DESCRIPTIVE QUESTIONS WITH SUGGESTED SOLUTIONS/ ANSWERS TESTED IN PAST ATTEMPTS 1 of 3

BUSINESS ECONOMICS – OPERATIONAL LEVEL-1

Q. 1 Define the term Economics. (05)

Suggested Solution/ Answer:
Economics is the study of how societies use scarce resources to produce valuable commodities and
distribute them among different people. It encompasses various subfields such as microeconomics, which
focuses on individual agents and markets, and macroeconomics, which examines aggregate economic
phenomena such as inflation, unemployment, and economic growth.

Q. 2 Define 'Land' and 'Labor'. (05)

Suggested Solution/ Answer:
Land: This factor is a natural resource. It includes the surface of the earth, lakes, rivers and forests. It also
includes mineral deposits below the earth and the climate above, as well as the small area of land that
makes up a farm or factory. The reward for owning land is the income that is generated.
Labour: This factor is the human resource, the basic determinant of which is the nation’s population. Not
all of the population is available to work because some are above or below the working population age and
some choose not to work. The reward for labour is the wage or salary that is paid.

Q. 3 Define the term 'Capital' and 'Entrepreneur'. (05)

Suggested Solution/ Answer:
Entrepreneur: This factor carries out two functions. First, the enterprise factor organizes the other three
factors of production. Second, enterprise involves taking the risk of production, which exists in a free
enterprise economy. Some firms are small with few resources. The functions of the enterprise are
undertaken by a single individual, the entrepreneur.
Capital: This factor is any man-made aid to production. In this category, we would include a simple spade
and a complex car assembly plant. Capital, goods help land and labour produce more units of output –
they improve the output from land and labour. The reward to capital is the rate of return that is earned.

Q. 4 Define utility, marginal utility and total utility. (05)

Suggested Solution/ Answer:
1. Utility refers to the usefulness or enjoyment a consumer can get from a service or good.
2. Marginal Utility: Marginal utility is the added satisfaction that a consumer gets from having one
more unit of a good or service.
3. Total utility: the overall satisfaction that is derived from the consumption of all units of a good over
a given period.

Q. 5 What is an indifference curve? (05)

Suggested Solution/ Answer:
An indifference curve shows the total satisfaction derived by a consumer from the use of two commodities.
It is drawn on the assumption that for all possible points on an indifference curve, total satisfaction of the
consumer remains the same. Hence, the consumer is indifferent as to the combinations lying on an
indifference curve.

Q. 6 Why demand curve slopes downward? (05)

Suggested Solution/ Answer:
Downward sloping of demand curve-The demand of a product refers to the desire of acquiring it by the
consumer but backed by his purchasing power and willingness to pay the price. The law of demand states
that there is an inverse proportional relationship between price and demand of a commodity. When the
price of commodity increases, its demand decreases. Similarly, when the price of a commodity decreases
its demand increases. The law of demand assumes that the other factors affecting the demand of a
commodity remain the same. Thus, the demand curve is downward sloping from left to right.

Q. 7 Explain the exceptional demand curve. (05)

Suggested Solution/ Answer:
An exceptional demand curve moves upward to the right as it violates the law of demand. Consumers are
willing to buy more commodities at a higher price. In other words, the higher the price, the higher the
quantity demanded and the lower the price, the lower the quantity demanded. While a normal demand
curve has a negative slope, an exceptional curve has a positive slope.

DISCLAIMER: These questions and suggested solutions/ answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA members, students and faculty members only. No part of it can be
reproduced, stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA. The
questions and suggested solutions/ answers provided on and made available through the ICMA’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. ICMA has provided the
same on the basis of certain assumptions for general guidance of the students and there may be other possible solutions/ answers based on different assumptions and understanding. It is clarified that ICMA shall not be liable to attend or
receive any comments, observations or critiques related to the same.
 DESCRIPTIVE QUESTIONS WITH SUGGESTED SOLUTIONS/ ANSWERS TESTED IN PAST ATTEMPTS 2 of 3

BUSINESS ECONOMICS – OPERATIONAL LEVEL-1

There are reasons for this abnormality, which include:
 Articles of ostentation
 Fear of future changes in prices
 Rare commodities
 Giffen goods
 The elasticity of demand.

Q. 8 Describe the ‘Monopolistic Competitive Market’. (05)

Suggested Solution/ Answer:
A monopolistic competitive market is a type of market structure in which many firms sell similar but not
identical products. Each firm offers a differentiated product, which gives it some degree of market power.
However, unlike a monopoly, firms in monopolistic competition face competition from other firms offering
close substitutes. There are low barriers to entry, meaning new firms can enter the market relatively easily.
As a result, firms cannot set prices arbitrarily high, and long-run profits tend to be driven to zero due to
competition.

In this market structure, the competition arises from product differentiation, and firms try to attract
customers through advertising, brand loyalty, and unique product features. While each firm has some
control over its product's price due to its differentiation, this power is limited by the availability of close
substitutes from competing firms.

Q. 9 What is meant by Monopoly? Explain. (05)

Suggested Solution/ Answer:
A market in which there is only one supplier is termed a “Monopoly Market”. The features that characterize
this market are given as under:
a. The firm is motivated by profits.
b. It stands alone and barriers prevent new firms from entering the industry.
c. The actions of the monopolist itself affect the market price of its output or it is not a “price taker”.
The output of the monopolist will be set at the point at which Marginal Revenue is equal to Marginal Cost.
If marginal revenue were higher, it would pay the monopolist to increase production because the additional
costs generated would be lower than the revenue, and profits would rise.
The monopoly will make profits in excess of those merely necessary to keep in business, and no pressure
exists for prices to fall and reduce these. Theory suggests that under monopoly prices are higher and
output lower than they would be under perfect Competition.

Q. 10 Define Multiplier Effect. (05)

Suggested Solution/ Answer:
The multiplier describes the process of circulation of income in the national economy, whereby an injection
of a certain size leads to a much larger increase in national income. The firms or households receiving the
injection use at least part of the money to increase their consumption. This provides money for other firms
and households to repeat the process. The level of national income might increase or decrease for several
reasons; for example, there might be an increase in productivity or an increase in the country's exports.
Keynes showed that if there is an initial change in expenditure due to increased exports, government
spending, investment or consumer spending, a new equilibrium national income level will eventually be
reached. The eventual total increase in national income will be greater than the initial expenditure
increase. This is because of the continuing circulation of the funds concerned.

Q. 11 What are sources of Economies of Scale? (05)

Suggested Solution/ Answer:
Economies of scale occur for several reasons:
1. Technical Economies: arise too because larger plant size is more productively efficient.
2. Managerial Economies: Specialization is an important source of greater efficiency
3. Purchasing and Marketing Economies: The larger firm is more likely to be able to buy raw
materials in bulk, and large firms are also able to enjoy lower average costs for marketing.
4. Financial Economies of scale, large firms have a much greater choice of finance

DISCLAIMER: These questions and suggested solutions/ answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA members, students and faculty members only. No part of it can be
reproduced, stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA. The
questions and suggested solutions/ answers provided on and made available through the ICMA’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. ICMA has provided the
same on the basis of certain assumptions for general guidance of the students and there may be other possible solutions/ answers based on different assumptions and understanding. It is clarified that ICMA shall not be liable to attend or
receive any comments, observations or critiques related to the same.
 DESCRIPTIVE QUESTIONS WITH SUGGESTED SOLUTIONS/ ANSWERS TESTED IN PAST ATTEMPTS 3 of 3

BUSINESS ECONOMICS – OPERATIONAL LEVEL-1

Q. 12 Define Public Finance and explain its branches. (05)

Suggested Solution/ Answer:
Public Finance implies a branch of economics which is concerned with government activities and the
various sources of financing expenditure. It deals with government revenue, expenses, and debt, as well
as its impact on the entire economy.
Public finance is broadly divided into four branches. These are Public Expenditure, Public Revenue, Public
Debt, and Financial Administration.
Q. 13 The monetary policy transmission works through five channels. Briefly explain the exchange rate and
asset price channels. (05)
Suggested Solution/ Answer:
The exchange rate channel is the channel that links the domestic economy with international economies.
For instance, an increase in domestic interest rates makes local currency financial assets, such as rupee-
denominated bonds, rupee deposits, etc., relatively more attractive than foreign currency-denominated
assets. It increases the relative demand for local currency compared to foreign currency and may lead to
either an appreciation of local currency or lower depreciation pressure on local currency. The relative
increase in the value of domestic currency makes domestic goods more expensive than foreign goods,
thereby causing a fall in net exports and thus in aggregate demand. In addition, changes in interest rates
directly affect inflation by influencing the prices of imported goods and services.
The asset price channel works through the prices of assets – real as well as financial. For instance, an
increase in interest rates results in a rise in the returns on bank deposits as compared to returns on
investing in other assets. As a consequence, investors and consumers prefer to deposit their cash rather
than hold real estate, bonds and stock. It results in a reduction in demand for these assets, which
eventually decreases their prices and the wealth of the holders of these assets. As their wealth falls, so
does their expenditure, which decreases the demand for goods and services in the economy and
eventually their prices as well.
Q. 14 Briefly explain the expectation channel that drives the monetary policy transmission. (05)
Suggested Solution/ Answer:
The expectations channel deals with the expectations of the general public and investors mainly about
future interest rates and inflation in the economy. As the longer-term interest rates depend in part on
market expectations about the future course of short-term rates, the expectations of future official interest-
rate changes affect the long-term interest rates and hence the aggregate demand in the economy.
Similarly, monetary policy may influence market expectations about future inflation, which generally plays
an important role in wage and price-setting behaviour of economic agents and determining actual inflation
in the economy. For instance, a credible central bank with a history of success in curtailing inflationary
pressure announces that inflation is high and may need tightening in the future. The announcement may
be enough to trigger market sentiment and may lead their stakeholders to adjust their expectations that
inflation will come down in the near term.
Q. 15 Explain the relationship between wages and the short-run aggregate supply curve. (05)
Suggested Solution/ Answer:
The relationship between wages and the short-run aggregate supply (SRAS) curve is crucial for
understanding how shifts in wages can impact overall economic output. Here's how it works:
1. Wage Rigidity: In the short run, wages are often sticky, meaning they do not adjust immediately to
changes in the economy. When the overall price level increases, firms are typically able to
increase their prices without an immediate corresponding increase in wages. This allows them to
increase profitability, leading to increased production.
2. Cost of Production: If wages rise, the cost of production for firms increases. Higher wages mean
that businesses have to pay more for labour, which can lead to a decrease in the quantity of goods
and services supplied at a given price level. This shifts the SRAS curve to the left, indicating a
decrease in supply.
3. Shifts in the SRAS Curve: Conversely, if wages fall or remain stable while prices increase, the
SRAS curve can shift to the right. Firms can produce more at each price level, leading to an
increase in overall output.
In summary, changes in wages can affect the SRAS curve's position: rising wages can decrease short-run
aggregate supply by increasing production costs, while stable or falling wages can increase supply.
THE END
DISCLAIMER: These questions and suggested solutions/ answers including write-ups, tables, charts, diagrams, graphs, figures etc., are uploaded for the use of ICMA members, students and faculty members only. No part of it can be
reproduced, stored in a retrieval system or transmitted in any physical/ or electronic form or by any other means including electronic, mechanical, photocopying, recording or otherwise without prior written permission of the ICMA. The
questions and suggested solutions/ answers provided on and made available through the ICMA’s website may only be referred, relied upon or treated as general guidelines and NOT a substitute for professional advice. ICMA has provided the
same on the basis of certain assumptions for general guidance of the students and there may be other possible solutions/ answers based on different assumptions and understanding. It is clarified that ICMA shall not be liable to attend or
receive any comments, observations or critiques related to the same.