Class XI Economics

 Price Elasticity Assessment

Question 1. (Teachy AI) If a company’s current assets amount to ₹8,00,000 and current liabilities are ₹5,00,000, while its inventory is ₹2,50,000 and prepaid expenses are ₹50,000, what is the Acid-Test Ratio (Quick Ratio) of the company? This is a key metric in financial statement analysis for Economics students.

(A) 0.6:1
(B) 2:1
(C) 1:1
(D) 1.6:1
(E) 1.2:1

Question 2. (Teachy AI) Himalayan Enterprises, a retail business, reported an increase in its Inventory by ₹75,000 and a decrease in Prepaid Expenses by ₹20,000 during the financial year. Concurrently, their Accrued Expenses increased by ₹15,000, and Income Received in Advance decreased by ₹10,000. If the Net Profit before tax was ₹8,00,000, and non-cash expenses included ₹50,000 for depreciation and ₹10,000 for amortisation, what is the cash generated from operating activities after adjusting for working capital changes?

(A) ₹8,70,000
(B) ₹7,50,000
(C) ₹9,10,000
(D) ₹8,10,000
(E) ₹8,40,000

Question 3. (Teachy AI) A manufacturing company, 'Bharat Industries', reported a Net Profit of ₹5,00,000 for the financial year ending March 31, 2023. During the year, the company recognised Depreciation on Plant & Machinery of ₹1,50,000, and a gain on the sale of an old building amounted to ₹80,000. Additionally, there was an increase in Trade Receivables by ₹60,000 and a decrease in Trade Payables by ₹30,000. Calculate the Cash Flow from Operating Activities using the indirect method for Bharat Industries.

(A) ₹6,60,000
(B) ₹5,40,000
(C) ₹5,70,000
(D) ₹6,30,000
(E) ₹4,80,000

Question 4. (Teachy AI) An online streaming service in India, 'CineScape', initially priced its premium subscription at ₹199 per month, attracting 500,000 subscribers. Following a competitor's aggressive pricing strategy, CineScape reduced its premium subscription price to ₹149 per month, leading to an increase in subscribers to 750,000. Assuming all other factors remained constant, what is the most precise interpretation of this price change impact on CineScape's revenue and the nature of demand?

(A) Demand is inelastic, and total revenue decreased from ₹111.75 million to ₹99.5 million.
(B) Demand is inelastic, and total revenue increased despite the price reduction.
(C) Demand is elastic, but total revenue decreased due to the significant price cut.
(D) Demand is elastic, and total revenue increased from ₹99.5 million to ₹111.75 million.
(E) Demand is unit elastic, and total revenue remained unchanged at approximately ₹99.5 million.

Question 5. (Teachy AI) In the urban Indian market, a prominent ride-sharing service, 'MetroRide', faces intense competition. During peak hours, MetroRide implements surge pricing, increasing fares by 30%. This leads to a 20% reduction in the number of rides booked through MetroRide, while bookings for a competitor, 'CityCabs', simultaneously increase by 15%. Based on this information, evaluate the price elasticity implications for MetroRide and CityCabs concerning MetroRide's pricing decision.

(A) MetroRide's demand is elastic, and MetroRide and CityCabs are strong substitutes with a cross-price elasticity of 1.5.
(B) MetroRide's demand is inelastic, and MetroRide and CityCabs are substitutes with a cross-price elasticity of 0.5.
(C) MetroRide's demand is elastic, and MetroRide and CityCabs are complements with a cross-price elasticity of -0.5.
(D) MetroRide's demand is unit elastic, and MetroRide and CityCabs are independent goods with a cross-price elasticity of 0.
(E) MetroRide's demand is inelastic, but CityCabs' demand for MetroRide's price change is negligible.

Question 6. (Teachy AI) A company’s Balance Sheet shows a Machinery account with an opening balance of ₹10,00,000 and a closing balance of ₹12,00,000. Accumulated Depreciation on Machinery had an opening balance of ₹2,00,000 and a closing balance of ₹2,80,000. During the year, machinery costing ₹3,00,000 (with accumulated depreciation of ₹1,00,000) was sold for ₹1,50,000. Determine the amount of machinery purchased during the year for the Cash Flow Statement under Investing Activities.

(A) ₹4,00,000
(B) ₹4,50,000
(C) ₹5,50,000
(D) ₹5,00,000
(E) ₹6,00,000

Question 7. (Teachy AI) A government policy aims to discourage consumption of sugary beverages by implementing a new tax. The initial market price per litre is ₹50, and 100 million litres are sold monthly. After the tax, the price increases to ₹55, and monthly sales drop to 90 million litres. If the long-run price elasticity of demand for sugary beverages is estimated to be -1.2, what would be the most probable long-run quantity demanded, assuming the initial price change is sustained?

(A) 92 million litres
(B) 95 million litres
(C) 88 million litres
(D) 85 million litres
(E) 90 million litres

Question 8. (Teachy AI) Consider the market for traditional handloom sarees in India. A major government initiative successfully promotes the export of these sarees, increasing foreign demand. Concurrently, new, cheaper synthetic fabric alternatives flood the domestic market, drawing away a significant portion of local consumers. How would these simultaneous events impact the equilibrium price and quantity of traditional handloom sarees domestically?

(A) Equilibrium price will definitely decrease, and equilibrium quantity will definitely decrease.
(B) Equilibrium price and equilibrium quantity will both definitely increase.
(C) Equilibrium quantity will definitely increase, while the change in equilibrium price will be indeterminate.
(D) Equilibrium quantity will definitely decrease, while the change in equilibrium price will be indeterminate.
(E) Equilibrium price will definitely increase, and equilibrium quantity will be indeterminate.

Question 9. (Teachy AI) A popular smartphone brand in India observes that when it increases the price of its flagship model by 10%, the quantity demanded falls by 15%. Simultaneously, the demand for a competing brand's similar model increases by 8%. If the company wishes to maximise total revenue for its flagship model, what pricing strategy should it immediately adopt, assuming no changes in production costs?

(A) Maintain the current price, as the cross-price effect suggests consumers are sensitive to price changes.
(B) Increase the price further to capitalize on brand loyalty and higher perceived value.
(C) Introduce a budget version of the flagship model at a lower price point.
(D) Focus on non-price competition like advertising, as price changes are detrimental.
(E) Decrease the price of the flagship model to increase total revenue.

Question 10. (Teachy AI) In the context of the Indian agricultural market, an innovative irrigation technology significantly reduces water consumption for paddy cultivation. Simultaneously, a national awareness campaign against rice consumption due to health concerns gains widespread traction among urban populations. Evaluate the impact on the equilibrium price and quantity of paddy.

(A) Equilibrium price will definitely decrease, and equilibrium quantity will be indeterminate.
(B) Equilibrium price and equilibrium quantity will both definitely increase.
(C) Equilibrium price will be indeterminate, and equilibrium quantity will definitely increase.
(D) Equilibrium price will definitely increase, and equilibrium quantity will definitely decrease.
(E) Equilibrium price will definitely decrease, and equilibrium quantity will definitely increase.

Question 11. (Teachy AI) A recent surge in raw material prices for smartphone manufacturing coincides with a popular social media trend that significantly boosts consumer preference for a specific, high-end smartphone model. Evaluate the most probable immediate impact on the equilibrium price and quantity of this specific smartphone model in the Indian market.

(A) Equilibrium price will definitely decrease, and equilibrium quantity will increase.
(B) Equilibrium price will definitely increase, and equilibrium quantity will be indeterminate.
(C) Equilibrium price and equilibrium quantity will both definitely increase.
(D) Equilibrium price will be indeterminate, and equilibrium quantity will definitely decrease.
(E) Equilibrium price will definitely increase, and equilibrium quantity will definitely decrease.

Question 12. (Teachy AI) The government introduces a new Goods and Services Tax (GST) on luxury cars, simultaneously with a significant decrease in average household income across major metropolitan areas. Considering these two events, what is the most likely combined effect on the market for luxury cars in India?

(A) Equilibrium price and equilibrium quantity will both definitely decrease.
(B) Equilibrium quantity will definitely decrease, while the change in equilibrium price will be indeterminate.
(C) Equilibrium price will be indeterminate, and equilibrium quantity will definitely increase.
(D) Equilibrium price will definitely decrease, and equilibrium quantity will increase.
(E) Equilibrium price will definitely increase, and equilibrium quantity will be indeterminate.

Question 13. (Teachy AI) An Indian airline, 'SkyHigh Airways', introduces a new business class segment on its popular Delhi-Mumbai route. The airline's market research indicates that demand for economy class tickets on this route has a price elasticity of -0.8, while the newly introduced business class has a price elasticity of -1.5. The CEO proposes reducing prices for both segments to fill more seats and achieve higher total revenue. Using the principles of Price Elasticity of Demand, critically assess the CEO's proposal for each segment, explaining which segment would benefit and why, and identify a potential unintended consequence for the airline's overall profitability.

Question 14. (Teachy AI) A newly established e-commerce startup, 'Digital Bazaar', recorded the following transactions in its first month of operations: Owners contributed ₹10,00,000 cash; Purchased inventory on credit for ₹3,00,000; Sold goods for ₹4,50,000, which cost ₹2,00,000 (all sales were on credit); Paid rent ₹50,000 in cash; Received ₹2,00,000 from customers; Paid suppliers ₹1,00,000. Prepare the initial Balance Sheet for Digital Bazaar at the end of the first month, reflecting these transactions. You do not need to prepare an income statement.

Question 15. (Teachy AI) The management of 'Evergreen Enterprises' is evaluating its financial performance. For the current year, their Gross Profit Margin was 30% and Net Profit Margin was 10%. Sales revenue amounted to ₹20,00,000. The opening inventory was ₹1,50,000 and closing inventory was ₹2,50,000. Calculate the Cost of Goods Sold and the Inventory Turnover Ratio for Evergreen Enterprises. Explain what these figures indicate about the company's operational efficiency within the context of Accounting and Financial Statements.

Question 16. (Teachy AI) Evaluate the financial health of 'Indira Textiles' based on the following selected figures from their Balance Sheet and Income Statement for the year ended March 31, 2023, by calculating their Debt-to-Equity Ratio and Interest Coverage Ratio. Total Debt: ₹15,00,000; Shareholder’s Funds: ₹25,00,000; Earnings Before Interest and Tax (EBIT): ₹8,00,000; Interest Expense: ₹1,50,000. Justify the company's long-term solvency based on these calculated ratios.

Question 17. (Teachy AI) A manufacturing company in India produces two products: essential medicines and luxury cars. The company's management is considering increasing the price of both products by 10% to boost revenue. Critically evaluate, using the concept of Price Elasticity of Demand (PED) from Economics, how this decision would likely impact the total revenue for each product, and justify why the impact would differ significantly, considering typical market conditions.

Question 18. (Teachy AI) Evaluate the implications of a significant increase in the price of petrol on the demand for electric vehicles (EVs) and two-wheelers in major Indian cities. Propose how this shift might influence investment decisions by automotive manufacturers and the government's policy response within the framework of supply and demand.

Question 19. (Teachy AI) Analyze how a government-imposed price ceiling set below the equilibrium price for essential medicines might disrupt market efficiency and lead to unintended consequences for both consumers and producers in the Indian pharmaceutical sector. Justify your reasoning using economic principles of supply and demand.

Question 20. (Teachy AI) Critique the argument that increasing the minimum wage always benefits low-income workers without any negative consequences for the overall economy, applying principles of supply and demand in the labour market. Justify your answer by considering both theoretical and practical aspects.

 

 

Answer Key:

 

Question 1. C - The Acid-Test Ratio (Quick Ratio) is calculated as (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities.

Quick Assets = Current Assets - Inventory - Prepaid Expenses
Quick Assets = ₹8,00,000 - ₹2,50,000 - ₹50,000 = ₹5,00,000

Acid-Test Ratio = Quick Assets / Current Liabilities
Acid-Test Ratio = ₹5,00,000 / ₹5,00,000 = 1:1

The correct answer is 1:1.

Question 2. D - Net Profit before tax = ₹8,00,000
Add: Non-cash expenses (Depreciation + Amortisation) = ₹50,000 + ₹10,000 = ₹60,000
Operating Profit before Working Capital Changes = 8,00,000 + 60,000 = ₹8,60,000

Adjustments for Working Capital Changes:
Increase in Inventory (current asset, cash outflow) = -₹75,000
Decrease in Prepaid Expenses (current asset, cash inflow) = +₹20,000
Increase in Accrued Expenses (current liability, cash inflow) = +₹15,000
Decrease in Income Received in Advance (current liability, cash outflow) = -₹10,000

Net adjustment for working capital = -75,000 + 20,000 + 15,000 - 10,000 = -₹50,000

Cash Flow from Operating Activities (after WC changes) = 8,60,000 - 50,000 = ₹8,10,000.

Question 3. E - Net Profit = ₹5,00,000
Add: Depreciation (non-cash expense) = ₹1,50,000
Less: Gain on sale of asset (non-operating income) = ₹80,000
Operating Profit before Working Capital Changes = 5,00,000 + 1,50,000 - 80,000 = ₹5,70,000

Adjustments for Working Capital Changes:
Decrease in Trade Payables (cash outflow) = ₹30,000
Increase in Trade Receivables (cash outflow) = ₹60,000

Cash Flow from Operating Activities = 5,70,000 - 30,000 - 60,000 = ₹4,80,000

The correct answer is ₹4,80,000.

Question 4. D - First, calculate the percentage change in quantity demanded: ((750,000 - 500,000) / 500,000)  100 = (250,000 / 500,000)  100 = 50%.
Next, calculate the percentage change in price: ((149 - 199) / 199)  100 = (-50 / 199)  100 ≈ -25.13%.
Price Elasticity of Demand (PED) = 50% / -25.13% ≈ -1.99. Since |PED| > 1, the demand is elastic.
Original Revenue = 199 * 500,000 = ₹99,500,000.
New Revenue = 149 * 750,000 = ₹111,750,000.
Since the price decreased and total revenue increased, this confirms that demand is elastic. Therefore, the price reduction effectively boosted CineScape's total revenue, indicating elastic demand.

Question 5. B - First, calculate the own price elasticity of demand for MetroRide: (% Change in Quantity Demanded for MetroRide) / (% Change in Price of MetroRide) = -20% / 30% = -0.67. Since |-0.67| < 1, the demand for MetroRide during peak hours is inelastic. This means a 30% price increase led to a proportionally smaller 20% decrease in quantity demanded, suggesting that despite competition, some consumers still find MetroRide a necessity during peak hours or perceive it as offering superior service.
Next, calculate the cross-price elasticity of demand between CityCabs and MetroRide: (% Change in Quantity Demanded for CityCabs) / (% Change in Price of MetroRide) = 15% / 30% = 0.5. Since the cross-price elasticity is positive, MetroRide and CityCabs are substitute goods, meaning an increase in MetroRide's price leads to an increase in demand for CityCabs. However, the value of 0.5 indicates they are relatively weak substitutes in this specific scenario, as a 30% price hike in MetroRide only results in a 15% increase for CityCabs.

Question 6. D - First, calculate the original cost of machinery disposed of:
Book value of machinery sold = Cost - Accumulated Depreciation = ₹3,00,000 - ₹1,00,000 = ₹2,00,000
Loss on sale = Book value - Sale proceeds = ₹2,00,000 - ₹1,50,000 = ₹50,000 (This loss will be adjusted in operating activities, not directly for purchase).

To find purchases, we use a Machinery Account (at cost) or a T-account approach:
Opening Balance of Machinery (cost) = ₹10,00,000
Machinery sold (cost) = ₹3,00,000
Closing Balance of Machinery (cost) = ₹12,00,000

Machinery Account (Cost):
Debit side (Increases): Opening Balance + Purchases
Credit side (Decreases): Machinery Sold + Closing Balance (if no other disposals)

Alternatively, a simpler formula:
Purchases = Closing Balance + Cost of machinery sold - Opening Balance
Purchases = ₹12,00,000 + ₹3,00,000 - ₹10,00,000 = ₹5,00,000

Alternatively, consider the T-account for Machinery (at cost):
Dr.                        Machinery Account (at cost)                Cr.
To Balance b/d         10,00,000     By Bank (Sale)           3,00,000
To Bank (Purchases) ?                By Balance c/d          12,00,000

Total Credit = 3,00,000 + 12,00,000 = 15,00,000
Purchases = 15,00,000 - 10,00,000 = 5,00,000

The amount of machinery purchased is ₹5,00,000.

Question 7. C - First, calculate the short-run price elasticity of demand (PED) from the given data. % Change in Quantity = (90-100)/100 = -10%. % Change in Price = (55-50)/50 = 10%. Short-run PED = -10%/10% = -1.0.
Now, we are given the long-run PED is -1.2. We need to find the % change in quantity demanded in the long run for the same price change. Long-run PED = (% Change in Quantity Demanded in Long Run) / (% Change in Price).
So, -1.2 = (% Change in Quantity Demanded in Long Run) / (10%).
% Change in Quantity Demanded in Long Run = -1.2 * 10% = -12%.
Initial quantity demanded = 100 million litres. A -12% change means a reduction of 12% of 100 million = 12 million litres.
Therefore, the long-run quantity demanded would be 100 million - 12 million = 88 million litres.

Question 8. D - The government initiative promoting exports increases overall demand for traditional handloom sarees, including the portion that can be sold domestically or internationally (effectively an increase in demand for Indian handloom sarees, which could lead to fewer available for domestic consumption at previous prices if exports are prioritized). However, the influx of cheaper synthetic fabric alternatives reduces domestic demand for traditional handloom sarees, as consumers switch to substitutes. These two effects on demand are contradictory. If the export promotion leads to higher prices internationally or reduced domestic availability, it could effectively increase domestic price pressure. The key here is the 'domestic market' impact. Increased foreign demand would pull supply away from the domestic market, thus reducing the domestic supply (shifting supply left) and pushing up domestic prices. The cheaper substitutes flooding the domestic market would decrease domestic demand (shifting demand left). Both a decrease in domestic supply and a decrease in domestic demand lead to an indeterminate effect on equilibrium price (price could go up or down). However, both effects unambiguously lead to a decrease in equilibrium quantity available in the domestic market, as some sarees are exported and domestic consumers switch to substitutes.

Question 9. E - The own price elasticity of demand (PED) for the flagship model is calculated as (% change in quantity demanded) / (% change in price) = (-15%) / (10%) = -1.5. Since the absolute value of PED (1.5) is greater than 1, the demand is elastic. For an elastic demand, to maximize total revenue, the company should decrease the price. A price decrease will lead to a proportionally larger increase in quantity demanded, thereby increasing total revenue. The cross-price elasticity of demand with the competing brand suggests they are substitutes, reinforcing the idea that a price increase on the flagship model hurts its sales while benefiting competitors. Therefore, a price reduction is the optimal strategy for revenue maximization.

Question 10. A - The innovative irrigation technology reduces cultivation costs, which leads to an increase in the supply of paddy (supply curve shifts right). The national awareness campaign against rice consumption, due to health concerns, reduces consumer preference, leading to a decrease in the demand for paddy (demand curve shifts left). When supply increases and demand decreases, the equilibrium price will unambiguously decrease. However, the effect on equilibrium quantity is indeterminate; it depends on the relative magnitudes of the supply increase and the demand decrease. If the supply increase is larger than the demand decrease, quantity might increase. If the demand decrease is larger than the supply increase, quantity might decrease. If they are equal, quantity might remain unchanged.

Question 11. B - The surge in raw material prices increases production costs, leading to a decrease in supply (supply curve shifts left). Simultaneously, the boost in consumer preference for the specific model increases demand (demand curve shifts right). When supply decreases and demand increases, the equilibrium price will unambiguously increase. However, the effect on equilibrium quantity is indeterminate; it depends on the relative magnitudes of the supply decrease and the demand increase. If the demand increase is larger than the supply decrease, quantity might increase. If the supply decrease is larger than the demand increase, quantity might decrease. If they are equal, quantity might remain unchanged. Therefore, the price definitely rises, but the quantity's change is uncertain.

Question 12. B - The introduction of GST on luxury cars increases their effective price for consumers, leading to a decrease in demand (or a leftward shift of the demand curve) if the tax burden falls on consumers, and also decreases supply as producers face higher costs (or a leftward shift of the supply curve if the tax burden falls on producers, or both). The significant decrease in average household income, for a luxury good (which is a normal good), will further reduce purchasing power, leading to another decrease in demand (leftward shift of the demand curve). Both factors unambiguously lead to a decrease in demand for luxury cars. The GST also acts as a cost to producers or a price increase for consumers, further impacting the market negatively. Therefore, the equilibrium quantity will definitely decrease. The effect on equilibrium price is indeterminate; it depends on the relative magnitudes of the decrease in demand and the decrease in supply. If the demand fall is stronger than the supply fall, price might fall. If the supply fall is stronger, price might rise.

Question 13. For the economy class tickets, the price elasticity of demand (PED) is -0.8. Since the absolute value of PED (0.8) is less than 1, demand is inelastic. For an inelastic demand, a price reduction will lead to a proportionally smaller increase in quantity demanded, resulting in a decrease in total revenue. Therefore, reducing prices for economy class would not achieve the goal of higher total revenue; it would, in fact, reduce it.

For the business class tickets, the PED is -1.5. Since the absolute value of PED (1.5) is greater than 1, demand is elastic. For an elastic demand, a price reduction will lead to a proportionally larger increase in quantity demanded, resulting in an increase in total revenue. Thus, reducing prices for business class would likely lead to higher total revenue for that segment.

Critically assessing the CEO's proposal: The CEO's proposal to reduce prices for both segments to increase total revenue is flawed. It would be beneficial for the business class segment but detrimental for the economy class segment.

An unintended consequence could be 'cannibalization'. If the price reduction in business class makes it significantly more affordable, some passengers who would have otherwise purchased economy class tickets (even with a price reduction) might now opt for the relatively cheaper business class. This could lead to a decrease in economy class revenue beyond what the inelastic demand suggests, and potentially reduce the overall profitability if the margins on business class are not sufficiently high to offset the lost revenue from economy class and the lower average revenue per business class seat.

Question 14. Digital Bazaar - Balance Sheet (as at end of first month)

Assets:

·        Cash:

·        Initial contribution: +₹10,00,000

·        Paid rent: -₹50,000

·        Received from customers: +₹2,00,000

·        Paid suppliers: -₹1,00,000

·        Net Cash = ₹10,50,000

·        Accounts Receivable (from sales on credit):

·        Total Sales on credit: ₹4,50,000

·        Received from customers: -₹2,00,000

·        Net Accounts Receivable = ₹2,50,000

·        Inventory:

·        Purchased on credit: ₹3,00,000

·        Cost of goods sold: -₹2,00,000

·        Net Inventory = ₹1,00,000

Total Assets = Cash + Accounts Receivable + Inventory
= ₹10,50,000 + ₹2,50,000 + ₹1,00,000 = ₹14,00,000

Liabilities:

·        Accounts Payable (for inventory purchased on credit):

·        Initial purchase: ₹3,00,000

·        Paid suppliers: -₹1,00,000

·        Net Accounts Payable = ₹2,00,000

Owner's Equity:

·        Capital (Initial Contribution): ₹10,00,000

·        Retained Earnings (Profit):

·        Sales Revenue: ₹4,50,000

·        Cost of Goods Sold: -₹2,00,000

·        Rent Expense: -₹50,000

·        Net Profit = ₹2,00,000

·        Total Owner's Equity = Capital + Retained Earnings
= ₹10,00,000 + ₹2,00,000 = ₹12,00,000

Total Liabilities & Owner's Equity = Accounts Payable + Total Owner's Equity
= ₹2,00,000 + ₹12,00,000 = ₹14,00,000

(The Balance Sheet balances, confirming the calculations.)

Question 15.

1.         Calculate Cost of Goods Sold (COGS):
Gross Profit Margin = (Gross Profit / Sales Revenue) * 100
30% = (Gross Profit / ₹20,00,000) * 100
Gross Profit = 0.30 * ₹20,00,000 = ₹6,00,000

Cost of Goods Sold = Sales Revenue - Gross Profit
COGS = ₹20,00,000 - ₹6,00,000 = ₹14,00,000

 

2.         Calculate Average Inventory:
Average Inventory = (Opening Inventory + Closing Inventory) / 2
Average Inventory = (₹1,50,000 + ₹2,50,000) / 2 = ₹4,00,000 / 2 = ₹2,00,000

 

3.         Calculate Inventory Turnover Ratio:
Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Inventory Turnover Ratio = ₹14,00,000 / ₹2,00,000 = 7 times

Explanation of Operational Efficiency:

·        Cost of Goods Sold (₹14,00,000): This figure represents the direct costs attributable to the production of the goods sold by Evergreen Enterprises. It is a critical component in determining the company's gross profit and overall profitability. A well-managed COGS indicates efficient purchasing and production processes.

·        Inventory Turnover Ratio (7 times): This ratio measures how many times inventory is sold and replaced over a period. A ratio of 7 times suggests that Evergreen Enterprises is selling and replenishing its entire stock an average of 7 times during the year. This is generally a healthy indicator of operational efficiency. A higher turnover typically implies effective inventory management, good sales performance, and minimal risk of obsolescence or holding costs. Conversely, a very low turnover might suggest slow-moving inventory or overstocking, while an excessively high turnover might indicate insufficient stock to meet demand, potentially leading to lost sales. For Evergreen Enterprises, a turnover of 7 times points to efficient management of its stock, converting inventory into sales at a reasonable pace.

Question 16.

4.         Debt-to-Equity Ratio:
Debt-to-Equity Ratio = Total Debt / Shareholder’s Funds
= ₹15,00,000 / ₹25,00,000 = 0.6:1
Interpretation: A ratio of 0.6:1 indicates that for every rupee of equity, the company has ₹0.60 of debt. This is generally considered a healthy ratio, as it suggests the company relies more on owner's funds than borrowed capital, implying lower financial risk.

 

5.         Interest Coverage Ratio:
Interest Coverage Ratio = Earnings Before Interest and Tax (EBIT) / Interest Expense
= ₹8,00,000 / ₹1,50,000 = 5.33 times
Interpretation: An interest coverage ratio of 5.33 times means the company's operating profit is 5.33 times higher than its interest obligations. This is a strong ratio, indicating that Indira Textiles can comfortably meet its interest payments, even if earnings decline. A ratio above 1.5 to 2 times is generally considered good.

Justification of Long-Term Solvency:
Based on both the Debt-to-Equity Ratio (0.6:1) and the Interest Coverage Ratio (5.33 times), Indira Textiles demonstrates strong long-term solvency. The low debt-to-equity ratio suggests a conservative capital structure with less reliance on external borrowings, reducing the burden of fixed payments. The high interest coverage ratio confirms the company's strong ability to generate sufficient operating profits to cover its interest expenses, minimising the risk of default on debt obligations. This combination indicates a financially stable company with a robust capacity to sustain its operations and growth in the long run.

Question 17. For essential medicines, the demand is typically highly inelastic. This is because medicines are necessities; consumers will purchase them regardless of minor price changes as there are few or no close substitutes for specific life-saving drugs. A 10% price increase would lead to a proportionally much smaller percentage decrease in quantity demanded (or negligible change). Consequently, for essential medicines, an increase in price would likely lead to an increase in total revenue. \n
Conversely, for luxury cars, the demand is typically highly elastic. Luxury items are often considered wants rather than needs, and consumers are very sensitive to price changes. There are many substitutes (other luxury brands, or delaying purchase). A 10% price increase would lead to a proportionally much larger percentage decrease in quantity demanded. Therefore, for luxury cars, an increase in price would likely lead to a decrease in total revenue. \n
In summary, the impact differs significantly because of the fundamental difference in the nature of demand for necessities versus luxuries, which determines their respective price elasticities. Essential medicines have inelastic demand, making a price hike revenue-positive, while luxury cars have elastic demand, making a price hike revenue-negative.

Question 18. A significant increase in petrol prices makes petrol-powered vehicles more expensive to operate. This makes electric vehicles (EVs) and two-wheelers (especially electric ones or those with better mileage) relatively more attractive. From a demand perspective, petrol and EVs are substitutes; therefore, a rise in petrol price would lead to an increase in the demand for EVs (demand curve for EVs shifts right). Similarly, for two-wheelers, if they offer better fuel efficiency or have electric variants, their demand might also increase (demand curve for two-wheelers shifts right).

Automotive manufacturers, observing this rising demand, would likely respond by increasing investment in EV research, development, and production capacity. This would lead to an increase in the supply of EVs over time (supply curve for EVs shifts right). For traditional two-wheelers, they might focus on more fuel-efficient models.

The government's policy response could include further subsidies or tax incentives for EV purchasers, investment in charging infrastructure, and policies promoting battery manufacturing (which would reduce production costs for EVs, shifting their supply curve further right). These actions aim to accelerate the shift towards EVs, addressing both environmental concerns and energy security.

Question 19. A price ceiling set below the equilibrium price creates a market shortage because the quantity demanded at this lower price will exceed the quantity supplied.

For consumers, while the immediate beneficiaries are those who can procure the medicine at the lower price, many will face scarcity, leading to long queues, black markets, or allocation based on non-price mechanisms. The consumer surplus for those who obtain the medicine might increase, but overall societal welfare could decrease due to unmet demand and inefficient distribution.

For producers, the lower price reduces their incentive to produce, potentially leading to a decrease in supply, reduced investment in research and development for new medicines, and even withdrawal from the market for certain drugs if production becomes unprofitable. This can exacerbate the shortage further and compromise the long-term availability and quality of essential medicines.

Ultimately, market efficiency is disrupted as the price mechanism, which normally allocates resources efficiently and signals demand/supply conditions, is overridden. This results in deadweight loss, representing the loss of total surplus (consumer + producer surplus) to society.

Question 20. The argument that increasing the minimum wage always benefits low-income workers without negative consequences needs critical evaluation through the lens of supply and demand in the labour market.

From a theoretical standpoint, if the minimum wage is set above the equilibrium wage, it acts as a price floor. This creates a surplus of labour, meaning the quantity of labour supplied (workers willing to work) exceeds the quantity of labour demanded (jobs available) at that wage. Those who retain their jobs and receive the higher wage do benefit. However, the unintended consequence is unemployment for some low-skilled workers who become too expensive to hire, leading to job losses or reduced hiring, especially in industries with tight margins or where automation is a viable alternative.

Practically, the impact can vary. Businesses, particularly small and medium enterprises (SMEs), might absorb some cost increases through reduced profits, higher prices for consumers, or increased efficiency. However, significant increases might force them to reduce staff, cut working hours, or slow down expansion. While individual workers earning the minimum wage would see an increase in income, the overall impact on the low-income segment is ambiguous if some workers lose their jobs or face reduced employment opportunities. The net benefit to the economy depends on the elasticity of labour demand and supply, and the extent to which employers can pass on costs.