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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 91
Technical economies of scale arise from:
Select an option first.
Correct answer: D — The use of larger and more specialised plant and machinery
Explanation: A larger output justifies equipment that would stand idle at small scale, and permits greater specialisation of both machines and workers. The other options describe marketing, financial and marketing economies respectively - the categories are examined by name, so keeping them apart matters.
Question 92
The expansion path of a firm traces:
Select an option first.
Correct answer: D — The least-cost input combination for each level of output
Explanation: Joining the successive points of tangency between isoquants and isocost lines shows how the optimal input mix changes as the firm expands, holding factor prices constant. The long-run cost curves are derived directly from it, which is why it occupies a central place in production theory.
Question 93
An isocost line shows:
Select an option first.
Correct answer: C — All combinations of two inputs that can be bought for the same TOTAL OUTLAY
Explanation: The isocost line is the producer's budget line, fixed by the outlay available and the prices of the two inputs. Distractor A defines the ISOQUANT - the two are the producer's counterparts of the consumer's budget line and indifference curve respectively.
Question 94
The learning or experience curve refers to the tendency for:
Select an option first.
Correct answer: B — Unit cost to FALL as cumulative output and experience increase
Explanation: Repetition improves technique, reduces waste and shortens set-up times, so cost per unit declines with accumulated production rather than with the rate of output. This is distinct from economies of scale, which relate to the SIZE of operations rather than to cumulative experience.
Question 95
The long-run average cost curve is often described as:
Select an option first.
Correct answer: D — The envelope curve
Explanation: It is drawn tangent to a family of short-run average cost curves, one for each possible plant size, and encloses them from below - hence envelope. It shows the lowest cost at which each output can be produced when the firm is free to choose its scale, so no short-run curve can ever lie beneath it.
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Question 96
The optimum firm is the firm which:
Select an option first.
Correct answer: B — Produces at the LOWEST average cost per unit
Explanation: At the optimum size, economies of scale have been fully exploited and diseconomies have not yet set in, so long-run average cost is at its minimum. Under perfect competition, long-run equilibrium compels every surviving firm to this size.
Question 97
A production function expresses:
Select an option first.
Correct answer: D — The technical relationship between inputs employed and output obtained
Explanation: It states the maximum output obtainable from each combination of inputs, given the state of technology - a purely PHYSICAL relationship, with no prices in it. Costs enter only when input prices are applied to it. A change in technology alters the function itself rather than moving along it.
Question 98
In the SHORT RUN, a firm can vary:
Select an option first.
Correct answer: D — Some factors, while at least one remains fixed
Explanation: The short run is defined not by clock time but by the presence of at least one fixed factor - typically plant and machinery. In the LONG RUN every factor including plant size can be altered, and in the very long run technology itself changes. The length of the short run therefore differs from industry to industry.
Question 99
The total variable cost curve:
Select an option first.
Correct answer: B — Starts from the ORIGIN and rises, first at a decreasing and then at an increasing rate
Explanation: At zero output no variable inputs are employed, so the curve begins at the origin - unlike the TOTAL cost curve, which starts at the level of fixed cost. Its changing slope reflects increasing and then diminishing returns to the variable factor.
Question 100
In economic analysis, normal profit is treated as:
Select an option first.
Correct answer: B — A part of COST, being the minimum return needed to keep the entrepreneur in the business
Explanation: Normal profit is the entrepreneur's reward for organising and bearing risk, and if it is not earned he will move his resources elsewhere - so it is a genuine cost of staying in business. Anything beyond it is SUPERNORMAL profit. This is why a perfectly competitive firm earning only normal profit is nonetheless in stable long-run equilibrium.
Question 101
Arc elasticity of demand is used when:
Select an option first.
Correct answer: A — The change in price is LARGE, so elasticity is measured over a range
Explanation: Over a sizeable price change the elasticity computed forwards differs from that computed backwards, so arc elasticity uses the AVERAGE of the two prices and quantities as the base to give a single consistent figure. Point elasticity applies to an infinitesimally small change at a specific point.
Question 102
The indifference curve approach differs from the Marshallian utility approach in that it assumes utility is:
Select an option first.
Correct answer: A — Only RANKABLE, not measurable in absolute units
Explanation: Marshall assumed utility could be counted in cardinal units, which is difficult to defend. Hicks and Allen required only that the consumer can say which of two bundles he prefers - an ORDINAL assumption that is far weaker and yet sufficient to derive the demand curve.
Question 103
A commodity that can be put to several different uses, such as steel, is said to have:
Select an option first.
Correct answer: B — Composite demand
Explanation: Composite demand is the total of the demands from all competing uses, so a rise in demand from one use raises the price for all the others. JOINT demand, by contrast, is where two goods are wanted together, as with cars and petrol.
Question 104
A 20% rise in the price of coffee raises the demand for tea by 10%. The cross elasticity is:
Select an option first.
Correct answer: D — Plus 0.5
Explanation: Cross elasticity is 10/20 = +0.5. The POSITIVE sign shows the goods are substitutes; the modest size shows they are not particularly close ones. Both the sign and the magnitude carry information, and a complete answer should interpret each.
Question 105
Quantity demanded rises from 100 to 120 units when price falls from Rs.50 to Rs.45. Price elasticity of demand is:
Select an option first.
Correct answer: A — 2.0
Explanation: Quantity rises by 20%, price falls by 10%, so elasticity is 20/10 = 2 - demand is elastic. Compute each percentage on its ORIGINAL value, and if the price change had been large, the arc method using average values would be the more appropriate measure.
Question 106
A 25% rise in income raises demand for a good by 5%. The income elasticity is:
Select an option first.
Correct answer: A — 0.2
Explanation: Income elasticity is 5/25 = +0.2 - positive but well below one, which identifies the good as a NECESSITY. A value above one would indicate a luxury, and a negative value an inferior good, so the number classifies the good directly.
Question 107
A 10% fall in price raises quantity demanded by 25%. Demand is:
Select an option first.
Correct answer: C — Elastic, with an elasticity of 2.5
Explanation: Elasticity is the percentage change in quantity divided by the percentage change in price: 25/10 = 2.5, ignoring the sign. Any value above 1 means demand is elastic - buyers respond more than proportionately. Distractor A inverts the fraction, which is the standard slip; put quantity on top every time.
Question 108
Under the utility approach, a consumer buying a single good is in equilibrium where:
Select an option first.
Correct answer: D — Marginal utility equals the price of the good
Explanation: The consumer keeps buying while the satisfaction from another unit exceeds what it costs, and stops when the two are equal. Buying beyond that point would add less utility than the money surrendered. Where several goods are involved, the condition generalises to the law of EQUI-MARGINAL utility.
Question 109
Under the indifference curve approach, the consumer is in equilibrium where:
Select an option first.
Correct answer: D — The marginal rate of substitution equals the ratio of the prices of the two goods
Explanation: This is the condition for tangency between the budget line and the highest attainable indifference curve. An INTERSECTION means a higher curve is still reachable, so it cannot be the optimum - which is why distractor A is a common but incorrect statement of the condition.
Question 110
Consumer surplus is:
Select an option first.
Correct answer: A — The excess of what a consumer is WILLING to pay over what he ACTUALLY pays
Explanation: Because a single price is charged for every unit while earlier units were worth more to the buyer, the buyer captures a gain measured by the area between the demand curve and the price line. It is the standard measure of the benefit consumers derive from a market, and it falls when a tax raises the price.
Question 111
When the price of a good rises, consumer surplus:
Select an option first.
Correct answer: D — Decreases
Explanation: The gap between what buyers were willing to pay and what they must now pay narrows, and some buyers leave the market entirely. This loss of consumer surplus is the standard measure of the harm done to buyers by a tax, a tariff or a monopoly price.
Question 112
A POSITIVE cross elasticity of demand between two goods indicates that they are:
Select an option first.
Correct answer: A — Substitutes
Explanation: A rise in the price of tea raises the demand for coffee, so quantity and price move in the same direction and the elasticity is positive - the mark of substitutes. Complements such as cars and petrol give a NEGATIVE cross elasticity, and unrelated goods approximately zero. The sign identifies the relationship; the size measures its closeness.
Question 113
The price effect of a fall in the price of a good can be decomposed into:
Select an option first.
Correct answer: D — The income effect and the substitution effect
Explanation: The substitution effect makes the now-cheaper good more attractive relative to others; the income effect reflects the rise in real purchasing power. For a normal good both work in the same direction; for a Giffen good the negative income effect outweighs the substitution effect, which is why its demand curve slopes upward.
Question 114
A leftward shift of the entire demand curve is called:
Select an option first.
Correct answer: A — A DECREASE in demand
Explanation: A decrease means less is demanded at EVERY price, caused by a fall in income for a normal good, a cheaper substitute, or a change in tastes. A contraction, by contrast, is a movement up along an unchanged curve following a rise in the good's own price.
Question 115
A demand schedule is:
Select an option first.
Correct answer: D — A TABLE showing the quantities demanded at various prices
Explanation: The schedule is the tabular statement; plotting it gives the demand CURVE, which is the same information in graphical form. Both relate quantity to price over a stated period, holding income, tastes and related prices constant.
Question 116
The demand for cement by construction firms is an example of:
Select an option first.
Correct answer: B — DERIVED demand, arising from the demand for buildings
Explanation: Factors of production and industrial inputs are wanted not for themselves but for what they help produce, so their demand depends on the demand for the final product. This is why a slump in construction transmits itself immediately to cement and steel.
Question 117
The price elasticity of demand for a good tends to be HIGHER when:
Select an option first.
Correct answer: A — Close substitutes are readily available and the good absorbs a large share of income
Explanation: Substitutability is the dominant influence: if buyers can switch easily, a price rise loses many of them. A large share of income makes buyers more price-conscious, and a LONGER time period raises elasticity further, since habits and equipment can be changed. Necessities and habitual goods are inelastic.
Question 118
Which of the following will cause the supply curve of a good to shift to the LEFT?
Select an option first.
Correct answer: A — An increase in indirect taxes on the good
Explanation: A higher tax raises the effective cost of supplying each unit, so less is offered at every price. Improved technology, cheaper inputs and more sellers all shift supply to the RIGHT. Note again that the good's own price never shifts the curve - it only moves along it.
Question 119
A rise in the price of a complementary good will cause the demand for the good in question to:
Select an option first.
Correct answer: C — Fall, shifting the demand curve to the left
Explanation: Complements are consumed together - cars and petrol, printers and cartridges - so dearer petrol reduces car use and therefore the demand for cars at every price. The cross elasticity between complements is NEGATIVE, whereas between substitutes it is positive; the sign is what identifies the relationship.
Question 120
A rise in the price of a substitute good will cause the demand for the good in question to:
Select an option first.
Correct answer: D — Rise, shifting the demand curve to the right
Explanation: Consumers switch away from the dearer substitute towards this good, so more is demanded at every price and the whole curve SHIFTS right. Note that the price of this good has not changed, so there is no movement along its curve - which is exactly the distinction between a shift and a movement.
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