Chartered Accountancy, Institute of Chartered Accountants of Pakistan (Scheme 2025) · Business and Economic Insights
ICAP PRC-3 Economic principles and microeconomics: practice questions with answers
6 free exam-style questions on Economic principles and microeconomics for ICAP PRC-3 Business and Economic Insights. Try each one, then open the answer to read the explanation. Fincora has 36 original questions on this syllabus area.
Question 1
Which of the following is a positive economic statement?
- A Raising the duty on imported phones will reduce the number of phones imported.
- B The government should raise the duty on imported phones to protect local assemblers.
- C It is unfair that imported phones are cheaper than those assembled in Pakistan.
- D Protecting local phone assemblers matters more than keeping phone prices low.
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Answer: A. A positive statement describes what is, was or will be, and can in principle be tested against facts (it may turn out to be false, but it is still positive). A normative statement expresses a value judgement about what ought to be, often signalled by words such as 'should', 'fair' or 'more important'.
Only the prediction that a higher duty will reduce phone imports can be checked against data, so it is the positive statement.
Question 2
A production possibility frontier is normally drawn concave to the origin (bowed outwards). What is the reason for this shape?
- A Resources are equally suited to both goods, so the opportunity cost of each extra unit is constant
- B Consumers value each extra unit of a good less, so its market price falls as output rises
- C Some resources are always unemployed, so the output of both goods can rise without any cost
- D Resources are not equally suited to both goods, so the opportunity cost of each extra unit rises
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Answer: D. The PPF is concave because of increasing opportunity cost. Resources (land, labour, machinery) are specialised and not equally productive in every use. When an economy moves resources into producing more of one good, it first transfers those best suited to it; further increases require resources that are less suited, so each extra unit costs more and more of the other good.
If resources were equally suited to both goods, the opportunity cost would be constant and the frontier would be a straight line.
Question 3
Which of the following would shift an economy's production possibility frontier outwards?
- A A larger and better-trained labour force from population growth and training
- B Re-employment of workers who had lost their jobs during a recession
- C A transfer of workers from farming to manufacturing in response to higher factory wages
- D A rise in the market price of one of the two goods that the economy produces
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Answer: A. The PPF shifts outwards (economic growth) when the economy's capacity to produce rises: more resources (labour, capital, land) or better technology or skills.
- More and better-trained workers increase productive capacity: outward shift.
- Re-employing idle workers moves the economy from a point inside the frontier towards it.
- Switching workers between industries is a movement along the frontier.
- Price changes affect the choice of output mix, not the frontier's position.
Question 4
In a market economy, how is it decided which goods are produced and in what quantities?
- A A central authority sets output targets for each firm in line with the national plan
- B Prices respond to consumer spending, and firms make more of whatever becomes more profitable
- C The government allocates resources to the goods that it judges to be most socially useful
- D Firms produce fixed quantities each year and consumers buy whatever happens to be available
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Answer: B. In a market economy the price mechanism answers the questions of what, how and for whom to produce. When consumers demand more of a good its price rises, production becomes more profitable and firms move resources into it; when demand falls, the price and profits fall and resources move elsewhere. Prices act as signals and incentives, and decisions are decentralised to households and private firms rather than made by a planning authority.
Question 5
In an Islamic economic system, which of the following describes zakat?
- A A voluntary donation a Muslim may give to the poor at any time and in any amount he chooses
- B A compulsory annual levy of 2.5% on qualifying wealth above the nisab held for a lunar year
- C A levy on the produce of agricultural land, charged on each harvest rather than on wealth
- D An interest-free loan given to a person in need and repaid without any addition to it
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Answer: B. Zakat is one of the pillars of Islam and a central redistributive institution of an Islamic economic system. It is an obligatory levy, generally 2.5% a year, on qualifying wealth (such as savings, gold, silver and trading stock) above a minimum threshold, the nisab, held for a full lunar year, and it is paid to specified categories of recipients such as the poor and needy.
It differs from sadaqah (voluntary charity), ushr (a levy on agricultural produce) and qard hasan (an interest-free loan that is repaid).
Question 6
Which of the following would make the supply of glass bangles from a Hyderabad manufacturer more price elastic?
- A Keeping large stocks of bangles and spare furnace capacity
- B Operating every furnace at full capacity, three shifts a day
- C Relying on a special sand that only one distant quarry supplies
- D Needing several months to train each new skilled bangle maker
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Answer: A. Price elasticity of supply (PES) measures how much quantity supplied responds to a change in price. Supply is more elastic when producers can expand output easily and quickly:
- spare capacity and stocks of finished goods;
- easy availability of extra raw materials and labour;
- short production periods and a longer time to adjust;
- ease of switching resources between products.
Full capacity, scarce inputs and long training periods all make supply less elastic.
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