MARKING SCHEME 1. D. 2Y

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1 Mid-year Exam 07-8 SUJBECT ECONOMICS M.M =80 MARKING SCHEME. D. Y. c. both a and b.. c. both a and b. 4. b. equal to AR 5. Demand of a single consumer for a good and summation of all individual demand for a good. 6. Upward rising portion of MC. 7. A Budget line represents the different combinations of two goods that are affordable and available to a consumer given his level of income and the market prices of the good. The equation of the BL is representing as P X + PXP =M Example: M = 00. P = 5 ad P = 4 SO BL = 5x + 4x = 00 ½ + ½ = Implication in oligopoly: a. Interdependence of firms: firms are said to be interdependence because firm take price and output decision by keeping in view the reaction pattern of the rival firms. b. Non-price competition: firms try to avoid price competition for the fear of price war. Therefore, they use methods like advertisements, better services to customers etc to compete with each other. 0. Price floor Chain effect: if the price is fixed above the equilibrium price, then there will be situation of EXCESS SUPPLY. This will lead surplus supply and deficient demand. This further leads to competition among the producers to sell their products. As a result, they will bid the price lower and the gap will be filled by consumers buying the product. Market effect: government will impose MSP to benefit the producers and through minimum wage legislation government will ensure that the wage rate of the labours does not fall below a particular level.. Cost in economics refers to the sum of actual money expenditure or inputs and the imputed expenditure in the form of input supplied by the owners including normal profit. If MC < AVC, THEN AVC WILL FALL. IF MC = AVC, THEN AVC WILL BE CONSTANT. IF MC > AVC THEN AVC WILL RISE. ½ ½ = ½ ½ = =4 REVENUE in economics refers to the market value of output produced or the receipts from sale of output produced. IF MR >AR, AR RISES. IF MR = AR, AR IS CONSTANT. IF MR < AR, AR FALLS.. Giving reasons which of the following costs are fixed and variable costs: a. Insurance premium paid by a firm. FIXED COST, as insurance premium is paid regularly and at a fixed amount. b. Coal charges for the amount of coal used in the production process. VARIABLE COST, as the purchase if coal and its charges can be increased or decreased according to the demand. These are raw-materials c. Payment of interest by firm to the bank. FIXED COST, INTEREST has to be paid regularly at a fixed amount. d. Travel expenses paid by the employer to his employee. =4

2 . REASON OUT whether the following statement is TRUE or FALSE. (i) The value of elasticity of supply for a perfectly elastic supply curve is equal to one. FALSE, when it is perfectly Es = (ii) when percentage change in supply is more than percentage change in price, supply is relatively elastic. TRUE, Ed > (iii) If Es = 5, then percentage in quantity supplied is 0 and percentage in price is. TRUE, 0/ = 5 (iv) two different supply curve respond differently to the same change in price. False, on which is flatter will relatively elstic and one which is steep will be inelastic. 4. SCARCITY OF RESOURCES means short supply of resources in relation to demand. It is shown by the unattainable combination beyond the PPC. Choice on the other hand creates NEED FOR MAKING OPTIMUM UTILISATION OF RESOURCES. Which in turn give rise to making choices in the use of resources so that maximum wants can be satisfied with minimum resources. This is shown when selecting one of the attainable point on the PPC. OC is shown by the negative slope of the PPC. IT IS NEGATIVELY SLOPED BECAUSE IN THE PRESENCE OF SCARCITY, more of one good can be produced only if resources are withdrawn from the production of another. 5. Any three point of differences between Micro economics and Macroeconomics. BAISIS Microeconomics Macroeconomics. Deals with the behavior of an Study of the economy as a individual units whole.. Concerns with price Concern is with general price mechanism level, employment and NI. Tools are demand and supply. Aggregate demand and aggregate supply. analyse whether the following are Microeconomics study or Macroeconomic study with reasons: a. Wheat production in an economy: MICRO b. General price level. MACRO c. Growth in the manufacturing sector from 00. MACRO 6. The producer s equilibrium condition are: (i) MC = MR AND (ii) MC > MR after equilibrium. Suppose MC > MR. In this situation it will be profitable for the firm to produce more or less depending upon relative changes in MR till MC = MR. Suppose MC < MR. It will be profitable for the producer to produce more till MC = MR. =4 ½ ½ = 4 =6 MC = MR is not sufficient condition to ensure equilibrium. Given MC = MR, suppose the behavior of MC and MR is such that is one more unit is produced, MC becomes less than MR. THEN in this case it will be profitable for the firm to produce more. Therefore, in this case though MC = MR the producer is not in equilibrium. However, if after MC = MR output MC becomes greater than MR, it will be most advantageous for the firm to produce only upto MC = MR. 7. Law of return to scale: Explanation of Different Stages of Laws of Returns to Scale. The Increasing Returns to Scale: === =6

3 There are increasing returns to scale when a given percentage increase in input leads to a greater relative percentage increase in output. It shows that output doubles itself even before the inputs can be doubled.in the following figure that the units of labour are measured on X-axis and units of capital on Y axis. The scale line OS is drawn which shows the expansion path of a firm. In this case the distance between every successive isoquants becomes smaller and smaller i.e. OA > AB > BC. In case of increasing returns to scale, the production function is homogeneous of degree greater than one. Example: 00 units (IQ at A) = L+ K 00 units (IQ at B) = 5L + 5K 00 units (IQ at C) = 6L + 6K How to read example () : 00 units of output requires three units of labour and three units of capital. Causes of Increasing Returns to Scale: a.internal economies of scale b.efficiency of labour and capital c.improvement in large scale operation d.division of labour and specialization e.use of better and sophisticated technology f.economy of organisation g.external economies of scale.constant Returns to Scale There are constant returns to scale when a given percentage increase in input leads to an equal percentage increase in output. It shows that if inputs are doubled then the output also gets doubled. If inputs are trebled then the output also trebles Symbolically: Where Proportionate Change in input. In the following figure, the units of labour are measured on X-axis and units of capital on Y-axis. OS is the scale of operation line. In this case the distance between every successive isoquant remains equal i.e. OL = LM = MN. It means if units of labour and capital are doubled, the output also doubles. In case of constant returns to scale, production function is homogenous of degree one. Example : 00 units (IQ at L) = L + K 00 units (IQ at M) = 6L + 6K 00 units (IQ at N) = 9L + 9K.Decreasing Returns to Scale There are decreasing returns to scale when a given percentage increase in input leads to a smaller percentage increase in output. Symbolically : Where: Proportionate change in output.following figure shows the decreasing returns, where, to get an equal increase in output, a larger proportionate increase in both labour and capital are required. In case of decreasing returns to scale the distance between every successive isoquant on expansion path becomes larger and larger, i.e. OP < PQ < QR. In this case, production function is homogenous of degree less than one. Example: 00 units (IQ, at P) = L + K 00 units (IQ at Q) = 7L + 7K 00 units (IQ at R) = L +K 8. Due to pollution and other incentives to use two wheelers and to protect the environment, the demand of the two wheelers will definitely increase. This will help to shift the demand curve to the right.

4 On the other side the supply for bikes will reduce, as people will reject the purchase of bikes. This will result in the leftward shift in the supply of bikes. Resulting an increase in the price of two wheelers and some what constant supply Mention the effect elasticity of demand on the following determinants: a. On the chocolate you eat (brand). ED < b. On fruits and vegetables. ED < c. Habitual coffee drinker. ED < d. Purchasing economics test book /sample papers. ED < with reasons 0. The inverse relationship between price and demand can be explained in terms of Law of diminishing MU or single commodity equilibrium condition MUx = Px. The law states that with successive increase in the unit of consumption of commodity every additional unit of a commodity gives lesser satisfaction to the consumer. To maximize his satisfaction a consumer purchase up to MUx = Px. If MUx>Px consumer will buy more till he reaches MUx = Px. =6 ½ ½ ½ ½ =6 =6 Section B. Exports Payment of interest by bank to a household on its deposit. Any payment. made by production unit to resource owner is factor payment.. It is assumed that the producer themselves have purchased the unsold goods lying with the producer. 4. Change in stock. 5. Only consumption does not generate income. Rest all the other economic activities do generates income. Consumption is just using up of the utility of goods and services hence no corresponding income is generated. 6. Estimation of the following in NI: A. Payment of fees to chartered accountant by a firm is intermediate cost to the firm and, therefore not included. B. Payment of corporate tax by a firm is a transfer payment and thus not included. C. Purchases of a refrigerator by a firm for own use is investment = expenditure and thus included. 7. Component of factor income received from abroad: a. COE received from abroad. b. OS received from non-resident abroad. c. Retained earnings from non-resident aabroad. No, it can tbe negative. =4 8. State whether the following statements are true or false. Give reasons for your answer: (a) Capital formation is a flow: true, as Invt. Is an economic activities and generates factor income? (b) Bread is always a consumer good: False, need not always be consumer good if purchased by a baker to make bread on cheese or some pudding, then it would be an intermediate good, (c) Nominal GDP can never be less than real GDP: False, nominal is calculated with price prevailing in the market, therefore always > real GDP. (d) Gross domestic capital formation is always greater than Gross fixed capital formation: 9. Calculating GDP at MP, Private Income and Personal Income.

5 GDP mp = GNP fc NFIA +NIT =,000 (-000) = 7,000 in crores. Private Income = GNP fc Dep. Govt. Income + TP s = 7, = 4,000 in crores. Personal Income = Private Income UDP Corporation tax. = 4, =,00 in crores. 0. Calculating NI by Income and Expenditure method: Income method Expenditure method a. COE = 5,00 b. OS =,000 c. MISE = 6,400 NDP fc =,600 +NFIA = 400 NNP fc = 4,000 a. Private FC Exp =,000 b. Govt. FC Exp =,500 c. GFCF =,500 d. Add. To stock = 400 e. Net Export = 400 GDP mp = 6,000 -Dep. +NFIA NIT =,000 NNP fc / NI = 4,000 =6 =6

ECONOMICS. Time allowed : 3 hours Maximum Marks : 100 QUESTION PAPER CODE 58/1/1 SECTION - A. 1. Define an indifference curve. 1

ECONOMICS. Time allowed : 3 hours Maximum Marks : 100 QUESTION PAPER CODE 58/1/1 SECTION - A. 1. Define an indifference curve. 1 ECONOMICS Time allowed : 3 hours Maximum Marks : 100 General Instructions: (i) (ii) (iii) (iv) (v) (vi) All questions in both the sections are compulsory. Marks for questions are indicated against each.