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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 121
If the government fixes a maximum price BELOW the equilibrium level, the result will be:
Select an option first.
Correct answer: D — A shortage, since quantity demanded exceeds quantity supplied
Explanation: At the lower price consumers want more while producers offer less, so excess demand appears. Rationing, queues and black markets typically follow, since price is no longer performing its allocative function. A ceiling set ABOVE equilibrium would have no effect at all, being irrelevant to the market.
Question 122
A minimum support price fixed ABOVE the equilibrium level results in:
Select an option first.
Correct answer: D — A surplus, since quantity supplied exceeds quantity demanded
Explanation: The higher guaranteed price encourages production while discouraging purchase, so unsold stocks accumulate and the government must buy and store them. This is the standard analysis of agricultural support prices, and the cost of holding the surplus is the policy's principal drawback.
Question 123
The imposition of an indirect tax on a good will normally:
Select an option first.
Correct answer: B — Raise the equilibrium price and reduce the equilibrium quantity
Explanation: The supply curve shifts left by the amount of the tax, so the new intersection lies at a higher price and a smaller quantity. How the burden divides between buyer and seller depends on relative elasticities - the more INELASTIC side of the market bears the larger share.
Question 124
Along a downward sloping STRAIGHT-LINE demand curve, elasticity is:
Select an option first.
Correct answer: D — Different at every point, being greater than one above the midpoint and less than one below it
Explanation: Slope and elasticity are not the same thing. Elasticity depends on the ratio of price to quantity as well as the slope, so it falls continuously from infinity at the price axis to zero at the quantity axis, passing through unity at the MIDPOINT. Assuming constant slope means constant elasticity is the classic error here.
Question 125
Demand for a good tends to become MORE elastic when:
Select an option first.
Correct answer: A — A LONGER time period is considered
Explanation: Given time, buyers find substitutes, change habits and replace the equipment that ties them to the good - so the response to a price change grows. This is why a petrol price rise has little immediate effect on consumption but a considerable effect over several years.
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Question 126
If demand for a good is INELASTIC, a rise in its price will cause total revenue to:
Select an option first.
Correct answer: B — Rise
Explanation: With inelastic demand the quantity sold falls proportionately less than the price rises, so the price effect dominates and revenue increases. Where demand is ELASTIC the opposite holds and a price rise reduces revenue; at unitary elasticity revenue is unchanged. This total outlay test is why firms facing inelastic demand can raise prices profitably.
Question 127
Elasticity of supply is measured as the percentage change in:
Select an option first.
Correct answer: B — Quantity supplied divided by the percentage change in price
Explanation: The responding variable, quantity supplied, goes on top. Because supply curves slope upward the result is POSITIVE, unlike demand elasticity which is negative and conventionally reported without its sign. Supply is more elastic the longer the period allowed for adjustment.
Question 128
For a Giffen good, the demand curve:
Select an option first.
Correct answer: C — Slopes UPWARD, more being bought at a higher price
Explanation: A Giffen good is a strongly inferior staple on which poor households spend a large part of their income. When its price rises, the loss of real income forces them to buy MORE of it and less of costlier alternatives, so the negative income effect overwhelms the substitution effect. Veblen goods bought for prestige are a separate exception with a different cause.
Question 129
Which of the following is NOT an exception to the law of demand?
Select an option first.
Correct answer: C — A normal good whose price falls, leading to greater purchases
Explanation: The last describes the law of demand OPERATING normally, not an exception to it. The recognised exceptions are Giffen goods, goods of ostentation, speculative expectations of further price change, and goods bought under the illusion that a higher price signals higher quality.
Question 130
If consumers expect the price of a good to rise sharply next month, current demand will:
Select an option first.
Correct answer: A — Increase, shifting the demand curve to the right
Explanation: Buyers advance their purchases to beat the expected rise, so more is demanded now at the SAME current price - a shift, not a movement. Expectations are one of the factors held constant in the law of demand, which is exactly why a change in them moves the whole curve.
Question 131
A rise in the quantity demanded caused by a fall in the good's OWN price is correctly called:
Select an option first.
Correct answer: B — An EXTENSION of demand
Explanation: Extension and contraction describe movement ALONG the curve caused by the good's own price. INCREASE and DECREASE describe shifts of the whole curve caused by anything else. Using the wrong pair of words is treated as a substantive error, not merely a verbal one.
Question 132
A rise in the quantity supplied caused by a rise in the good's own price is called:
Select an option first.
Correct answer: D — An EXTENSION of supply
Explanation: As with demand, the good's own price produces movement along the curve - extension upward or contraction downward. A change in costs, technology, taxes or the number of sellers shifts the whole curve, and only then is it correct to speak of an increase or decrease in supply.
Question 133
Under perfect competition, the demand curve facing the FIRM is horizontal while that facing the INDUSTRY slopes downward because:
Select an option first.
Correct answer: C — One firm's output is negligible relative to the market, but total market quantity still depends on price
Explanation: A single firm can double its output without perceptibly affecting the market price, so it faces a horizontal curve. The market as a whole cannot: selling more in total requires a lower price. Both statements are true simultaneously, which is the point that confuses candidates.
Question 134
On a straight-line demand curve meeting both axes, elasticity at the MIDPOINT is:
Select an option first.
Correct answer: D — Equal to one
Explanation: By the geometric method, elasticity at a point equals the lower segment of the curve divided by the upper segment. At the midpoint the two segments are equal, so elasticity is exactly 1; it exceeds 1 above the midpoint and falls below 1 beneath it, reaching infinity at the price axis and zero at the quantity axis.
Question 135
Which of the following is likely to have the MOST inelastic demand?
Select an option first.
Correct answer: B — Salt
Explanation: Salt is a necessity with no close substitute, absorbs a negligible share of income and is bought in habitual quantities, so price changes barely affect the amount purchased. A particular BRAND of soap, by contrast, has many close substitutes and is therefore highly elastic - the narrower the definition of the good, the more elastic its demand.
Question 136
A good whose demand FALLS when consumer incomes rise is:
Select an option first.
Correct answer: B — An inferior good
Explanation: The negative income elasticity defines an inferior good - coarse cereals or second-hand clothing, for instance - as buyers switch to preferred substitutes. Note that a good may be inferior for one income group and normal for another, so the classification is not intrinsic to the commodity.
Question 137
The income consumption curve slopes BACKWARD for:
Select an option first.
Correct answer: D — An inferior good
Explanation: As income rises, less of an inferior good is bought, so the curve bends back towards the axis of the other good. For normal goods it slopes upward throughout. The shape of the curve therefore identifies the good's classification directly.
Question 138
For a NORMAL good, the income effect of a fall in its price is:
Select an option first.
Correct answer: D — Positive, increasing the quantity demanded
Explanation: A price fall raises real income, and for a normal good more is bought as real income rises - so the income effect reinforces the substitution effect. For an INFERIOR good the income effect is negative and works against the substitution effect, though usually without overcoming it.
Question 139
For an inferior good, income elasticity of demand is:
Select an option first.
Correct answer: A — Negative
Explanation: As income rises, consumers switch away from an inferior good to a better substitute, so quantity demanded FALLS and the elasticity carries a minus sign. Normal necessities have a positive elasticity below 1, and luxuries above 1. The sign of income elasticity is therefore what classifies a good, not the good's own nature.
Question 140
For a necessity, income elasticity of demand is:
Select an option first.
Correct answer: A — Positive but LESS than one
Explanation: As income rises the household buys somewhat more of a necessity, but less than in proportion, since needs are limited - so the elasticity is positive and below 1. Luxuries exceed 1, and inferior goods are negative. The value of income elasticity is what classifies the good, not any intrinsic quality of it.
Question 141
An indifference map is:
Select an option first.
Correct answer: B — A set of indifference curves, each representing a different level of satisfaction
Explanation: Curves further from the origin represent higher satisfaction, so the map ranks every possible combination of the two goods. Since the curves cannot intersect, the ranking is consistent throughout - which is what makes an ordinal preference ordering possible.
Question 142
The law of demand states that, other things remaining equal, a fall in the price of a good leads to:
Select an option first.
Correct answer: A — A rise in the quantity demanded
Explanation: The inverse relationship rests on the income effect, since the buyer's real purchasing power rises, and the substitution effect, since the good becomes cheaper relative to others. Note the wording: a price change alters QUANTITY DEMANDED, not demand itself. The phrase 'other things remaining equal' is essential, since income, tastes and related prices must be held constant.
Question 143
The law of diminishing marginal utility states that, as more units of a good are consumed:
Select an option first.
Correct answer: D — The satisfaction from each ADDITIONAL unit falls
Explanation: Each successive unit adds less satisfaction than the one before, though TOTAL utility continues to rise so long as marginal utility remains positive. Total utility peaks where marginal utility reaches zero. The law explains why the demand curve slopes downward - a buyer will pay less for a unit that yields less satisfaction.
Question 144
The law of equi-marginal utility states that a consumer maximises satisfaction by:
Select an option first.
Correct answer: A — Equalising the marginal utility PER RUPEE across all goods bought
Explanation: Satisfaction is maximised when the last rupee spent on each good yields the same utility; if it did not, transferring spending towards the better-yielding good would raise total satisfaction. Note that it is utility per RUPEE, not utility itself, that must be equalised - prices differ, so raw marginal utilities will not be equal.
Question 145
The law of supply states that, other things remaining equal, a rise in price leads to:
Select an option first.
Correct answer: C — A rise in quantity supplied
Explanation: Price and quantity supplied move in the SAME direction, because a higher price makes it profitable to bring less efficient capacity into use and draws resources from other uses. Note again that a price change causes a movement ALONG the supply curve; only a change in costs, technology or the number of sellers shifts it.
Question 146
The slope of an indifference curve at any point measures the:
Select an option first.
Correct answer: B — Marginal rate of substitution between the two goods
Explanation: The slope shows how much of one good the consumer will give up for one more unit of the other while remaining equally satisfied. It DIMINISHES as we move along the curve, which is why indifference curves are convex to the origin. Consumer equilibrium occurs where this rate equals the ratio of the two prices, that is where the budget line is tangent to the curve.
Question 147
The Marshallian utility analysis assumes that the marginal utility of MONEY is:
Select an option first.
Correct answer: A — Constant, so that money can serve as a measuring rod for utility
Explanation: Without a constant yardstick, utility measured in money terms would not be comparable across purchases and the analysis would collapse. The assumption is questionable, since money is itself subject to diminishing marginal utility - which is one of the criticisms the indifference curve approach was designed to escape.
Question 148
The market demand curve for a good is obtained by:
Select an option first.
Correct answer: A — Adding the individual demand curves HORIZONTALLY, that is summing quantities at each price
Explanation: At any given price the market quantity is the sum of what every buyer wants at that price, so the summation is across quantities - horizontal addition. Vertical addition would sum prices, which is the method used for a PUBLIC good, where all consume the same quantity jointly.
Question 149
Market equilibrium is established at the price where:
Select an option first.
Correct answer: B — Quantity demanded equals quantity supplied
Explanation: At the equilibrium price the plans of buyers and sellers are exactly consistent, so there is no tendency to change. Above it, unsold surpluses push the price down; below it, unsatisfied buyers bid it up. The market clears only where the two curves intersect.
Question 150
The market supply curve is obtained by:
Select an option first.
Correct answer: C — Adding individual supply curves horizontally at each price
Explanation: As with demand, quantities are summed at each price to give the total offered by the market. The market curve is therefore flatter, that is more elastic, than any individual firm's curve, since more sellers can respond to a given price change.
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