CA Foundation Business Economics Jan 2026 Paper Review

CA Foundation Business Economics paper presented an easy to average difficulty level for well-prepared students, with potential for scores over 90 marks. Crucially, the paper contained no errors or mistakes, thus ruling out grace marks. This analysis offers a comprehensive solution key to enable students to verify their responses, resolve doubts, and accurately estimate their performance.

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CA Foundation Business Economics Paper Review: Question-by-Question Analysis and Solutions

The following section provides a comprehensive breakdown of core economic concepts, ranging from market structures to production factors. By analyzing these specific solutions, students can better understand the underlying logic of market behavior and the financial principles that dictate firm-level decision-making. These insights are designed to clarify common misconceptions in micro and macroeconomics.

1. Cross-Price Elasticity: If cross-price elasticity is zero, goods are totally unrelated.

2. Definition of an Entrepreneur: An entrepreneur bears the risks, innovates, and organizes all other factors of production.

3. Circulating Capital: Characterized by its one-time use in production.

4. Shift in Demand Curve: A rise in the price of complementary goods causes a leftward shift in the demand curve (decrease in demand).

5. Opportunity Cost: It is not recorded in the books of accounts.

6. Long-Run Equilibrium in Perfect Competition: Firms earn only normal profit, not supernormal profit.

7. Foreign Currency Contracts: Contracts for future currency exchange are made in the forward market or futures market.

8. Cost, Revenue, and Profit (Monopoly): If Average Total Cost (ATC) > Average Revenue (AR), the firm incurs a loss.

9. Cross Elasticity in Monopoly: Cross-price elasticity of demand for a monopolist's product is zero or very small.

10. Components of Operating Surplus: Includes rent, interest, and profit.

11. Numerical: National Income Calculation (GDP at FC):

• NDP at FC = Compensation of Employees + Operating Surplus + Mixed Income = 5,000.

• GDP at FC = NDP at FC + Depreciation = 5,000 + 300 = 5,300.

12. Numerical: National Income Calculation (GDP at MP):

• GDP at MP = GDP at FC + Net Indirect Taxes (NIT) = 5,300 + 400 = 5,700.

13. Numerical: Real GDP Calculation:

• Real GDP = (Nominal GDP / GDP Deflator) * 100

• Real GDP = (450 / 120) * 100 = 375.

14. Tobin's Liquidity Preference: Establishes a relationship between the rate of interest and the demand for money.

15. Credit/Money Multiplier:

• Formula: 1 / Required Reserve Ratio (RRR)

• RRR = 8% (0.08) => Multiplier = 1 / 0.08 = 12.5.

• RRR = 12% (0.12) => Multiplier = 1 / 0.12 = 8.33.

16. Fisher's Equation (Expanded Form): The expanded form is PT = MV + M'V'.

17. Investment Opportunities and Demand for Money: Attractive investment opportunities drive speculative demand for money.

18. Monetary Policy Transmission Mechanism: Open Market Operations (OMO) is a tool, not a transmission channel.

19. Brownfield Investment: Investment made in existing infrastructure.

20. FDI in India: The service sector is the largest recipient of Foreign Direct Investment (FDI) in India.

21. Reforms Not Started in 1980s: Currency demonetization was not a reform of the 1980s.

22. Electric Vehicle Information Portal: The E-Amrit portal provides information on electric vehicles.

23. Make in India 2.0: Focuses on 27 sectors.

24. Core Sectors in IIP: Coal is one of the eight core sectors.

25. Formula for Point Elasticity: (P/Q) * (dQ/dP).

26. Intersecting Indifference Curves: Standard convex indifference curves are used for distinct goods. Perfect substitutes have straight lines, perfect complements have L-shaped curves.

27. Total Revenue and Elasticity: If an increase in price leaves total revenue constant, price elasticity of demand is unitary elastic (e=1).

28. Mid-Point Method Formula: [(Q2-Q1)/(Q1+Q2)] / [(P2-P1)/(P1+P2)].

29. First-Degree Price Discrimination: Targets each individual consumer to extract their entire consumer surplus.

30. Kinked Demand Curve (Oligopoly): If one firm raises its price, rival firms will not follow.

31. Relationship between MR and Elasticity: If elasticity (e) = 1, then MR = 0.

32. Numerical: Calculating MR in Two Markets:

• Market A (Price = 60, e = 5): MR_A = 60 × (5-1)/5 = 48.

• Market B (Price = 60, e = 6): MR_B = 60 × (6-1)/6 = 50.

33. Monopoly and Monopolistic Competition: Both exhibit Price higher than Marginal Cost (P > MC).

34. Exclusions from National Income: Pensions for retired workers are transfer payments and are not included.

35. Numerical: Trade Multiplier:

• Formula: k = 1 / (1 - b + m)

• k = 1 / (1 - 0.8 + 0.04) = 1 / 0.24 = 4.167.

36. NFI and National vs. Domestic Income: If Net Factor Income from Abroad (NFI) is negative, National Income is smaller than Domestic Income.

37. National Income and Aggregate Supply: National Income (disposable) is equivalent to Aggregate Supply and is either consumed or saved.

38. Numerical: Equilibrium Consumption:

• Equilibrium Income (Y): S = I => -20 + 0.5Y = 100 => 0.5Y = 120 => Y = 240.

• Consumption (C): C = Y - S(at equilibrium) = 240 - 100 = 140.

39. Net Divisible Pool: Portion of central government's gross tax revenue distributed between Centre and States.

40. Numerical: Budgetary Deficit: Total Expenditure - Total Receipts = 6,000.

41. Numerical: Revenue Deficit: Revenue Expenditure - Revenue Receipts = 5,000.

42. Laissez-Faire Approach: Characteristic of a capitalist economy with minimal government intervention.

43. Industries Reserved for Public Sector: Railways and Atomic Energy.

44. Financial Sector Reforms: Accounting, income recognition, and bad debt provisioning fall under Monetary and Financial Sector Reforms.

45. India's Unique Growth Trajectory: Transitioned directly from primary sector to tertiary sector.

46. Tax Not Subsumed in GST: Income Tax is a direct tax, unlike GST.

47. Crops under MSP: Minimum Support Price (MSP) is provided for 23 crops.

48. Numerical: Price Elasticity of Demand (Quantity):

• e = 1, % Change in Price = 20%. % Change in Quantity = 20%.

• 20 = (120 / Q) * 100 => Original Q = 600.

• New Quantity = 600 + 120 = 720.

49. Demand for Complementary Goods: There is a negative (inverse) relationship between the price of one complementary good and the demand for the other.

50. Characteristics of Socialist Economy: Bureaucracy and red-tapism are common demerits.

51. Consumer Surplus: Difference between what a consumer is willing to pay and actually pays.

52. Methods to Calculate Price Elasticity of Supply: Point method, arc method, and percentage method are all valid.

53. Role of WTO: Maintaining secrecy is not a function of the WTO.

54. Protectionism: Policies reducing imports to protect domestic industries.

55. Vehicle Currency: The US Dollar is considered the primary vehicle currency.

56. Countervailing Duties (CVDs): Imposed to neutralize the effect of subsidies from foreign governments.

57. FDI Type: Conglomerate FDI: Investment in a business unrelated to existing business at home.

58. Isocost Line: Shows different combinations of two inputs a firm can purchase with a given expenditure.

59. Characteristic of Oligopoly: Interdependence between firms.

60. Numerical: Calculating Marginal Revenue (MR):

• MR = ΔTR / ΔQ = (120 - 100) / (70 - 60) = 20 / 10 = 2.

61. Supply of Land: Perfectly inelastic, meaning quantity is fixed and unaffected by demand changes.

62. Factor Market: Market where firms buy inputs and resources for production.

63. Contraction Phase of Business Cycle: An expansion of bank credit is NOT a feature (it occurs in expansion).

64. Exclusions from National Income: Interest paid on loans for consumption purposes is a transfer payment and not included.

65. Lagging Indicators: Change in stock prices is generally a leading or coincident indicator, not lagging.

66. Numerical: Gross Value Added at Market Price (GVA_MP):

• GVA_MP = Value of Output - Intermediate Consumption

• Value of Output = Sales + Change in Stock = Sales + (Closing Stock - Opening Stock)

• Resulting answer: 550.

67. Macroeconomic Goals: Universal education for all is a social goal, not a primary macroeconomic goal (which are growth, price stability, employment).

68. Stagflation: Simultaneous occurrence of high inflation and high unemployment.

69. Nature of GST: A consumption-based tax.

70. Deadweight Loss: Arises from interventions (e.g., high taxes) that discourage production or work, leading to overall welfare loss.

71. Fiscal Policy Statements: Both increasing spending during recession and using a deficit budget to stimulate growth are correct.

72. Non-Tariff Measures (Technical): Checking the production process is a technical non-tariff barrier.

73. Numerical: Nominal Exchange Rate: Using the ICAI module formula [RER = Nominal Rate × (Domestic Price Index / Foreign Price Index)], the nominal exchange rate is 12.5.

74. Limitation of International Trade: Underprivileged countries can be more vulnerable, not less, to exploitation.

75. Tariff Rate Quota: Combines features of both a quota and a tariff.

76. Scope of Macroeconomics: The general price level is a subject of macroeconomics.

77. Property Rights in Capitalism: Property rights are paramount in capitalist ideology.

78. Normative Statements: Often contain words like "should" or "ought to," indicating value judgments.

79. Matching Economic Systems:

• Capitalist Economy: High operative efficiency.

• Socialist Economy: Command Economy.

• Mixed Economy: Encourages enterprise with government intervention.

80. Numerical: AVC at 4 units:

• TFC = TC at zero output = 270.

• TVC = TC (4 units) - TFC = 610 - 270 = 340.

• AVC = TVC / Q = 340 / 4 = 85.

81. Numerical: AFC at 3 units:

• AFC = TFC / Q = 270 / 3 = 90.

82. Returns to Scale: Applies when all inputs are changed in the same proportion (long run).

83. Law of Variable Proportions: In Stage II, TP increases at a diminishing rate, it does not decrease.

84. Economies of Scale: Supply of skilled labor is an example of an external economy of scale.

85. Market Equilibrium Shift: If demand decreases and supply increases simultaneously, equilibrium price will definitively fall, while equilibrium quantity is indeterminate.

86. Downswing Phase: Also known as contraction in the business cycle.

87. Slope of MR and AR Curves: The slope of the Marginal Revenue (MR) curve is twice the slope of the Average Revenue (AR) curve for a linear demand curve.

88. Stagnation of Demand: Occurs during the peak phase of the business cycle.

89. Pigou's Theory of Business Cycles: Attributes cycles to waves of pessimism and optimism (expectations).

90. Leakages from Circular Flow: Profits are not leakages; taxes, savings, and imports are.

91. "Economic Bads" in National Accounting: Traffic congestion is an "economic bad" and a GDP limitation.

92. Exclusions from Government Final Consumption Expenditure: Pensions are transfer payments and are not included.

93. Impact of Increased Imports on Equilibrium Income: Increased imports decrease aggregate demand, leading to a fall in equilibrium income.

94. Objective of Fiscal Policy: Promoting exports and imports is primarily a trade policy objective, not a primary fiscal policy objective.

95. Inflation Targeting in India: Framework established by Central Government and RBI.

96. Open Market Operations (OMO) to Increase Money Supply: RBI will purchase government securities from the public.

97. Determinants of Money Multiplier: Larger when the currency deposit ratio is smaller.

98. Moral Suasion: Central bank uses persuasion or advice to influence commercial banks.

99. Baumol-Tobin Model and Demand for Money: Shows a negative relationship between interest rate and money holding.