funds out of the country through hawala and then get it back using P-Notes.

Additional Information

• They provide liquidity to the investors as they can transfer the ownership by endorsement and delivery.
• While the FIIs have to report all such investments each quarter to SEBI, they need not disclose the identity of the actual investors. 

What are the govt & regulator’s concerns?

• The primary reason why P-Notes are worrying is because of the anonymous nature of the instrument as these investors could be beyond the reach of Indian regulators.
• Further, there is a view that it is being used in money laundering with wealthy Indians, like the promoters of companies, using it to bring back unaccounted funds and to manipulate their stock prices.

The Reserve Bank of India on 4^th Mar 15 cut repo rate by 25 basis points to 7.5 percent, signaling that it was convinced by the fiscal consolidation measures announced in the Budget. This is the second out of turn 25 basis point-cut after the one in January.

Axioms of Revealed Preference Theory are (a) Rationality (b) Consistency (c) Transitivity.
Revealed preference theory is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior.

• Wald test means error in variable model.
• Unit root test is related to stationarity.
• Student's test is related to significance of regression coefficient.
• Granger test is related to casuality.

The correct answer is Violates the law of demand.
Key Points

• The Law of Demand is a key assumption of the Revealed Preference Theory. According to this law, if the price of a good decreases, the quantity demanded for that good should increase, assuming all other factors are constant. 
• Therefore, if a consumer switches from good A to good B when the price of good A decreases, this would contradict the Law of Demand and violate the assumptions of the Revealed Preference Theory. 

Additional Information

•  The law of demand is an economic principle that states that there is an inverse relationship between the price of a good or service and the quantity demanded, all else being equal.
• In other words, as the price of a product increases, the quantity demanded decreases, and vice versa.
• The law of demand is based on the observation that consumers tend to buy more of a good or service when its price is lower and buy less when its price is higher.  

The correct answer is 2 only.

• The rate of growth of Real Gross Domestic Product had declined due to the recession in 2008 and other reasons for the next few years from 8-9% to 5-6%. Hence statement 1 is incorrect.
• A surge in capital inflows, an inflationary explosion in global commodity prices, the global financial meltdown, and the collapse of international trade are the major challenges of India for the decline of the rate of growth of Real Gross Domestic Product.

Additional Information

• Gross Domestic Product (GDP) is the final monetary value of all final goods and services produced in a country in a year.
• Real gross domestic product is the inflation-adjusted value of the goods and services in a country.

• GDP at market prices has always increased year on year since last decade. Though the growth rate declined, it has never become negative. Hence statement 2 is correct.

The correct answer is (A) and (D) only 

Key Points

• The test is easy for students because most of them obtained marks above the mean score.
• Negatively skewed data is a type of distribution in which more values are concentrated on the right side. It is also called left-skewed.
  • 
• ​Skewness shows the symmetricity of data
• In negatively skewed data mean<median<mode i.e mode is the greatest.​

Additional Information

There are three types of distribution of data in a normal probability curve :

• Positively skewed data is a type of distribution in which more values are concentrated on the left side. It is also called right-skewed.
• Negatively skewed data is a type of distribution in which more values are concentrated on the right side. It is also called left-skewed.
• Symmetrical distribution is equally divided on both sides.

​Thus, according to the above concept (A) and (D) only is the correct answer.

The correct answer is All 1, 2 and 3.
Key Points 

• Introduced by M.D. Morris in 1979, the Physical Quality of Life Index (PQLI) marked a considerable departure from the tradition of using GNP per capita as the primary measure of development. By studying 23 developing nations, Morris constructed the PQLI as a comprehensive composite index that encompassed three crucial indicators, namely Infant Mortality Rate, Life Expectancy at Age One and Basic Literacy Rate.
• This innovative index serves as a reflection of various facets of societal well-being such as health, education, clean water access, nutrition, and sanitation, providing a broader perspective on the quality of life. The index measures improvements in living conditions as societies benefit from economic advancements, indicated by increased life expectancy, reduced infant mortality, and elevated literacy rates.
• Each of these three elements is evaluated on a scale of zero to 100, with zero representing the worst possible outcome, and 100 symbolizing the ideal scenario. The PQLI is subsequently computed by averaging these three indicators, providing each equal weight, and also scaling the resultant value from 0 to 100.
• The methodology adopted ensures that an increase in the indicators for life expectancy and literacy rates implies improved performance, while for the infant mortality rate, a decrease indicates progress. This is due to its negative indicator status, wherein the best case is the lowest value, and the worst case is the highest.
• In Morris's view, each of these indicators measures outcomes rather than inputs and is sensitive to distribution effects, implying that enhancements in these indicators reflect a broader section of the population reaping their benefits. Nevertheless, the indicators are independent of any specific level of development, making them suitable for international comparisons.
• However, the PQLI is not without limitations. It acknowledges being a limited measure of basic needs and does not supplant GNP, nor does it track changes in the economic and social structure or quantify total welfare. Criticism has also been voiced against Morris's decision to assign equal weight to the three variables, which some argue undermines the index's value in cross-country comparisons.
• Yet, despite these drawbacks, the PQLI proves valuable in identifying regions of underdevelopment and social groups affected by the neglect or failure of social policy. 

The correct answer is Food items.

Key Points

Public Goods :

• In economics, a public good is a good that is both non-excludable and non-rivalrous.
• For such goods, users cannot be barred from accessing or using them for failing to pay for them.
• Also, use by one person neither prevents access of other people nor does it reduce availability to others.
• Examples - National defence, Roads, Government administration, etc.

Private Goods: 

• In economics, private good is a good that is both excludable and rivalrous. 
• For instance, food consumed automatically bars other people from consuming that portion. 
• Food items are private food. 

Hence Food items are NOT public goods.

Additional Information 

The correct answer is 1, 2, 3 and 6 only

Key Points

• Banks in India were using Marginal Cost of Fund-based Lending Rates (MCLR).
• Due to weak monitory transmission MCLR system failed, then RBI decided to follow an external benchmark system from October 2019
• Banks must link their loan interest rate  "External Benchmark + Spread + Risk Premium" System.
• Banks are free to peak anyone External Benchmark such as 

1. RBI repo rate 
2. 91 day T-bill yield
3. 182 days T-bill yield
4. Any other benchmarks by Financial Benchmarks India Ltd.

• Banks must field the latest data of external benchmark in the above formula at least once every 3 months.
• It is applicable to previous loans.

• Nitrogen is an important component of proteins and nucleic acids, which are necessary for life and required for respiration, respectively. Several additional airborne gases, including carbon dioxide, are essential for life and play significant roles in the environment.
• These gases are regarded as air pollutants and may be hazardous to both the environment and human health. Pollutants like carbon monoxide (CO), sulphur dioxide (SO2), methane (CH4), and others can exacerbate environmental issues including smog, acid rain, and climate change.

Hence, (A-Air contains important substances, such as oxygen and nitrogen, that most species need to survive.) is correct and (R-Air pollution not including gases like CO2, CO, SO2, and CH4.​) is the correct explanation of (A)

Second and third paragraph clearly states that the government’s fiscal deficit is increasing i.e. government is spending more than it is what it is earning. This is because increased expenditure is not matched by the increased tax rates. Also, if the prices of oil products are not increased, the deficit will keep on increasing further impacting our economy.

1. Optimal Income Taxation concept was given by F. Ramsey.
2. Economic Theory of Politics was given by Anthony Downs.
3. Concept of Local Public Goods was given by Charles Tiebout.
4. Zero-Based Budgeting concept was given by Peter A. Phyrr.