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## Saturday, March 03, 2018

### AHSEC Class 12: Economics Solved Question Paper' 2016

H.S. 2nd Year, 2016
ECONOMICS
Full Marks: 100
Time: 3 hour
PART - A
1. (a) What is mixed economy? 1
Ans: Mixed economy is such type of economic system where some industries are owned and managed by the private sector.
(b) What is opportunity cost? 1
Ans: The Opportunity cost of anything is the next best alternative that has been forgone.
(c) Give one example of complementary goods. 1
Ans: Complementary goods are those goods which required together or it can satisfy human wants jointly.
(d) Fill in the blanks: AC = AVC + ……………. 1
Ans. AC = AVC + AFC.
(e) What does the average fixed cost (AFC) curve look like? 1
Ans. AFC curve is downward sloping to right. As the output increases, the average fixed costs get distributed that is AFC falls.
(f) Give an example of variable cost. 1
Ans. Examples of variable costs are – labour cost and costs of raw materials.

2. Mention two central problems of an economy. 2
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. Mention any two determinants of market demand. 2
Ans. Market demand for a commodity is affected by the following factors:
1. Price of the Commodity: When price of the commodity increases in the market, its quantity demanded decreases and vice versa.
2. Income of the Consumer: Market demand for a commodity is directly related to income of the consumer. Increase in income of consumer causes increase in market demand for the commodity.
3. Prices of Related Goods: In case of substitute goods, demand for a commodity falls with fall in price of the substitute commodity. In case of complementary goods, market demand for the commodity rises with a fall in the price of complementary commodity.
4. Tastes and Preferences: If consumer’s tastes and preferences change, quantity demanded of the commodity will also change.
5. Income Distribution: If income distribution is even, market demand for the commodity will be more, than otherwise.
6. Size of Population: Higher population implies greater market demand for goods and services and vice versa.
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 equation of his budget line.      2
Ans.
5. What is marginal rate of substitution? 2
Ans: The marginal rate of substitution refers to the rate at which the consumer is willing to sacrifice goods – Y for a unit more of goods – X.
6. Mention two determinants of the supply curve of a firm. 2
Ans. Following factors cause a change in supply:
1. Price of Other Goods: Supply curve shifts forward in case price of the substitute good decreases.
2. 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.
3. 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.
7. Explain the relation between market price and marginal revenue of a price taking firm. 2
Ans: The market price is very short period price like an hour, a day or few days. Demand plays an active role for determining price in such a market. On the other hand, Marginal revenue is the addition to total revenue on account of sale of one more unit of output.
8. If the total product with 5 units of a variable factor is 55, calculate the average product of it. If the factor is increased by 1 more unit as a result of which the total product becomes 60, what will be the marginal product? 4
Ans.
Or
Explain the conditions for equilibrium of a firm. 4
Ans: The conditions for equilibrium of a firm are as follows:
1. At Q level of output, P = MR = MC that means, price = Marginal revenue = Marginal cost.
2. At Q level of output, there is a rising cost at that point.
3. The market price (P) at Q level of output in the short period.
4. In the long run, that means P is more than or equal to average cost.
9. What is meant by Returns to scale? Explain the various returns to scale. 1+3=4
Ans: Returns to scale relates to long run production function or input output relation where all inputs increase at a same proportion. There are three types of return to scale.
1. Constant returns to scale,
2. Increasing returns to scale and
3. Diminishing returns to scale.
Constant returns to scale refers when the factors of production are changed in a certain proportion and output also exactly in the same proportion.
Increasing returns to scale refers when the factors of production are changed in a certain proportion and the output changes more than the rate of changes in factors.
Diminishing returns refers when the factors are changed in a certain proportion and the output changes less than the rate of change in factors.
Or
Distinguish between returns to factor and returns to scale. 4
Ans: Following are the differences between returns to factors and returns to scale.
1. Returns to factor related to the behaviour of total output when only input is increased and all other inputs are held constant. On the other hand, returns to scale refers to the increase in output when all inputs are increased in the same proportion.
2. Returns to a factor related in the short run. On the other hand, returns to scale relates in the long run.
3. Returns to a factor can be explained with the help of law of variable proportion from where we derive three stages of production function like increasing marginal return, diminishing marginal return and negative marginal returns. On the other hand returns to scale may be increasing, decreasing and constant returns.
10. The production function of a firm is given as . Calculate the level of output when it employs 25 units of Labour (L) and 16 units of Capital (K).
Ans.
11. The marginal revenue (MR) schedule of a production unit is given below. Calculate the total revenue (TR) and the average revenue (AR) schedules.
 Q MR 1 2 3 4 5 6 21 19 17 11 7 3
Ans:
 Q MR TR AR 1 2 3 4 5 6 21 19 17 11 7 3 21 40 57 68 75 78 21 20 19 17 15 13
12. Write down four characteristics of monopoly market. 4
Ans: The main features of monopoly market are as follows:
1. Single seller and large number of buyers of a product.
2. Entry of new firms not possible. Therefore, a monopolist can earn extra normal profits in the long run.
3. No close substitutes of the monopoly product.
4. Full control over price.
5. Price discrimination is possible.
13. State and explain the law of demand with the help of a demand schedule and a diagram. 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) 2 4 6 8 10 8 6 4
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.

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.
Or
Explain the concept of market equilibrium with the help of a demand and supply curves.
Ans: When quantity demand and quantity supply of a commodity are equal then a market gets an equilibrium position. At that equilibrium position, the amount demanded at this price is equal to the amount supplied. That means total supply of the good that all the sellers want to sell is exactly equal to the total supply which all the consumers. It is determined at a point where demand and supply curves intersect each other.
In the perfectly competitive market determines equilibrium price and quantity by the interaction of demand and supply. The impact of simultaneous shift of demand and supply on equilibrium price and quantity is depicted by a schedule. Simultaneous shift of demand and supply may be four types that are as follows:
1. Both the demand curve and supply curve shift rightwards.
2. Both the demand curve and supply curve shift leftwards.
3. Demand curve shifts rightward and supply curve shifts leftward.
4. Demand curve shifts leftward and supply curve shift rightward.
 Shift of Demand Shift of Supply Quantity Price Leftward Rightward Rightward Leftward Leftward Rightward Leftward Rightward Decrease Increase Rise/fall change in Rise/fall change in Rise/fall remain constant Rise/fall remain constant Rise Fall
The following schedule diagram illustrates the determination of market equilibrium.
 Price (Rs.) Demand Supply 6 5 4 3 2 1 50 100 200 300 400 500 600 500 400 300 200 100

The above table and diagram show that the equilibrium is attained at that point E, where at price Rs. 3, the quantity demand is 300 and quantity supply is also 300 intersect each other and the firm gets equilibrium position.

14. What is price elasticity of demand? Explain briefly any two factors determining price elasticity of demand for a goods. 2+4=6
Ans:  Price elasticity of demand as the ratio of the percentage change in quantity demanded to a percentage change in price. The elasticity of demand is affected by the following factors:
1. Nature of Commodity: Goods may be necessaries, luxuries and comforts. Demand for necessaries (like salt) is highly inelastic; demand for luxuries (like ACs) is highly elastic; and demand for comforts (like air coolers) is moderately elastic.
2. Availability of Substitutes: Commodities which have substitutes have elastic demand, like tea and coffee. Commodities having no substitutes like liquor and cigarettes, etc. have inelastic demand.
3. Alternative Uses of a Commodity: If a commodity is used for different purposes, it has elastic demand. Example: Electricity and coal.
4. Price Level: Higher the level of price, higher is the elasticity of demand for a commodity.
5. Time Period: Elasticity of demand is high over a long period (compared to a short period), because during a short period of time, consumption habits tend to be stable.
Or
Explain the implications of the features, “Product differentiation” and “Selling Costs” under monopolistic competition. 3+3=6
Ans. Product differentiation implies that products are the same type but they are differentiate according to its quality, size, colour, taste etc. So, they are differentiating product among the consumers. Forms the product differentiation, different consumers are found to gradually attach their loyalty to particular brand names of the product.
Selling cost imply the extra cost of a monopolistic product. In the monopolistic market situation, the producer bears extra charge on their product like advertisement cost to counter the rival firms actions, to ensure their survival and growth in the industry.
PART - B
15. (a) What constitute fiat money? 1
Ans: Fiat money is a currency without intrinsic value established as money by government regulation. e.g. paper money and coins.
(b) 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.
(c) Define involuntary unemployment. 1
Ans. Involuntary unemployment refers to a situation in which people are ready to work at the current wage rate but do not find any work.
(d) What is National Income? 1
Ans. National income refers to aggregate income of the whole economy during a given period of time.
(e) Why is post office not considered as bank? 1
Ans: Post office though provides banking services but this is not a bank because it is not covered under Banking Regulation Act.
(f) Give one example of accommodating capital flow. 1
Ans: Government Financing
16. Suppose the Net National Product at market price (NNPMP) of a country is Rs. 1600 crore. If the total indirect tax is Rs. 100 crore and the total amount of subsidy paid by the government is Rs. 80 crore, find out the National Income of the country. 2
Ans:
17. What do you understand by the problem of double counting in the context of a measurement of National Income? 2
Ans: The counting of the value of commodity more than once is called double counting. This leads to over estimation of the value of goods and services produced. Thus, the importance of avoiding double counting lies in avoiding over estimating the value of domestic product.
18. Distinguish between induced investment and autonomous investment. 2
Ans: 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.
Autonomous investment is income inelastic. On the other hand, induced investment is income elastic.
19. Name two sources of non-tax revenue. 2
Ans. Fees, Commercial Revenue
20. Mention two main items of non-plan expenditure of a government budget. 2
Non-Plan expenditure refers to that government expenditure which is incurred on regular function of the government. This includes expenditure of the government other than plan expenditure such as expenditure on police, judiciary, military, expenditure on normal running of government department, relief expenses on earthquake and flood victims.
21. What is devaluation of currency? 2
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.
22. Define personal income and private income and distinguish between them. 2+2=4
Ans: Following are the difference between personal income and private income:
1. Personal income is the income actually received by the individuals during a particular period of time. On the other hand, private income is the income of the private sector that is factor incomes and transfer incomes received from all sources within and outside the country.
2. Personal income is obtained by deducting two items from the private income that is undistributed profits and corporate taxes.
3. The concept of private income is vast that the personal income.
23. If National Income in an economy increases by Rs. 1,000 crore as a result of a new investment of Rs. 200 crore, find out the values of (i) MPC, and (ii) Multiplier (K). 2+2=4
Ans:
24. Explain the relationship between marginal propensity to consume (MPC) and marginal propensity to save (MPS). 4
Ans. We know that a major part of increase in income is spent on consumption and the rest in saved. This can be written as –
25. What is meant by revenue deficit? Explain three implications of revenue deficit. 1+3=4
Ans. Revenue deficit refers to the excess of total revenue expenditure of the government over its total revenue receipts.
Implications:
1. Revenue deficit affects the economic growth of the economy as Govt. expenditure is reduced to the extent of deficit on the revenue account.
2. Revenue deficit lowers the rate of economic growth of an economy as govt. has to borrow from the market which reduces the resources available for private investment.
3. Revenue deficit is a reflection of the government’s fiscal policy.
Or
What are the basic objectives of a government budget? Explain them briefly.
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.
26. Distinguish between balance of trade (BOT) and balance of payment (BOP). 4
Ans: Following are the differences between balance of payment and balance of trade:
 Basis Balance of Trade Balance of Payments Meaning The balance of exports and import of the product and services is termed as Balance of Trade. The balance of payments of a country is a systematic record of all its economic transactions with the outside world in a given year. Recording of transactions It records transactions relating to goods only. It records transactions relating to both goods and services. Capital transfer Capital transfers are not included in balance of trade. Capital transfers are included in balance of payment. International transactions Balance of trade gives a partial picture of the international transactions of a country. Balance of payment gives a full picture of the international transactions of a country. Component It is a component of current account of balance of payment. It has two components – capital account and current account. Result It can be favourable, unfavourable and balanced. Both the receipts and payments sides tallies.
Or
Differentiate between fixed and flexible exchange rates.
Ans: Following are the differences between flexible foreign exchange rate and fixed foreign exchange rate in the content of foreign trade.
1. Flexible exchange rate is determined by the forces of demand and supply of foreign exchange. On the other hand, the fixed exchange rate is determined automatically through the working of the economic system by the govt.
2. Under flexible exchange rate it is free to fluctuate according to change in demand and supply of foreign currency. On the other hand, under fixed exchange rate system, only the govt. has the power to change it.
3. Under flexible exchange rate, the exchange rate is frequently changed. On the other hand, in the fixed exchange rate system, changes of exchange rate come when there is disequilibrium in balance of payment.
4. Under flexible exchange rate, it creates situations of instability and uncertainty. On the other hand, under fixed exchange rate system, it ensures stability in exchange rate.
5. Under flexible exchange rate it eliminated the problem of overvaluation or undervaluation of currency. On the other hand, under fixed exchange rate there may be undervaluation or overvaluation of currency.
27. Explain the Precautions needed to be taken while calculating National Income by expenditure method. 6
Ans: Precautions: While calculating National Income by expenditure method, the following precautions are necessary:
1. We should not include expenditure on the purchase of second hand goods as the expenditure on these goods has been included when they are bought for the first time.
2. For avoid double counting only including the expenditure of final products.
3. Expenditure on gifts, donation, taxes, scholarships etc. is not the expenditure on final products. There are transfer payments (or transfer expenditure) and should not be included in final expenditure.
4. Expenditure on intermediate goods such as fertilisers and seeds by the farmers and wool, cotton and yarn by manufacturers of garments should also be excluded. This is because we have to avoid double counting. Therefore, for estimating Gross Domestic Product we have to include only expenditure on final goods and services.
5. Expenditure on purchase of old shares and bonds from other people and from business enterprises should not be included while estimating Gross Domestic Product through expenditure method. This is because bonds and shares are mere financial claims and do not represent expenditure on currently produced goods and services.
Or
Explain the circular flow of income in a simplified economy with two sectors – households and firms.
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 below:
28. Briefly explain any four functions of money.
Ans: Money performs four important functions each of which overcomes one of the difficulties of barter. These are:
1. Medium of Exchange (Primary): The first and foremost function of money is that it acts as a medium of exchange. Barter exchanges become extremely difficult in an economy. It is because of reason that people looking for suitable persons to exchange their goods would have to spend for of time and labour.
2. Measure of Value (Primary): Measuring value of a commodity we take money as a unit of amount. Money serves as a unit of measurement in terms of which the value of all goods and services are measured and expressed.
3. Standard of Deferred Payments (Secondary): Money serves as a standard of deferred payment. Deferred payments refer to those payments which are to be made in future.
4. Store of Value (Secondary): Store of value means store of wealth for future use. Money is not perishable and its storage costs are also considerably lower. It is also acceptable to anyone of any point of time.
Contingent functions refers to those functions of money which help various economic entities such as consumers, producers etc. in taking their economic decisions. These include the following:
1. Measurement of National Income.
2. Distribution of National Income.
3. Maximization of Satisfaction.
4. Basis of Credit.
5. Productivity of Capital.
Or
Briefly explain any four functions of the RBI.

Ans: Refer Q.N. 28, year 2014