Actuarial Science CT-7 Business Economics Quick Review

Planning to write Actuarial Science CT-7 this diet or having an interview soon? Don’t have time to go through the whole study material or that you don’t want to go through the whole study material. Don’t worry here is the solution for you. I am putting some important questions related to the course that could be asked in an interview and/or in examinations.

Before that, please note CT7 question paper contains both objective and subjective type questions. So, I would suggest you go through each definition. I will try my best to cover as much as I can.

Let’s start with this. Please find the questions below:

Q: Define the problem of Scarcity?
Ans: The central problem facing all individuals and societies is one of scarcity. Scarcity is the excess of human wants over what can be produced to fulfill those wants.

Q: Define the terms consumption and production?
Ans: Consumption is the act of using goods and services to satisfy wants. This will normally involve purchasing of goods and services.

Production is the transformation of inputs into outputs by firms in order to earn the profit.

Q: What are the factors of productions used by firms to produce output?
Ans: The main factors of production used by firms are as follows:

  • Labour: All forms of human input (both mental and physical) into production.
  • Land and raw materials: All natural occurring resources, eg oil, cotton.
  • Captial: Manufactured resources, eg factories, computers.

Q: Define the terms microeconomics and macroeconomics?
Ans: Microeconomics is concerned with individual parts of the economy and the way they interact to determine the production and distribution of goods and services.

Macroeconomics is concerned with the economy as a whole and studies economic aggregates, such as national income, employment and the general level of prices.

Q: Define rational choice and rational decision making?
Ans: The Rational choice is one that involves weighing up the benefits of an activity against its opportunity cost.

Rational decision making involves weighing up the marginal benefit of an activity and marginal cost.

Q: Define opportunity cost?
Ans: The Opportunity cost of an activity is the cost of activity measured in terms of the best alternative forgone.

Q: Define marginal cost and marginal benefit?
Ans: Marginal cost for a firm is the additional cost of producing one more unit of output. For an individual, it is the additional cost of a little bit more of a particular activity.

Marginal benefit for a firm is the additional benefit of producing one more unit of output. For an individual, it is the additional benefit of a little bit more of a particular activity.

Q: State the law of demand?
Ans: The law of demand states that the quantity of a good demanded per period of time will fall as the prices rise and rise as the price falls, other things being equal. This reflects the income and substitution effect.

  • Income effect: The effect of a change in price on quantity demanded arising from the consumer becoming better or worse off as a result of price change.
  • Substitution effect:  The effect of a change in price on quantity demanded arising from the consumer switching to or from alternative (substitute) products.

Q: Give the definition of demand curve?
Ans: A demand curve is a graph that shows the relationship between the price of a good and the quantity of the good demanded over a given time period. Law of demand suggests that it slopes downwards.

Q: What is the nature of different kind of goods?
Ans: The natures of different kind of goods are as follows:

  • Substitute goods: These are the goods which consumer considers to be alternatives to each other. As the price of one increase, the demand for other rises.
  • Complementary goods: These are the pair of goods that are consumed together. As the price of one goes up, the demand for both the goods will fall.
  • Normal goods: These are the goods for which demand rises as people’s incomes rise. Most goods are normal goods.
  • Inferior goods: These are the goods for which demand falls as people’s incomes rise.

Q: Give the definition of supply curve?
Ans: A supply curve is a graph that shows the relationship between the price of a good and the quantity of the good supplied over a given time period. It typically slopes upwards.

Q: When does a market clear?
Ans: A market clears when supply matches demand to leave no shortage or surplus. The price at which demand equals supply is the equilibrium price or market clearing price.

Q: Define the terms maximum price and minimum price?
Ans: Maximum price is a price ceiling set by the government or some other agency. The price is not allowed to rise above this level.

Minimum price is a price floor set by the government or some other agency. The price is not allowed to fall below this level.

Q: Define the price elasticity of demand?
Ans: The price elasticity of demand (PED) measures the sensitivity of quantity demanded to a change in price. Percentage changes are used so that we can make valid comparisons between the changes in demand for different good and services.

PED is typically negative as an increase (decrease) in price leads to a fall (rise) in quantity demanded.

Q: What is the difference between risk and uncertainty?
Ans: Risk refers to a situation in which the probabilities of the different possible outcomes are known, but it is not known which outcome will occur.

Uncertainty refers to a situation in which the probabilities of the different possible outcomes are not known.

Q: Define the terms futures & forwards, spot price and future price?
Ans: The terms are as follows:

  • Futures & forwards: These are the agreements to trade a specified quantity of good or asset at a specified price at an agreed date in the future. They enable firms and individual to fix future prices and thereby reduces uncertainty.
  • Spot price: It is the price agreed now to exchange the good or asset now.
  • Future price: it is the price agreed now to exchange good or asset at an agreed future date.

Q: Define total and marginal utility?
Ans: Total Utility is the total satisfaction derived from the consumption of goods within a given time period.

Marginal Utility is the addition to the total satisfaction derived from the consumption of one extra unit of a good within a given time period, assuming that the consumption of other goods is held constant.

Q: What is the principle of diminishing marginal utility?
Ans: According to the principle of diminishing marginal utility the additional utility gained from consuming successive units of good will decrease. In fact, the marginal utility may eventually become zero, or even negative.

Q: What is the adverse selection?
Ans: When information is asymmetric those with particular unobserved characteristics are more likely to enter the market. These people know that they are particularly bad risks and more inclined to take out insurance than those who know that they are good risks. This situation is described as adverse selection. It is sometimes called self-selection and anti-selection.

To reduce the problem of adverse selection companies may try to find out lots of information about policyholders and then can put them in homogeneous groups. This is called screening.

Q: What is the moral hazard?
Ans: Moral hazard describes a situation where, following a deal, there is an increased chance of one party engaging in problematic behavior that will disadvantage the other.

In order to reduce the problem of moral hazard consumer’s behavior should be monitored regularly.

Q: When the insurance contract is said to be feasible?
Ans: An insurance contract is said to be feasible if the minimum premium that the insurer is prepared to charge is less than the maximum amount that a potential policyholder is prepared to pay. This will be the case only if the insurer is less risk averse with respect to the insured event than the policyholder.

Q: Define bygones principle?
Ans: According to bygone principle, when deciding how much of a good to be produced, only variable costs should be considered; sunk costs could be ignored.

Q: Define economies of scale.
Ans: Economies of scale refers to the situation where long-run average costs fall as the scale of production is increased. If all factors are constant, then increasing returns to scale will result in economies of scale.

Q: What are the different types of market structure?
Ans: The different types of market structure are as follows:

  • Perfect competition: A market structure in which there are many firms; where there is freedom of entry to the industry; where all firms produce an identical product; and where all firms are price takers.
  • Monopolistic competition: A market structure where, like perfect competition, there are many firms and freedom of entry into the industry, but where each firm produces a differentiated product and thus has some control over its price.
  • Oligopoly: A market structure where there are few enough firms to enable barriers to be erected against the entry of new firms; where some firms have a relatively high market share and can influence pricing and marketing.
  • Monopoly: A market structure where there is only one firm in the industry.

Q: Explain game theory?
Ans: Game theory is the study of alternative strategies that players may choose to adopt, depending on their assumptions about their rivals’ behavior.

Q: Define nash equilibrium?
Ans: A Nash equilibrium is a position resulting from everyone making their optimal decision based on their assumption of rivals’ behavior. Without collusion, neither firm can improve its payoff given the other firm’s strategy, so there is no incentive for any firm to change its position.

Q: What is the difference between merger and takeover?
Ans: A merger occurs when two firms agree to combine their business operations. A takeover occurs when one firm buys sufficient shares in another firm to take control of that firm.

Q: Explain limit pricing?
Ans: Limit pricing occurs when an existing firm deliberately sets its price below the level that would maximize its profit in the short run ina n attempt to deter new rivals from entering the market.

Q: Define transfer pricing?
Ans: Transfer pricing is the pricing system used by large organizations such as multinationals, where intermediate goods are transferred between the different divisions of the organization.

Q: Define externalities?
Ans: Externalities are spillover or “third-party” effects of a particular activity. Consumers externalities are spillover effects on other people of consumers’ consumption, and production externalities are spillover effects on other people of firms’ production.

Q: Define a public good?
Ans: A public good has two features:

  • Non-rivalry: Consumption by one person does not prevent consumption by other.
  • Non-excludability:  It is impossible or too costly to prevent people who have not paid from consuming the goods and services.

Q: Define the term globalization?
Ans: Globalisation refers to the process of developing increasing political, cultural and economic ties between people all around the world. It has been more rapid to dramatic improvements in transport and communication links.

Q: Explain absolute advantage?
Ans: Country X has an absolute advantage over Country Y in producing a good when Country X can produce a unit of that good using fewer resources than Country Y. This often arises because of the country’s endowment of factors of production.

Q: State the law of comparative advantage?
Ans: The law of comparative advantage states that whenever the opportunity cost of producing a good differs between two countries, each country can gain if it produces and exports those goods for which it faces a lower opportunity cost and imports those goods for which it faces a higher opportunity cost.

Q: Define dumping?
Ans: Dumping occurs when exports are sold at prices below marginal cost, often as a result of a government subsidy.

Q: What do you mean by balance of payments account?
Ans: The balance of payments account is the set of accounts that records the flow of money between a country’s residents and the rest of the world. These flow of money give rise to either a demand for the domestic currency or the supply of domestic currency on the foreign exchange markets.

Q: Define exchange rate and effective exchange rate?
Ans: An exchange rate is a rate at which one currency trades for other on the foreign exchange market.

An effective exchange rate is a weighted average of the exchange rate of a particular currency against all other currencies, where the weights are based on the proportions of transactions between each country.

Q: Define GDP and ways of calculating GDP?
Ans: GDP at market price is the main measure of a country’s output. This is the value of output produced within a country over a 12-month period in terms of the price actually paid.

The three ways of calculating the nation’s GDP are as follows:

  • Product method
  • Income method
  • Expenditure method

Q: Define the term business cycle?
Ans: The economy’s potential output tends to grow quite steadily, but actual output sometimes grows more quickly and at other times more slowly than the trend of potential output. This phenomenon is known as the business cycle or trade cycle.

Q: Define gearing?
Ans: The ratio of debt capital to equity capital is known as gearing.

Q: Explain the term quantitative easing?
Ans: Quantitative easing involves the central bank using electronic money to purchase large quantities of government bonds and other securities in the open market, with the aim of increasing the money supply as the seller of bonds deposit money in the banks and banks may use it for increasing their lending to customers.

This is all from my side. Hope this helps. Thank you for your time.

GOOD LUCK

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