Economics Exam Answers: MCQ Key and Short Answer Solutions

Posted on Jan 6, 2026 in Economy

Objective

50 × 1 = 50

1. D    11. A   21. B   31. D   41. D
2. C    12. B   22. D   32. A   42. C
3. D    13. A   23. B   33. B   43. A
4. D    14. C   24. A   34. C   44. D
5. B    15. A   25. D   35. C   45. C
6. B    16. B   26. C   36. A   46. D
7. D    17. A   27. A   37. A   47. D
8. C    18. C   28. B   38. D   48. C
9. B    19. A   29. B   39. A   49. C
10. A   20. A   30. B   40. D   50. D

Section B — Short Answers

1. What is meant by factor price determination?

Factor price determination refers to the economic process of setting the prices (returns) for factors of production — such as land, labour, capital and entrepreneurship — based on their supply and demand in factor markets.

2. Explain Capitalist Economy.

A capitalist economy is an economic system in which the means of production are owned and controlled by private individuals or businesses rather than the government. The profit motive and private property rights are its main features.

3. Define Consumer’s Equilibrium.

Consumer’s equilibrium is a situation where a consumer attains maximum satisfaction (utility) from the goods and services purchased, given their income and prevailing market prices.

5. When does demand become perfectly elastic?

Demand is perfectly elastic when a tiny change in price leads to an infinite change in quantity demanded; consumers will only buy at one price and any price rise reduces demand to zero.

6. What is meant by fixed factors of production?

Fixed factors of production are inputs that cannot be easily changed in the short run and remain constant regardless of the output level, such as land, major plant machinery, or large-scale buildings.

7. Define Marginal Cost.

Marginal cost is the increase in total cost that results from producing one additional unit of output.

8. When does Total Revenue (TR) start declining?

Total Revenue starts declining when marginal revenue becomes negative — that is, selling additional units reduces total revenue.

10. State the Law of Supply.

The Law of Supply states that, ceteris paribus, price and quantity supplied are directly related: as price increases, quantity supplied increases, and as price decreases, quantity supplied decreases.

11. What does price elasticity of supply mean?

Price elasticity of supply measures how responsive the quantity supplied of a good is to a change in its price. It is the percentage change in quantity supplied divided by the percentage change in price.

12. Write two features of perfect competition.

  1. Large number of buyers and sellers.
  2. Homogeneous (identical) product.

13. Explain market equilibrium price.

The market equilibrium price is the price at which quantity demanded equals quantity supplied. It is also called the market-clearing price because at this price there is neither excess demand nor excess supply.

14. What is derived demand?

Derived demand refers to demand for a factor of production that arises from the demand for the final product it helps produce. In other words, demand for inputs depends on demand for output.

15. Mention the difference between Microeconomics and Macroeconomics.

Microeconomics studies individual economic units such as consumers, firms, and markets. Macroeconomics studies the economy as a whole, including aggregate indicators like GDP, inflation, and unemployment.

16. Why is flow of income called circular flow?

The flow of income is called circular because money continuously moves between households and firms through production, income (wages, rent, profit), and expenditure, creating a circular pattern of economic activity.

Long Answer Questions

31. What are the exceptions to the Law of Demand?

The main exceptions include:

  • Giffen goods: Inferior goods for which demand rises as price rises due to a strong income effect outweighing the substitution effect.
  • Veblen goods: Luxury or status goods for which higher prices may increase demand because price itself confers status.
  • Expectations of future price increases, necessities with no substitutes, and consumer ignorance can also limit or reverse the usual inverse price–demand relationship.

32. Explain the factors determining elasticity of demand.

Elasticity of demand depends on several factors:

  1. Availability of close substitutes.
  2. Nature of the commodity (necessity vs luxury).
  3. Proportion of income spent on the good.
  4. Time period (longer periods allow more substitution).
  5. Habit formation and the number of uses of the good.

33. Distinguish between fixed cost and variable cost.

Fixed Cost:
Remains constant regardless of output. Examples: rent, salaries, insurance.

Variable Cost:
Changes with the level of output. Examples: raw materials, piece-rate wages, fuel.

36. Explain the main functions of the Reserve Bank of India.

The Reserve Bank of India performs several key functions:

  • Controls money supply and credit policy (monetary policy).
  • Issues and manages currency.
  • Acts as banker, agent, and adviser to the central and state governments.
  • Manages foreign exchange reserves and the external value of the rupee.
  • Regulates and supervises the banking system and financial institutions.
  • Works to ensure financial stability and a sound payment system.

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