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Saturday, March 03, 2018

AHSEC Class 12: Economics Solved Question Paper' 2012

H.S. 2nd Year, 2012
Full Marks: 100
Time: 3 hour
1. (a) Opportunity cost is also called the Marginal Opportunity Cost/Alternative cost 1
(b) In economics, it is generally assumed that the consumer is an individual. 1
Ans: False, Rational individual
(c) What is an inferior good? 1
Ans. Inferior goods are those goods in case of which there is a negative relationship between consumer’s income and quantity demanded. Implying that income effect is negative.
(d) Total Cost (TC) = ____ + Total Variable (TVC) 1
Ans. TC = TVC + TFC.
(e) State two main features of a perfectly competitive market. 1
Ans: the goods are sold of uniform price, products are homogeneous and the average and marginal revenue of a firm always equal.
2. Mention three basic problems of an economy. 3

Ans: The resources required to satisfy unlimited wants are limited in supply, it has created economic problems in the society. The central problems of an economy which is based on scarcity of resources are as follows:
  1. What to produce?
  2. How to produce? And
  3. For whom to produce?
  1. What to produce: That means the economy or firm has to decide what type of goods are produced whether it is consumption goods or capital goods etc.
  2. How to produce: Another central problem of an economy arises for what method is used for production, whether it is labour based or capital based.
  3. For whom it is produced: Distribution of produced goods among the different classes of the society is one of the central problems of an economy.
3. Draw a vertical demand curve and state the nature of price elasticity on it. 3

D:\Work from Atanu\Arjun Sir\H.S. XII Year Economics\New Folder (2)\Untitled-4 copy.jpg

In the above diagram, it is shown that DQ is a vertical demand curve. When the price is OP, the quantity demand is OQ. When the price is increase to OP1 the quantity demand is also the same that is OQ. And when the price is decreases to OP2, the quantity demand is the same that is OQ. The quantity demand does not response to change in its price. So it indicates perfectly inelastic demand.
4. The total money income of a consumer is M and he spends his entire money income on the consumption of two commodities, viz X and Y. The prices of X and Y are PX and PY respectively. State the budget equation. 3
5. If the total product with 5 units of a variable factor is 56, calculate the average product. If the variable factor is increased by 1 more unit as a result of which the total product becomes 57, what will be the marginal product? 3
6. State the conditions needed for a firm to maximize profits by producing positive output in a competitive market. 3
Ans: A firm is in equilibrium when it is earning maximum profits. A firm will go on expanding output as long as marginal revenue exceeds marginal cost or equal to marginal cost. If the price less than marginal cost it is ruled out for profit maximization for a firm under perfect competition. If at any level of output marginal revenue is less than the marginal cost, the firm will incur loss and it will contract output to avoid loss. So, the firm will attain equilibrium at point where marginal revenue is equal to marginal cost. At this point the profit of the firm is maximum.
7. Suppose there are two consumers in a market. The demand function of the first consumer is –
The demand function of the second consumer is –
Find out the market demand function. 4
8. Explain the relationship between average product and marginal product with the help of diagram. 4
Ans: The relationship between the two is as follows –
  1. As we increase the amount of an input, MP rises AP being the average of marginal products, also rises, but rises less than MP.
  2. The average product curve slopes upwards as long as the marginal product curve is above it. It makes no difference whether the MP curve itself is sloping upwards or downwards.
  3. When MP falls sufficiently, it becomes less than the prevailing AP and the later (i.e. AP) also starts falling. So MP and AP both are inversely U shaped.
  4. The slope of the AP curve depends on whether MP is above or below AP. When MP is above AP, the AP curve slopes upwards and when MP is below AP, the AP curve slopes downwards.
  5. MP can be zero and negative but AP is always positive.
9. The production function of a firm is given as. Calculate the level of output when it employs 25 units of labour and 16 units of capital. 4
10. State and explain the law of demand. 6
Ans: “Other things remain constant” when the price of a commodity increases then its demand falls and when the price of the commodity decreases, then the demand increases for the commodity. That means, there is an inverse relationship between price of the commodity and its quantity. Other things constant means that consumer’s income, choice and preference of the consumer’s does not change. The law of demand is explained with the help of an individual demand schedule.
Individual Demand Schedule
Price of orange
(Per unit) Rs.
Quantity of orange
(Per unit)
From the above schedule it is shown that when the price of orange increases then the demand for orange decreases and it increases when its price decreases. This schedule is explained below with a diagram.

D:\Work from Atanu\Arjun Sir\H.S. XII Year Economics\New Folder (2)\Untitled-5 copy.jpg

In the diagram, OX-axis represents quantity of orange and OY-axis represents price of orange. When the price of orange is Rs. 8 then, the consumer will willing to purchase only 4 unit of oranges. But when the price of oranges falls to Rs. 2 then the demand of the consumer for oranges will go up to 10. If various points like A, B, C and D join together then the consumer gets a downward slopping curve which is the demand curve for the consumer. This curve is negatively sloped as there is an inverse relationship between price and quantity.
11. The short run total cost (TC) function of a production unit is given below. Find out the total variable cost (TVC), average fixed cost (AFC), average variable cost (AVC) and average cost (AC) schedule. 6
Show with the help of diagram that total cost is the vertical sum of total fixed cost and total variable cost. 6
Ans: Relationship between TC, TFC and TVC: Total fixed costs are those which do not vary with different levels of production. For example, the cost of machinery, salary of permanent staff, rent of the land etc. The cost that a producer incurs to employ these fixed inputs is called the total fixed cost (TFC). Total variable costs are those, which vary almost in direct proportion to volume of production. That means, when production is increase average variable cost is also increases, and vice-versa. For example, wages of labour, raw materials etc. Total cost is the sum total of total fixed cost and total variable cost. That means TC = TFC + TVC.D:\Work from Atanu\Arjun Sir\H.S. XII Year Economics\New Folder (2)\Untitled-12 copy.jpg
In the diagram, OX-axis represents cost of production and OY-axis represents quantity. Fixed cost remains unchanged for any level of output. So the TFC curve is parallel to the OX-axis. If the production is zero, total variable cost is also zero. Hence the point of origin of the total variable cost is zero. As the total cost curve is the sum total of TVC and TFC. So the total cost is start from point “A”.
12. Show how a monopolist earns profit by using total cost curve and total revenue curve. 6
Explain the relation among the TR, AR and MR of a monopoly firm with the help of an imaginary table and diagram. 6
Ans: The relationship between TR, AR and MR of a monopoly firm with the help of an imaginary table and diagram are given below:
Number of units of commodity
Market Price
Total Revenue
TR = P x Q
AR = P
Marginal Revenue
From the above table we find that when the 1st unit is sold, total revenue, average revenue and marginal revenue are the same that is Rs. 10. A firm can sell more of its product only at a lower price. As a result both average revenue and marginal is falls. But marginal revenue falls more rapidly than the average revenue. Total revenue is positively sloped straight line implies that quantity demanded rises in greater proportion to fall in price. When marginal revenue (MR) becomes negative then total revenue (TR) starts declining. D:\Work from Atanu\Arjun Sir\H.S. XII Year Economics\New Folder (2)\Untitled-9 copy.jpg
This relationship among the three are diagrammatic represents in below. In the below diagram, the number of units of commodity is measured in OX-axis, while the TR, AR and MR are measured along OY-axis. As shown in the figure, TR, AR, MR are respectively the total revenue curve, average revenue curve and marginal revenue curve. In accordance with the description of above table, the total revenue is downward sloping after the point “A”. Because marginal revenue is zero in case of 6th unit of output level. If the units of commodity are sold beyond 6th unit of level of output, the marginal revenue will be negative gradually by an increasing amount. The total revenue will go on declining with increase of every unit of commodity. AR curve always remains above the MR curve. The slope formed by a straight line drawn from the point of origin O to a point on the total revenue curve (TR) relating to any output level will be the measure of average revenue at that level of output.
13. (a) In a modern economy, people hold money broadly for two motives. One is transaction motive, what is the other. 1
Ans: Speculative Motive
(b) Name the monetary authority that issues currency notes in India. 1
Ans: Reserve Bank of India
(c) What is aggregate demand? 1
Ans: Aggregate demand is the total demand for goods and services in the economy.
(d) Given the marginal propensity to save is 0.3, find out the income multiplier. 1
(e) Y = C + I + G + NX – In this equation what does NX refer to? 1
Ans: Here, NX refers net export. That means difference between export and import.
14. Explain how to calculate gross national product from gross domestic product. 3
Ans: GNP is the money value of all the final goods and services produced by the normal residents of a country. GNP is typically calculated as: GNP = GDP + Net income inflow from abroad – Net income outflow to foreign countries.
15. Distinguish between gross investment and net investment. 3
Ans: a) Gross investment means the final goods that comprises of capital goods are called gross investment. For example – machines, roads, bridges etc. On the other hand net investment means the value of those investments which are received after deducting the replacement expenditure from the gross investment.
b) The amount of net investment is always lower than gross investment.
c) The net picture of a country is given by net investment instead of the gross investment.
16. What is net national product at factor cost? 3
Ans: NNPfc is defined as the measure of the factor earnings of the residents of a country, both from economic territory and abroad. Therefore, NNPfc is equal to national income of country. It can be calculated as follows: NNPfc = NDPfc + NFIA.
17. What is devaluation of currency? 3
Ans: Devaluation refers to a decrease in a currency's value with respect to other currencies. A currency is considered devalued when it loses value relative to other currencies in the foreign exchange market. 
18. What is gold standard? 3
Ans: A gold standard is a monetary system where gold is used to measure the value of goods, services or investments in an economy. Printed money is used as legal tender where it has an equivalent value of gold upon demand. This system ensures that issued notes by a government is backed by the intrinsic value of gold. This gold standard was introduced in 1816 by Great Britain.
19. Explain the concept of ex-ante consumption. 4
Ans: This refers to planned (desired) consumption expenditure of households. Consumption function is represented by C = C + bY where indicates autonomous consumption (i.e., consumption expenditure when income is zero), b shows marginal propensity to consume (MPC) and Y stands for level of income. Remember, consumption demand is the total expenditure which all the households in the economy are willing to incur on purchase of goods and services for their personal satisfaction.
20. What are the sources of government revenue? 4
Ans: Sources of revenue of Government are divided into two parts: Tax revenue and non-tax revenue.
  1. Tax Revenue: A tax is a legal compulsory payment imposed by the government on the people. All taxes are broadly classified into i) Direct Tax and ii) Indirect Tax. When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called direct tax. e.g. Income tax, corporation tax, Gift tax etc. When the liability to pay a tax falls on one person and burden of that tax falls on some other person, the tax is called an Indirect tax. e.g. Goods and Services tax, Value added tax etc.
  2. Non-Tax Revenue: Non tax revenue consists of all revenue receipts other than taxes. For e. g.: fees, fines, dividend, gifts, External grants-in-aid, commercial revenue etc.
Some of them are explained below:
  1. Commercial revenue: The commercial revenues are received in the form of prices paid for govt. produced commodities and services. For example, electricity distributed by the Govt. railway service.
  2. Administrative revenues: The receipts placed in the category of administrative revenues include fees, licenses, fines etc.
  3. Gifts and grants: Gifts are voluntary contributions from private individuals or non-government donors to the govt. fund for specific purposes such as relief fund or defence fund during a war or an emergency.
21. When does a government incur budget deficit? Suppose the total government spending G = 150 and tax revenue T = 0.20Y. Now if the level of national income (Y) is 20000, what is the condition of government budget 1+3
22. Explain the circular flow of income in a simplified economy with two sectors – households and firms. 6D:\Work from Atanu\Arjun Sir\H.S. XII Year Economics\New Folder (2)\Untitled-1 copy.jpg
Ans: Circular flow of income forms the basis for measurement of Macro economics activities. It helps to know the functioning of an economy. Circular flow of income is a two sector economy is presented in the form of a household sector and firm sector. Factors of production are required for producing goods. The households (owners of factor inputs) supply factor services to the firms; which pay them a price for these services in form of wage, rent, interest and profit. Households make use of this income to purchase different goods and services produced by the firms. Thus, households depend on firms for factor payments and firms depend on households for sales revenue. The circular flow of income in a two sector economy is presented in the form of a figure given.
Explain the income method of calculating gross domestic product (GDP). 6
Ans: The income method of calculating national income is also called the factor income method or factor share method. This method measures national income from distribution side i.e. the national income is measured after it has been distributed and appears as income earned by individuals in the country. To estimate the national income by this approach, the total sum of the factor payments received during a given period is estimated. The factors of production are classified as land, labor, capital and organization. Accordingly, the national income is calculated as the sum of various factor payments like rent, wages, interest and profits plus depreciation.
Thus, National income = Rent + Wages + Interest + Profits + Depreciation
This method of estimating national income is of great advantage as it shows the distribution of national income among different income groups such as landlords, capitalists, workers, etc. It is therefore called national income by distributive shares.
Precautions: While estimating national income through income method the following precautions should be taken:
  1. Transfer payments are not included in estimating national income through this method.
  2. Imputed rent of self-occupied houses are included in national income as these houses provide services to those who occupy them and its value can be easily estimated from the market value data.
  3. Illegal money such as hawala money, money earned through smuggling etc. are not included as they cannot be easily estimated.
  4. Windfall gains such as prizes won, lotteries are also not included.
23. Explain the transaction demand for money. 6
Ans: Transaction demand for Money: Transaction demand for money is the amount of money required for current transaction of individuals and firms. The main reasons to hold money in cash for meeting day to day transactions is to bridge the interval between receipt of income and expenditure. For example, a worker who gets his wages of Rs. 700 on the first day of the month has to spend it continuously throughout the month. His cash balance at the beginning and end of the month are Rs. 700 and 0 respectively. So, the average cash holding of the man will be (Rs. 700 + Rs. 0) / 2 = Rs. 350. With the help of Rs. 700, so, the average transaction demand for money of the person is equal to half of his monthly income.
Let us now consider a two person economy consisting of a firm (owned by a person) and a worker. At the beginning of every month, the firm owner, pays the worker a salary of Rs. 500. The worker spends this income of the output produced by the firm. So, at the beginning of every month the worker has a money balance of Rs. 500 and the firm has a balance of Rs. 0. And on the last day of the month, the firm has a balance of Rs. 500 through its output sales. The average money holding of the firm as well as the worker is Rs. 250 each. So the total transaction demand for money in the economy is Rs. 500 (250 + 250)
The total volume of monthly transactions in the economy is Rs. 1000 because the firm has sold its output worth Rs. 500 to the worker and the worker has sold his services worth Rs. 500 to the firm. The transaction demand for money in the economy is a fraction of the total volume of transactions in the economy over the unit period of time. So the transaction demand for money in the economy can written as:
T = Total volume of transactions in the economy over unit period of time.
K = A positive fraction.
What are the instruments of monetary policy used by RBI? Explain any two of them. 6
Ans: The principle methods or instruments of Credit Control used by the Central Bank are:
  1. Quantitative or General Methods
  2. Qualitative or Selective methods
  1. Quantitative or General Methods: These are the traditional or general methods of credit control. These methods one used by Central Bank to expand or contract the total volume of credit in the economy neglecting the purpose for which it is used. These methods are :-
  1. Variation in the bank rate
  2. Open Market operations:
  3. Variation in cash reserve ratio:
  4. Variation in the statutory liquidity ratio:
  5. ‘Repo’ Transactions:
  1. Variation in the bank rate: Bank rate or discount rate is the rate at which the Central Bank of a country makes advances to the banks against approved securities or rediscounts the eligible bills. The purpose of change in the rate is to make the credit cheaper or expensive depending upon whether the purpose is to expand or control credit. An increase in bank rate result, in increase in lending rate of commercial banks lending to contraction of credit while a decrease in bank rate leads to decrease in lending rates of commercial banks lending to expansion of credit.
  2. Open Market operations: Open market operations means deliberate and direct buying and selling of securities and bills in the market by the Central Bank. The open market operations of the RBI are mostly confined to government securities. In order to increase money supply in the market, the RBI purchases securities in the open market. On the other hand, in order to contract credit, the RBI starts selling the securities in the open market.
  3. Variation in cash reserve ratio: Every scheduled bank in India is required to maintain a minimum percentage of their deposits with the RBI. Larger the reserve, lesser is the power of the banks to create credit and smaller the reserves, greater is the power of the banks to create credit.
  4. Variation in the statutory liquidity ratio: Statutory liquidity ratio is another reserve requirement used by the RBI to control money supply. In India, besides maintaining the cash reserve, every bank has to maintain a statutory reserve of liquid assets in terms of cash, gold or unencumbered securities. This is termed as statutory liquidity ratio. In increase in the liquidity ratio implies a transfer of banking funds to Government and corresponding reduction in credit available to the borrowers.
  5. ‘Repo’ Transactions: ‘Repo’ stands for repurchase. Repo or repurchase transactions are undertaken by the Central Bank in the money market to manipulate short term interest rates and to manage liquidity levels. In case the RBI desire to inject fresh funds in the economy it conducts ‘Repo’ transactions. On the other hand, to absorb liquidity the RBI ‘Reserve Repo’ transactions. The securities eligible for carrying out this operation are selected by the RBI. It includes government promissory notes, treasury bills and public sector bonds.
  1. Qualitative or Selective Methods: These are basically the selective and general methods of credit control. These methods are used for controlling the use and direction of credit. They have nothing to do with the control of the total volume of credit in economy. These methods are :-
  1. Direction
  2. Margin Requirement
  3. Consumer Credit Regulations
  4. Publicity
  5. Credit Rationing
  6. Moral Suasion.
  7. Direct Action.
  1. Directions: Sec. 21 of the Banking Regulation Act gives wide power to the RBI for controlling granting of advances by an individual bank or by banking as a whole. The RBI can give directors to any particular bank or all banks in general in regard to the purposes for which advances may or may not be made, the maximum amount of advance to any individual, firm or company etc.
  2. Margin requirement: Margin means the difference between the market price of security and loan amount. Changing margin requirement is another credit control method followed by the RBI. This system was introduced in 1956. By requiring higher margin while accepting a commodity as a security, the RBI can decrease the flow of credit to particular sector or vice versa.
  3. Consumer Credit Regulation: Under this method, consumer credit supply is regulated through hire-purchase and installment sale of consumer goods. Under this method the down payment, installment amount, loan duration, etc is fixed in advance. This can help in checking the credit use and then inflation in a country.
  4. Publicity: This is yet another method of selective credit control. Through it Central Bank (RBI) publishes various reports stating what is good and what is bad in the system. This published information can help commercial banks to direct credit supply in the desired sectors. Through its weekly and monthly bulletins, the information is made public and banks can use it for attaining goals of monetary policy.
  5. Credit Rationing: Central Bank fixes credit amount to be granted. Credit is rationed by limiting the amount available for each commercial bank. This method controls even bill rediscounting. For certain purpose, upper limit of credit can be fixed and banks are told to stick to this limit. This can help in lowering banks credit exposure to unwanted sectors.
  6. Moral suasion: It implies to pressure exerted by the RBI on the Indian banking system without any strict action for compliance of the rules. It is a suggestion to banks. It helps in restraining credit during inflationary periods. Commercial banks are informed about the expectations of the central bank through a monetary policy. Under moral suasion central banks can issue directives, guidelines and suggestions for commercial banks regarding reducing credit supply for speculative purposes.
  7. Direct action: Under this method the RBI can impose an action against a bank. If certain banks are not adhering to the RBI's directives, the RBI may refuse to rediscount their bills and securities. Secondly, RBI may refuse credit supply to those banks whose borrowings are in excess to their capital. Central bank can penalize a bank by changing some rates.
24. Explain the relationship between investment multiplier and marginal propensity to consume. 6
Ans. Investment multiplier is the co-efficient relating to an increment of investment to an increment of income. That is , Where
The value of the multiplier is determined by the marginal propensity to consume. The higher the marginal propensity to consume, the higher is the value of the multiplier and vice-versa. The relationship between the multiplier and the marginal propensity to consume are as follows –
Since C is the marginal propensity to consume, the multiplier K is by definition, equal to. The size of the multiplier varies directly with the MPC.
Since the MPC is always greater than zero and less than one. The multiplier is always between one and infinity. If the multiplier is one, it means that the whole increment of income is saved and nothing is spent because the MPC is zero. On the other hand an infinite multiplier implies that MPC is equal to one and the entire increment of income is spent on consumption.