THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA CERTIFICATE IN ACCOUNTING & BUSINESS - I EXAMINATION MARCH 2011

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1 Copyright Reserved No. of Pages = 05 No. of Questions = 20 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA CERTIFICATE IN ACCOUNTING & BUSINESS - I EXAMINATION MARCH MANAGEMENT AND BUSINESS ECONOMICS PAPER 'A' - MULTIPLE CHOICE QUESTIONS Time allowed : One (01) hour Marks : 40 marks Instructions (i) (ii) (iii) (iv) Answer all the questions. Answer should be given in the special answer paper given to you. The number of the most suitable answer to the relevant question should be entered in the answer paper against the relevant question number. The answer paper should be handed over to the Supervisor at the end of the time allocated for the paper i.e. 1 hour. Each correct answer is entitled to 2 marks.

2 Question No. 01 Suppose that production possibilities in an economy for tea and rice are given in the following table: Tea (Kg.) million Rice (Kg.) million If the economy is currently producing 50 million kilograms of tea and 60 million kilograms of rice, then : (1) It is an efficient level of production. (2) An efficient level of production can be achieved by producing 20 more kilograms of rice. (3) An efficient level of production can be achieved by producing fewer kilograms of rice and more kilograms of tea. (4) An efficient level of production can be achieved by producing 10 more kilograms of rice. Question No. 02 An increase in the price of an input used to produce a good will: (1) shift the supply curve for the good to the right. (2) Shift the supply curve for the good to the left. (3) Increase the supply of good. (4) Affect the quantity of production but not the supply of goods. Question No. 03 To reduce the supply of money, the government could: (1) Reduce interest rates. (2) Buy back government bonds. (3) Sell government bonds. (4) Encourage banks to lend. Question No. 04 If the income elasticity of demand is grater than 1, the commodity is : (1) A necessity. (2) A luxury. (3) An inferior good. (4) A giffen good. (2)

3 Question No. 05 Which one of the following is not a barrier to entry for a firm? (1) Ownership of a vital resource. (2) Licenses and patents. (3) Homogeneous character of the products. (4) Economies of scale. Question No. 06 Given below are the labour inputs, total outputs and total labour costs of a firm. Labour Input Units Total Output Units Total Cost of Labour In the table above, at what level of labour input does the diminishing returns set in? (1) 2 units. (2) 3 units. (3) 4 units. (4) 5 units. Question No. 07 Labour hours needed to produce one unit Country One kg. of peanuts Mirror Sri Lanka 4 8 India 8 20 According to the above table, which one of the following statements is true? (1) Sri Lanka has the comparative advantage in the production of mirrors but not absolute advantage in the production of either good. (2) India has comparative and absolute advantage in the production of peanuts. (3) Sri Lanka has the comparative advantage in the production of peanuts and absolute advantage in the production of mirrors. (4) India has the comparative advantage in the production of peanuts, but no absolute advantage in the production of either good. Question No. 08 When internal economies of scale occur : (1) Total costs fall. (2) Marginal costs increase. (3) Average costs fall. (4) Revenue falls. (3)

4 Question No. 09 If in the Short Run (SR), P < AVC < ATC (where P = Price, AVC = Average Variable Cost, ATC = Average Total Cost), it is advisable to a monopolistic firm to: (1) Expand output to minimise losses. (2) Expand output to maximise profits. (3) Lower the price to increase profits. (4) Raise price to turn losses into profits. Question No. 10 When the Central Bank buys government bonds, it : (1) Lowers reserves, decreasing the monetary base. (2) Lowers reserves, increasing the monetary base. (3) Raises reserves, decreasing the monetary base. (4) Raises reserves, increasing the monetary base. Question No. 11 An agreement in favour of trade restrictions include : (1) Strategic trade policies. (2) National defense consideration. (3) Infant industry argument. (4) All of the above. Question No. 12 The development of futures market in currencies allows firms to : (1) Increase exchange rate risk in a flexible exchange rate system. (2) Reduce exchange rate risk in a flexible exchange rate system. (3) Increase exchange rate risk in a fixed exchange rate system. (4) Reduce exchange rate risk in a fixed exchange rate system. Question No. 13 The cost that a firm incurs in purchasing or hiring any factor of production is referred to as : (1) Explicit cost. (2) Implicit cost. (3) Sunk cost. (4) Variable cost. Question No. 14 Total cost increases from Rs. 500 to Rs. 600 when output increases from 20 to 30 units. Fixed costs are Rs Which one of the following is true? (1) Marginal cost is Rs. 20. (2) Average cost falls. (3) Variable cost rises by Rs (4) Average fixed cost is Rs. 20. (4)

5 Question No. 15 To obtain the gross domestic product (GDP), start with net domestic product (NDP) and add : (1) Depreciation. (2) Depreciation and indirect business taxes. (3) Depreciation, indirect business taxes, and corporate profits. (4) Depreciation, indirect business taxes, corporate profits, and social insurance contributions. Question No. 16 The balanced budget multiplier is the ratio of the change in real GDP to a change in : (1) Taxes. (2) Net export. (3) Government expenditures made by a change in taxes. (4) Government expenditure made by a change in net export. Question No. 17 In the communication process, a receiver is : (1) The person who encodes an idea. (2) The person who decodes a message. (3) Message interference. (4) A message pathway. Question No. 18 Charismatic Leaders are those who have the ability to : (1) Resolve every problem in an organisation. (2) Influence others in a desired manner. (3) Command over a large number of employees. (4) Strictly impose set rules. Question No. 19 The first step in the decision making process is to : (1) Identify alternatives. (2) Evaluate results. (3) Find and define the problem. (4) Choose a solution. Question No. 20 Top manager in an organisation commonly uses information to make decision about : (1) Strategy formulation. (2) Operational plans. (3) Day-to-day operations. (4) Short-term plans. (5)

6 Copyright Reserved No. of Pages = 03 No. of Questions = 07 THE INSTITUTE OF CHARTERED ACCOUNTANTS OF SRI LANKA CERTIFICATE IN ACCOUNTING & BUSINESS - I EXAMINATION MARCH MANAGEMENT AND BUSINESS ECONOMICS PAPER 'B' Time allowed : 2 hours Marks : 60 marks Instructions to candidates: (1) Answer only four (4) questions from Part I and one question from Part II. (2) Submit all workings. (3) Begin each answer on a separate page. (4 All answers should be in one language, in the medium applied for, in the answer booklets provided. PART I (Answer any four (04) questions) Question No. 01 Assume that the market demand (Qd) and supply (Qs) of potatoes are given by the following figures. Price (Rs.) Q d (Kilos) Q s (Kilos) (a) What are the equilibrium price and quantity? (b) Suppose that the government paid potato producers a subsidy of Rs. 1 per kilo. (i) Give the new supply schedule. (ii) What will be the new equilibrium price? (iii) How much will this subsidy payment cost the government?

7 (c) Alternatively, suppose that the government guaranteed potato producers a price of Rs per kilo, instead of the subsidy: (i) How many kgs of potatoes would the government have to buy in order to ensure that all the potatoes produced are sold? (ii) How much would this guaranteed price cost the government? Question No. 02 (a) (i) While the industry under perfect competition faces a downward-sloping curve, why does an individual firm faces a horizontal demand curve?. (3 marks) (ii) Why is the profit maximizing price under monopoly greater than marginal cost?. Illustrate your answer by way of a suitable graph. (3 marks) (b) Would you expect the demand curve for a firm in a monopolistically competitive industry to be more or less elastic after supernormal profit have been eliminated? (6 marks) Question No. 03 An economy is currently in equilibrium. The following figures refer to the elements in its national income accounts. Rs. billion Consumption (total) 60 Investment 5 Government expenditure 8 Imports 10 Exports 7 (a) What is the current equilibrium level of national income? (4 marks) (b) What is the level of injections? (c) What is the level of withdrawals? (d) Assuming that tax revenue is Rs. 7 billion, how much is the level of saving. (4 marks) ( Total 12 marks ) Question No. 04 Suppose that a bank in the banking system receives additional deposits of Rs. 100 million where the required reserve ratio is 20 per cent. (a) Calculate the excess reserve of the bank. (b) How much will bank choose to lend out initially? (c) Calculate the value of deposit multiplier. (4 marks) (d) If the bank uses fully its excess reserves to grant loans, show the final balance sheet of the bank. (4 marks) (2)

8 Question No. 05 Country A and B produce commodity X and Y respectively. Assume that for a given amount of land and capital, the output of commodity X and Y require the following constant number of workers. A B 1 unit of commodity X unit of commodity Y 4 5 Assume that each country has 20 million workers. (a) Draw the production possibility curves for the two countries. (4 marks) (b) What is the opportunity cost of one unit of commodity X in country A and B? (c) Which country has a comparative advantage in which product? (4 marks) (d) Calculate the range for mutually beneficial trade to take place between country A and B. Question No. 06 PART II (Answer one question only) (a) What is planning? (b) State the benefits of planning. (c) Explain the essential features of a good plan. (4 marks) (d) What are the steps in planning? (4 marks) Question No. 07 (a) What is the role of information in the management process? (6 marks) (b) What are the steps in the decision making process? (6 marks) (3)

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