SECTION A. 1. Any statement about demand for a good is considered complete only when the following is/are mentioned in it.

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1 1. All questions in both the sections are compulsy. However, there is internal choice in some questions. 2. Marks f questions are indicated against each question. 3. Question nos. 1 to 5 and 16 to 20 are very sht answer questions carrying 1 mark each. They are required to be answered in one sentence. 4. Question nos. 6 to 8 and 21 to 23 are sht answer questions carrying 3 marks each. Answers to them should not nmally exceed 60 wds each. 5. Question nos. 9 to 11 and 24 to 26 are also sht answer questions carrying 4 marks each. Answer to them should not nmally exceed 70 wds each. 6. Question nos. 12 to 15 and 27 to 30 are long answer questions carrying 6 marks each. Answer to them should not nmally exceed 100 wds each. 7. Answers should be brief and to the point and the above wd limit be adhered to as far as possible. Time : 3 hours Max. Marks : 80 SECTION A 1. Any statement about demand f a good is considered complete only when the following is/are mentioned in it. (a) Price of the good (c) Period of time Ans. (d) All of the above (b) Quantity of the good (d) All of the above 2. Demand f a good is termed inelastic through the expenditure approach when (a) price of the good falls, expenditure on it rises (b) price of the good falls, expenditure on it falls (c) price of the good falls, expenditure on it remains unchanged (d) price of the good rises, expenditure on it falls Ans. (b) Price of the good falls, expenditure on it falls 3. Define indifference curve. Ans. An indifference curve is a curve which represents all those combinations of two commodities which give same level of satisfaction to a consumer.

2 4. A seller cannot influence the market price under (a) perfect competition (c) monopolistic competition Ans. (a) Perfect competition (b) monopoly (d) All of the above 5. State any one feature of monopolistic competition. Ans. Product differentiation is a distinct feature of monopolistic competition. 6. Give the meaning and characteristics of Production Possibility Frontier (PPF). (3) Ans. Production Possibility Frontier is a curve, which shows the various alternative production possibilities of two goods that can be produced with given resources and techniques of production. It is an imptant tool to solve the central economic problems. The Production Possibility Frontier has following two basic properties (i) It is a downward sloping curve from left to right. (ii) The shape of the Production Possibility Frontier is concave to the igin. (1 2 = 2) 7. Explain the problem of how to produce. (3) Ans. The problem of how to produce is a problem relating to choice of technique of production which is to be used. There are two types of techniques of production. These are as follows (i) Labour intensive technique It is that technique in which labour is used me than capital. (ii) Capital intensive technique It is that technique in which capital is used me than labour. ( 1 2 = 2) 8. Distinguish between increase in demand and increase in quantity demanded of a good. Explain the meaning of budget set and budget line. (3) Ans. Differences between increase in demand and increase in quantity demanded are Basis Increase in demand Increase in quantity demanded Meaning It is defined as the rise in demand at the same price of the commodity. It is defined as rise in quantity demanded due to fall in price of the commodity. Direction In this, there is a rightward shift of the demand curve. In this, the consumer moves downward on the same demand curve. Reasons It is due to (i) Increase in consumer s income in case of nmal goods. (ii) Increase in the price of substitute goods. (iii) Fall in the price of the complementary goods. (iv) Favourable changes in consumer s taste f this good. It is due to fall in the price of the commodity only. (1 3 = 3) Budget Set It refers to the set of bundles attainable to the consumer, given his income and price of goods. Thus, the budget set is the collection of all bundles that the consumer can affd to buy with his/her income at the prevailing market prices, Equation of budget set is Where P X P Y Q X Q Y = Price of good X = Price of goody = Quantity of good X = Quantity of goody PXQ X + PY QY M M = Money income 1 1 2

3 Budget Line It refers to the set/bundle of two goods which cost exactly equal to the consumer s income. Budget line is a limiting fact f the consumer beyond which he cannot go, that means a consumer can only affd to buy combinations that fall along his budget line inside it. He cannot affd to buy combinations that are above his budget line. Equation of Budget line is M = PXQ X + PY QY Where, M = Given money income P X and P Y = Per unit price of goods X andy Q X andq Y = Quantity of goods X andy Explain with the help of a numerical example, the meaning of diminishing Marginal Rate of Substitution. Ans. Marginal Rate of Substitution (MRS) refers to the rate at which the consumer is willing to substitute one good to obtain one me unit of the other good. Symbolically, Quantity of the Good Sacrificed MRS = XY Quantity of the Good Obtained Y X In an indifference curve, the Marginal Rate of Substitution tends to decrease with every successive increase in the consumption of one good. This is due to the fact that the marginal utility derived from the consumption of each successive unit tends to fall. Because of this, the consumer is willing to sacrifice less and less units of a good to increase the consumption of the other good. (2) e.g. if a consumer wants to consume good X and Y, then f every unit increase in the consumption of good X, the consumer will be willing to sacrifice less and less units of good Y. It is explained in the table below Combination Good X Good Y MRS a 1 8 b : 1 c : 1 d : 1 From the above table, it can be observed that the consumer is willing to sacrifice less units of GoodY to increase the consumption of Good X. This gives rise to diminishing Marginal Rate of Substitution. (2) 10. Define market supply. Explain the fact input prices that can cause a change in supply. Give the behaviour of marginal product and total product as me and me units of only one input are employed while keeping other inputs as constant. (4) Ans. Market Supply Quantities of a particular commodity offered f sale by all the firms at different prices in the market is known as market supply. It is the sum total of supply of all the sellers ( firms) of a commodity in a market at different prices during a given period of time. Input Price/Price of Facts of Production It is an imptant fact affecting the supply of a firm. With the rise in the price of facts of production, the cost of production rises, which results in decrease in supply due to lesser profit margin. On the other hand, if the price of facts of production decreases, then the cost of production also decreases, which results in increase in supply due to higher profit margins. (3)

4 The Law of Variable Proption shows the impact on output when units of variable fact are increased, keeping fixed facts constant in the sht-run. This law has three stages. The behaviour of marginal product (MP) and total product (TP) in each of the three stages is given below Stage I : Increasing Return to Fact In this stage TP tends to rise at an increasing rate and MP also rises. Stage II : Decreasing Returns to Fact In this stage, TP tends to rise at a diminishing rate and MPP tends to fall, up to a point that is reaches zero. Stage III : Negative Returns to Fact In this stage TP tends to fall and MP becomes negative. ( 1 3 = 3) 11. Explain perfect knowledge about the markets feature of perfect competition. (4) Ans. Perfect competition is a fm of market in which there are very large number of buyers and sellers of a commodity. Homogeneous products are sold at a unifm price. It also possesses the feature of Perfect Knowledge about the Markets. This feature implies that the producers and consumers have perfect knowledge about the product and the fact market. Because of this feature (i) the buyers are fully aware of the fact that a unifm price prevails in the market. This prevents them from being cheated by the sellers. (ii) the sellers are also aware of the fact that a unifm price prevails in the market. Because of this they do not sell their products at a price below the prevailing price. (iii) the sellers are also aware that the facts of production are perfectly mobile. This ensures unifm cost of production. (1 3 = 3) 12. When the price of a good rises from ` 10 per unit to ` 12 per unit, its quantity demanded falls by 20 %. Calculate its price elasticity of demand. How much would be the percentage change in its quantity demanded, if the price rises from ` 10 per unit to ` 13 per unit? (6) Ans. Old Price ( P ) = ` 10 New Price = ` 12 Change in Price ( P ) = ` 2( 12 10) Change in Price 2 Percentage Change in Price = 100 = 100 = 20% Old Price 10 Percentage change in quantity demanded = 20% (given) We know that, Elasticity of Demand ( E d ) = 20 = 20 Now accding to the given condition, Old Price (P) = ` 10 Percentage Change in Quantity Demanded Percentage Change in Price 1 (3) New Price = ` 13 Change in price = ` 3( 13 10) Change in Price 3 Percentage Change in Price = 100 = 100 = 30% Old Price 10

5 Elasticity of Demand (E d ) Percentage Change in Quantity Demanded 1 = 30 So, Percentage change in quantity demanded = 30% (3) 13. Complete the following table (6) Output (units) Average Fixed Marginal Average Variable Average Ans. Output (units) Average Fixed Marginal Average Variable Average Fmulae used TC = TFC + TVC ΣMC TVC = AVC Output AFC = TFC Output AVC = TVC Output AC = TC Output MC = TVC N TVC N From the following Total Cost and Total Revenue schedule of a firm, find out the level of output, using Marginal Cost and Marginal Revenue approach, at which the firm would be in equilibrium. Give reasons f your answer. (6) Output (units) Total Revenue (`) Total (5)

6 Ans. Total and Marginal Cost and Revenue Schedule Output (units) Total Revenue (`) Total Marginal Revenue (`) Marginal Cost (`) We know that a firm is at equilibrium, subject to the fulfillment of the following two conditions (i) Marginal Revenue (MR) should be equal to Marginal Cost (MC). (ii) Beyond the point of equilibrium, MC should rise. Now, keeping these conditions in mind, we reach to the conclusion that the firm is at equilibrium when the output is 4 units because both the conditions are being fulfilled at this level of output only, viz. MR = MC = ` 4 and at the 5th unit of output, MC has risen from ` 4 to ` 8. (4) 15. Distinguish between perfect oligopoly and imperfect oligopoly. Also explain the interdependence between the firms feature of oligopoly. (6) Explain the meaning of excess demand and excess supply with the help of a schedule. Explain their effect on equilibrium price. (6) Ans. Oligopoly is a market fm in which few firms operate and each firm commands a substantial share of the market. Differences between perfect and imperfect oligopoly are Basis Perfect oligopoly Imperfect oligopoly (2) Meaning Perfect oligopoly is a market fm in which the firms produce a homogeneous product. Imperfect oligopoly is a market fm in which firms produce differentiated products. Example Cement industry, steel industry Automobile industry, mobile handset industry Oligopoly fm of market possesses the following distinct feature Interdependence between the Firms Under oligopoly, there is a high degree of interdependence between the firms. Price and output policy of one firm has a significant impact on the price and output policy of the rival firms in the market. When one firm lowers its price, the rival firms may also lower the price. And when one firm raises the price, the rival firms may not do so. Accdingly, while taking an action on price output, a firm must take into account the possible reaction of the rival firms in the market. (3) Excess Demand Excess demand means market demand f a commodity exceeds market supply of a commodity at a given price. Excess Supply Excess supply means market supply of a commodity is me than the market demand f a commodity at a given price. (3)

7 This has been explained with the help of the following schedule and diagram Schedule Price (`) Demand (units) Supply (units) Excess demand [D>S] [Equilibrium (D = S)] Excess supply [S>D] Price ( ` ) Equilibrium price O Excess supply Excess demand Quantity (units) Equilibrium quantity Equilibrium point Diagram Showing Excess Demand and Excess Supply From the above schedule and graph, it is clear that there is excess demand when prices are ` 1 and ` 2 and there is excess supply when prices are ` 4 and ` 5. (4) Effect of Excess Demand of Equilibrium Price Excess demand causes equilibrium price to increase. Effect of Excess Supply on Equilibrium Price Excess supply causes equilibrium price to decrease. SECTION B 16. Demand deposits include (Choose the crect alternative). (a) saving account deposits and fixed deposits (b) saving account deposits and current account deposits (c) current account deposits and fixed deposits (d) All types of deposits Ans. (b) Saving account deposits and current account deposits. 17. Define marginal propensity to consume. Ans. Marginal propensity to consume measures change in consumption expenditure due to change in income. 18. If the marginal propensity to consume is greater than marginal propensity to save, the value of the multiplier will be (a) greater than 2 (b) less than 2 (c) equal to 2 (d) equal to 5 Ans. (a) Greater than 2

8 19. Define government budget. Ans. Government budget is a statement of expected receipts and expenditures of the government over the period of a financial year, i.e. from 1st April to 31st March. 20. What is meant by depreciation of domestic currency? Ans. Depreciation of domestic currency means that the value of domestic currency decreases in relation to the value of feign currency under flexible exchange rate system. 21. Explain with the help of an example, the basis of classifying goods into final goods and intermediate goods. (3) Ans. The basis of classification is the end-use of the product. Goods which are used by the producers in the process of production such as raw material goods purchased f resale, are known as intermediate goods, e.g. shirt purchased by a firm f resale. These goods are still within the production boundary. Goods which are outside the boundary line of production and are ready f use by their final users are called final goods, e.g. shirt purchased by a consumer. (3) 22. Explain difficulty in sting wealth problem faced in the barter system of exchange. Explain medium of exchange function of money. (3) Ans. In barter system of exchange goods were exchanged f goods. Due to absence of money in barter system, wealth was sted in terms of goods. Sting of goods carried some problems like cost of stage, loss in value of goods due to passage of time, difficulty to transfer from one place to other, etc. So, it was difficult f people to ste their purchasing power under barter system of exchange. (3) Medium of exchange is a very imptant and main function of money. Any commodity can be purchased sold through the medium of money. In other wds, money becomes the representative of general purchasing power. It is this function of money which has made the wk of exchange easy because money has the merit of general acceptability. (3) 23. Distinguish between direct taxes and indirect taxes. Give an example of each. (3) Ans. Differences between direct tax and indirect tax are Basis Direct tax Indirect tax Meaning Example A Direct Tax is one in which the burden of tax cannot be shifted. Income Tax and Wealth Tax are examples of direct tax. An Indirect Tax is one in which the burden of tax can be shifted. Value Added Tax and Goods and Service Tax are examples of indirect tax. ( 1½ 2 = 3) 24. Explain the bankers bank function of the Central Bank. Explain the process of credit creation by commercial banks. (4) Ans. A Central Bank is an apex institution of a country which operates, controls, directs and regulates the monetary and financial system of a country.

9 Imptant function perfmed by Central Bank is Banker s Bank A Central Bank is a bank of other commercial banks of the country. It grants loans to the commercial banks to fulfill their needs of funds and also accepts their deposits. It is not f the common people of the country. It maintains same relation with the commercial banks as commercial banks have with general public. (3) Commercial banks create credit out of their total deposits which are many me times greater than their initial level of deposits. Money created by commercial banks can be ascertrained by using the given fmula Money Creation = Initial Deposits 1 LRR F example, let the LRR be 20% and Initial deposits = ` As required, the banks keep 20% i.e. ` 2000 as cash and lend the remaining amount of ` Further, it is also assumed that, persons receiving the debt will deposit the amount in the bank. This will result in banks receiving fresh deposits of ` The banks again keep ` 1600 as cash and lend ` 6400, which is also 80% of the last deposit, this money also comes back to the banks leading to a fresh deposit of ` In this way, the money goes on multiplying and ultimately, total money creation accding to the fmula, will be 1 Money Creation = = ` (2) 20% 25. An economy is in equilibrium. From the following data, calculate the Marginal Propensity to Save. (a) Income = ` (b) Autonomous consumption = ` 500 (c) Consumption expenditure = ` 8000 Ans. We know that, Consumption expenditure = C + by, where C = Autonomous consumption, b = Marginal Propensity to Consume and Y = Income So, on substituting the given variables, we get = b. 10, = b. 10, 000 b = = 0. 75, i.e Marginal Propensity to Consume = (2) We also know that, MPC + MPS = 1, where, MPC = Marginal Propensity to Consume, and MPS = Marginal Propensity to Save On substituting MPC = 0. 75, we get MPS = 1, MPS = = 0.25, i.e. Marginal Propensity to Save = 0.25 (2) (2) (4)

10 26. Explain how government budget can be helpful in bringing economic stablisation in the economy. Ans. Government budget can be helpful in bringing economic stabilisation in the economy by checking inflationary and deflationary tendencies. To curb the inflationary tendency, the government can prepare a surplus budget. A surplus budget is one in which estimated receipts exceed the estimated expenses. Such a budget reduces the money supply in the economy. With a fall in the money supply, the purchasing power of people also fall, leading to a fall in the level of aggregate demand. As aggregate demand falls, the price level the rate of inflation also falls. To curb the deflationary tendency, the government can prepare a deficit budget. A deficit budget is one in which estimated expenses exceed the estimated receipts. Such a budget increases the money supply in the economy. With increase in money supply, the purchasing power of people also rise, leading to an increase in the level of aggregate demand. As aggregate demand rises, the price level also rises and rate of deflation begins to fall. (4) 27. Distinguish (a) between current account and capital account, and (b) between autonomous transactions and accommodating transactions of Balance of Payments account. (6) Ans. (a) Differences between current and capital account of Balance of Payments (BoP) are Basis Current account of BoP Capital account of BoP (4) Nature of transaction These are the transactions which do not affect the assets liabilities position of the country. These are the transactions which affect assets liabilities position of the country. Concept It is a flow concept. It is a stock concept. Fmula/Components Current Account = Expts and Impts of Visible and Invisible Items + Unilateral Transactions + Income Received and Paid to Abroad Capital Account = Browings and Lending from and to Abroad + Investment to and from Abroad + Change in the Reserve of Feign Exchange (b) Differences between autonomous and accommodating transactions are ( 1 3 = 3) Basis Autonomous Transactions Accommodating Transactions Meaning Recded in Example Autonomous transactions are the transactions between the residents of two countries which take place due to consideration of profit. These transactions can either be recded in current account capital account, depending on their nature. Expts and impts of goods and services, unilateral transactions etc are examples of autonomous transactions. Accommodating transactions are those transactions which help to reste identity of Balance of Payments. These transactions are recded only in capital account. Browings from IMF, change in feign exchange reserves etc are examples of accommodating transactions. ( 1 3 = 3) 28. Explain the precautions that should be taken while estimating national income by expenditure method. (6) Will the following be included in the domestic product of India? Give reasons f your answer. (6) (a) Profits earned by feign companies in India. (b) Salaries of Indians wking in the Russian Embassy in India. (c) Profits earned by a branch of State Bank of India in Japan.

11 Ans. While using expenditure method, the following precautions are required to be taken, related to the calculation of National Income (i) Only final expenditure is to be taken into account to avoid err of double counting. (ii) Expenditure on second hand goods is not to be included, because value of second hand goods has already been accounted f during the year of their production. (iii) Expenditure on shares and bonds is not to be included in total expenditure, as these are mere paper claims and are not related to the production of final goods and services. (iv) Expenditure on transfer payments by the government is not to be included. (v) Imputed value/estimated value of expenditure on goods produced f self-consumption should be taken into account, as these goods are reflected in the estimation of Gross Domestic Product (GDP). (6) (a) Profits earned by feign companies in India This will be included in the estimation of domestic product, as these companies have earned profit in India, i.e. from the domestic territy of India. (b) Salaries of Indians wking in Russian Embassy in India This will not be included in the domestic product of India as Russian Embassy in India is not a part of India s domestic territy. (c) Profits earned by a branch of State Bank of India in Japan This will not be included in the domestic income of India as it is not located within the domestic territy of India. ( 2 3 = 6) 29. Calculate (a) National Income, and (b) Net National Disposable Income. (` in cres) (i) Compensation of employees 2000 (ii) Rent 400 (iii) Profit 900 (iv) Dividend 100 (v) Interest 500 (vi) Mixed income of self-employed 7000 (vii) Net fact income to abroad 50 (viii) Net expts 60 (ix) Net indirect taxes 300 (x) Depreciation 150 (xi) Net current transfer to abroad 30 Ans. (a) Net Domestic Product at Fact Cost (NDP FC ) = Compensation of Employees + Rent + Interest + Profit + Mixed Income of Self Employed = = ` cres National Income = NDPFC Net Fact Income to Abroad = = ` cres (4) (b) Net National Disposable Income = National Income + Net Indirect Tax Net Current Transfers to Rest of the Wld = = ` cres (2) (6)

12 30. Given a consumption curve, outline the steps required to be taken in deriving a saving curve from it. Use diagram. Ans. The given consumption curve and the savings curve derived from it are given below Consumptions ( C ) Saving ( S ) Y O Y O S C B (C = Y) Incme ( Y) C= c + by S= s+ SY Various steps to be taken f derivation of saving curve from consumption curve are (i) At zero level of income (Y ), the autonomous consumption is OC. If we take the vertical distance between the Consumption Curve ( CC ) and income line ( Y ) at zero level of income, then savings at zero level of income dissavings will be OC. Hence, the savings curve starts from the points S on the negativey -axis. (ii) The Consumption Curve ( CC ) intersects income line at point B. B is the break even point, where consumption is equal to income ( C = Y ). At this point, saving will be zero as all the income is consumed. Hence, the savings curve will intersect the X -axis (at point E) at this income level. (iii) Consumption is less than income beyond point B. It means the excess income after consumption is saved and hence the saving curve moves toward positive direction above X -axis beyond point E with the increase in the level of income. (4) S E ( S = 0) Incme ( Y) Y C X X (6) (2) (Only Uncommon Questions from Set I) SECTION A 7. Explain the problem of f whom to produce. (3) Ans. It is the problem which is concerned with the distribution of income among all facts of production like wages to the labour, rent to the landld and interest to the invest and profit to the entrepreneur. Each and every economy has limited resources. So, keeping that in mind, an economy has to decide where to employ those resources and whether the targeted consumers have means to buy those goods and services. (2) Distribution of income could be of following two types (i) Factal distribution (ii) Interpersonal distribution

13 13. Complete the following table Output (units) Total Average Variable 0 30 Marginal Average Fixed Ans. Output (units) Total Average Variable Fmulae used Marginal Average Fixed TC = TFC + TVC ΣMC AFC = TFC Output AVC = TVC Output MC = TC N TC N 1 (5) 14. From the following table find out the level of output at which the producer will be in equilibrium (use marginal cost and marginal revenue approach). Give reasons f your answer. (6) Output (units) Total Revenue (`) Total Ans. Producer will be in equilibrium when the output is 4 units. Solve as Q. No. 14 of All India Set I. SECTION B 21. Explain the circular flow of income. (3) Ans. Circular flow of income refers to the unending flows of production of goods and services and income and expenditure in an economy. It shows the redistribution of income in a circular manner between production units (firms) and households. It can be better understood with the help of diagram given below. (2) Expenditure on goods and services Fact Services Household Firms Fact Payments

14 28. Explain the precautions that are taken while estimating national income by value added method. Will the following be included in the national income of India? Give reasons f your answer. (6) (a) Financial assistance to flood victims (b) Profits earned by the branches of a feign bank in India (c) Salaries of Indians wking in the American Embassy in India Ans. While using value added method f computing national income, the following precautions should be taken (i) The value of intermediate goods should not be included. (ii) Purchase and sale of second hand goods should be excluded. (iii) Imputed value of self-consumed goods should be included. (iv) Own account production should be included. (v) Value of self-consumed services should not be included in the estimation of National Income. (vi) Commission earned on account of sale and purchase of second hand goods is included. (vii) Imputed rent on the owner occupied house is also taken into the account. (viii) The value added in the government sect is equal to compensation of employees only. (a) Financial assistance to flood victims It will not be included in the national income of India as it is a fm of transfer payment. It does not add to the stock of goods and services in the economy. (b) Profits earned by branches of a feign bank in India Refer to Q.No. 28, part (a) in AI set I. (c) Salaries of Indians wking in the American Embassy in India Refer to Q.No. 28, part (b) in AI set I. (6) 29. Calculate the (a) Net National Product at Market Price, and (b) Gross National Disposable Income: (` in cres) (i) Mixed income of self-employed 8000 (ii) Depreciation 200 (iii) Profit 1000 (iv) Rent 600 (v) Interest 700 (vi) Compensation of employees 3000 (vii) Net indirect taxes 500 (viii) Net fact income to abroad 60 (ix) Net expts ( ) 50 (x) Net current transfers to abroad 20 Ans. (a) Net Domestic Product at Fact Cost (NDP FC ) = Compensation of Employees + Rent + Interest + Profit + Mixed Income of Self Employed = = ` cres Net National Product at Market Price(NNP MP ) = NDPFC Net Fact Income to Abroad + Net Indirect Taxes = = ` cres (4) (b) Gross National Disposable Income = NNP MP Net Current Transfers to Abroad + Depreciation = = ` cres (2) (6)