CA Foundation · Paper 4 · Business Economics

Chapter 1 · Unit 2 · Basic Problems of an Economy & Role of Price Mechanism

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Question 01

The central economic problem arises mainly because:

human wants are limited resources are scarce and have alternative uses all economies are capitalist government always controls production

The central problem exists because resources are limited while wants are many, and the same resources can be used for different purposes.

Question 02

Which of the following is treated as a basic economic problem?

What to produce How to produce For whom to produce All of the above

All economies must decide what to produce, how to produce and for whom to produce. ICAI also includes provision for growth as another basic issue.

Question 03

Which of the following is the fourth basic problem discussed in this unit?

How to tax How to export What provision should be made for economic growth How to fix exchange rate

Besides the first three classic problems, ICAI also highlights the need to decide what provision should be made for future growth.

Question 04

The problem of “What to produce” is basically about deciding:

which goods and services and in what quantities should be produced who should get the produced goods which ministry should regulate markets whether prices should be fixed by law

“What to produce” means deciding the composition and quantity of output.

Question 05

The problem of “How to produce” refers to choice among:

different consumer groups alternative techniques of production different forms of taxation domestic and foreign markets

The economy has to choose between labour-intensive and capital-intensive or other alternative production methods.

Question 06

The choice between handlooms, power looms and automatic looms illustrates the problem of:

for whom to produce what to produce economic growth how to produce

That example is used to explain the choice of production technique.

Question 07

The choice of production technique depends mainly on:

the religion of consumers climate only availability and relative prices of factors of production number of exporters

Economies choose methods based on factor availability and their relative prices.

Question 08

The problem of “For whom to produce” is mainly concerned with:

distribution of output among members of society choice of machinery setting support price import restrictions

This question is about who gets how much of the total output produced.

Question 09

The need to save and invest for future production capacity is related to:

how to produce provision for economic growth consumer sovereignty free competition

If all resources are used only for current consumption, future productive capacity will not rise.

Question 10

Which economic systems face the central problem of scarcity?

Only capitalist economies Only socialist economies Only mixed economies All economies

All economies, regardless of system, face scarcity and must make choices.

Question 11

A capitalist economy is mainly characterized by:

private property and freedom of enterprise state ownership of all means of production absence of competition production only for social welfare

Capitalist economies are based on private property, individual freedom and market forces.

Question 12

In a capitalist economy, economic decisions are mainly guided by:

central planning board military authority self-interest and price mechanism religious institutions

ICAI specifically notes that capitalist systems function through self-interest and price mechanism with minimal control.

Question 13

In a capitalist economy, the question “What to produce” is largely decided by:

bureaucrats consumer preferences expressed through demand foreign trade ministry labour unions alone

Consumers show what they want by spending on goods and services, and producers respond to profitable demand.

Question 14

In a market economy, “for whom to produce” is largely decided by:

voting rights age of consumers quantity of exports purchasing power and distribution of income

In market systems, goods go to those who can pay, so income distribution strongly affects allocation.

Question 15

Which of the following is a merit of capitalism highlighted in the ICAI material?

It is self-regulating and works automatically through price mechanism It eliminates all inequalities completely It removes all business cycles It abolishes competition

ICAI lists self-regulation through price mechanism and efficiency incentives among the merits of capitalism.

Question 16

Which force solves the central problems in a capitalist economy?

religious customs central allocation board market demand and supply through price mechanism trade unions only

The official unit says capitalist economies use impersonal market demand and supply, i.e., price mechanism, to solve central problems.

Question 17

Price mechanism refers to the system in which allocation decisions are guided by:

cabinet resolutions prices determined by demand and supply court orders random choice of producers

Price mechanism means market prices coordinate decisions of buyers and sellers.

Question 18

In a free market economy, which of the following statements is correct?

Government fixes all prices and outputs Consumers have no role in allocation Competition is absent Price mechanism plays a central role in resource allocation

A free market economy relies on the market mechanism for allocation of scarce resources.

Question 19

Consumer sovereignty means:

consumers influence production by their spending choices consumers own all factories consumers fix wages directly consumers pay no price

In capitalism, consumers signal preferences by spending, and producers respond to this demand.

Question 20

Which of the following is most closely linked with the phrase “guns or butter”?

problem of inflation problem of taxation choice of what to produce under scarcity problem of foreign exchange

“Guns or butter” is a classic illustration of scarcity forcing a choice among competing outputs.

Question 21

If an economy chooses to devote more resources to current consumption and none to future production, then:

future production capacity will surely rise future production capacity may not increase scarcity disappears consumer sovereignty increases automatically

Without saving and investment for future growth, an economy’s productive capacity may not expand.

Question 22

Which of the following is a feature of capitalism?

private property freedom of enterprise competition All of the above

ICAI lists private property, freedom of enterprise, economic freedom and competition among key features of capitalism.

Question 23

Absence of government interference is most strongly associated with:

capitalist economy socialist economy closed economy war economy

In pure capitalism, economic decisions are mainly left to private agents and market forces.

Question 24

Which of the following best explains why trade-offs exist?

because wants are fully satisfied because prices never change because choosing one use of resources means sacrificing another because government bans all alternatives

Trade-offs arise because scarce resources have alternative uses, so one choice involves giving up another.

Question 25

If labour is abundant and capital is scarce, an economy is more likely to prefer:

capital-intensive technique labour-intensive technique fully automated production always no production at all

Choice of technique should make the best use of available factors at their relative prices.

Question 26

Which of the following is most accurate about price mechanism?

It operates only in socialist economies It ignores consumer demand It fixes prices by law in all markets It helps coordinate production and distribution through market prices

The price mechanism coordinates choices of producers and consumers through the signal of prices.

Question 27

Which statement is correct about scarcity?

Scarcity exists even if resources are useful and limited relative to wants Scarcity means absolute non-existence of resources Scarcity disappears in rich countries Scarcity affects only poor economies

Scarcity is a universal economic problem because wants exceed available resources everywhere.

Question 28

The phrase “who should get how much of total output” relates to:

what to produce how to produce for whom to produce whether to save

This is the distribution problem: allocation of goods and services among members of society.

Question 29

In a capitalist economy, the allocation of resources is mainly influenced by:

central planning authority customs and traditions price mechanism and profit motive foreign governments

In capitalism, allocation is driven by demand, supply, and profit signals — not central authority.

Question 30

Which of the following situations best reflects the problem of “for whom to produce”?

deciding between labour and capital intensive techniques distribution of goods based on purchasing power choosing between wheat and rice production deciding level of future investment

“For whom to produce” deals with distribution — in market economies, it depends on income and purchasing power.

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