Eco cbse_2012-13_12th_30-03-13

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Series : SKS/1

Roll No.

Code No. 58/1/1Candidates must write the Code onthe title page of the answer-book.

Code number given on the right hand side of the question paper should be written on the title page ofthe answer-book by the candidate.

Please write down the Serial Number of the questions before attempting it.

15 minutes time has been allotted to read this question paper. The question paper will be distributed at10.15 a.m. From 10.15 a.m. to 10.30 a.m., the student will read the question paper only and will notwrite any answer on the answer script during this period.

ECONOMICS

[Time allowed : 3 hours] [Maximum marks : 100]

General Instructions:

1 . All questions are compulsory.

2 . Marks for questions are indicated against each.

3 . Questions numbered 1 to 5 and 17-21 are very short-answer questions carrying 1 mark each. They arerequired to be answered in one sentence each.

4 . Questions numbered 6 to 10 and 22-26 are short-answer questions carrying 3 marks each. Answer tothem should not normally exceed 60 words each.

5 . Questions numbered 11 to 13 and 27-29 are also short-answer questions carrying 4 marks each. Answerto them should not normally exceed 70 words each.

6 . Questions numbered 14 to 16 and 30-32 are long-answer questions carrying 6 marks each. Answer tothem should not normally exceed 100 words each.

7 . Answer should be brief and to the point and the above word limit be adhered to as far as possible.

Studymate Solutions to CBSE Board Examination 2012-2013

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STUDYmate

SECTION-A

1. Give two examples of fixed costs.

Ans. Rent and Interest.

2. Define marginal cost.

Ans. Marginal cost refers to the addition to the total cost when one more unit of output is produced.

3. When is the demand for a good said to be inelastic?

Ans. When a change in the price of a commodity brings about a LESS THAN PROPORTIONATECHANGE in the quantity demanded for it, then the demand is said to be relatively inelasticdemand. The change in quantity demanded is less than the change in price.

4. Give the meaning of market demand.

Ans. Market demand is the total demand of all the buyers in the market which they are ready tobuy at different possible prices of the commodity at a point of time.

5. Under which market form a firm’s marginal revenue is always equal to price?

Ans. Marginal Revenue is always equal to price under perfect competition.

6. Explain the difference between an inferior good and a normal good.

Ans. Normal Goods Inferior Goods

An increase in the money income of a consumer increases the demand for the normal good and a fall in the income reduces the demand for it.

An increase in the income generally leads to fall in demand for an inferior good because a household can now afford to buy normal (superior) good.

Income effect is positive in case of normal goods.

Income effect is negative in case of inferior goods.

There is a direct relation between income and demand for normal goods.

There is an inverse relation between income and demand for inferior goods.

‘Full Cream Milk’ is a normal good if its demand increases with an increase in income.

‘Toned Milk’ is an inferior goods if its demand decreases with an increase in income.

7. Explain the law of diminishing marginal utility with the help of a total utility schedule.

OR

Explain the conditions of consumer’s equilibrium with the help of utility analysis.

Ans. The law states, “As more and more units of a commodity are consumed, marginal utilityderived from additional units goes on falling” or “As the consumer consumes more and moreunits of a good, the addition to total utility obtained goes on decreasing.”

Bars of chocaltes (N) TU (Utils) MU (TU/N)

0123456

081418202018

–86420–2

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STUDYmate

In the schedule, as a consumer buys units from 1 to 4, additional utility is MU declines from8 to 2.

OR

Ans. There are two equilibrium conditions as per this approach:

(a) MUx = price, i.e., xMU

PMU x

m

If MUx (money) > P

x, consumer keeps on consuming more units. When he consumes

more unit, the additional utility derived from consuming x keeps on falling. He keepson consuming till MU

x (money) = P

x.

If MUx (money) < P

x, he will decrease the consumption of x. When he decreases the

consumption of x, the marginal utility of x will increase. He will keep on decreasingconsumption of x till MU

x(money) = P

x.

(b) Total gain falls as more is purchased after equilibrium.

The consumer continues to purchase so long as gain is increasing or at least constant.

8. When the price of a good rises from ` 20 per unit to ` 30 per unit, the revenue of the firmproducing this good rises from ` 100 to ` 300. Calculate the price elasticity of supply.

Ans. P TR Quantity Supplied = TR/P

2030

100300

510

P = 10

Q = 5

ep = Q P

Q P

= 5 20

5 10

= 2

9. Complete the following table:

Units of Labour Average Product (Units) Marginal Product (Units)

123456

810

_________9

_________7

__________________

10_________

4_________

Ans. Units of Labour

Average Product (Units)

Marginal Product (Units)

TP

123456

81010987

81210642

82030364042

Formulae used,

TP = AP × Units of Labour

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STUDYmate

TP = MP

MP = TPn – TP

n–1

AP = MP

Units of labour

10. Explain ‘large number of buyers and sellers’ feature of a perfectly competitive market.

Ans. A Large Number of Buyers and Sellers: There are so many buyers and sellers that no individualbuyer or seller can influence the price of the commodity in the market. Any change in theoutput supplied by a single firm will not affect the total output of the industry. To an individualproducer the price of the commodity is given. He can sell whatever output he produces at thegiven price, i.e., an individual seller is a price-taker. Similarly, no individual buyer caninfluence the price of the commodity by his decision to vary the amount that he would like tobuy, i.e., price of the commodity is given to the buyer. He is a price-taker having no bargainingpower in the market.

Pri

ce

OutputO X

P

S

SD

D

Market

Pri

ce

OutputO

P

Firm

AR = MR = P

Implication: The perfectly competitive firm is then a ‘price-taker’ and can sell any amountof the commodity at the established price. Thus, AR is a straight line parallel to x-axis.

11. Production in an economy is below its potential due to unemployment. Government startsemployment generation schemes. Explain its effect using production possibilities curve.

Ans. When the economy is below its potential due to unemployment the economy operates insidethe PPC.

A

B

C

D

E

Good 1

Good 2

u

When the government starts employment generation schemes it enables the economy utiliseits existing resources in the optimum manner.

The resources who were sitting idle now get job and the economy function at its maximumcapacity and moves from inside the PPC to points on the PPC.

Thus, economy moves from point u in the PPC to any point on PPC as shown in the diagram.

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STUDYmate

12. Explain the conditions of producer’s equilibrium with the help of a numerical example.

Ans. Two conditions of producer’s equilibrium are

(a) MC = MR;

(b) MC curve cuts the MR curve from below.

MR is the addition to total revenue from the sale of one more unit of output and MC is the

addition to total cost for increasing the production by one unit.

As long as the addition to revenue is greater than the addition to cost, it is profitable for a firm

to continue producing more units of output.

Condition 1: MC = MR. This can be explained with the help of illustration and diagram.

Output (Units) Marginal Revevenue (In ̀ ) Marginal Cost (In `)

1 10 10

2 10 5

3 10 2

4 10 5

5 10 7

6 10 107 10 13

8 10 15

Two other situations may exist

(a) MR > MC. At output level less than OQ, MR > MC, this implies that the firm is earning

profit on the last unit of output. The marginal profit provides an incentive to the firm to

increase production and move towards OQ units of output. Therefore when MR > MC,

the firm increases output to maximise its profit.

(b) MR < MC. At output level more than OQ, MR < MC. This implies that the firm is making

a loss on its last unit of output. Hence, in order to maximise profit, a rational producer

decreases output as long as MC > MR. Thus the firm moves towards producing OQ units

of output.

Output (in units)

X

Y

AR = MR

MCR K

P

O Q1 Q

Rev

enu

ean

dC

ost

(in

Rs.

)

Producer’sequilibrium

In the diagram, AR = MR = P. The marginal cost (MC) curve is U-shaped. Now, the condition of

MR = MC is satisfied at two points; R and K. However, profits are maximised at point K,

corresponding to OQ level of output.

Condition 2; MC cuts MR curve from below. MC = MR at two points R and K in the diagram

but profits are maximised at point K, corresponding to OQ level of output.

Between O Q1 and OQ levels of output, MR exceeds MC, therefore firm will not stop at point R

but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at

point K.

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STUDYmate

13. The price elasticity of demand for a good is –0.4. If its price increases by 5 per cent, by whatpercentage will its demand fall? Calculate.

OR

Explain any two factors that affect the price elasticity of demand. Give suitable examples.

Ans. ep = –0.4

ep = % change in quantity

% change in price

0.4 = % change in quantity

5%

2% = % change in quantity

Hence, demand will fall by 2%.

OR

Ans. The two factors that affect the price elasticity of demand are:

(a) Nature of the Commodity.

i. Necessities: These commodities are essential for satisfying the basic needs of

individuals. Examples of necessities includes vegetables, salt, medicines, sugar, pulses,

grains, etc. The demand for these products is relatively insensitive to price changes, as

these are needed for day-to-day living. Hence, as price changes, demand for such

commodities changes but by a smaller extent. Thus, the elasticity of these products is

relatively inelastic.

ii. Luxuries: These commodities are typically not required for survival. Examples of luxury

goods include ice creams, watches, branded clothing, cosmetics, tinned and other

processed food, etc. If prices of such commodities rise then individuals can wait to

purchase them or substitute them for more basic commodities. Thus, demand for such

product changes by a large extent with a price change. Luxury goods are relatively

elastic products.

(b) Availability of substitute goods

i. If there are a large number of close substitutes available for a product, then it is easy for

consumers to replace the good when its price increases. Here, demand reduces by a

large extent. Similarly, when the price of the products reduces, individuals consuming

substitute products start buying this product. Here, demand rises by a large extent.

Hence, larger the number of substitutes available for a commodity, the more elastic

is its demand.

Now if the price of Amul Chocolate were to increase, then demand shifts from Amul

chocolate to other brands, as consumer have the option of doing so. Demand for Amul

chocolate decreases by a large extent. Hence demand is relatively elastic.

ii. Fewer the substitutes available for a product, the more inelastic is its demand.

Products such as cooking gas do not have close substitutes available. Here even if price

increases, demand reduces (usage of electric ranges may increase or people start

conserving cooking gas) but the reduction in demand is relatively small, as consumers

do not have many options of switching to alternative products.

14. Giving reasons, state whether the following statements are true or false:

(i) A monopolist can sell any quantity he likes at a price.

(ii) When equilibrium price of a good is less than its market price, there will be competitionamong the sellers.

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STUDYmate

Ans. (i) A monopolist can sell any quantity he likes at a price

False, a monopolist can sell more quantity only by lowering the price of a commodity.The demand curve is a constraint faced by a monopoly firm.

Since consumer demand more only at a lower price, therefore monopolist will have tolower down the price to sell more output. AR is, therefore, downward sloping.

(ii) False, when equilibrium price of a good is less than its market price, there will becompetition among the buyers

– At a price lower than market price, there will be excess demand, i.e., demand willbe more than supply

– Due to excess demand, buyers will compete with each other and price begins torise.

– When price rises, demand contracts and supply expands, till excess demandbecomes zero.

15. Explain the Law of Variable Proportions with the help of total product and marginal productcurves.

Ans. The law states, ‘if more and more units of a variable factor are employed with fixed factors,total product (TP) increases at an increasing rate in the beginning, then increases at adiminishing rate and finally starts falling.

Three phases of production

Land

(Acre)

No. of

labourers

TP

(quintal)

AP

(quintal)

MP

(quintal)

1

11

1

0

12

3

0

26

12

0

23

4

–

2Phase I

4

6

1

1

1

4

5

6

16

18

18

4

3.6

3

4

2 Phase II

0

1

1

7

8

16

15

2.2

1.8–2

Phase III–1

Phase I : Stage of increasing returns

TPP increases at an increasing rate. In the following figure, TP increases up to OQ1 level of

output at an increasing rate. Accordingly TP curve is increasing from point O to M.

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STUDYmate

Unit of variablefactor

M

O

OMP

R

N

TPTP

MP

Y

Q1Q2

X

Unit of variable factor

Q1Q2

Phase I Phase II

X

MP keeps rising between O to Q1 level of output and reaches its maximum (here point R)

where this stage ends. This is reflected by MP curve from point O to R. Increasing returnsoccur due to better utilisation of abundant fixed factor and devision of labour and specialisationof variable factors.

Phase II : Stage of Diminishing returns

TP increases at a diminishing rate till it reaches its maximum point (here N). This is reflectedby TP curve from point M to point N which lies between Q

1 and Q

2 level of output. The point

(here M) where TP changes from increasing at increasing rate to increasing at decreasingrate is called the point of inflexion.

MP is falling but remains positive. This phase covers from point R where MP is maximum topoint Q

2 where MP = 0. During phase II since MP is diminishing, it is called the phase of

diminishing returns to a factor. Out of three phases of production, this phase is crucial becausea firm would always try to operate in phase II. Diminishing returns occur due to scarcity offixed factor and overabundance of variable factor.

Phase III : Stage of negative returns

TP starts declining. As a result TP curve starts sloping downward. So phase III is called thephase of negative returns.

16. Explain consumer’s equilibrium with the help of Indifference Curve Analysis.

OR

Explain the relationship between:

(i) Prices of other goods and demand for the given good.

(ii) Income of the buyers and demand for a good.

Ans. Account to indifference curve approach consumers equilibrium is determined if the followingtwo conditions are satisfied.

(i) MRSxy

= MRE = Px/ P

y(ii) MRS

xy is declining.

MRSxy

is the rate at which the consumer is willing to sacrifice Y to obtain one more unit of X.

MRE is the rate at which market requires a consumer to sacrifice units of Y to buy one moreunit of X which is equal to ratio of prices of x and y good. MRE = P

x/P

y.

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STUDYmate

If MRSxy > MRE it implies that the consumer is willing to sacrifice more unit of Y than what

market requires. This induces the consumer to buy more of x. When he buys more of x, utilityderived from X falls and he is willing to sacrifice less of Y. Thus MRS

xy starts declining. He

continues to consume more of X, till MRSxy = MRE = P

x/P

y.

If MRSxy < MRE, it implies consumer is willing to sacrifice less units of Y than what the

market requires. He decreases the consumption of X. Due to this MRSxy began to rise, he

continues to decrease the consumption of X till MRSxy

= MRE.

Thus we can say that

“A consumer is in equilibrium at a pointwhere budget line is tangent to indifference curve”.

Good Y

A

y1

O Bx1

Good X

X

Y

E

GIC1

IC2

IC3

F

Slope of indifference curve = Slope of budget line i.e. MRSxy

= Px/P

y.

In the diagram, equilibrium is at point E, where the budget line touches the highest attainableindifference curve IC

2 within consumer’s budget.

Bundles on the indifference curve IC3 are not affordable within budget.

Bundles on the indifference curve IC1 (i.e., points F and G) are lying on a lower indifference

curve i.e. will have lower utility levels as compared to the tangency point E. Therefore, theconsumer will choose only the tangency point on the budget line.

Therefore, E is a point of consumer’s equilibrium where he maximizes his satisfaction. PointE is also called the “Optimum Consumption Point” where he consumes OX

1 of X and OY

1 of Y.

OR

Ans. (i) Prices of other goods and demand for the given good.

(a) The effect of change in price of substitude good. Two goods are substitutes ifone can be used in place of the other. They compete with each other for demand inthe market. For example, Tea and Coffee. Suppose the price of coffee falls. Sincethe relative price (i.e., the proportional price) of coffee is now lower the consumeris likely to consume more coffee in place of tea. The demand for tea is likely to fall.

0Quantity Demanded

Pri

ce

D2D1

P

D3

C A BLeftward shift in demand curve (A to C)owing to fall in the price of thesubstitute commodity.

Rightward shift in demand curve (A to B)owing to rise in the price of thesubstitute commodity.

As such, with the fall in price of a substitute (coffee) the demand for the given good(tea) falls. Again, with the rise in price of a substitute the demad for a given goodrises. So, there is a positive relation between the price of a substitute and thedemand for the given good.

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(b) Effect of change in price of a complementary good. Two goods are complementaryto each other when they are used jointly. They are also called joint goods. Forexample, tea and milk are complementary goods.

Suppose the price of milk rises. Rise in the price of milk reduces demand for milk.Since, milk is used with tea the demand for tea is also likely to fall. So a rise inthe price of a complementary good (milk) leads to fall in demand for the given good(tea). Again, fall in price of a complementary good is likely to lead to rise in demandfor the given good. Thus, there is an inverse relation between the price of acomplementary good and demand for the given good.

0Quantity Demanded

Pri

ce

D2D1

P

D3

C A BLeftward shift in demand curve (A to C)owing to rise in the price of thecomplementary commodity.

Rightward shift in demand curve (A to B)owing to fall in the price of thecomplementary commodity.

(ii) Income of the buyers and demand for a good.

(a) Normal good. A good whose demand by a consumer rises with the rise in theincome of that consumer is called a normal good. For example, if a consumer buysmore of toned milk for his family as his income rises, then toned milk with becalled a normal good. Demand for a normal goods falls with the fall in income.

0Quantity Demanded

Pri

ce

D2D1

P

D3

C A BLeftward shift in demand curve (A to C)owing to fall in the income of theconsumer.

Rightward shift in demand curve (A to B)owing to rise in the income of theconsumer.

(b) Inferior good. A good whose demand by a consumer falls with the rise in incomeof that consumer is called an inferior good. For example, if a consumer reducesthe consumption of toned milk when his income rises, then toned milk is aninferior good for that consumer. Remember, toned milk is not always an inferiorgood. At lower income levels it may be a normal good. Like this, no good is eitheralways normal or always inferior. It is the income level of the individual consumerthat makes a good normal or inferior for him. Demand for an inferior good riseswith the fall in income.

0Quantity Demanded

Pri

ce

D2D1

P

D3

C A BLeftward shift in demand curve (A to C)owing to rise in the income of theconsumer.

Rightward shift in demand curve (A to B)owing to fall in the income of theconsumer.

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SECTION-B

17. How can increase in foreign direct investment affect the price of foreign exchange?

Ans. An increase in foreign direct investment will result in more supply of foreign exchangetherefore due to excess supply price of foreign exchange will fall i.e. exchange rate falls.

18. What are demand deposits?

Ans. Demand deposits are those deposits which are payable on demand i.e. the depositor has theright to go to the bank and withdraw his entire balance in the account. A demand deposit istreated as equal to currency held, and included in money supply.

19. Give one example of “extrenality” which reduces welfare of the people.

Ans. When the activities of one result in harm to others with no payment made for the harm done,such activities are called negative externalities. GDP does not take into account negativeexternalities. For example, factories produce goods but at the same time create pollution ofwater and air. Producing goods increases welfare but creating pollution reduces welfare.

20. Give two examples of indirect taxes.

Ans. It refers to those taxes which are imposed by the government on the production and sale ofgoods and services. Sales tax, excise duty, custom duty, etc. are some examples of indirecttaxes.

21. What is a Government Budget?

Ans. Government budget is an annual statement, showing item-wise estimates of receipts andexpenditures during a fiscal year. A budget shows the financial accounts of the previous years,the budget and revised estimates of the current year and the budget estimates for next year.

22. Explain the problem of double coincidence of wants faced under barter system. How has moneysolved it?

Ans. (i) Double coincidence of wants means the simultaneous fulfillment of mutual wants bybuyers and sellers.

(ii) In the Barter system, a lot of time and energy gets wasted in finding/locating theindividuals who both wants the good/service that you want to sell and is willing toexchange it for the good that you want.

Money as a medium of exchange

(i) With the introduction of money, the goods produced can be exchanged for money andwith the money, any commodity can be purchased at any time.

(ii) The problem of double coincidence of wants gets automatically eliminated and the tradingcost which is present in the Barter system wouldn’t be present here. We can buy thecommodity from anywhere at any point of time, wherever we get the best bargain.

(iii) Therefore, Money is called a bearer of options / of generalized purchasing power, becausemoney provides us with a choice.

23. Distinguish between revenue expenditure and capital expenditure in Government budget.Give an example of each.

OR

Distinguish between revenue deficit and fiscal deficit.

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STUDYmate

Ans. Revenue Expenditure Capital Expenditure

Revenue expenditure neither creates any asset nor reduces any liability

Capital expenditure either creates an asset or reduces a liability.

Revenue expenditure is incurred on the normal functioning of government departments and on the provisions for various services

Capital expenditure is incurred for acquisition of assets, granting of loans and advances and repayment of borrowings.

Revenue expenditure is recurring in nature i.e. an expenditure is made by the government on its day-to-day activities.

However, capital expenditure is non-recurring in nature.

ORAns.

Revenue Deficit Fiscal Deficit

1. It refers to the excess of total revenue expenditure of the government over its total revenue receipts.Revenue deficit = Revenue expenditures – Revenue receipts

1. Its defined as excess of total expenditure over total receipts excluding borrowing during a fiscal year.Fiscal deficit = Total budget expenditure – Total budget receipts excluding borrowings

2. Revenue Deficit implies that the government is overspending to meet its current expenses.

2. Fiscal deficit shows the borrowing requirements of the government to meet its revenue and capital expenditure.

3. Revenue deficit can be made up by capital receipts.

3. Fiscal deficit can be meet through monetary expansion and borrowing.

24. Explain any one objective of Government Budget.

Ans. Objectives of Government Budget

1. Reallocation of Resources-

(a) The government aims to reallocate resources according to economic and social prioritiesthrough its budgetary policy.

(b) Government encourages the production of certain commodities by giving subsidies ortax reliefs. For e.g. government encourages the use of’ khadi products’ by providingsubsidies.

(c) Government can discourage the production of harmful goods like liquor or cigarettes,by imposing heavy excise duties or taxes.

25. Explain the effect of appreciation of domestic currency on imports.

Ans. Demand curve of foreign exchange is downward stoping i.e. less of foreign exchange is demandedas exchange rate rises and more is demanded when exchange rate falls.

When exchange rate falls there is appreciation of domestic currency. Foreign exchange becomescheaper. Less of domestic currency has to be paid for purchasing foreign currency.

There is fall in rupee cost of foreign goods therefore imports become cheaper, their demandincreases as a result demand for foreign exchange increases.

Foreign assets also become cheaper for the domestic country therefore foreign investmentincrease resulting in increase in demand of foreign exchange.

Therefore when foreign exchange rate falls, there is increase in demand for import andinvestment. As a result more foreign exchange is demanded to pay for them.

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STUDYmate

26. Distinguish between balance of trade and balance on current account.

Ans. Balance of Trade Balance on Current Account

Balance of trade includes only visible items. It is the difference between exports and imports of a country.

Balance on current account is the difference between sum of credit items and sum of debit items on current a/ct.

BOT does not record any transactions of invisible items and transfers.

Balance of current account includes balance of visible items balance of invisible items and Balance of unilateral transfer.

Balance of trade is a narrower concept and it is only a part of the balance of payments account.

Balance on current account includes the balance of trade.

Deficit in balance of trade can be made up by surplus in other transactions of current a/ct.

Deficit in current a/ct can be made up by capital transactions in BOP a/ct.

27. Calculate “sales” from the following data:

(` in Lakhs)

(i) Net value added at factor cost 560

(ii) Depreciation 60

(iii) Change in stock (–) 30

(iv) Intermediate cost 1000

(v) Exports 200

(vi) Indirect taxes 60

Ans. GVAMP

= Value of output – Intermediate consumption

NVAFC

+ Depreciation + Net Indirect Taxes = Sales + Change in stock – Intermediateconsumption

560 + 60 + 60 = Sales + (–30) – 1000

680 + 30 + 1000 = Sales

Sales = 1710 lakhs

Hence, Sales = 1710 lakhs

28. Giving reasons categorise the following into stock and flow:

(i) Capital

(ii) Saving

(iii) Gross domestic product

(iv) Wealth

OR

Explain the circular flow of income.

Ans. (i) Capital - It is a man made means of production. It is a stock because it is measured ata given point of time.

(ii) Saving - Saving is the surplus of production over consumption. It is a flow as it is measuredduring a period of time.

(iii) Gross domestic product - It is a flow as it is the market value of final goods and servicesproduced with in the domestic territory during a period of time.

(iv) Wealth - It is a stock as it is measured at a particular point of time.

OR

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STUDYmate

Ans. Circular flow of income refers to the cycle of generation of income in the production process, its

distribution among the factor of production and finally, its circulation from households to the

production units in the form of consumption expenditure on goods and services produced by these

units.

Phases of Circular Flow of Income

There are 3 different phases (generation, distribution and disposition) in circular flow of income,as shown in the given diagram:

Production Phase(Generation of Income)

Different Phases of Circular Flow of Income

Income Phase(Distribution of Income)

Expenditure Phase(Disposition of Income)

(i) Generation Phase : In this phase, firms produce goods and services with the help offactor services.

(ii) Distribution Phase : This phase involves the flow of factor income (rent, wages, interestand profit) from firms to the households.

(iii) Disposition Phase : In this phase, the income received by factors of production, is spenton the goods and services produced by firms.

Income is first generated in production units, then distributed to households, and finallyspent on goods and services produced by these units to make the circular flow complete itscourse.

29. Explain “Banker to the Government” function of the Central Bank.

Ans. “Banker to the Government”

A central bank conducts the banking accounts of government departments. It acceptstheir deposits and undertakes inter-bank transfers. It also gives loans to the government.

Agent : A central bank also provides various services as agent of the government. It managespublic debt. It undertakes payment of interest on this debt and all sorts of other servicesrelating to public debt.

Advisor : Central bank gives advice to the government regarding money market, capital market,government loans, and on economic policy matters.

Central bank carries out monetary policy, while government carries out fiscal policy. Boththe policies are intimately connected. The main objective of both is to serve the public interest.

30. C = 100 + 0.4 Y is the Consumption Function of an economy where C is ConsumptionExpenditure and Y is National Income. Investment expenditure is 1100. Calculate

(i) Equilibrium level of National Income.

(ii) Consumption expenditure at equilibrium level of national income.

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STUDYmate

Ans. C = 100 + 0.4 Y

S = –100 + 0.6 Y

I = 1100

At Equilibrium level of Income

S = I

–100 + 0.6 Y = 1100

0.6 Y = 1200

Y = 2000

Consumption at equilibrium level of income

C = 100 + 0.4 Y

Y = 2000

C = 100 + 0.4 (2000)

= 900

31. Complete the following table.

Income (`)

Consumption expenditure

(`)

Marginal propensity to

save

Average propensity to

save

0 80

100 140 0.4 ……

200 …… …… 0

300 240 …… 0.20

400 260 0.8 0.35

Ans. Income(`)

Consumption expenditure (̀ ) S

Marginal propensity to save

Average propensity to save

0 80 –80 – –

100 140 –40 0.4 –0.4

200 200 0 0.4 0

300 240 60 0.6 0.20

400 260 140 0.8 0.35

Formulae:

MPS = S

Y

APS = S

Y

32. Calculate National Income from the following data:

(` in crores)

(i) Private final consumption expenditure 900

(ii) Profit 100

(iii) Government final consumption expenditure 400

(iv) Net indirect taxes 100

(v) Gross domestic capital formation 250

(vi) Change in stock 50

(vii) Net factor income from abroad (–) 40

(viii) Consumption of fixed capital 20

(ix) Net imports 30

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STUDYmate

× · × · × · × · ×

OR

Calculate net national disposable income from the following data:

(` in crores)

(i) Gross domestic product at market price 2000

(ii) Net current transfers to rest of the world (–) 200

(iii) Net indirect taxes 150

(iv) Net factor income to abroad 60

(v) National debt interest 70

(vi) Consumption of fixed capital 200

(vii) Current transfers from Government 150

Ans. GDPmp

= PFCE 900

+ GFCE 400

+ GDCF 250

+ Net Export – 30 (Net Imports are given, therefore Net exports = –30.)

1520 crores

NNPFC

= GDPmp

– Depreciation – NIT + Net factor income from abroad

= 1520 – 20 – 100 + (– 40)

= ` 1360 crores

OR

Ans. NNDI = NNPmp

+ Net current transfers from rest of the world

NNPmp

= GDPmp

consumption of fixed capital + NFIA

= 2000 – 200 + (–60)

= 1740 crores

NNDI = NNPMP

+ Net current transfers from rest of the world

= 1740 + 200

= 1940 crores

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STUDYmate

SECTION-A

1. Give two examples of variable costs.

Ans. Raw materials and Electricity Bills.

8. A firm’s revenue rises from ̀ 400 to ̀ 500 when the price of its product rises from ̀ 20 per unitto ` 25 per unit. Calculate the price elasticity of supply.

Ans. P (`) TR (̀ ) Q = TR/P

2025

400500

2020

eS =

q P

p Q

= 0 20

5 20

= 0

Hence, the price elasticity of supply is perfectly inelastic.


Output (Units) Average Cost (̀ ) Marginal Cost (`)

123456

1210

_________10.511

_________

__________________

10__________________

17

Ans. Output (Units) Average Cost (̀ ) Marginal Cost (`) TC

123456

121010

10.51112

–810121317

122030425572

10. Explain any two features of monopoly market.

Ans. Single Producer

(a) There is a single firm producing the commodity in the market. Since there is singlefirm, the difference between firm and industry vanishes.

(b) It may be due to some legal restrictions in the form of patent, copyright, state monopolyor due to some natural conditions prevailing in the market.

Code No. 58/1/2


UNCOMMON QUESTIONS ONLY

Series : SKS/1

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STUDYmate

(c) Since there is a single seller, he can influence the price of the market by influencingthe supply of a commodity.

(d) Thus, the implication of this assumptionis that the firm is a price maker.

No Close Substitutes

(a) The monopoly firm has no fear of competition from new or existing products. For example,there is no close substitutes of electricity services provided by BSES.

(b) Monopolist can practice price discrimation, i.e., he can change different prices for hisproduct from different sets of consumers.

12. The demand for good rises by 20 per cent as a result of fall in its price. Its price elasticity ofdemand is (–)0.8. Calculate the percentage fall in price.

OR

How is price elasticity of demand affected by:

(i) Number of substitutes available for the good.

(ii) Nature of the good.

Ans. ed = % change in quantity

% change in price

0.8 = 20%

% change in price

% change in price = 20

0.8 = 25%

Hence, percentage fall in price = 25%

OR

Ans. (i) Availability of substitutes.

(a) If there are a large number of close substitutes available for a product, then it iseasy for consumers to replace the good when its price increases. Here, demandreduces by a large extent. Hence, larger the number of substitutes available fora commodity, the more elastic is its demand.

(b) Fewer the substitutes available for a product, the more inelastic is its demand.Products such as cooking gas do not have close substitutes available. Here even ifprice increases, demand reduces (usage of electric ranges may increase or peoplestart conserving cooking gas) but the reduction in demand is relatively small, asconsumers do not have many options of switching to alternative products.

(ii) Nature of the good.

(a) Necessities: These commodities are essential for satisfying the basic needs ofindividuals. Examples of necessities includes vegetables, salt, medicines, sugar,pulses, grains, etc. The demand for these products is relatively insensitive toprice changes, as these are needed for day-to-day living. Hence, as price changes,demand for such commodities changes but by a smaller extent. Thus, the elasticityof these products is relatively inelastic.

(b) Luxuries: These commodities are typically not required for survival. They satisfythe ‘higher wants’ of individuals. Examples of luxury goods include ice creams,watches, branded clothing, cosmetics, tinned and other processed food, etc. Thedemand for these products is relatively sensitive to price changes, as individualscan easily do without them. If prices of such commodities were to rise thenindividuals can wait to purchase them or substitute them for more basiccommodities. Thus, demand for such product changes by a large extent with aprice change. Luxury goods are relatively elastic products.

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STUDYmate

SECTION-B

28. How do commercial banks create deposits? Explain.

Ans. Mone creation or deposit creation or credit creation by the bank is determine by the amountof the initial fresh deposits and the Legal Reserve Ratio (LRR), the minimum ratio of depositlegally required to be kept as cash by banks. It is assumed that all the money that goes out ofbank is redeposisted in to the banks.

It is determined by the legal Reserve Ratio (LRR) (or (reserve Deposit Ratio). The value is:

Deposit multiplier 1

LRR .

Suppose new deposits of ̀ 1,000 are made in banks. Let the LRR be 20 per cent. It means that

banks keep only ` 200 as cash reserve and lend the remaining amount of ` 800. Lending

means that banks create deposits of ` 800 in the names of borrowers. This is the first round

creation and equals 80 per cent of the initial deposit. Suppose, borrowers withdraw the entire

amount of loan and spend the same on the goods and services needed for investment and

consumption. It means that the sellers of these goods and services receive ` 800 of revenue

and deposit the same in their respective bank accounts. The banks get new deposits. They

keep 20 percent of these deposits, i.e. ` 160, as cash and lend the remaining ̀ 640. This is the

second round increase. It is 80 per cent of the previous round increase. In the same manner

as above, the third round creation of deposits will be 80 per cent of ̀ 640, i.e. ` 512 and soon in

each of the further round will be 80 per cent of previous round. In each round, the increase

becomes smaller and smaller and ultimately, it becomes virtually zero. The sum total of all

deposits will ultimately be ` 5000, i.e. five times the initial deposit. The working of the deposit

creation process is summed up in the following table.

Deposits Loans Cash reserves

Initial 1,000 800 200

I Round 800 640 160

II Round 640 512 128

· · · ·

· · · ·

· · · ·

· · · ·

· · · ·

5000 4000 1000

In the above example LRR = 20 % i.e. 0.2, then

Deposit multiplier 15

0.2

Initial deposit of ` 1000 can create credit of 5000 `.

30. In an economy, S = –100 + 0.6 Y is the saving function, where S is Saving and Y is NationalIncome. If investment expenditure is 1100, calculate:

(i) Equilibrium level of National Income.

(ii) Consumption expenditure at equilibrium level of National Income.

Ans. S = –100 + 0.6Y

I = 1100

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STUDYmate

× · × · × · × · ×

(i) At equilibrium level of National Income

S = I

–100 + 0.6 Y = 1100

0.6 Y = 1100 + 100

Y = 1200

0.6

Y = 2000

(ii) Saving at equilibrium level of National Income

= –100 + 0.6 × 2000

= –100 + 1200

= 1100

C = Y – S = 2000 – 1100 = 900


Income (̀ ) Savings (`) Average Propensity to Consume

Marginal Propensity to Consume

050100150200

–40–2003050

____________

0.8______

______0.6

____________

Ans. Income (`) Savings (̀ ) ConsumptionAverage Propensity

to ConsumeMarginal Propensity

to Consume050100150200

–40–2003050

4070100120150

01.41

0.80.75

–0.60.60.40.6

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STUDYmate

SECTION-A

1. Give an example each of fixed cost and variable cost.

Ans. Fixed Cost: Rent

Variable Cost: Wages to the casual labour

8. The price elasticity of supply of a good is 0.8. Its price rises by 50 per cent. Calculate thepercentage increase in its supply.

Ans. ep = 0.8

P = 50%

ep = % change in quantity

% change in price

0.8 = % change in quantity

50%

40% = % change in quantity

Hence, supply increases by 40%.


Units of Labour Average Product (Units) Marginal Product (Units)

123456

1620

_________18

_________14

__________________

20_________

8_________

Ans. Units of Labour

Average Product (Units)

Marginal Product (Units)

TP

123456

162020181614

1624201284

164060728084

10. Explain “freedom of entry and exit to firms in industry” feature of monopolistic competition.

Ans. Every firm is free to enter into the industry and come out from the industry as and when itwishes.

The implication of this assumption is that given sufficient time, all firms in the industrywill be earning just normal profit.

Suppose the existing firms are earning super normal profits. Attracted by the positive profits,


UNCOMMON QUESTIONS ONLY

Series : SKS/1 Code No. 58/1/3

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STUDYmate

the new firms enter the industry. The industry’s output, i.e., market supply goes up. The pricecomes down. New firms continue to enter till economic profits are reduced to zero.

Now suppose the existing firms are incurring losses. The firms start leaving the industry.The industry’s output starts falling and price starts going up. All this continues till losses arewiped out. The remaining firms in the industry once again earn just the normal profits.

12. Give the meaning of producer’s equilibrium. A producer produces that quantity of his productat which marginal cost and marginal revenue are equal. Is he earning maximum profits?Give reasons for your answer.

Ans. Producer’s equilibrium means that combination of price and output which yields the producermaximum profit and the profit declines as more is produced.

Two conditions of producer’s equilibrium are

(a) MC = MR;

(b) MC curve cuts the MR curve from below.

MR is the addition to total revenue from the sale of one more unit of output and MC is the

addition to total cost for increasing the production by one unit.

As long as the addition to revenue is greater than the addition to cost, it is profitable for a firm

to continue producing more units of output.

Condition 1: MC = MR. This can be explained with the help of illustration and diagram.

Output (Units) Marginal Revevenue (In ̀ ) Marginal Cost (In `)

1 10 10

2 10 5

3 10 2

4 10 5

5 10 7

6 10 107 10 13

8 10 15

Two other situations may exist

(a) MR > MC. At output level less than OQ, MR > MC, this implies that the firm is earning

profit on the last unit of output. The marginal profit provides an incentive to the firm to

increase production and move towards OQ units of output. Therefore when MR > MC,

the firm increases output to maximise its profit.

Output (in units)

X

Y

AR = MR

MCR K

P

O Q1 Q

Rev

enu

ean

dC

ost

(in

Rs.

)

Producer’sequilibrium

(b) MR < MC. At output level more than OQ, MR

< MC. This implies that the firm is making

a loss on its last unit of output. Hence, in

order to maximise profit, a rational producer

decreases output as long as MC > MR. Thus

the firm moves towards producing OQ units

of output.

In the diagram, AR = MR = P. The marginal cost (MC) curve is U-shaped. Now, the condition of

MR = MC is satisfied at two points; R and K. However, profits are maximised at point K,

corresponding to OQ level of output.

Condition 2; MC cuts MR curve from below. MC = MR at two points R and K in the diagram

but profits are maximised at point K, corresponding to OQ level of output.

Between OQ1 and OQ levels of output, MR exceeds MC, therefore firm will not stop at point R

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STUDYmate

but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at

point K.

SECTION-B

27. Calculate “sales” from the following data:

(` in Lakhs)

(i) Intermediate cost 700

(ii) Consumption of fixed capital 80

(iii) Change in stock (–)50

(iv) Subsidy 60

(v) Net value added at factor cost 1300

(vi) Exports 50

Ans. NVAFC = 1300

GVAmp = NVAFC 1300

+ Dep. + 80

+ NIT – 60 (Subsidy)

1320 Lakhs

GVAmp + IC = GVOmp

1320 + 700 = GVOmp

2020 = GVOmp

Sales = GVOmp – Change in Stock

Sales = 2020 – (–50)

Sales = 2070 Lakhs

31. C = 50 + 0.5 Y is the consumption function where C is consumption expenditure and Y isNational Income and investment expenditure is 2000 in an economy. Calculate

(i) Equilibrium level of (national) income

(ii) Consumption expenditure at equilibrium level of (national) income

Ans. C = 50 + 0.5 Y

I = 2000

(i) Equilibrium level of income

S = –50 + 0.5 Y

I = 2000

S = I

–50 + 0.5 Y = 2000

0.5Y = 2000 + 50 = 2050

Y = 4100

(ii) C at Y = 4100

C= 50 + 0.5 (4100) = 2100

Consumption = 2100 at equilibrium level of income.

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STUDYmate

× · × · × · × · ×


Consumption Expenditure (`) Savings (̀ ) Income (̀ )


100175250325

5075100125

150__________________

__________________

Ans. Consumption Expenditure (`) Savings (̀ ) Income (̀ )


100175250325

5075100125

150250350450

–0.750.750.75

Eco cbse_2012-13_12th_30-03-13

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