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Free CA Business Economics Practice Questions & Answers
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100% free · No login to startQuestion 151
In economics, demand means:
Select an option first.
Correct answer: B — Desire backed by the ability AND willingness to pay
Explanation: All three elements must be present: a beggar may desire a car, but without purchasing power that desire is not demand. Demand is also always defined with reference to a PRICE and a PERIOD of time - a quantity per week at a stated price, not a bare number.
Question 152
Which of the following is a SURVEY method of demand forecasting?
Select an option first.
Correct answer: D — Consumer interview and expert opinion surveys
Explanation: Survey methods gather intentions directly from buyers, the sales force or experts, and suit short-term forecasts and new products. Statistical methods - trend projection, regression and barometric techniques - work from historical data and suit established products with a usable record.
Question 153
A change in the price of the good itself causes:
Select an option first.
Correct answer: D — A movement ALONG the existing demand curve
Explanation: The demand curve is drawn with price on one axis, so a change in that price simply moves the position occupied on the curve - an extension or a contraction of demand. A SHIFT requires a change in something the curve holds constant: income, tastes, the price of a related good, or expectations. Confusing the two is the single commonest error in this chapter.
Question 154
An increase in the population of a town will, other things equal, cause the market demand curve for food to:
Select an option first.
Correct answer: A — Shift to the right
Explanation: More buyers means a greater quantity demanded at every price, so the entire curve shifts outward. Note that this is a change in DEMAND rather than in quantity demanded, since the good's own price has not moved.
Question 155
Price elasticity of demand by the percentage method is:
Select an option first.
Correct answer: B — Percentage change in QUANTITY DEMANDED divided by percentage change in PRICE
Explanation: Quantity is the responding variable and belongs on top; price is the cause and belongs below. Inverting the fraction, as distractor A does, is the standard error and turns an elastic answer into an inelastic one. Because the two move in opposite directions the result is negative, and the sign is conventionally ignored.
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Question 156
Perfectly elastic demand is represented by a demand curve that is:
Select an option first.
Correct answer: C — Horizontal, with elasticity infinity
Explanation: At the ruling price buyers will take any quantity, but at the slightest higher price demand falls to nothing - a horizontal line. This is the demand curve facing an individual firm under PERFECT COMPETITION, which is why such a firm is a price taker. It is a limiting case rather than something observed in whole markets.
Question 157
A perfectly elastic supply curve is:
Select an option first.
Correct answer: D — HORIZONTAL, with elasticity infinity
Explanation: At the ruling price any quantity will be supplied, but nothing at all below it. It is the limiting case approached in a constant cost industry in the long run, where output can expand indefinitely without any rise in price.
Question 158
Perfectly inelastic demand has an elasticity of:
Select an option first.
Correct answer: D — Zero, with a vertical curve
Explanation: The same quantity is bought however the price moves, so the curve is vertical and elasticity is zero. Nothing is perfectly inelastic in reality, but a life-saving drug over a limited price range comes close. Unitary elasticity, where total outlay stays constant, gives the rectangular hyperbola of distractor B.
Question 159
The price consumption curve traces the consumer's equilibrium as:
Select an option first.
Correct answer: C — The price of one good changes, income and the other price remaining constant
Explanation: The demand curve for the good is derived directly from this curve, by reading off the quantity chosen at each price. The INCOME consumption curve, by contrast, traces equilibrium as income varies, and yields the Engel curve.
Question 160
If demand for a firm's product is elastic, a reduction in price will cause total revenue to:
Select an option first.
Correct answer: A — Rise
Explanation: With elastic demand the proportionate rise in quantity exceeds the proportionate fall in price, so revenue increases. This is why a firm facing elastic demand can gain by cutting price, while one facing inelastic demand would lose by doing so.
Question 161
Two indifference curves:
Select an option first.
Correct answer: D — Can never intersect each other
Explanation: Each curve represents a different level of satisfaction, so an intersection would imply that one combination yields two different levels at once - a contradiction. Indifference curves also slope downward, are convex to the origin, and give higher satisfaction the further they lie from it.
Question 162
A demand curve that is a rectangular hyperbola has an elasticity of:
Select an option first.
Correct answer: C — One at every point
Explanation: On such a curve total expenditure is the same at every price, since price and quantity change in exactly offsetting proportions - which is the definition of unitary elasticity. It is the one demand curve along which elasticity does NOT vary from point to point.
Question 163
The budget line shifts outward and PARALLEL to itself when:
Select an option first.
Correct answer: C — Income rises, prices remaining unchanged
Explanation: A change in income alters the intercepts equally, so the line moves out without changing slope - the slope being the ratio of the two prices. A fall in the price of ONE good pivots the line about the other intercept instead, changing its slope. Tastes affect indifference curves, never the budget line.
Question 164
The supply curve of a good shifts to the RIGHT when:
Select an option first.
Correct answer: D — The cost of production falls or technology improves
Explanation: Lower costs make every quantity more profitable to supply, so more is offered at each price. An indirect tax does the reverse, shifting supply LEFT. A rise in the good's own price moves along the curve rather than shifting it, and a change in demand shifts the demand curve, not this one.
Question 165
Elasticity of supply is generally GREATEST in:
Select an option first.
Correct answer: C — The long run
Explanation: Given enough time, firms can build new capacity and new firms can enter, so output responds fully to price. In the market period supply is fixed and elasticity is zero; the short run permits some variation. Time is the dominant influence on supply elasticity.
Question 166
In the market period, or very short run, the elasticity of supply is:
Select an option first.
Correct answer: A — Perfectly inelastic
Explanation: In the market period the stock in existence cannot be altered at all - fish already landed must be sold whatever the price - so the supply curve is vertical and elasticity is zero. Supply becomes progressively more elastic in the short run, when output can be varied, and more so in the long run, when capacity itself can change.
Question 167
A supply schedule shows:
Select an option first.
Correct answer: B — The quantities a producer OFFERS FOR SALE at various prices
Explanation: Supply refers to what sellers are willing and able to offer at each price over a period, not to the stock in existence. The distinction matters: a large stock may be held back if the price is unattractive, so stock and supply are not the same thing.
Question 168
An Engel curve shows the relationship between:
Select an option first.
Correct answer: B — INCOME and the quantity of a good demanded
Explanation: The curve slopes upward for normal goods and downward for inferior ones, so its shape reveals the good's classification. Engel's law - that the proportion of income spent on food falls as income rises - is the best-known empirical finding drawn from this relationship.
Question 169
The budget line of a consumer shows:
Select an option first.
Correct answer: B — All combinations of two goods that can be bought with the whole of a given income at given prices
Explanation: The budget line reflects what the consumer CAN buy, given income and prices; the indifference curve reflects what he WANTS. Equilibrium is where the two are reconciled - which is why both are needed and why distractor A, the indifference curve, is a different concept.
Question 170
The phrase 'other things remaining equal' in the law of demand means that:
Select an option first.
Correct answer: A — Income, tastes, prices of related goods and expectations are held constant
Explanation: The law isolates the effect of the good's OWN price by freezing everything else. If those other factors change, the whole curve shifts and the observed price-quantity relationship may appear to contradict the law - which is why the assumption is stated explicitly rather than assumed silently.
Question 171
When the price of a good falls, the substitution effect:
Select an option first.
Correct answer: C — Always increases the quantity demanded of that good
Explanation: The substitution effect is unambiguously positive for a price fall, because the good has become cheaper relative to alternatives regardless of its nature. Only the INCOME effect varies by type of good, and only for a Giffen good is it large enough and negative enough to reverse the total.
Question 172
Total utility is at its maximum when marginal utility is:
Select an option first.
Correct answer: D — Zero
Explanation: Each additional unit adds marginal utility to the total, so the total keeps rising while marginal utility is positive and starts falling once it turns negative. The peak of total utility is therefore the point of SATIETY, where the last unit adds nothing at all.
Question 173
Under the total outlay method, demand is UNITARY elastic when a change in price leaves total expenditure:
Select an option first.
Correct answer: B — Unchanged
Explanation: If price and quantity change in exactly offsetting proportions, the amount spent is the same before and after, which defines unitary elasticity. Where expenditure moves in the OPPOSITE direction to price the demand is elastic, and where it moves in the SAME direction it is inelastic.
Question 174
A Veblen good is one that is bought:
Select an option first.
Correct answer: C — For its prestige value, so that a HIGHER price may increase its attractiveness
Explanation: Diamonds, luxury watches and designer labels derive part of their appeal from being expensive, so a price cut can reduce demand by destroying the exclusivity. This is a distinct exception from the GIFFEN case, which concerns inferior staples and works through the income effect rather than prestige.
Question 175
A cross elasticity of demand of approximately ZERO between two goods indicates that they are:
Select an option first.
Correct answer: A — Unrelated goods
Explanation: If a change in the price of one good leaves demand for the other unaffected, no economic relationship exists between them - salt and stationery, for instance. Substitutes give a positive value and complements a negative one, so the sign identifies the relationship and the magnitude its strength.
Question 176
In a two-sector economy, aggregate demand consists of:
Select an option first.
Correct answer: B — Consumption and investment expenditure
Explanation: With only households and firms there is no government and no foreign trade, so demand is C + I. Adding government gives C + I + G, and adding the rest of the world gives C + I + G + (X - M) - each sector adding one term to the expression.
Question 177
Autonomous investment is investment that is:
Select an option first.
Correct answer: C — Independent of the level of income, often undertaken by government
Explanation: Autonomous investment - infrastructure, or investment driven by innovation - does not respond to current income, which is why it is the initiating force in the multiplier process. INDUCED investment rises with income and is what the accelerator describes.
Question 178
The average propensity to consume is:
Select an option first.
Correct answer: C — Total consumption divided by total income
Explanation: APC is a ratio of totals, whereas MPC is a ratio of CHANGES - the distinction distractor A blurs. Because autonomous consumption is positive, APC exceeds MPC at every income level, and APC falls as income rises.
Question 179
In computing national income, double counting is avoided by including:
Select an option first.
Correct answer: A — Only the value added at each stage, or equivalently only final goods
Explanation: Counting both the flour and the bread would count the flour twice, since its value is already embodied in the bread. Either sum the value ADDED at each stage or count only FINAL goods - the two give the same total. Purely financial transactions and second-hand sales are excluded altogether, as no current production is involved.
Question 180
In the simple circular flow between households and firms:
Select an option first.
Correct answer: D — Households supply factor services and firms supply goods and services
Explanation: Households provide land, labour, capital and enterprise and receive rent, wages, interest and profit; firms provide goods and services and receive consumption expenditure. The real flow and the money flow run in opposite directions, and because each transaction is both an income and an expenditure, the three methods of measuring national income must agree.
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