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Saturday, March 03, 2018

AHSEC - Class 12: Economics Solved Question Paper' 2013

H.S. 2nd Year, 2013
Full Marks: 100
Time: 3 hour
Part - A

1. (a) What is mixed economy?
Ans. Mixed economy is such type of economic system where some industries are owned and managed by the private sector. 1
(b) Give one example of complementary goods. 1
Ans. Complementary goods are those goods which required together or it can satisfy human wants jointly.
(c) If the percentage change in quantity demanded is equal to the percentage change in price, what is the price elasticity of demand? 1
Ans. Price elasticity of demand as the ratio of the percentage change in quantity demanded to a percentage change in price.
(d) Define average variable cost. 1
Ans. Average variable cost is obtained by dividing the total variable cost by the number of units produced. That means, .
(e) Fill up the blank:  For a firm under perfect competition, the average revenue = ? 1

Ans. Marginal revenue
(f) 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.
2. Give one example of each of goods and services. 2
Ans: Goods example – medicine, Services example - services of doctors, teachers
3. Explain how price elasticity of demand for a good depends on its nature. 2
Ans: Larger the number of substitutes of a commodity, greater is the elasticity of demand, as in a situation of monopolistic competition. This is because the consumer gets a choice of shifting from one commodity to the other when price of one commodity changes in relation to price of other. On the other hand, if a commodity has no close substitute as under monopoly, elasticity of demand will be low. Because, in such a situation the consumer has little choice of shifting from one commodity to the other when price changes.
4. Why does an indifference curve slop downward? 2
Ans: The indifference curve slope downwards from left to right because the consumer increases more units of one commodity he will have to sacrifice the another commodity so that level of satisfaction is maintained.
5. State the law of variable proportions. 2
Ans. Law of variable proportions states that as more and more units of a variable factor are employed with fixed factors, total product increases at an increasing rate in the beginning then increases at a diminishing rate and finally starts falling.
6. State the concept of utility function. 2
Ans: In economics, the utility function measures welfare or satisfaction of a consumer as a function of consumption of real goods, such as food, clothing and composite goods rather than nominal goods measured in nominal terms. Utility function is widely used in the rational choice theory to analyze human behavior.
7. What is shut down point of a firm? 2
Ans: A firm will not produce at a price which is lower than the average variable cost. So long price is above the average variable cost, production will go on. If the price falls below the average variables cost, it will stop production. It is the Shut-down point.
8. The monthly income of a consumer is Rs. 400 and he spends this income entirely on two commodities, X and Y. The Price of the commodity X is Rs. 20 and that of Y is Rs. 25. On the basis of this information:
  1. Draw the budget line of the consumer.
  2. What will happen to the budget line if the price of commodity Y decreases to Rs. 20 while the income of the consumer and the price of commodity X remain the same? 2+2=4
In the above diagram, OX axis represents X commodity OY axis represents Y Commodity. “AC” is the budget line. If the income of the consumer and the price of commodity X remains the same, while the price of commodity Y decreases to Rs. 20, then he will purchased (Y commodity) .
9. What is budget line? Why does it slope downward? 1+3=4
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.
10. What is an Isoquants? Explain it graphically. 1+3=4
Ans. A curve indicates the same quantity of production of the firm. It shows a set of all possible combinations of the two inputs that would yield the same maximum possible output.
11. The production function of a firm is given as. Calculate the level of output when it employs 16 units of labour and 36 units of Capital. 4
12. Show that the average fixed cost curve is a rectangular hyperbola. 4
Ans. AVC curve is U-shaped as it falls upto a point and then start rising. The law of variable proportions explains why AVC is U-shaped whereas AFC curve is a rectangular hyperbola. AFC always decreases with increase in the level of output. It is because TFC remains constant at all levels of output. But AVC initially falls and then starts rising. As a result, the difference (or gap) between AC and AFC increases with increase in the level of output
13. Show how the price elasticity of demand is graphically measured along a linear demand curve. 6
Ans: Larger the number of substitutes of a commodity, greater is the elasticity of demand, as in a situation of monopolistic competition. This is because the consumer gets a choice of shifting from one commodity to the other when price of one commodity changes in relation to price of other. On the other hand, if a commodity has no close substitute as under monopoly, elasticity of demand will be low. Because, in such a situation the consumer has little choice of shifting from one commodity to the other when price changes.
Prove that at consumer’s optimum point on an indifference curve, the marginal rate of substitution is equal to the ratio of the prices.
Ans: The budget like is included for determining optimum choice of the consumer and the point on the indifference curve. The point on the budget line which touches the indifference curve would be the optimum choice of the consumer. The following diagram shown the optimum choice of the consumer, where

D:\Work from Atanu\Arjun Sir\New Folder (6)\Untitled-1 copy.jpg

OX-axis represents X commodity and OY-axis represents Y commodity. At point E, consumer gets equilibrium. The budget line BB touches the indifference curve IC at point E. So, E is said to be the optional choice of the consumer at point E,. That means, Marginal rate of substitution is equal to the price ratio. At this point E, the slope of both the budget line and indifference curve is equal. Then assuming that the consumer spends his whole income on the two commodities X and Y and gets equal satisfaction
14. “Monopoly firm is a price maker” – Explain. 6
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.
The demand and supply functions of a firm under perfectly competitive market are given below: And
Find (i) The equilibrium level of output and price. (ii) If due to increased cost, the supply function becomes, what will be the changes in equilibrium price and quantity?
15. (a) What is cash reserve ratio? 1
Ans: All the commercial banks are required to deposit a minimum percentage of its deposit in the central bank. This is called cash reserve ratio.
(b) Define high-powered money. 1
Ans: An high powered money refers the liability of the monetary authority of the country, RBI.
(c) Choose the correct one and fill in the gap: The ratio of additional consumption to additional income is called ____. (marginal propensity to save/marginal propensity to consume/marginal income). 1
(d) What is aggregate supply? 1
Ans: Aggregate supply refers to the value of total output available in an economy during a given period.  AS = Y, where Y is the national income AS = Aggregate supply.
(e) What is balance of payments? 1
Ans: The balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. These are all those unilateral payments corresponding to which there is no value-addition in the economy. For example: gifts, donation etc.
(f) What is value added of a firm? 1
Ans. Value added is defined as the difference between total value of output of a firm and value of input from other firm. That means, Value added = Value of output – Value of input used.
16. What is national disposable income? 2
Ans: National disposable income is the maximum available income from all sources that a country can spend on consumption or saving during a year.
17. What is net national product at factor cost? 2
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.
18. Give the concept of transfer payment along with an example. 2
Ans: A transfer payment is money or other aid that is given by a government without any good or service in return. The government simply transfers money, for example, from its tax revenue to an individual or business. 
19. In an open economy, if the marginal propensity to consume (c) is 0.8 and the marginal propensity to import (m) is 0.2, find the size of the income multiplier. 2
20. What is inflation?
Ans. 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. 2
21. What is ex-ante investment? 2
Ans: Ex-ante investment refers to amount of investment which firms plans to invest at different levels of income in the economy. The amount of ex-ante or planned investment is determined by the relation between investment demand and rate of interest, i.e. by investment demand function.
22. A firm produces goods of Rs. 500 per year and intermediate goods used by the firm is of worth Rs. 250. The cost of capital consumption is Rs. 20 per year. Calculate gross value added and net value added by the firm.  4
23. Briefly explain the components of aggregate demand. 4
Ans: There are four components of aggregate demand (AD).
  1. Consumption.
  2. Investment.
  3. Govt. expenditure.
  4. Net exports.
24. Distinguish between autonomous investment and induced investment. 4
Ans: Investment that is dependent on the level of income or on the rate of interest is called induced investment. Investment that would respond to a change in national income or in the rate of interest is called induced investment. 
If investment does not depend either on income/output or the rate of interest, then such investment is called autonomous investment. Thus, autonomous investment is independent of the level of income.
Following are the differences between autonomous and induced investment as follows:
  1. Autonomous investment is that investment which does not change the change in income. On the other hand induced investment is that investment which changes with the changes with the level of income.
  2. Induced investment is influenced by exogenous factors like invest growth of population, revolution etc. On the other hand autonomous investment is influenced by income, output, wage, sales, profit etc.
  3. The curve autonomous investment is shown as a curve parallel to the horizontal axis.
  4. Autonomous investment is income inelastic. On the other hand, induced investment is income elastic.
25. Trace out the relationship between government deficit and government debt. 4
Ans: The Government deficit is equal to government receipts minus spending for any fiscal year. It is a deficit if the outcome of that equation is negative. If the outcome of that equation is positive, we have a budget surplus. When there is a deficit, the government sells bonds. The total amount of bonds outstanding is called “the government debt".
26. What are the basic objectives of a government budget? – Explain them briefly. 4
Ans: A government budget is a detailed statement of the Govt. receipts and Govt. expenditure during a financial year. The objectives of the govt. budget are as follows:
  1. Promoting economic growth: The govt. can help economic growth by setting up basic and heavy industries like steel, furniture, machines, buildings.
  2. Reducing inequalities of income: The govt. can reduce inequalities of income by taxing the rich people more in the budget and spending more on the poor.
  3. Economic stability: The govt. budget is used as an important policy instrument to reduce economic instability that is inflation and deflation in the economy.
  4. Providing infrastructural facilities: To fulfill these objectives, the govt. spends on education, health, sanitation, water and electricity, supply transport and communication services etc.
  5. Besides these, removal of poverty providing employment opportunity, formation of human capital etc. are the objectives of govt. budget.
27. Discuss the reasons why it will not be correct to say that the GDP is the index for measuring welfare of the people of a country. 6
Ans: Limitations of GDP: There are several limitations of GDP as a welfare indicator which are listed below:
  1. GDP does not incorporate any measures of welfare: GDP only describes the value of all finished goods produced within an economy over a set period of time. There are multiple ways to calculate and measure GDP, but neither of them includes any indicator of welfare or well-being.
  2. GDP only includes market transactions: As a result, it does not account for domestic or voluntary work, even though these activities have a considerable positive impact on social welfare, as they complement the market economy and thus improve the standard of living. On the other hand GDP does not include black market transactions or other illegal activities that may have a substantial negative impact on overall social well-being.
  3. GDP does not describe wealth distribution: If there is a high degree of wealth inequality, the majority of people do not really benefit from an increased economic output because they cannot afford to buy most of the goods and services. Thus to accurately describe social welfare it is essential to consider wealth distribution.
  4. GDP does not describe what is being produced: Since GDP measures the value of all finished goods and services within an economy, it also includes products that may have negative effects on social welfare.
  5. GDP ignores externalities: Economic growth usually goes hand in hand with increased exploitation of both renewable and non-renewable resources. Due to this overuse, more and more negative externalities arise (e.g. pollution, overfishing) and social welfare will decrease as a result. This effect is not included in GDP at all.
Due to the above mentioned reasons, we can say that it will not be correct to say that the GDP is the index for measuring welfare of the people of a country
Explain the income method of calculating GDP.
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.
28. Explain the role of the RBI as the lender of the last resort. 6
Ans. Lender of the last resort: The Central Bank is the Lender of the last resort of the commercial banks. When the other banks shortage of funds, then they can approach to the Central Bank for financial assistance. The Central Bank lends money to them by discounting their bills. This enables the Central Bank to establish control over the banking system of the country. The RBI is ultimate source of money and credit provide fund to money market participate thus the RBI act as lender of last resort for the commercial banks.
Explain the concept of deficit financing.
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. The expenditure revenue gap is financed by either printing of currency or through borrowing. There are many causes continuing deficit in the Govt. budget since the beginning of the First Five Year Plan.
  1. The non-developmental expenditure of the government has been increasing at a faster rate.
  2. The main purpose of deficit financing in India has been to enable the government to obtain the necessary resources for the development plans.
The important evil effects of deficit financing are as follows:

  1. It creates rise in prices in the economy.
  2. It creates adverse effects on savings. Because, deficit financing creates a fast rising trend due to increasing prices which results adverse effects on savings.