PRINCIPLE OF ECONOMICS

1 .What is price discrimination? Under what necessary conditions can price discrimination be practiced?    

    
2 .Explain the concept of consumer’s surplus. How is it related to utility?    

3 . Distinguish between factors causing movement and shift in the supply curve.    

    
Case Study
An Oil Crisis Provoked Policy Dilemma
The sudden increase in the price of crude oil by the OPEC countries has put India in a fix. To top it, the Finance Ministry which had increased the market price of LPG and SKO (kerosene) had to partially roll it back, the former by Rs 10 and the latter by Re 1 under political pressure. This means the burden on the Union Budget has increased on both grounds, one because of an increase in the oil price internationally and second, because of the subsidy on petroleum products. All of these will result in an additional burden of Rs 560 crore, a burden which is unbearable, given the present situation of the Central Government's deficit. The fiscal deficit stands at a figure of 5.6 per cent as against the target of 4.5 per cent. The situation by all standards is alarming. Some suggested that a temporary cut should be made in the import of crude oil, but this is a straight invitation to a supply shock inflation, such that not only the prices in the economy go up, but there is a shortfall in the supply of various products including LPG, SKO, HSD (diesel), etc., a situation totally avoidable by all means. A more plausible argument was put forward by some other people in the Finance Ministry, that of restructuring so that more emphasis is laid automatic stabilizers, various direct taxes like income tax, corporate tax, etc. The argument that was put forward was, the industry was out of recession and corporate income seemed to be on a pick. The export sector was also booming with a growth rate of 15 per cent. All these have a positive impact on the GDP growth rate (though the agricultural sector seemed to be pulling along without much growth in the services sector). The GDP at market price seemed to grow at an impressive rate of 7 per cent (whereas the GDP at factor cost was growing only at 6.25 per cent). All these make the industrial as well as the external sector, a good source of taxation; Ministry officials further said, in the face of a surging fiscal deficit, mainly due to interest repayment, the burden of government-increased taxation seems inevitable, and one is lucky that at least two sectors are doing well.
However, the officials seem to have missed one point: a direct tax like income or corporate tax, which moves proportionally with the rising income has a dampening effect on not only the overall industrial and corporate atmosphere, but the total effect is a multiple of the initial tax burden as it affects the investment multiplier value negatively. Taxing the export sector also creates a negative multiplier effect. People from the ministry seem to face a real dilemma. An increase in such proportional direct taxes make them instantaneously richer by Rs 9,000 to12,000 crore, but there is a risk of putting the country back on yet another industrial slowdown. However, allowing further deficit in the budget is also by no means desirable.
        
1. Discuss the kind of inflation the country might face if there is a shortage of crude oil in the economy. 
 
2. How does a direct proportional tax have a negative multiplier effect on the economy's level of income? 

Question No.  1    Marks - 10
________________________________________
The rate at which one input can be reduced per additional unit of the other input while holding output constant is measured by the:    
 
Options    
    
Marginal rate of substitution.

Marginal rate of technical substitution.

Average product of the input.

None of the given options.

Question No.  2    Marks - 10
________________________________________
All of the following are determinants of supply except:    
 
Options    
    
Price

Income levels

Objectives of the firm

Level of technology

Question No.  3    Marks - 10
________________________________________
Demand function is given as Dx=f(Px, Pr,Y,T) What does T stand for:    
 
Options    
    
Taxes

Tastes

Both Taxes and Tastes

None

Question No.  4    Marks - 10
________________________________________
What kind of relationship exist between demand for a good and price of its substitute goods?    
 
Options    
    
Direct

Inverse

No effect

Can be direct or inverse

Question No.  5    Marks - 10
________________________________________
What kind of relationship exist between demand for a good and price of its complementary
goods?    
 
Options    

Direct

Inverse

No effect

Can be direct or inverse

Question No.  6    Marks - 10
________________________________________
Degree of responsiveness of demand to a change in any of its determinants is called    
 
Options    
    
Elasticity of demand

Law of demand

Law of supply

Elasticity of supply

Question No.  7    Marks - 10
________________________________________
………. tells us about the , ‘direction’ of change in demand in response to a change in any of its determinants; it , however does not tells us anything about the ‘ magnitude’ of change    
 
Options    
    
Law of demand

Demand function

Both

None

Question No.  8    Marks - 10
________________________________________
The value of elasticity coefficient varies between zero and ………    
 
Options    
    
Infinity

One

Both

None

Question No.  9    Marks - 10
________________________________________
Elasticity of supply is defined as the ……of percentage change in quantity supplied and the percentage change in the price of the commodity    
 
Options    
    
Ratio

Addition

Multiplication

None of the above

Question No.  10    Marks - 10
________________________________________
Perishable goods cannot store and thus, entire stock of such goods must be disposed of within very short period, whatever may be price. Hence the nature of supply of such goods is –    
 
Options    
    
Elastic

inelastic

unitary elastic

none

Question No.  11    Marks - 10
________________________________________
In Marginal utility theory, utility is an:    
 
Options    
    
Ordinal concept

Cardinal concept

Both ordinal and cardinal concept

None of the above

Question No.  12    Marks - 10
________________________________________
MU of the commodity becomes negative when TU of the commodity is:    
 
Options    
    
Rising

Constant

Falling

zero

Question No.  13    Marks - 10
________________________________________
Falling MU shows which law?    
 
Options    
    
Law of diminishing returns

Law of diminishing marginal rate of substitution

Law of diminishing marginal utility    

None of the above

Question No.  14    Marks - 10
________________________________________
Slope of TU curve is called    
 
Options    
    
Reginal utility

Utility

Average utility

None

Question No.  15    Marks - 10
________________________________________
Indifference mean:    
 
Options    
    
X is preferred to Y

Y is preferred to X

X and Y are equally preferred

None

Question No.  16    Marks - 10
________________________________________
Higher Indifference curve means:    
 
Options    
    
Consumer has more income

Price of goods have reduced

Higher utility level

All of the above

Question No.  17    Marks - 10
________________________________________
MRS is given by :    
 
Options    
    
ΔX/ ΔY

ΔX- ΔY

ΔY/ ΔX

ΔY- ΔX

Question No.  18    Marks - 10
________________________________________
When tax is raised, consumer surplus:    
 
Options    
    
Falls

Rises

Remain unchanged

Becomes Zero

Question No.  19    Marks - 10
________________________________________
Consumer surplus is the difference between:    
 
Options    
    
Amount consumer is willing to pay minus amount actually paid by the consumer

Amount consumer actually paid minus the amount consumer is willing to pay

Amount consumer actually paid minus the amount charged by the seller

Amount consumer is willing to pay minus the amount producer is wanting.

Question No.  20    Marks - 10
________________________________________
The common assumption of marginal utility and indifference curve theories is:    
 
Options    
    
Consistency

Transitivity

Rationality

More is better

Question No.  21    Marks - 10
________________________________________
Factors of production can be :    
 
Options    
    
Land

Labour

Organisation

All of the above

Question No.  22    Marks - 10
________________________________________
Production function means:    
 
Options    
    
Physical relationship between inputs used and output

Technical relationship between inputs used and output

Financial relationship between inputs used and output

Both physical and technical relationship between inputs used and output

Question No.  23    Marks - 10
________________________________________
Short –run production function means    
 
Options    
    
At least one factor is in fixed supply

Two factor are in fixed supply

All factors are in fixed supply

One factor is in variable supply

Question No.  24    Marks - 10
________________________________________
Law of variable proportion holds when    
 
Options    
    
State of technology is same

All units of variable factor are homogeneous

There is at least one fixed factor

All of the above

Question No.  25    Marks - 10
________________________________________
Returns to scale occur :    
 
Options    
    
In the long –run

When all inputs are increased

When the increase in inputs is in the same proportion

All of the above

Question No.  26    Marks - 10
________________________________________
Cost of next best alternatives opportunity given up is called    
 
Options    
    
Outlay cost

Opportunity cost

Explicit Cost

Implicit Cost

Question No.  27    Marks - 10
________________________________________
Fixed cost is also called:    
 
Options    
    
Sunk cost

Supplementary cost

Overhead Cost

All of the above

Question No.  28    Marks - 10
________________________________________
MC curve is ……… shaped.    
 
Options    
    
L-shaped

Straight line

U –shaped

Inverse S-shaped

Question No.  29    Marks - 10
________________________________________
Long-run AC curve is also called:    
 
Options    
    
Planning curve

Envelop curve

Cost frontier

All of the above

    

Question No.  30    Marks - 10
________________________________________
Total cost at zero level of output will be= ………….?    
 
Options    
    
TFC

TVC

AC

AFC

Question No.  31    Marks - 10
________________________________________
Homogenous product exists under:    
 
Options    
    
Perfect Competition

Monopoly

Monopolistic Competition

All of the above

Question No.  32    Marks - 10
________________________________________
One seller exists under:    
 
Options    
    
Perfect Competition

Monopoly

Monopolistic Competition

All of the above

Question No.  33    Marks - 10
________________________________________
Monopolistic competition means:    
 
Options    
    
Large number of sellers

Product differentiation

Free entry and exit of firms

all of the above

Question No.  34    Marks - 10
________________________________________
Homogenous product means product are:    
 
Options    
    
Perfect substitutes

Identical

Cross elasticity between products is infinity

All of the above

Question No.  35    Marks - 10
________________________________________
Discriminating monopoly means:    
 
Options    
    
Different prices are charged

Consumers might be same or different

Commodity is same

All of the above

Question No.  36    Marks - 10
________________________________________
What brings about pure competition?    
 
Options    
    
Large number of buyers and sellers

Homogenous product

Free entry and exit of firms

All of the above

Question No.  37    Marks - 10
________________________________________
Who coined the term monopolistic competition?    
 
Options    
    
Chamberlin

Joan Robinson

Robbins    

Marshall

Question No.  38    Marks - 10
________________________________________
What is the basic principle of all market conditions?    
 
Options    
    
A firm should produce only if TR>TC

To maximise profit, firm must produce where MR=MC

Slope of MC should be more than slope of MR

All of the above

Question No.  39    Marks - 10
________________________________________
In economics , …………………measures the payments that flow between any individual country and all other countries    
 
Options    
    
Exchange Rate

BOP

Both of the above

None

Question No.  40    Marks - 10
________________________________________
A term commonly used to refer to a central banks operations which mitigates the two potentially undesirable effects of inbound capital (currency appreciation and inflation) is-    
 
Options    
    
Sterilisation

Open market operations

Exchange Rate

none