Previous Year Question Paper

(2023)

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PART - A

1. (a) Define microeconomics.

Answer: Microeconomics is a branch of economics that deals with the behavior of individual units within an economy, such as consumers, firms, and industries. It focuses on the mechanisms of supply and demand, price determination, resource allocation, and production decisions. Microeconomics also analyzes how individuals and organizations make choices under conditions of scarcity and how these decisions affect the utilization and distribution of resources. It contrasts with macroeconomics, which deals with aggregate economic variables. Understanding microeconomics helps in optimizing resource use and making informed managerial decisions in various sectors, including technology and engineering.

(b) What is production possibility curve?

Answer: The Production Possibility Curve (PPC) is a graphical representation that shows the maximum possible output combinations of two goods or services an economy can achieve when all resources are fully and efficiently utilized, given the available technology. It illustrates the concept of opportunity cost, showing that to produce more of one good, some quantity of the other must be sacrificed. The curve is typically concave to the origin, reflecting increasing opportunity costs. Points inside the curve indicate underutilization, points on the curve show efficient use of resources, and points outside are unattainable with current resources.

(c) State the limitations of NPV method of capital budgeting.

Answer: The Net Present Value (NPV) method has several limitations despite being widely used. First, it relies on accurate estimation of future cash flows and an appropriate discount rate, which can be difficult to predict. Second, NPV does not consider the project's duration or size—larger projects may appear more attractive due to higher NPV even if less efficient. Third, it assumes reinvestment of cash inflows at the discount rate, which may not be realistic. Lastly, NPV does not provide any insight into the liquidity or risk associated with the investment, requiring supplementary analysis.

(d) How pay-back period is calculated?

Answer: The pay-back period is the time required for an investment to recover its initial cost through net cash inflows. It is calculated by dividing the initial investment by the annual cash inflow when the inflows are uniform. If cash inflows vary each year, cumulative cash flows are tracked until the initial investment is recovered. The year in which cumulative inflows equal the initial investment is the pay-back period. Although simple and easy to understand, it ignores the time value of money and does not consider returns after the pay-back period.

(e) Define demand forecasting.

Answer: Demand forecasting is the process of estimating the future demand for a product or service using historical data, market trends, and statistical analysis. It helps businesses make informed decisions regarding production planning, inventory management, workforce requirements, and budgeting. Accurate demand forecasting enables companies to meet customer needs without overproducing or underproducing. Methods include qualitative techniques like expert opinion and quantitative methods such as time series analysis, regression analysis, and econometric models. It plays a vital role in aligning supply with anticipated demand and achieving organizational goals efficiently.

(f) What is meant by elasticity of demand?

Answer: Elasticity of demand measures how much the quantity demanded of a good or service changes in response to a change in its price, income level, or price of related goods. It indicates the sensitivity of consumers to such changes. The most common type is price elasticity of demand, calculated as the percentage change in quantity demanded divided by the percentage change in price. If demand is elastic, a small price change leads to a large change in quantity demanded. If it is inelastic, demand changes little. Elasticity helps in pricing, taxation, and revenue decisions.

(g) Examine the relevance of depreciation towards industry.

Answer: Depreciation is the reduction in the value of fixed assets due to wear and tear, obsolescence, or passage of time. In industry, it plays a crucial role in financial reporting, cost estimation, tax calculation, and capital budgeting. Depreciation helps in determining the true profitability of a firm by allocating the cost of assets over their useful life. It is also considered while setting prices for goods and services, ensuring recovery of asset costs. Furthermore, depreciation provides tax benefits by reducing taxable income, and helps businesses plan for replacement of aging equipment and infrastructure.

 

(h) What is opportunity cost?

Answer: Opportunity cost is the value of the next best alternative that is foregone when a decision is made to choose one option over another. It represents the benefits that could have been gained if the resources were used differently. For example, if a student chooses to study instead of working a part-time job, the opportunity cost is the income they sacrificed. It is a key concept in economics that helps individuals and businesses make informed decisions by considering the trade-offs involved in resource allocation.

(i) Explain the various types of market.

Answer: Markets can be classified based on competition and the nature of goods:

1. Perfect Competition – Many buyers and sellers, homogeneous products, no single entity controls the price.
2. Monopolistic Competition – Many sellers offering differentiated products (e.g., clothing brands).
3. Oligopoly – Few large firms dominate the market; may sell identical or varied products (e.g., telecom industry).
4. Monopoly – Single seller dominates the market with no close substitutes (e.g., Indian Railways in passenger trains).
   Each market type affects pricing, consumer choice, and efficiency differently.

(j) State the features of Indian Economy.

Answer: Key features of the Indian economy include:

1. Mixed Economy – Coexistence of public and private sectors.
2. Agriculture Dominance – Significant employment in agriculture despite industrialization.
3. Large Population – High labor availability but also population pressure.
4. Developing Economy – Moderate GDP growth, infrastructure development, and rising income levels.
5. Service Sector Growth – Rapid expansion of IT, finance, and communication industries.
6. Poverty and Unemployment – Persistent challenges needing policy attention.
7. Global Integration – Active participation in international trade and investment post-liberalization.

 

PART – B

2. Explain and illustrate the relationship between science, technology and economic development.

Answer: Science provides the foundation for new knowledge, while technology applies that knowledge to develop tools, systems, and solutions. Economic development refers to the sustained improvement in the standard of living and economic health of a country.

The relationship among them is deeply interconnected. Scientific discoveries lead to technological innovations, which improve productivity, efficiency, and resource management. For example, advances in agricultural science have led to high-yielding crops, boosting food production and reducing poverty. Similarly, information technology has transformed communication, business, and education, creating new markets and employment.

Technology reduces production costs, improves quality, and opens global markets. Nations investing in R\&D, such as the U.S., Germany, and India (ISRO, digital infrastructure), have witnessed faster economic development. Thus, continuous investment in science and technology is crucial for long-term economic growth.

3. Discuss the factors that determine elasticity of demand.

Answer: Elasticity of demand refers to the responsiveness of quantity demanded to changes in price or other economic variables. The major factors influencing it include:

1. Nature of the Good: Necessities (e.g., salt) have inelastic demand; luxuries (e.g., air conditioners) have elastic demand.

2. Availability of Substitutes: More substitutes (e.g., toothpaste brands) increase elasticity.

3. Proportion of Income: Goods consuming a large portion of income (e.g., cars) are more elastic.

4. Time Period: Demand is more elastic in the long run as consumers find alternatives.

5. Addictiveness: Addictive goods (e.g., cigarettes) have inelastic demand.

6. Brand Loyalty: High loyalty reduces elasticity.

7. Habitual Consumption: Regular-use products tend to be inelastic in the short run.

Understanding these factors helps in pricing strategies and forecasting consumer behavior.

4. State the advantages and limitations of Internal Rate of Return (IRR) method of capital budgeting.

Answer: Advantages:

1. Time Value of Money: Considers the present value of future cash flows.

2. Profitability Indicator: A project with IRR greater than the cost of capital is accepted.

3. Simplicity: Easy to understand for non-finance managers.

4. Comprehensive: Reflects both profitability and efficiency of investment.

Limitations:

1. Multiple IRRs: Projects with alternating cash flows may have multiple IRRs, creating confusion.

2. Reinvestment Assumption: Assumes reinvestment at IRR, which may not be realistic.

3. Not Suitable for Mutually Exclusive Projects: Can give misleading results.

4. Scale Insensitivity: Ignores the magnitude of investment.

Despite limitations, IRR is widely used in financial planning and investment analysis.

5. Examine the importance of the law of variable proportions. What do you think to be its causes and effects?

Answer: The Law of Variable Proportions states that as more units of a variable input (e.g., labor) are added to fixed inputs (e.g., land), the marginal product initially increases, then decreases, and may become negative.

Importance:

* Explains short-run production behavior.

* Helps determine optimal resource utilization.

* Aids in cost and output decisions.

Causes:

1. Indivisibility of Fixed Factors

2. Improved Efficiency with Specialization

3. Overcrowding of Inputs

Effects:

* Increasing returns lead to higher efficiency.

* Diminishing returns increase per-unit cost.

* Negative returns indicate inefficiency and resource wastage.

This law is vital for firms to plan input mix and scale operations effectively.

6. Explain the features of monopoly competition through appropriate examples.

Answer: Monopoly competition (often called monopolistic competition) is a market structure combining elements of monopoly and perfect competition. Its features include:

1. Many Sellers: Each firm has a small market share (e.g., restaurants).

2. Product Differentiation: Firms sell similar but not identical products (e.g., soaps, clothes).

3. Freedom of Entry and Exit: New firms can enter the market easily.

4. Price Makers: Firms have some control over prices due to brand loyalty.

5. Selling Costs: High advertising expenditure to promote product uniqueness.

6. Non-price Competition: Based on quality, design, and packaging rather than price.

This structure allows for innovation but may lead to inefficient resource use due to excess capacity.

 

 

 7. State the differences between:

(a) Fiscal and Monetary Policy

Basis	Fiscal Policy	Monetary Policy
Authority	Government	Central Bank (e.g., RBI)
Tools	Taxation, public expenditure	Interest rates, reserve ratio, open market ops
Objective	Economic growth, employment, income distribution	Price stability, inflation control
Time Lag	Longer to implement	Relatively faster
Budget Link	Part of annual budget	Independent of budget

 

(b) Central Bank and Commercial Bank

Basis	Central Bank	Commercial Bank
Role	Regulates money supply, issues currency	Accepts deposits, lends money
Ownership	Government-owned (e.g., RBI)	Can be private or public
Profit Motive	Not profit-driven	Operates for profit
Customer	Government and banks	General public and businesses
Functions	Controls inflation, monetary policy	Provides loans, savings accounts, credit cards