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# CA Foundation | Basic Problems of an Economy & Role of Price Mechanism MCQ Test | Chanakya Commerce Classes

CA Foundation Paper 4 Business Economics Chapter 1 Unit 2 Basic Problems of an Economy and Role of Price Mechanism MCQ test page with instant scoring by Chanakya Commerce Classes.

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Business Economics MCQ
Chapter 1 · Unit 2 · Basic Problems of an Economy & Role of Price Mechanism
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CA Foundation · Paper 4 · Business Economics
Chapter 1 · Unit 2 ·
Basic Problems of an Economy & Role of Price Mechanism
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30 MCQs
Foundation Level
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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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MCQ Master Model · Chapter 1 · Unit 2 · Basic Problems of an Economy & Role of Price Mechanism