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Free CA Business Economics Practice Questions & Answers
501 exam-style Business Economics questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 31
If the marginal propensity to consume is 0.8, the value of the investment multiplier is:
Select an option first.
Correct answer: A — 5
Explanation: The multiplier is 1 divided by (1 - MPC) = 1/0.2 = 5, so an additional Rs.100 crore of investment ultimately raises income by Rs.500 crore. Equivalently it is the reciprocal of the marginal propensity to SAVE. The higher the propensity to consume, the larger the multiplier - and distractor B inverts the fraction.
Question 32
The recovery phase of a business cycle is marked by:
Select an option first.
Correct answer: D — Rising output, employment and business confidence from a low base
Explanation: Recovery begins at the trough, as replacement investment revives, expectations improve and employment picks up. It merges into expansion as the process gathers pace. Distractor B describes the PEAK, which is a turning point rather than a phase of improvement.
Question 33
The sunspot theory of business cycles, associated with Jevons, linked fluctuations to:
Select an option first.
Correct answer: C — Variations in solar activity affecting harvests and hence the wider economy
Explanation: In a predominantly agricultural economy a poor harvest depressed rural incomes and industrial demand alike, so the mechanism was not absurd for its time. Its relevance faded as agriculture's share of output shrank, but it survives as the classic example of an exogenous theory.
Question 34
The peak and the trough of a business cycle are described as:
Select an option first.
Correct answer: C — TURNING POINTS, at which the direction of activity reverses
Explanation: Expansion and contraction are the two phases; the peak and trough are the moments separating them, where an upswing becomes a downswing or the reverse. Distinguishing a phase from a turning point is a small but frequently examined precision.
Question 35
The under-consumption theory explains the downturn by:
Select an option first.
Correct answer: C — Income being distributed so unequally that consumption fails to keep pace with output
Explanation: If too large a share of income accrues to those with a low propensity to consume, demand lags behind productive capacity and goods go unsold. The remedy suggested is redistribution towards those who spend a larger proportion of what they receive.
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Question 36
Division of labour raises productivity chiefly because it:
Select an option first.
Correct answer: C — Increases skill through repetition, saves time between tasks, and permits use of specialised machinery
Explanation: Adam Smith's pin factory illustrated all three effects. Division of labour also allows each worker to be placed where his aptitude is greatest, and it is limited, in Smith's phrase, by the extent of the market - a small market cannot support fine specialisation.
Question 37
Average product is at its maximum at the point where:
Select an option first.
Correct answer: A — Marginal product equals average product
Explanation: While marginal product exceeds average product it pulls the average up; once it falls below, it pulls the average down. The average therefore peaks exactly where the two are equal. This is the same arithmetic of averages that makes marginal cost cut average cost at its minimum.
Question 38
As output increases, the average fixed cost curve:
Select an option first.
Correct answer: D — Falls continuously, approaching but never touching the horizontal axis
Explanation: Total fixed cost is a constant spread over more and more units, so average fixed cost falls throughout - the phenomenon known as spreading the overhead. It approaches zero without ever reaching it, since the numerator never becomes zero. Only AVERAGE VARIABLE and AVERAGE TOTAL cost are U-shaped.
Question 39
The process of capital formation involves:
Select an option first.
Correct answer: D — Saving, mobilisation of those savings, and their investment in productive assets
Explanation: All three stages are necessary: saving without a financial system to mobilise it, or mobilised funds without productive outlets, leave capital formation incomplete. A low rate of capital formation is a central obstacle to growth in developing economies.
Question 40
Diminishing marginal returns set in because:
Select an option first.
Correct answer: B — The FIXED factor becomes a constraint, so each additional unit of the variable factor has less of it to work with
Explanation: The workers are not inferior; there is simply less capital, land or equipment per worker as more are added. This is why the law applies only where a fixed factor exists, and why it does not operate in the long run when every factor can be expanded together.
Question 41
In the early stage of production, marginal product rises because:
Select an option first.
Correct answer: C — The fixed factor is under-utilised, and adding the variable factor permits better utilisation and specialisation
Explanation: With too few workers for the plant, machinery stands idle and no division of labour is possible. Adding workers allows both to improve, so output rises more than proportionately - until the optimum ratio is passed and diminishing returns take over.
Question 42
Diseconomies of scale arise chiefly from:
Select an option first.
Correct answer: C — Managerial and coordination difficulties as the firm grows too large
Explanation: Beyond a point, communication lengthens, decisions slow, supervision weakens and motivation falls, so average cost rises with further expansion. Because management is the factor that cannot be indefinitely expanded, managerial diseconomies are usually the binding constraint on firm size.
Question 43
A distinctive feature of labour as a factor of production is that:
Select an option first.
Correct answer: D — It is INSEPARABLE from the labourer and perishable, since a day not worked is lost for ever
Explanation: Because the seller must deliver the service in person, working conditions matter in a way they do not for other factors, and the worker's weak bargaining position when unemployed is a standing concern. Labour is also heterogeneous in skill and relatively immobile in the short run.
Question 44
As a factor of production, land is distinguished by the fact that it is:
Select an option first.
Correct answer: C — A free gift of nature, fixed in total supply and geographically immobile
Explanation: Land in economics means all natural resources, not merely soil. Its total supply cannot be increased by human effort, though the supply to a PARTICULAR use can be, and it differs in fertility and situation - which is the basis of Ricardo's theory of rent.
Question 45
In the short run, total cost equals:
Select an option first.
Correct answer: C — Total fixed cost plus total variable cost
Explanation: Total fixed cost is a horizontal line and total variable cost rises with output, so total cost starts at the level of fixed cost and rises with the same shape as variable cost. At zero output total cost equals total fixed cost - which is why a firm shutting down temporarily still bears a loss.
Question 46
Total fixed cost is Rs.200 and total variable cost at 20 units is Rs.300. The average total cost at that output is:
Select an option first.
Correct answer: B — Rs.25
Explanation: Total cost = 200 + 300 = Rs.500, and dividing by 20 units gives Rs.25. The components are average fixed cost of Rs.10 and average variable cost of Rs.15, which indeed sum to Rs.25 - a useful cross-check whenever both parts are available.
Question 47
The total cost of producing 10 units is Rs.500 and of producing 11 units is Rs.540. The marginal cost of the 11th unit is:
Select an option first.
Correct answer: B — Rs.40
Explanation: Marginal cost is the ADDITION to total cost from one more unit: 540 - 500 = Rs.40. Distractor A is the average cost at 10 units, Rs.50, which is a different quantity. Marginal cost here lies below average cost, which tells us the average is still falling at this output.
Question 48
If all inputs are increased by 20% and output also rises by exactly 20%, the firm is experiencing:
Select an option first.
Correct answer: A — Constant returns to scale
Explanation: Output changing in the SAME proportion as all inputs together defines constant returns to scale, and the long-run average cost curve is flat over that range. Distractor D is a short-run concept involving a fixed factor, and applying it here is the standard confusion.
Question 49
In break-even analysis, contribution per unit is:
Select an option first.
Correct answer: B — Selling price minus VARIABLE cost per unit
Explanation: Contribution first covers fixed cost and then becomes profit, so the break-even output is total fixed cost divided by contribution per unit. Because fixed cost does not vary with output, it is variable cost alone that is deducted in arriving at contribution.
Question 50
As output increases, the gap between the average total cost curve and the average variable cost curve:
Select an option first.
Correct answer: B — Narrows continuously but never closes
Explanation: The gap IS average fixed cost, which falls as the constant total fixed cost is divided by a larger output. It approaches zero without ever reaching it, since total fixed cost never becomes zero - which is why the two curves converge but never meet.
Question 51
A cost function expresses the relationship between:
Select an option first.
Correct answer: D — Output and the cost of producing it, given input prices
Explanation: The cost function is derived by combining the PRODUCTION function, which is purely technical, with the prices of the inputs. This is why a change in either technology or factor prices shifts the cost curves, and why costs cannot be discussed independently of production.
Question 52
In production theory, the LONG RUN is a period in which:
Select an option first.
Correct answer: A — ALL factors of production, including plant and scale, can be varied
Explanation: The long run is defined by the absence of any fixed factor, so the firm can move to an entirely different scale of operation. It is not a fixed length of clock time - for a steel plant it may be years, for a food stall a matter of weeks. Changing TECHNOLOGY belongs to the very long run.
Question 53
Diminishing marginal returns to the variable factor cause marginal cost to:
Select an option first.
Correct answer: B — Rise
Explanation: If each additional worker adds less output, the cost of each additional unit of output must rise. Marginal cost is thus the mirror image of marginal product, and the onset of diminishing returns is exactly the point at which marginal cost turns upward.
Question 54
Economic cost exceeds accounting cost because economic cost includes:
Select an option first.
Correct answer: A — Both explicit payments AND the opportunity cost of owner-supplied resources
Explanation: Accounting cost records what was actually paid out. Economic cost adds what was forgone - the owner's salary elsewhere, the return on his capital, the rent on his premises. A firm covering accounting costs but not economic costs is earning less than its resources could earn in their next best use.
Question 55
Economies of scope arise when:
Select an option first.
Correct answer: D — It is cheaper to produce two or more products TOGETHER than separately
Explanation: Shared facilities, common distribution networks and joint use of a brand allow a multi-product firm to spread costs across product lines. Economies of SCALE concern the volume of one product; economies of SCOPE concern the variety - a distinction worth stating explicitly.
Question 56
A shopkeeper who gives up a job paying Rs.5,00,000 a year to run his own shop should treat that salary as:
Select an option first.
Correct answer: B — An IMPLICIT cost of running the shop
Explanation: The forgone salary is the opportunity cost of his own labour and must be covered before the shop can be said to be worth running. It appears in no ledger, which is why accounting profit will overstate the true economic result by that amount.
Question 57
Explicit costs are:
Select an option first.
Correct answer: D — Actual money payments made to outsiders for factors and materials
Explanation: Explicit costs are contractual payments recorded in the books - wages, rent, raw materials, interest. IMPLICIT costs, the value of the owner's own labour and capital, involve no payment and appear nowhere in the accounts, which is why accounting profit exceeds economic profit.
Question 58
External economies of scale arise from:
Select an option first.
Correct answer: A — The growth of the INDUSTRY as a whole
Explanation: As an industry concentrates in a locality, all firms in it gain from a skilled labour pool, specialist suppliers, better infrastructure and shared research. These benefits are available to every firm regardless of its own size, which is precisely what makes them external rather than internal.
Question 59
Financial economies of scale mean that a large firm:
Select an option first.
Correct answer: B — Can raise capital more easily and at a lower rate of interest
Explanation: Lenders regard a large, established firm as a better risk and it can also tap markets closed to small firms, such as public issues of debentures. The lower cost of finance reduces average cost, and is one of the internal economies driving the long-run curve downward.
Question 60
Which of the following does NOT vary with the level of output in the short run?
Select an option first.
Correct answer: C — Rent of the factory building
Explanation: Fixed costs are incurred whether output is zero or at full capacity - rent, insurance, salaries of permanent staff and depreciation on a time basis. The other three vary directly with production and are variable costs. In the LONG RUN every cost becomes variable, since the firm can change its scale entirely.
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