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## Saturday, March 03, 2018

### AHSEC - Class 12: Solved Question Paper' 2014

H.S. 2nd Year, 2014
ECONOMICS
Full Marks: 100
Time: 3 hour
1. (a) What is market economy? 1
Ans. Market economy is an economic system where price is determined by the forces of demand and supply. The capitalist controls all the factors of production in such type of economic system.
(b) Fill in the blank: Opportunity cost is known as Marginal Opportunity Cost/Alternative cost. 1
(c) Define utility. 1
Ans. Utility refers to the want satisfying capacity of a commodity.
(d) What is marginal revenue? 1
Ans. Marginal revenue is the addition to total revenue on account of sale of one more unit of output.
(e) Draw a very short-run supply curve for perishable commodities. 1

(f) Give an example of fixed cost. 1
Ans. Examples of fixed costs are – wages to permanent staff, Rent for factory building.
2. State two central problems of an economy. 2
Ans: Refer 2012 Question  paper
3. Why is an Isoquants negatively sloped? 2
Ans: An Isoquant Slopes Downward from Left to Right: This implies that the Isoquant is a negatively sloped curve. This is because when the quantify of factor K (capital) is increased, the quantity of L (labour) must be reduced so as to keep the same level of output.
4. State any two factors affecting the supply of a commodity. 2
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.
5. Distinguish between short-run and long-run. 2
Ans. Distinctions between short period and in long period are given below:
1. Short period is such type of period in which producers does not change all the factors. But on the other hand, long period is such type of period in which producers changes all the factors.
2. In the short period, producer changes its production only by changing variable factor. On the other hand, in the long period, a producer changes its production both by fixed and variable factors.
3. In the short period demand plays an active role for determining price of the commodity. On the other hand, in the long period both demand and supply determine price of the commodity.
6. State two reasons behind the working of the law of diminishing marginal product. 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.
7. Write down the concept of normal profit. 2
Ans. Normal profit is that which is just sufficient to induce the individual firms to remain in the industry. In that situation total revenue is equal to total cost.
8. What is price elasticity of demand? Mention any three important factors determining price elasticity of demand? 1+3=4
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. 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.
9. Suppose, when the price of a commodity is Rs. 10, the quantity supplied is 20 units. As price increases to Rs. 15, the quantity supplied increases to 30 units. Calculate the elasticity of supply. 4
10. The total cost (TC) schedule of a production unit is given below. Find out the average cost (AC) and marginal cost (MC) schedules for the production unit. 2+2=4
 Q TC 1 2 3 4 5 6 7 30 55 75 90 110 140 180
Ans: From the above table, AC and MC are calculate for the production unit.
 Q TC AC MC 1 2 3 4 5 6 7 30 55 75 90 110 140 180 30 27.50 25 22.50 22 23.33 25.71 30 25 20 15 20 30 40
11. Show the relationship between average cost (AC) and marginal cost (MC) with the help of a 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).
12. Write down four characteristics of a perfectly competitive market. 4
Ans: Characteristics or Features of Perfect competition are as follows:
1. Large numbers of Buyers and Sellers: The number of buyers and sellers of a commodity is very large under perfect competition but no seller or buyer can influence the price.
2. Homogeneous Product: All sellers sell identical units of a given product.
3. Perfect Knowledge: Buyers and sellers have full knowledge regarding the prevailing market price.
4. Freedom of Entry and Exit: A firm can enter or leave the industry any time. There are no restrictions.
13. State and explain the law of demand with the help of 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 short-run equilibrium of a monopoly market assuming zero cost.
14. “In perfect competition, AR = MR but in monopoly AR > Mr.” – Explain. 6
Or
The demand and supply function of a firm under perfectly competitive market are given below:
Ans.

PART - B
15. (a) In which type of money, the face value is higher than the intrinsic value? 1
Ans: Credit money
(b) Define final goods. 1
Ans: Final products are those products which are used for final consumption that is cloth, bread, machinery, tractor etc.
(c) What is bank rate? 1
Ans: Bank rate is the rate at which the central bank advances loans to the commercial banks.
(d) What type of budget should the government prepare in times of inflation? 1
Ans:
(e) State one example of non-tax revenue. 1
Ans. Fees, Commercial Revenue
(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. Distinguish between gross investment and net investment. 2
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.
17. What is personal disposable income? 2
Ans: Personal disposable income is the income left with individuals after deducting personal taxes.
18. The marginal propensity to consume (MPC) of an economy is 0.9 and suppose, an additional sum of Rs. 500 crores is invested in it. How much new income will be generated in the economy? 2
Ans.
19. What is marginal propensity to save? 2
Ans: Marginal propensity to saving (MPS) is the ratio of change in saving to change in income.
20. Mention two main accounts of balance of payments. 2
Ans: Two main accounts of the balance of payments are: Current account and Capital account.
21. What does the revenue account of a government budget contain? 2
Ans: Revenue receipts and revenue expenditure of the government are shown in the revenue account.
22. Distinguish between consumer goods and capital goods. 4
Ans: The main differences between consumer goods and capital goods are as follows:
 Consumer Goods Capital Goods These goods are used by their ultimate consumers. These are final goods used by the producers in the production process. These goods directly satisfy human wants. Thus they have direct demand. These goods indirectly satisfy human wants. Thus they have derived demand. These goods may be consumer durables (i.e. TV set, car), Semi-durables like clothing and single use goods such as milk, good etc. Capital goods are the producer durables of high value. The wear and tear of consumer durables, when put in use, is not taken into account while measuring national income. These goods undergo wear and tear and hence are gradually replaced over time. Their cost of wear and tear is deducted to arrive at net national income.

23. The autonomous consumption of an individual is Rs. 500 and his personal disposable income is Rs. 5000. If his marginal propensity to consume is 0.8, find out the level of aggregate consumption. 4
24. What is investment multiplier? Explain it with the help of a diagram. 4
Ans: Investment multiplier is defined as the ratio of change in income to change in investment.
Diagrammatic Representation of Multiplier: The multiplier can be illustrated through savings investment diagram also. The multiplier can be explained with the help of savings investment diagram, as has been shown in Fig. 10.2. In this figure SS is the saving curve indicating that as the level of income increases, the community plans to save more. II is the investment curve showing the level of investment planned to be undertaken by the investors in the community. The investment has been taken to be a constant amount and autonomous of changes in income.
This investment level OI has been determined by the marginal efficiency of capital and the rate of interest. Investment being autonomous of income means that it does not change with the level of income. Keynes treated investment as autonomous of income and we will here follow him. It will be seen from Fig. 10.2 that saving and investment curves intersect at point E, that is, planned saving and planned investment are in equilibrium at the level of income OY1Thus, with the given saving and investment curves level of income equal to OYis determined.
Now suppose that there is an increase in investment by the amount II”. With this increase in investment, the investment curve shifts to the new dotted position TF. This new investment curve II intersects the saving curve at point F and a new equilibrium is reached at the level of income OY2 A glance at Fig. 10.2 will reveal that the increase in income Y1 Y2 is greater than the increase in investment by II”.
On measuring these increments in income and investment it will be found that the increment in income Y1 Yis two times the increment in investment II. This is because we have here assumed that propensity to save is equal to 1/2 (Or marginal propensity to consume is equal to 1/2) Therefore, the slope of the saving curve has been taken to be equal to 1/2 or 0.5 Thus in this case multiplier is equal to 2.
Multiplier = ∆Y/∆I = Y1 Y2/II, 1/MPS =2
Since marginal propensity to save is here equal to1/2 the multiplier on the basis of our above formula, namely, k =1/ MPS will be equal to 2.
25. Distinguish between balance of trade and balance of payments. 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. Result It can be favourable, unfavourable and balanced. Both the receipts and payments sides tallies.
26. Distinguish between plan and non-plan expenditure. 4
Ans: Plan expenditure refers to that expenditure of the government which represents current development and investment that arises due to plan proposals.  This includes both consumption as well as investment expenditure by the government such as expenditure on agriculture, power, industry, health and education etc.
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.
27. Explain the circular flow of income in a simplified economy with two sectors – households and firms. 6
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
Or
Explain the value added method of calculating GDP.
Ans. Value added method: This is also the another method of avoiding double counting in calculating national income in which the country’s income is measured by adding the differences between the values of inputs and output at each stage of production. As per this method, income is the sum of value added by different producing units of a country in their production process. Hence, Value added = Value of output – Cost of production For the purpose of estimating value added, the following steps are generally applied:
1. Identifying the production units and classifying them under different industrial activities.
2. Estimating net value added by each production unit in an industrial sector.
3. Adding up the total value added of each final product to calculate GDP.
This method is considered very useful as it helps to get some very important information about the contribution made by each of the different production sectors of the economy to the value of GDP. It also gives us an idea about the current structure of national income and changes in the structure over the period of time.
28. Explain the functions of the RBI. 6
Ans: The functions of RBI are:
1. Note Issue: The reserves bank of India is the sole authority for the issue of currency in India other than one rupee coins/notes and subsidiary coins. The RBI has adopted the minimum reserves system of note issue to issue currency notes in the country. Under this system the RBI maintains a minimum reserve of Rs. 200 crore of which Rs. 115 crore is in gold and the rest in securities. The issue department of RBI has the responsibility to issue paper money; the issue of currency into circulation and its withdrawal from circulation take place through the banking department of the Bank.
2. Bankers to Government :- The RBI acts as banker to the Central and State Government as a bankers as a adviser as a agent into there capacities :-
1. As a bankers.
2. As an agent.
As a Government banker the RBI performs the following functions:-
1. It maintains and operates deposit account of the central and state governments.
2. It receives and collects payment on behalf of the Central and state governments.
3. It makes payments on behalf of the central and state governments.
4. It provides short term advances to government for which are called ways and means advances etc.
As a Government agent the RBI perform the followings functions:-
1. Collect tax and other payments on behalf of the government.
2. Raise loan from the public and thus manages public debts.
3. Transfer funds and provide remittances facilities to the government etc.
As an adviser the RBI acts as an advising the Government on all financial matters such as loan separations investment, agricultural and industrial finance, banking planning etc. It also advices to promote the attainment of the national economic goals.
1. Bankers Bank: The Central Bank is a banker to all the other banks. It is the supreme bank of all the banks. As the supreme bank it performs various functions. Some of the functions are:
1. Custodian of cash reserve of the bank: The Central Bank acts as the custodian of cash reserve of the banks. Every Commercial bank has to keep a certain portion of their deposits and time and demand liabilities to the Central Bank in the form of cash reserves. The Central Bank maintains this cash reserve as the custodian and grants money to the commercial bank in times of emergency.
2. 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. 2013
3. Clearing agent: In India the central clearing functions is managed by the RBI or the SBI is authorized to manage clearing house functions every day. Each commercial bank receives a number of cheques for collection from other banks on account of their customers. One bank may have to pay certain amount to another bank again the RBI will transfer fund from debtor to creditors account. Since all banks have their accounts with the RBI, the RBI can easily settle the claims of various banks each other with least use of cash.
1. Control of credit :- As a central bank, the RBI take the responsibility to control of credit in order to economic development and price stability in the country under credit control policy different method are used to control the volume of credit in the economy. Important of them are General Credit Control and Selective Credit Control.
2. Custodian of gold and foreign exchange reserves: - The RBI act as a custodian of gold and foreign exchange reserves for both on its own and on behalf of the Government.
Or
Describe the speculative demand for money.

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.”