Saturday, March 03, 2018

AHSEC Class 12: Economics Solved Question Paper' 2017

H.S. 2nd Year, 2017
ECONOMICS\
Full Marks: 100
Time: 3 hour
PART - A
1. (a) Define Service. 1
Ans: The work done by a person for others is called service rendered. It satisfies the wants of the service seekers. For example – services of doctors, teachers.
(b) Fill in the blank: The allocation of Limited resources and distribution of the final goods and services are the central problems of any economy. 1
(c) What is a demand function? 1
Ans: The demand function for a commodity is the relation between the various quantities of the commodity. If the price of x commodity increase then there is change in demand for x commodity.
(d) What happens to total product when marginal product is zero? 1
Ans: Total product is maximum when marginal product is zero.
(e) What does a vertical supply curve imply? 1
Ans: Vertical supply curve indicates perfectly inelastic supply. It means with changes in price there is no change in supply.
(f) Why is average total cost (ATC) greater than average variable cost (AVC)? 1

Ans: Average total cost is greater than average variable cost because ATC is the sum of average fixed cost and average variable.
2. State the meaning of microeconomics and macroeconomics.
Ans: Micro economics studies the small part or component of the whole economy. It studies all economic matters like consumer behaviour, price, demand, income etc. from individual point of view.
Macro economics studies the aggregates of the whole economy such as national income, full employment, total saving etc.
3. Why does a budget line slope downward?
Ans. Budget line is a straight line curve which indicates different combination of commodities that the consumer can purchased with his money income.
Slope of budget line represents the ratio of the prices of two goods in such a manner that both goods are equal to the consumer. That means, slope of budget line is equal to the ratio of the prices of the two commodities i.e.  - PX/PY. Its slopes downwards because the consumer can buy extra units of one commodity only by sacrificing some units of the other commodity.
Another characteristic of budget is that it is a straight line implying that slope of budget line is constant. The slope is constant because price ratio remains constant.
4. If the total utilities of 4 and 5 units of a commodity for a consume are 56 and 60 respectively, calculate the marginal utility of 4 units of it for him.
Ans.
5. State any two exceptions of the law of demand. 2
Ans: The law of demand will not hold good under the following circumstances:
  1. Goods of Conspicuous Consumption: In such case, higher price mean more consumption.
  2. Giffen Goods: When price of a Giffen goods falls, it quantity demanded also falls.
  3. Ignorance: The law of breaks down when consumers judge quality of the commodity by its price.
6. Define the term ‘long-run’ as used in production. 2
Ans. Long run is refer to a long time in which a firm can change all factors including machinery, building etc. There is no difference between fixed cost and variable cost in the long period.
7. State any two assumptions of the law of variable proportions. 2
Ans. Diminishing returns to a factor operate due to:
  1. Fixity of the factors: As more and more units of a variable factors are combined with the fixed factors, the latter gets over utilized hence the diminishing returns.
  2. Factors of productions are imperfect substitute of each other.
8. Distinguish between supply and stock. 4
Ans: The differences between stock and supply are given below:
Stock
Supply
1. Stock refers to the total volume of a commodity that can be brought into the market for sale at short notice.
1. Supply refers to quantity of a commodity that is actually brought into the market for sale.
2. The stock of a commodity mainly depends upon (a) production of the commodity, (b) procurement price and (c) storage cost.
2. Supply depends mainly upon the market price of that commodity.
Or
Explain briefly any four factors affecting supply of a commodity. 4
Ans: Change in supply means the shift of supply curve. With increase in supply, supply curve shifts to the right and with decrease in supply, the supply curve shifts to the left. Following factors cause a change in supply:
  1. Technological Change: When there is technological improvement, output is produced at lower cost. Lower cost of production increases the supply of the commodity. The supply curve shifts to the right.
  2. Price of Other Goods: When price of a substitute good increase, the quantity supplied of the concerned good decreases and there is backward shift of the supply curve. Supply curve shifts forward in case price of the substitute good decreases.
  3. Price of Factors of Production: If factor price decreases, cost of production also decreases. Accordingly supply increases and the supply curve shifts to the right. If factor price increases, supply tends to decline and there is a backward shift in supply curve.
  4. Number of Firms: Increase in the number of firms implies increase in market supply and conversely decrease in number of firms reduces the market supply of the commodity.
9. Explain the law of supply with the help of a supply schedule. 4
Ans. Law of supply: The law of supply states that, other things being equal, quality supplied increases with increases in price and decrease with decrease in price. In other words, there is positive relationship between price and quantity supplied.
We can explain law of supply with the help of a schedule.
(Rs.)
(units)
10
11
12
100
200
300
The above schedule shows that quantity supplied increases from 100 to 200 units. When own price of the commodity increases from Rs. 10 to Rs. 11 per unit. Likewise, it increases from 200 to 300 units when increases from Rs. 11 + Rs. 12 per unit. Implying that there is positive relationship between own price of the commodity and its quantity supplied.
10. State the relationship between average cost (AC) and marginal cost (MC) using diagram. 4
Ans. Relationship between AC and MC: We observe the following relationship between AC and MC is:
  1. Both average cost and marginal cost are obtained from total cost as under:
  1. When average cost falls with an increase in output (upto q, level of output as shown marginal cost always remains lower than average cost.
  2. When average cost is rising, marginal cost remains above average cost. In other words, marginal cost rises faster than average cost (beyond q1 level of output).
  3. Marginal cost and average cost are equal when average cost in minimum (at q1 level of output).

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11. State the distinction between explicit cost and implicit cost. Give one example of each of them. 2+2=4
Ans: The differences between explicit costs and implicit costs are as follows:
Basis
Explicit Costs
Implicit Costs
1. Meaning
There are the costs of hired/purchased inputs.
These are the costs of self supplied inputs which are used in production.
2. Payment
Explicit costs are the cost of inputs whose payment is made to the out orders.
Implicit costs involve no money payment. These include the imputed value of self inputs supplied.
3. Examples
(i) Payment of wages.
(ii) Payment of rent of hired building.
(iii) Payment for raw material purchased.
(i) Interest on own capital.
(ii) Rent of own land and building.
(iii) Estimated salary of the owner who is acting as a manager.
12. Write down three characteristics of monopolistic competition. State whether the output produced by a firm under such a market is higher/lower than or equal to that of a firm under perfect competition. 3+1=4
Ans. The basic features of monopolistic competition are as follows:
  1. Large Number of Sellers (firms) and Buyers.
  2. Product Differentiation.
  3. Free Entry and Exit of Firms.
  4. Selling Costs.
  5. Non Price Competition.
Or
“Monopoly firm is a price maker” – Explain. 4
Ans: In a monopoly market there is a single seller and there are no close substitutes of the commodity sold by the monopolist. The monopolist controls the entire production of a commodity and the entry of new firms is completely closed. The monopolist is in a position to influence the price of the product. He is a price maker in that sense that he can increase its sale only when the price of the goods falls. The monopolist earns supernormal profit both in the short run as well as long run.
13. Explain the two basic conditions of consumer’s equilibrium assuming that the consumers only two goods.
Ans: Consumer’s Equilibrium in case of two commodities through utility approach is attend when ratio marginal utility of commodity to its price becomes equal to the ratio of marginal of the other commodity to its price. Symbolically,
These can be explain with the help of following utility schedule. Suppose consumer’s money income is Rs. 30, Price of goods 1 is Rs. 10 per unit and Price of goods 2 is Rs. 2 per unit.
Unit of goods
1
2
3
4
5
6
100
80
60
40
20
0
10
10
10
10
10
10
10
8
6
4
2
0
24
22
20
18
16
14
2
2
2
2
2
2
12
11
10
9
8
7
Expenditure on X + Expenditure on Y = Money Income
For obtaining maximum satisfaction by spending given income of Rs. 30 the consumer will buy 2 units of goods – X and 5 units of goods – Y. These combinations of goods bring in maximum satisfaction or state of equilibrium because a rupee worth of marginal utility incase of goods – X is Rs. 8 i.e. .
Or
Explain the concepts of change in quantity demanded and change in demand curve using suitable diagrams.
Ans: The demand curve will shifted if the consumer’s quantity demands of a commodity changes. Sometimes, the demand curve will change when the price of a commodity remains constant. There are various reason for the change in demand. Following are the most important ones:
  1. Change in consumer’s income.
  2. Change in the consumer’s tastes and habits.
  3. Change in the relative preference of the consumer.
  4. Change in the price of related commodities.
  5. Expectation of decline in price in future etc.
In the below diagram, it is shown that at the same market price the demand curve is shifted from to or



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14. The demand and supply functions of a firm under perfectly competitive market are given below –
Find (i) The equilibrium price and output.
(ii) , what will be the changes in equilibrium Price and Output? 3+3=6
Ans.
Or
The total cost (TC) and prices (P) at different units of output of a monopolist are given below:
  1. Find out the total revenue (TR), marginal revenue (MR) and marginal cost (MC) schedules.
  2. Find out the equilibrium quantity of output. 1+2+2+1=6
Q
TC
P
1
2
3
4
5
6
7
8
20
35
45
51
58
66
76
88
15
14
13
12
11
10
9
8

Ans.
Q
TC
P
TR
MC
AC
MR
AR
Profit
1
2
3
4
5
6
7
8
20
35
45
51
58
66
76
88
15
14
13
12
11
10
9
8
15
28
39
48
55
60
63
64
20
15
10
6
7
8
10
12
20
17.5
15
12.75
11.6
11
10.85
11
15
13
11
9
7
5
3
1
15
14
13
12
11
10
9
8
-5
-7
-6
-3
-3
-6
-13
-24

PART - B
15. (a) What is the alternative name of macroeconomics? 1
Ans: Theory of Income and Employment
(b) What is the significance of the 450 line in Keynesian income determination model? 1
Ans: The 45-degree line shows the set of points where the level of aggregate expenditure in the economy is equal to the level of output or national income in the economy.
(c) What is the value of MPC when MPS is zero? 1
Ans: The value of MPC is equal to unity (i.e., 1) when MPS is zero since MPC + MPS = 1
(d) What is foreign exchange rate? 1
Ans: Foreign exchange rate is the price of one currency in terms of another currency.
(e) What is meant by appreciation of the currency of a country? 1
Ans: Currency appreciation means when there is a decrease in domestic currency price of the foreign currency.
(f) What is invisible trade? 1
Ans: Invisible trade refers to the services rendered by the country to other countries. Such services consists of banking, insurance etc.
16. Give any two examples of macroeconomics variable. 2
Ans: Exchange Rate, National output, Interest rate, Employment.
17. State the concept of depreciation in the context of national income accounting. 2
Ans: Depreciation refers to a fall in the value of fixed assets due to normal wear and tear, passage of time and expected obsolescence (change in technology). The concept of depreciation assumes a great significance in national income accounting. It is used to differentiate between gross variables and net variables. Gross variables like GDP, gross profit, gross investment are inclusive of depreciation. When we deduct depreciation from a gross variable, we obtain a net variable. For example, when we deduct depreciation from GDP, we get NDP.
18. If the marginal propensity to save (s) of an economy is 0.3, find out the value of the income multiplier. 2
Ans.
19. State any two measures of fiscal policy to correct, the problem of excess demand in an economy. 2
Ans: The following are the two fiscal policy measures used to combat the problem of excess demand: Increase in taxes and Reduction in government expenditure.
20. Give the concept of full employment equilibrium. 2
Ans. Full employment equilibrium refers to a situation where aggregate demand and aggregate supply are equal at full employment output where as under employment equilibrium implies a situation where aggregate demand and aggregate supply become equal in the state of unemployment.
21. What is deficit financing? 2
Ans: Deficit financing is the budgetary situation where expenditure is higher than the revenue. It is a practice adopted for financing the excess expenditure with outside resources.
22. What are the four factors of production? Write down the name of the remuneration to each of them. 2+2
Ans: There are four factors of production:
  1. Land
  2. Labour
  3. Capital
  4. Entrepreneurship
Remuneration for four factors of production:
  1. Land: Rent
  2. Labour: Wages
  3. Capital: Interest
  4. Entrepreneurship: Profit
23. Explain any four causes of disequilibrium in BOP. 4
Ans: Disequilibrium in Balance of Payments: Balance of payments always balances in the accounting sense. The overall account of the balance of payments necessarily balance or must always be in equilibrium. It is because of the reason that balance of payment is prepared in terms of credits and debits based on the system of double entry book-keeping. Under the system, the two sides are kept equal.
Causes behind Deficit in BOP: Deficit in BOP is caused by a variety of factors which are given below
  1. Huge Development Expenditure: When a backward country starts various development schemes often needs the imports of machines, raw materials, etc. This raises the country’s import bill and consequently its BOP becomes adverse.
  2. Population Growth: A country with a high rate of growth of population often faces an adverse balance of payments because the total demand for goods and services within the country cannot be met out of domestic production.
  3. Inflation: Inflation may also cause deficit in the balance of payments; Exports decrease as a result of inflation and at the same time the demand for imports increases.
  4. Change in Foreign Exchange Rates: When the external value of the domestic currency goes up, imports become cheaper and exports dearer.
Or
Distinguish between factor income and transfer income. 4
Ans: The differences between these two are given below:
Factor Income (or Payment)
Transfer Income (or Payment)
It is received in return for rendering productive service.
It is received without providing any good or service in return.
It comprises rent, wages, interest and profit.
It comprises gifts, subsidies, donations, scholarships etc.
It is an earned income and hence, an earning concept.
It is an unearned income and hence a receipt concept.
It is included in national income.
It is not included in national income.
24. It is planned to increase national income by Rs. 1,000 crore in an economy. How much increase in investment is required to achieve this goal if MPC = 0.6? 4
Ans.
25. What is the meaning of government budget? Distinguish between revenue receipts and capital receipts. 1+3
Ans: A government budget is a detailed statement of the Govt. receipts and Govt. expenditure during a financial year.
Capital Receipts: Capital Receipts refer to those receipts of the government which i) tend to create a liability or ii) Causes for reduction in its assets. All the Capital receipts are broadly classified into three categories.
Revenue Receipts: Any receipts which do not either create a liability or lead to reduction in assets is called revenue receipts. Revenue receipts consist of 1) Tax Revenue and 2) Non-Tax Revenue.
Revenue receipts may be distinguished from Capital receipts as follows:
  1. In case of revenue receipts, government is under no obligation to return the amount in future, while in case of capital receipts government is under obligation to return the amount along with interest.
  2. Revenue receipts neither create liabilities nor cause any reduction in assets, whereas capital receipts either create liabilities or reduce assets.
26. Point out two merits and two demerits of indirect tax. 2+2=4
Ans: An indirect tax is that tax which is paid by one individual but the burden of which is borne by another individual.
Advantages of indirect tax:
  1. Indirect taxes are broad-based as these taxes are collected from the all the different classes of people.
  2. As indirect taxes are included with the prices of these commodities thus buyers cannot evade payment of such taxes.
Disadvantages of indirect tax:
  1. These taxes are uncertain. The amount calculated through this tax cannot be calculated beforehand.
  2. Indirect taxes are regressive in nature. Every consumer, whether rich or poor pays the amount of tax at the same rate. So, the poor people’s bear more burden than the rich one.
27. Explain the income method of calculating 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.
Or
Explain the relationship between investment multiplier and MPC. 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.
28. Briefly explain any four functions of a commercial bank. 6
Ans: Commercial Banks are the financial institution which accepts deposits from different institutions and advances loans to some other institutions. The primary functions of a Bank are:
  1. Acceptance of Deposits: It is the most important function of a bank. According to this function, the commercial bank accepts deposits from different individuals and organizations. The bank accepts deposits from them and provides all securities to them.
  2. Making loans and advances: The second important function of bank is advancing loan. The commercial banks earn interest by lending money.
  3. Investment of funds: Besides loan and advances, banks also invest a part of its funds in govt. and industrial securities. Banks purchases both govt. and industrial securities like govt. bills, share, debentures, etc from their market.
  4. Credit Creations: The banks create credit. When a bank advances a loan, it does not give cash to the borrower. It opens an account in the name of the borrower. The borrower is allowed to withdraw money by cheque whenever he needs. This is known as Credit Creation.
The secondary functions of a bank are:
  1. Agency functions: These functions are performed by the banker for its own customer. For these services, the bank charges certain commission from its customers. These functions are :-
  1. Remittance of funds.
  2. Collection and payment of credit instruments.
  3. Execution of standing orders.
  4. Purchase and sale of securities.
  5. Collection of Dividend and interest
  6. Income tax consultancy.
  1. General Utility functions: These are certain utility functions performed by the modern commercial bank to its customer for the community. These are:
  1. Safe custody of valuables.
  2. Issuing letters of credit.
  3. Gift Cheques.
  4. Dealing in foreign exchange.
  5. Credit cards.
  6. Collection of statistics.
Or
Describe the speculative demand for money. 6

Ans: Speculative Demand for Money: Ans. Speculative demand for money refers to the demand for holding certain amount of wealth in reserve to make speculative gains out of the purchases and sale of bonds and securities through future changes in the rate of interest. Wealth can be held (stored) in the form of landed property, bonds, money, bullion, etc. For the sake of simplicity, all forms of assets except money may be clubbed in a single category called bonds. Thus, according to Keynes, there are two types of assets, i.e. money and bonds. People compare rate of return on bond with rate of interest on bank deposits. It is speculation about future changes (rise/fall) in interest rate and bond prices that the resulting demand for money is called ‘speculative demand for money.”