Test: Business Economics - 1 - CA Foundation MCQ

A perfectly competitive firm is a price taker, which means that it must accept the equilibrium price at which it sells goods. If a perfectly competitive firm attempts to charge even a tiny amount more than the market price, it will be unable to make any sales.

Explanation: The Giffen Paradox is applicable to income demand. The Giffen Paradox is an economic concept that explains the phenomenon of a particular type of inferior good, called a Giffen good, for which the demand increases as its price increases, contrary to the general law of demand. The paradox is named after the Scottish economist Sir Robert Giffen, who first observed this behaviour in the 19th century. The Giffen Paradox is applicable for income demand because:

- Inferior goods: Giffen goods are inferior goods, meaning that as the consumer's income increases, the demand for these goods decreases. This is because consumers prefer to buy superior or normal goods when they have more disposable income.

- Substitution effect: The substitution effect refers to the change in demand for a good when its price changes relative to the price of other goods. For most goods, when their price increases, consumers tend to substitute them with other goods that are relatively cheaper. However, in the case of Giffen goods, the substitution effect is not strong enough to counteract the income effect.

- Income effect: The income effect occurs when a change in the price of a good affects the consumer's real income, and thus their ability to buy goods. When the price of a Giffen good increases, it reduces the consumer's real income, which leads to an increase in demand for the good, as it is still more affordable compared to other goods.

- Examples: The Giffen Paradox is often observed in the case of staple foods, such as bread or rice, in low-income communities. When the price of these goods increases, the consumers might not be able to afford more expensive alternatives, and thus, they end up consuming more of the Giffen good. In conclusion, the Giffen Paradox is primarily applicable for income demand, as it deals with the relationship between consumer income and the demand for inferior goods.

- The total expenditure method analyzes elasticity by comparing changes in total revenue (price × quantity) when price changes.
- Initially: (10 times 100 = 1000).
- New scenario: (8 times 130 = 1040).
- Total revenue increased from 1000 to 1040 when the price decreased, indicating demand is elastic.
- Elasticity greater than one implies consumers' demand is highly responsive to price changes.
- Therefore, the elasticity of demand is more than unitary, thus the correct answer is C: More than unitary.

The methods used by the central bank to influence the total volume of credit in the banking system, without any regard for the use to which it is put, are called quantitative or general methods of credit control.

The Income Method measures national income from the side of payments made to the primary factors of production in the form of rent, wages, interest and profit for their productive services in an accounting year.

Answer: C. Structural

Explanation:

- Structural unemployment: This type of unemployment occurs when there is a mismatch between the skills that workers possess and the skills required for the available jobs. In India, a significant portion of the labour force is engaged in informal or unorganized sectors with limited skills and education, which makes it difficult for them to find appropriate jobs in the organized sector.

Reasons for structural unemployment in India:

- Lack of quality education: Many people in India do not have access to quality education, which restricts their ability to acquire the skills needed for better employment opportunities.

- Technological changes: Rapid technological advancements have led to a demand for skilled workers in various industries. Those who cannot adapt to these changes often find themselves unemployed.

- Slow economic growth: India's economic growth has not been consistent, leading to fewer job opportunities in various sectors.

- Rural-urban migration: Many people migrate from rural to urban areas in search of better job opportunities, but they often lack the necessary skills and education to find suitable employment. Other types of unemployment, such as voluntary, frictional, and temporary, do exist in India but are not as prevalent as structural unemployment. The primary focus needs to be on addressing the structural unemployment issue by investing in education and skill development programs, promoting industries and sectors with high employment potential, and creating a more inclusive labour market.

The correct answer is B: providing loans. Explanation: Agency functions of commercial banks refer to the services that banks provide on behalf of their customers. These functions mainly involve assisting customers in managing their financial transactions and assets. Providing loans, however, is considered a primary function of commercial banks and not an agency function. Agency functions of commercial banks include:

A: Collection of dividends - Commercial banks collect dividends from various investment sources such as stocks and bonds on behalf of their customers.

C: Collection of cheques and drafts - Banks collect cheques and drafts for their customers, allowing them to receive payments from other parties.

D: Acting as trustee or executor - Commercial banks can act as a trustee or executor for their customers by managing their estates, trusts, or other assets as per their instructions. In contrast, providing loans is a primary function of commercial banks, which involves lending money to customers for various purposes such as personal expenses, business investments, or buying property. This function is essential for the bank's profitability and does not fall under the category of agency functions.

The correct answer is C: Demand Schedule.

Explanation: A demand schedule is a tabular statement that represents the relationship between the price of a good or service and the quantity demanded by consumers. It is a way to display the information in a structured and organized manner. A demand schedule typically consists of:

1. Price column: This column lists the various prices of a specific good or service. - The prices are usually listed in descending order, showing the highest price at the top and the lowest price at the bottom.

2. Quantity demanded column: This column lists the corresponding quantities of the good or service that consumers are willing and able to purchase at each given price level.

- The quantity demanded usually decreases as the price increases, which demonstrates the law of demand. A demand schedule can be used to create a demand curve, which is a graphical representation of the price-quantity relationship. The demand curve also demonstrates the law of demand, which states that as the price of a good or service increases, the quantity demanded decreases, and vice versa, all other factors remaining constant.

Answer: C. Arunachal Pradesh Explanation: - Arunachal Pradesh has the lowest population density among Indian states. - Population density refers to the number of people living per square kilometer of land area. - According to the 2011 Census of India, Arunachal Pradesh has a population density of only 17 people per square kilometer. - This low population density is attributed to the state's large forest cover, mountainous terrain, and limited urbanization, which make it difficult for people to settle in large numbers. - On the other hand, states like West Bengal and Delhi have much higher population densities, with 1,029 and 11,297 people per square kilometer, respectively.

Deficit financing is the primary domestic source of fund mobilization for the government. Here is an explanation: Deficit Financing: - Deficit financing refers to the government's practice of borrowing money to cover the gap between its revenue and expenditure. - This can be done through various means, such as issuing government bonds, taking loans from domestic banks, or printing more currency. - Deficit financing allows the government to meet its short-term financial obligations and invest in long-term projects that can stimulate economic growth. - However, excessive deficit financing can lead to inflation and a rise in public debt, which could negatively impact the economy in the long run. While grants and loans can provide funds to the government, they are usually considered external sources of funding, as they typically come from foreign governments or international organizations.

The term 'deposits with banks with maturity over one year' comes under the M-3 definition of money. Explanation: There are four measures of money in the economy, commonly referred to as M-1, M-2, M-3, and M-4. Each measure includes different components of the money supply: M-1: - Currency in circulation (coins and notes) - Demand deposits (checking accounts) - Traveler's checks M-2: - All components of M-1 - Savings deposits - Small denomination time deposits (certificates of deposit less than $100,000) - Money market deposit accounts M-3: - All components of M-2 - Large denomination time deposits (certificates of deposit of $100,000 or more) - Institutional money market funds - Deposits with banks with maturity over one year M-4: - All components of M-3 - Other liquid assets, such as Treasury bills and commercial paper The term 'deposits with banks with maturity over one year' falls under the M-3 definition of money because it includes large denomination time deposits and other less liquid assets in addition to the components of M-2.

Answer: D. NABARD

Explanation:

• The apex body for rural credit and agricultural finance in India is the National Bank for Agriculture and Rural Development (NABARD).
• NABARD was established in 1982 with a primary objective to provide financial assistance and support to rural and agricultural development in India.
• It acts as a refinancing agency for various financial institutions, such as Regional Rural Banks (RRBs), Cooperative Banks, and other institutions involved in providing credit to the rural and agricultural sectors.
• NABARD also plays a crucial role in formulating and implementing policies related to rural credit, agricultural finance, and other allied activities.
• In addition to its role in rural credit and agricultural finance, NABARD is also involved in promoting rural infrastructure development, providing support for microfinance institutions, and promoting financial inclusion in rural areas.

Explanation: Indian agriculture has been of subsistence nature, which can be explained by the following points:

1. Focus on meeting basic needs: - The primary objective of Indian agriculture has been to produce enough food to meet the needs of its large population. - Farmers grow crops mainly for their own consumption, and any surplus is sold in the market.

2. Small and fragmented landholdings: - The majority of Indian farmers have small and fragmented landholdings, which makes it difficult to adopt modern and commercial farming techniques. - This results in low productivity and farmers mainly focus on producing enough to feed their families.

3. Dependence on monsoons: - Indian agriculture is heavily dependent on monsoons, as a large percentage of the cultivated land is rainfed. - This makes agriculture vulnerable to the uncertainties of rainfall, leading to crop failures and low productivity.

4. Limited use of modern technology: - Due to financial constraints and lack of awareness, many Indian farmers are still using traditional methods of farming. - The limited use of modern technology and agricultural practices contributes to the subsistence nature of Indian agriculture.

5. Low level of commercialization: - The majority of Indian farmers are engaged in subsistence agriculture and produce mainly food crops. - The level of commercialization is low, with cash crops like cotton, jute, and sugarcane being produced on a relatively small scale. In conclusion, the Indian agriculture sector has been predominantly subsistence in nature due to its focus on meeting basic needs, small landholdings, dependence on monsoons, and limited use of modern technology. However, efforts are being made to transform Indian agriculture into a more modern and commercial sector through various government initiatives and the adoption of new technologies.

Answer: A. Prof. Marshall Explanation: - The welfare definition of economics is primarily associated with Prof. Alfred Marshall, a British economist. - Prof. Marshall's definition of economics focuses on the study of wealth and its impact on human welfare. - In his book, "Principles of Economics," he defines economics as "a study of mankind in the ordinary business of life; it examines that part of individual and social action which is most closely connected with the attainment and with the use of the material requisites of wellbeing."

Key Points: - Prof. Marshall's welfare definition emphasizes the importance of wealth in improving human welfare. - This definition considers both individual and social aspects of economic activities. - The welfare definition was prevalent in the late 19th and early 20th centuries but was later challenged by other definitions, such as the scarcity definition by Lord Robbins.

Answer:

D: Contraction Explanation: When a lesser quantity is demanded with a rise in price, it is called contraction of demand. This concept is based on the law of demand, which states that the quantity demanded of a good or service is inversely related to its price. Key points to understand the contraction of demand:

- Price increase: When the price of a good or service increases.

- Lesser quantity demanded: The quantity demanded by consumers decreases due to the higher price.

- Contraction: This decrease in quantity demanded is referred to as a contraction of demand.

- Law of Demand: The contraction of demand is in line with the law of demand, which establishes a negative relationship between price and quantity demanded.

Answer: B Explanation: In monopolistic competition, the following is true: - AR > MR (Average Revenue is greater than Marginal Revenue) This situation occurs due to the following reasons:

• Downward Sloping Demand Curve: In monopolistic competition, there is a downward sloping demand curve. This means that in order to sell more units of a product, the firm has to lower the price. This results in a decrease in marginal revenue.
• Product Differentiation: Firms in monopolistic competition differentiate their products from their competitors'. This differentiation allows firms to have some degree of market power and charge a higher price than their marginal cost, resulting in a higher average revenue.
• Price Elasticity of Demand: In monopolistic competition, the demand for a firm's product is relatively elastic due to the presence of close substitutes. This means that a decrease in price leads to a proportionately larger increase in quantity demanded, resulting in a lower marginal revenue.

Overall, in monopolistic competition, firms are able to charge a higher price than their marginal cost, leading to AR > MR.

Firm's Equilibrium and Profit Maximization

A firm is said to be in equilibrium when its profits are maximized. This can be better understood by considering the following points:

• Revenue and Cost: A firm is in equilibrium when the difference between its total revenue and total cost is the highest. In other words, the firm is earning the maximum profit possible given its production and market conditions.
• Marginal Revenue and Marginal Cost: A firm reaches its equilibrium when its marginal revenue (the additional revenue generated by selling one more unit) equals its marginal cost (the additional cost of producing one more unit). At this point, any further increase or decrease in production would not lead to higher profits.
• Optimal Resource Allocation: When a firm is in equilibrium, it is allocating its resources in the most efficient way possible. This means that the firm is producing the optimal quantity of goods and services at the lowest possible cost, leading to maximum profit.
• Market Conditions: A firm's equilibrium also depends on the market conditions, such as the level of competition, demand, and supply. A firm is in equilibrium when it is making the highest profit possible given the prevailing market conditions.

In summary, a firm is in equilibrium when its profits are maximized, which is achieved through the optimal allocation of resources, equal marginal revenue and marginal cost, and adapting to market conditions.

Regressive Taxation System

• A regressive taxation system is one where the tax rate decreases as the taxable income increases.
• Under this system, the burden of tax is higher on lower-income groups, as they are required to pay a larger percentage of their income as taxes compared to higher-income groups.

The Burden of Tax in a Regressive Taxation System

• Poor class: The burden of tax lies more on the poor class in a regressive taxation system. This is because poor individuals pay a higher percentage of their income in taxes, which can lead to financial strain and limit their ability to meet basic needs.
• Rich class: The burden of tax is comparatively lower on the rich class, as they pay a smaller percentage of their income in taxes. This can lead to wealth accumulation and contribute to income inequality.
• Middle class: The burden of tax on the middle class is also relatively lower compared to the poor class but higher than the rich class. This can result in the middle class bearing a higher tax burden than they would under a progressive taxation system.

Conclusion

Under a regressive taxation system, the burden of tax lies more on the poor class, leading to negative impacts on their financial well-being and contributing to income inequality. In contrast, the rich class experiences a lower tax burden, allowing them to accumulate wealth more easily.

The balance of payments includes all transactions between a country and the rest of the world. These transactions can be classified into three main categories:

1. Visible items of imports and exports: - This refers to the trade in goods or merchandise between countries. - Examples include exports of machinery, automobiles, and agricultural products, as well as imports of consumer goods, raw materials, and capital goods.

2. Invisible items of imports and exports: - This refers to the trade in services and other intangible items between countries. - Examples include tourism, transportation, financial services, and royalties from intellectual property rights.

3. Capital account transactions: - This refers to the flow of financial resources between countries, such as investments and loans. - Examples include foreign direct investments, portfolio investments, and loans between countries. So, the correct answer is Option D. All of these, as the balance of payments include visible items of imports and exports, invisible items of imports and exports, and capital account transactions.

Answer: B. Labour

The most important input cost in the service industry is labour. This is because:

• Services are often people-intensive, requiring a significant amount of human interaction and expertise to deliver value to customers.
• Labour costs are typically higher in the service industry compared to other industries, as it involves skilled professionals and specialized knowledge.
• Unlike manufacturing industries, where material costs can be a significant portion of the overall costs, service industries generally have lower material costs, as they primarily deal with intangible products and offerings.
• While overheads such as rent, utilities, and equipment are important, they do not usually outweigh the significance of labour costs in the service industry.

Therefore, labour is the most important input cost in the service industry, as it has the most significant impact on the quality and delivery of services provided to customers.