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CIMA BA1 Sample Question Answers

Question # 1

Which of the following is most likely to lead to a rise in the exchange rate of country's currency and a fall in the price of stocks shares?

A. An increase in the deficit in the country's balance of payments on current account 
B. Foreign investors purchasing shares on the country's capital markets 
C. An increase in the country's money supply 
D. An increase in rates of interest within the country 

Question # 2

The real rate of interest is 

A. The rate of interest charged by banks on loans. 
B. The nominal rate of interest adjusted for inflation. 
C. The compound rate of interest. 
D. The rate of interest charged on loans plus administrative charges. 

Question # 3

Which of the following is not a source of long-term capital for a company?

A. Retained profits 
B. Dividends 
C. Term loans 
D. Issuing corporate bonds 

Question # 4

According to the purchasing power parity theory, if a country's inflation rate is 5% higher than the inflation rates of the country's competitors in the world economy

A. The country's exchange rate will fall by 5% to restore the terms of trade 
B. The domestic purchasing power of the currency must fall 
C. The country's firms must reduce their export prices to remain competitive 
D. The overseas demand for the country's exports will be price elastic 

Question # 5

Which of the following provide possible explanations for the existence of a structure of interest rates?(i). Borrowers having different risk profiles(ii). Lenders wishing to lend for different time profiles(iii). The market for loanable funds being perfectly competitive(iv). The existence of margins between borrowing and lending rates

A. (i) and (iv) only 
B. (ii) and (iii) only 
C. (i), (ii) and (iv) only 
D. (i), (ii) and (iii) only 

Question # 6

All of the following are appropriate policies to deal with the problem of industries which cause pollution except which one?

A. Taxes on the consumption of the product 
B. Subsidies to the producers 
C. The auctioning of pollution permits 
D. Legal controls to limit pollution levels 

Question # 7

The linking of net savers with net borrows is known as:

A. financial intermediation 
B. the savings function 
C. money transfer 
D. credit creation 

Question # 8

What is meant by a 'Eurobond'?

A. A bond denominated in Euros 
B. A bond issued to markets anywhere in Europe 
C. A bond denominated in a currency that differs from the domestic currency of the country where the bond was issued 
D. A bond issued by the European Central Bank 

Question # 9

The following figures relate to a particular economy. From the above information, it can be correctly concluded that each pound was spent an average of

A. 2 times 
B. 5 times 
C. 25 times 
D. 50 times 

Question # 10

Which ONE of the following would be expected to reduce the net present value of a proposed investment project? A rise in

A. the expected cash flows from the project 
B. the scrap value of the capital at the end of the project's life 
C. interest rates 
D. the net present value of alternative projects 

Question # 11

All of the financial instruments are traded on the long term capital market except one.Which ONE is the exception?

A. Shares 
B. Certificate deposit 
C. Government undated stock 
D. Long dated bonds 

Question # 12

All of the following are examples of not-for-profit organizations except one. Which ONE is the exception?

A. Mutual savings societies 
B. Charities 
C. Partnerships 
D. Trade Unions 

Question # 13

Why was the Global Banking Crisis of 2007 followed by a credit crunch of low lending?

A. Governments sought to reduce aggregate demand to avoid a boom 
B. Households and firms were unwilling to borrow 
C. Banks had lost reserves and could not support high lending 
D. Households had stop saving due to loss of confidence in commercial banks 

Question # 14

Which one of the following would lead to a fall (depreciation) in the exchange rate for a country's currency?

A. A fall in interest rates in that country 
B. An inflation rate below that of the country's trading partners 
C. A fall in that country's imports 
D. A fall in the export of capital from that country 

Question # 15

A business could meet a short term financial need by all of the following except one. Which ONE is the exception?

A. Using its cash reserves 
B. A bank overdraft 
C. Issuing shares 
D. Factoring 

Question # 16

Identify the source of funds most appropriate for a growing company to use which wishes to borrow funds long-term to pay for initial marketing research and promotion?

A. A debenture 
B. A commercial bill 
C. Ordinary shares 
D. Overdraft 

Question # 17

Diseconomies of scale

A. are the result of the operation of the law of diminishing returns 
B. occur because all firms face a U shaped short run average cost curve 
C. cause the long run average cost curve to rise 
D. are the result of businesses adopting a divisional structure 

Question # 18

Which of the following is NOT a suitable way for a manufacturing company to finance buying assets?

A. Certificates of deposit 
B. Commercial bills 
C. Commercial bonds 
D. Leases 

Question # 19

£100 of new cash is issued, which is then deposited in a bank which is part of a banking system operating a cash ratio of 10%. The maximum possible increase in the moneysupply which can follow from this transaction, additional to the initial deposit, is

A. £90 
B. £190 
C. £900 
D. £1000 

Question # 20

Which of the following pairings of policy instruments and policy objectives is correct?

A. A 
B. B 
C. C 
D. D 

Question # 21

Which of the functions of a financial intermediary is described by the following statement 'Bundles small deposits of liquidity into larger loans'?

A. Aggregation 
B. Risk management 
C. Maturity transformation 
D. Introducing borrows and lenders 

Question # 22

All of the following are functions of central banks except which one?

A. Banker to the commercial banks 
B. Holder of the foreign exchange reserves 
C. Banker to the government 
D. Determination and conduct of fiscal policy 

Question # 23

A government can finance a budget deficit by:i. increasing taxation rates.ii. Reducing government expenditure.iii. Selling long term government bonds.iv. Issuing Treasury Bills.v. Raising interest rates.vi. Reducing transfer payments.

A. (i), (ii) and (iii) only 
B. (ii), (v) and (vi) only 
C. (ii) and (vi) only 
D. (iii) and (iv) only 

Question # 24

Which one of the following methods of government borrowing is most likely to be inflationary? The sale of:

A. Treasury bills to the banking sector 
B. Long-term securities to insurance companies and pension funds 
C. National savings securities to the general public 
D. Long-term securities to the banking sector 

Question # 25

All of the following were features of the financial crisis of 2008 except one. Which ONE is the exception?

A. A rise in the volume of mortgage defaults 
B. A chronic shortage of liquidity in the banking system 
C. A severe contraction in inter-bank lending 
D. A sharp fall in rate of interest on inter-bank lending 

Question # 26

Which of the functions of a financial intermediary is described by the following statement 'Invests across a wide range of assets to reduce the loss of capital value if a particular borrower defaults'?

A. Aggregation 
B. Risk management 
C. Maturity transformation 
D. Introducing borrows and lenders 

Question # 27

Calculate the yield to an investor available from the following commercial bill: Face value$100,000 Market price$98,500 Maturity90 days time

A. 1.5% 
B. 4.5% 
C. 6.1% 
D. $1,500 

Question # 28

Which of the following describes a 'spot rate' in foreign currency dealing?

A. It is a short term rate that may change in the immediate future 
B. It is the price for a currency that is to be delivered immediately 
C. It is the exchange rate minus any commissions or transactions charges 
D. It is the exchange rate minus the inflation rate 

Question # 29

Which of the following is not a function of a central bank?

A. Banker to the banking system 
B. Supervision of the banking system 
C. Banker to the government 
D. Regulation of the taxation system 

Question # 30

All of the following are advantages of a system of floating (flexible) exchange rates except one. Which ONE is the exception?

A. They provide automatic correction of imbalances in the balance of payments 
B. Countries no longer need to hold foreign exchange reserves to manage the currency 
C. Countries with inflationary problems can avoid losing international price competitiveness 
D. They encourage international trade by eliminating foreign exchange transactions costs 

Question # 31

The World Bank is an international financial institution, controlled by governments, that lends money to developing nations to allow them to afford to build infrastructure and industries that will enable them to become richer countries over the following decades. Identify the function being performed by the World Bank.

A. Helping countries overcome the lack of synchronization between payments and receipts over the long run 
B. Channeling funds from deficit countries to surplus countries 
C. Enabling developed countries to transform their financial risks 
D. Enabling maturity transformation 

Question # 32

A promoter has arranged a large outdoor concert. All the costs are fixed and there are no variable costs associated with the number of spectators attending.Which of the following statements about the profit maximizing price is FALSE?

A. It is the price at which Marginal Revenue is zero 
B. At this price, the price elasticity of demand will be unity (i.e. equal to 1) 
C. This price will ensure the promoter covers the cost of the concert 
D. This is the price which maximizes the revenue the promoter earns from the concert 

Question # 33

Select the best definition of the corporate governance of a company from the list below.

A. The structure and functions of the Board of a firm 
B. The systems by which companies are directed and controlled
C. The composition and duties of the management of a company 
D. The financial and non-financial performance of a company 

Question # 34

If real rates of interest are positive and rising, then

A. The average level of saving will be decreasing 
B. Lenders are gaining at the expense of borrowers 
C. The rate of inflation must be increasing 
D. The desire to hold cash balances will be increasing 

Question # 35

All of the following were contributory causes of the banking crisis of 2008 (the 'credit crunch') except one. Which ONE is the exception?

A. Large scale default in the in the US sub-prime mortgage market 
B. Over- capitalization of commercial and investment banks 
C. The bundling of mortgages into collateralized debt obligations which were sold onto banks 
D. Erroneous credit rating of collateralized debt obligations by credit rating agencies 

Question # 36

Regulatory offices have been established after the privatization of some nationalized industries because

A. some industries retain significant monopoly power 
B. the number of new producers entering the industry must be controlled 
C. these privatized industries produce public goods 
D. government regulations make monopolies in the private sector illegal. 

Question # 37

Identify in the following list the statement that does not describe a function of a financial intermediary:

A. Aggregation of funds 
B. Maturity transformation 
C. Risk transformation 
D. Transfer payments 

Question # 38

In a system of freely floating exchange rates the central bank and government will

A. Not need to engage in exchange equalization 
B. Allow market forces to determine the exchange rate within a strictly limited band 
C. Have less ability to control the money supply than in a fixed exchange rate system 
D. Have to intervene in foreign exchange markets in order to maintain the system 

Question # 39

All of the following are sources of finance for business except which one?

A. Retained profits 
B. Certificates of deposit 
C. New share issues 
D. Mortgages 

Question # 40

Financial intermediation is the process by which

A. Net savers and net borrowers are brought together. 
B. Banks create credit on the basis of their liquid assets. 
C. The central bank acts as a link between commercial banks and the government. 
D. Banks provide commercial services for their customers. 

Question # 41

Central banks inspect and sometimes set minimum limits on the reserves held by commercial banks. Which ONE of the following statements is NOT a reason that centralbanks seek to influence the reserves of commercial banks?

A. To influence commercial banks' ability to create credit 
B. To avoid the commercial banks running out of liquidity 
C. To regulate the profits of commercial banks 
D. To prevent the collapse of the banking system 

Question # 42

Real GDP per capita in an economy is directly affected by(i). The quantity of resources located in the economy(ii). How efficiently the economy uses resources when producing goods and services(iii). The size of the working population(iv). The flow of investment income from abroad

A. (i) and (iv) only 
B. (i) and (ii) only 
C. (ii), (iii) and (iv) only 
D. (i), (ii) and (iii) 

Question # 43

The stock market fulfils all of the following functions except which one?

A. A market for government bonds. 
B. A market for foreign exchange. 
C. A market for company shares. 
D. A market for short term loans. 

Question # 44

Which of the functions of a financial intermediary is described by the following statement 'converts a flow of short-term deposits into a supply of long term loans'?

A. Aggregation 
B. Risk management 
C. Maturity transformation 
D. Introducing borrows and lenders 

Question # 45

Which of the following is NOT achieved by the price mechanism in a market economy?

A. Signaling of consumers' requirements 
B. Allocation of adequate resources for future investment 
C. Rationing of scarce resources between potentially unlimited demands 
D. Setting of rewards to factors of production 

Question # 46

All of the following are functions of a central bank except one. Which ONE is the exception?

A. Lender of the last resort 
B. Banker to the commercial banks 
C. The conduct of fiscal policy 
D. Regulation of the banking system 

Question # 47

Which of the following might be regarded as benefits of the single currency, the Euro?(i). Greater freedom for member countries to set their own interest rates(ii). It is easier to compare prices of consumer goods in all countries using the Euro(iii). A reduction in transactions costs for trade between countries using the Euro(iv). Increased economic growth resulting from a more efficient common market

A. (i) and (ii) only 
B. (i), (ii) and (iv) only 
C. (iii) and (iv) only 
D. (ii), (iii) and (iv) only 

Question # 48

When central banks adopt a policy of 'quantitative easing' this means that they:

A. Lift quantitative restrictions on bank lending 
B. Lower the capital adequacy requirements for banks 
C. Buy government bonds from the banks 
D. Ease the liquidity ratios banks need to hold 

Question # 49

Which ONE of the following financial instruments is NOT issued for long term borrowing by the issuer?

A. Treasury bills 
B. Equities 
C. Treasury bonds 
D. Mortgages 

Question # 50

Identify which of the following features does not distinguish redeemable debt apart from equity:

A. It has a face value which shows its value at redemption 
B. It will pay a regular set sum of interest 
C. It will have a maturity date when it will mature 
D. It will never be traded on an investment market 

Question # 51

Which of the following is not a reason for a firm to issue bonds rather than ordinary shares to raise additional finance?

A. Cheaper borrowing because the interest payments on bonds qualify for tax relief whereas dividend payments do not 
B. Cash flow advantages because dividends are discretionary but interest payments are not 
C. To avoid diluting the votes of existing shareholders as a consequence of issuing shares to strangers 
D. Lower risk because bond holders cannot liquidate a firm for non-payment of interest whereas shareholders can 

Question # 52

Which ONE of the following would tend to make the demand for a product price inelastic?

A. Expenditure on the product accounts for a large part of total household spending 
B. There are many close substitutes for the product 
C. The product is regarded as a luxury 
D. The price changed a short while ago 

Question # 53

All of the following statements about a firms total revenue curve are true except which ONE?

A. Because the price of a product falls as more is supplied to the market the curve is not a straight line 
B. Price elasticity of demand for the product = 1 at the highest point of the curve 
C. If price of the product rose the curve would pivot upwards 
D. The curve would be a horizontal straight line if demand for the product were perfectly price elastic 

Question # 54

Which of the following are external stakeholders for an organization?i. Shareholdersii. Customersiii. Governmentiv. Trade Unionsv. Pressure groupsvi. Employees

A. (i), (ii) and (iii) only 
B. (ii), (iii) and (iv) only 
C. (iii), (iv) and (v) only 
D. (i), (v) and (vi) only 

Question # 55

Which ONE of the following would tend to make the demand for a product price inelastic?

A. Expenditure on the product accounts for a large part of total household spending 
B. There are many close substitutes for the product 
C. The product is regarded as a luxury 
D. The price changed a short while ago 

Question # 56

Which ONE of the following circumstances is essential if producer incomes are to rise following the imposition of a price floor (minimum price) in a market?

A. Market supply is price inelastic 
B. Market demand is price inelastic 
C. Market supply is price elastic 
D. Market demand is price elastic 

Question # 57

Firms may suffer from X-inefficiency because of organizational slack. All of the following would lead to organizational slack except which one?

A. Uncertainty about future demand 
B. Managers become more cautious 
C. A complex organizational structure in the firm 
D. The number of rival firms increases 

Question # 58

Which of the following statements most accurately describes the role of an agent as defined in principal-agent theory?

A. An employee of the organization 
B. An owner of the organization 
C. One who is paid by the owners of the organization 
D. One who is responsible for ensuring the organization pursues the interests of its owners 

Question # 59

A shift in the supply curve for a good will have the biggest effect on the market price when the demand curve for the good

A. is highly price elastic 
B. is highly price inelastic 
C. has unit price elasticity 
D. is perfectly price elastic 

Question # 60

Total economic welfare derived from an activity will be maximized if the activity is undertaken up to the point at which

A. Marginal private benefit exceeds marginal private cost 
B. Marginal social benefit equals marginal social cost 
C. Marginal social benefit equals marginal private benefit 
D. Marginal private benefit equals marginal private cost 

Question # 61

Why do monopoly market structures charge higher prices than would be charged by more competitive market structures?

A. They are more likely to suffer from diseconomies of scale 
B. They must recover their higher research and development expenditures 
C. They can increase profits by reducing output to force prices higher 
D. They have barriers to entry that stop customers going to new markets 

Question # 62

All of the following are examples of externalities except which one?

A. Pollution resulting from a production process 
B. Firms training workers who then move to other employers 
C. Some consumers being unable to afford goods because prices have been driven up by the demand from other consumers 
D. Road congestion caused by rush hour traffic on the roads 

Question # 63

Globalization will have all the following effects on businesses except one. Which ONE is the exception?

A. Access to cheaper sources of supply in emerging economies 
B. Increased competition on world markets for manufactured goods 
C. Decreased international transportation and communications costs 
D. The ability to shift production to low cost locations 

Question # 64

The 'satisfying' model of business behavior states that business will aim to:

A. seek profits as the primary business objective 
B. concentrate on the long run growth of sales 
C. attempt to meet the differing demands of various stakeholders 
D. satisfy shareholders demands to maximize shareholder wealth 

Question # 65

Which of the following is likely to cause the demand curve of margarine to shift to the left?

A. A fall in the price of margarine 
B. A fall in the cost of vegetable oils 
C. A successful advertising campaign by butter producers 
D. A fall in the price of bread 

Question # 66

Which of the following provides a definition of a free good?

A. No charge is made for it by its supplier 
B. Its provision is financed by taxation 
C. It is produced from renewable resources 
D. It is available at zero cost of production in unlimited quantities 

Question # 67

A business can always raise its profits or reduce its losses by increasing output

A. providing total revenue rises as a result 
B. if it is operating on the downward sloping part of its average cost curve 
C. providing total revenue rises faster than total variable costs 
D. if it is operating on the upward sloping part of its total revenue curve 

Question # 68

Which ONE of the following is NOT a class of stakeholder? 

A. Connected 
B. Internal 
C. External 
D. Collaborative 

Question # 69

If the demand curve for good A is negatively sloped, a fall in the price of a substitute good B results in

A. An increase in the quantity demanded of good A 
B. A rightward shift in the demand curve for good A 
C. A leftward shift in the demand curve for good B 
D. A leftward shift in the demand curve for good A 

Question # 70

If the government imposed a legal minimum wage that was above the market equilibrium wage, the resulting unemployment would be the greatest when:

A. the demand for labor and the supply of labor are both price inelastic 
B. the demand for labor and the supply of labor are both price elastic 
C. the demand for labor is price inelastic and the supply of labor is price elastic 
D. the demand for labor is price elastic and the supply of labor is price inelastic 

Question # 71

There are waiting lists and shortages of a product. Which ONE of the following statements explains the cause of this?

A. A price floor (minimum price) has been set above free market price 
B. A price ceiling (maximum price) has been set above free market price 
C. A price floor (minimum price) has been set below free market price 
D. A price ceiling (maximum price) has been set below free market price 

Question # 72

If a firm increases employment of all its factors of production by 50% and as a result output increases by 60%, it has experienced

A. Increasing productivity of labor 
B. Increasing returns to scale 
C. External economies of scale 
D. The benefits of the division of labor 

Question # 73

Firms in competitive markets can earn only normal profit in the long run because:

A. they produce homogeneous products 
B. there are no barriers to entry into these markets 
C. production costs are the same for all producers 
D. of the absence of economies of scale 

Question # 74

MNO is considering moving production to a developing country. Which ONE of the following would NOT reduce its production costs?

A. MNO can choose from a wider choice of suppliers or production locations 
B. The move will increase the length of MNO's supply chains 
C. MNO may benefit from a superior skill base in some emerging economies 
D. Reduced employment regulation in some emerging economies may cut staff costs 

Question # 75

All of the following factors contribute to the instability of agricultural prices except which ONE?

A. Agricultural products have low price elasticities of supply 
B. Output is affected by non-controllable factors such as climate 
C. Supply decisions are based on the prices of the present time period 
D. Markets have a low price elasticity of demand 

Question # 76

Whenever demand for a good is price elastic, an increase in price will

A. Increase monopoly power 
B. Increase consumer expenditure on the good 
C. Increase consumer expenditure on a good in joint demand 
D. Decrease total consumer expenditure on the good 

Question # 77

Which ONE of the following statements best describes the impact of a government price floor (minimum price) set below free market price?

A. It will create a shortage of the product and incentives for producers and consumers to evade the policy 
B. It will create a surplus of unsold produce that will need to be paid for from taxation 
C. It will not affect market price or producer incomes at the present time 
D. It will increase farm incomes but eventually force the government to introduce maximum quotas on production 

Question # 78

All of the following are arguments for privatizing a public sector industry except which one?

A. The profit motive will make the industry more efficient 
B. The industry will respond more to consumer wishes and preferences 
C. The industry is a natural monopoly 
D. Competition will force the industry to become more efficient 

Question # 79

Which of the following statements about public goods is correct?

A. Public goods are defined as those goods provided by the state 
B. Public goods are examples of free goods 
C. Public goods are characterized by the free-rider problem 
D. The problem of scarcity does not affect the provision of public goods 

Question # 80

 Merit goods are typically characterized by

A. non-excludability in consumption 
B. external social costs in production 
C. external social benefits in consumption 
D. non-rivalry in consumption 

Question # 81

A business is selling a good with a price inelastic demand. If it decreases the supply of the good the result will be:

A. the market price will rise, demand will contract and total revenue will rise 
B. the market price will rise, demand will contract and total revenue will fall 
C. the market price will rise, demand will decrease and total revenue will fall 
D. the market price will fall, demand will increase and total revenue will rise 

Question # 82

Which of the following are examples of long run internal economies of scale?i. Mass production using robot machine tool technologyii. Obtaining lower prices when buying raw materials in bulkiii. Long run technical change in the industryiv. The emergence of specialized training institutions for the industryv. Lower borrowing costs for large firmsvi. The spreading of fixed costs over a larger output

A. (i), (ii) and (iii) only 
B. (ii), (iii) and (v) only 
C. (i), (ii) and (v) only 
D. (i), (iv) and (vi) only 

Question # 83

A profit-maximizing firm will cut the product's price to increase profits if

A. Demand is elastic 
B. Unit costs fall 
C. The demand curve shifts rightwards 
D. Marginal revenue is greater than marginal cost 

Question # 84

All of the following would be motives for a horizontal merger except one. Which ONE is the exception?

A. To reduce competition in the industry 
B. To secure economies of scale 
C. To secure sources of supply 
D. To pool technology and research 

Question # 85

Which of the following is most likely to increase rather than to reduce market imperfections?

A. An increase in the number of buyers and sellers in a market 
B. A lowering of entry barriers separating markets 
C. Informative advertising giving way to persuasive advertising 
D. Employers making greater use of the Internet to advertise job vacancies 

Question # 86

All the following statements about small firms are correct except one. Which statement is incorrect?  

A. Small firms do not generally raise finance on the capital market 
B. Banks may refuse to lend to small firms because of the risk involved 
C. Small firms are common in industries which display increasing returns to scale 
D. Small firms are common in industries where there are niche markets 

Question # 87

In a market economy, prices act as all of the following except which one?

A. Signals to consumers about costs 
B. Signals to producers about consumer preferences 
C. A substitute for barter 
D. A means of allocating scarce resources 

Question # 88

Which of the following best defines 'corporate governance'?

A. The laws of a country that govern the companies within it 
B. A market where a small number of dominant firm controls prices and quantities 
C. The systems by which organizations are directed and controlled 
D. A situation where management act as agents for shareholders 

Question # 89

Which ONE of the following conditions would lead to instability over time in the incomes of producers of primary products?

A. Both demand and supply tend to be price inelastic 
B. Large shifts in demand combined with supply that is price inelastic 
C. Large supply shifts under the impact of unstable weather conditions 
D. Both demand and supply tend to be price elastic 

Question # 90

If in the short run a business raises the output of its product then

A. average fixed cost will remain constant over the whole range of output 
B. average variable cost will fall over the whole range of output 
C. average total cost will initially fall and then rise as output is increased 
D. average total cost will fall until constant returns to scale achieved 

Question # 91

Porter describes differentiation as a firm having a unique product or service that is valued by the customer. Which ONE of the following is NOT a factor in the higher prices andprofits from differentiated products?

A. Lower price elasticity of demand due to the product having few substitutes 
B. Price inelastic supply because differentiation acts as a barrier to entry against other firms 
C. Higher customer satisfaction making them willing to pay a higher price 
D. Higher costs of production and marketing necessitating the charging of a higher price 

Question # 92

Which ONE of the following is NOT a symptom of the principal-agent problem in company XYZ?

A. The pay of the directors of XYZ is not related to the company's financial performance 
B. XYZ loses money following a risky investment in a new line of business 
C. The family of the Chief Executive of XYZ use the company jet for shopping trips 
D. XYZ's Board conceals information about losses from shareholders 

Question # 93

If a manufacturing firm contributes to global warming as a byproduct of its production process, this is an example of

A. A merit good 
B. An external social cost 
C. A diseconomy of scale 
D. A public good 

Question # 94

Which of the following sets of conditions will lead to greater stability (or convergence) of prices in the Cobweb model (or Cobweb theorem)?

A. Price elastic demand, price inelastic supply 
B. Price inelastic demand, price elastic supply 
C. Price elastic demand, price elastic supply 
D. Price inelastic demand, price inelastic supply