Delhi Public School, Jammu Question Bank Class : XII (2017-18 ) Subject : Economics Section A: Microeconomics 1. When is a consumer said to be rational? ANS. A consumer is said to be rational when he aims at maximizing his utility from the consumption of the given commodity, within his money income 2. Define normative economics, with a suitable example. ANS. Economics as a normative science deals with situations of value judgments or condition of what ought to be. Eg. India should create more employment opportunities. 3. State the meaning of `quantity demanded of a commodity`. ANS. Quantity demanded is that quantity of a commodity which a consumer is willing and able to buy at a particular price and a given point of time 4. If a firm s production department data says that the total variable cost for producing 8 units and 10 units of output is 2,500 and 3,000 respectively, marginal cost of 10 th unit will be ANS. d) 250 a. 100 b. 150 c. 500 d. 250 5. State any one assumption for the construction of the curve that shows the possibilities of potential production of two goods in an economy. ANS. Increasing marginal opportunity cost or any other valid assumption 6. State the behavior of Marginal Physical Product, under Returns to a Factor. ANS. i. MPP initially rises to its maximum ii. MPP then decreases (stays positive) to become zero iii. MPP becomes negative 7. Using appropriate schedules, briefly describe the determination of market equilibrium. Price (in ) Demand (in units) Supply (in units) 1 16 4 2 14 6 3 12 8 4 10 = 10 5 8 12 6 6 14 Schedule Explanation in the above schedule the market equilibrium is established at price of quantity demanded and quantity supplied are equal, with equilibrium quantity of 10 units. 4 where the
8. In a hypothetical market of mobile phones, the brand AWAAZ was leading the market share. Its nearest competitor VAARTA suddenly changed its strategy by bringing in a new model of the mobile phone at a relatively lesser price. In response, AWAAZ too slashed its price. Based on the above information, identify the form of market represented and discuss any one feature of the market. ANS. The market in the question is Oligopoly. Explanation of any one Feature, say Price Rigidity. Price rigidity is the tendency of oligopolistic firms to stick to the ongoing price of the product, with a view to avoid any sort of price war. 9. Discuss the primary reason for indeterminateness of demand curve under the oligopoly form of market. ANS. Indeterminateness of Demand Curve: In an Oligopoly form of market no single firm can predict its prospective sales with perfection. This is because any given change in the price/output decision by a rival firm would initiate a series of actions, reactions Ascending and counter order: actions -0.3, by others. -0.7,-0.8,-1.1. Therefore there is no certain nature and position of (minus demand sign curve only under represents this form the inverse of market relation for a between firm. price and quantity demanded) 9. a. Arrange the following coefficients of price elasticity of demand in ascending order: Price (in ) Quantity (in units) Total outlay (in ) 18-0.7, -0.3, -1.1, -0.8 50 900 13 b. Comment upon the 100 degree of elasticity of demand 1300 for Good X, using the total outlay CONCLUSION: method, if the price The given of X falls data from shows an 18 per inverse unit relation to 13 per between unit and Px its quantity demanded and rises Total from outlay, 50 units thus to as 100 per units. the total expenditure method, Ed > 1. ANS. Ascending order: -0.3, -0.7,-0.8,-1.1. (minus sign only represents the inverse relation between price and quantity demanded) Price (in ) Quantity (in units) Total outlay (in ) 18 50 900 13 100 1300 CONCLUSION: The given data shows an inverse relation between Px and Total outlay, thus as per the total expenditure method, Ed > 1. 10. Identify which of the following is not true for the Indifference Curves. Give valid reasons for choice of your answer: a. Lower indifference curve represents lower level of satisfaction. b. Two regular convex to origin indifference curves can intersect each other. c. Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer s equilibrium.
d. Indifference curves are drawn under the ordinal approach to consumer equilibrium. ANS. Out of the given options, (B) is incorrect. Indifference Curves have a property that two ICs cannot intersect. Suppose, there are any two ICs intersecting each other. As per the figure A =C ( on IC1) D= E (on IC2) But if we see the peculiarity of point B (the point of intersection), this would result into absurd situation of A=C=B & D=C=B, which is not possible, as they are violating the basic definition of the Indifference Curves. 11. A consumer has total money income of 250 to be spent on two goods X and Y with prices of 25 and 10 per unit respectively. On the basis of the information given, answer the following questions: a. Give the equation of the budget line for the consumer. b. What is the value of slope of the budget line? c. How many units can the consumer buy if he is to spend all his money income on good X? d. How does the budget line change if there is a fall in price of good Y? ANS. a) PxQx + PyQy = M 25Qx + 10Qy = 250 (b) Slope of Budget Line = (-) Px/Py = (-) 25/10 = (-) 2.5 (c) If Qy is to be Zero 25Qx + 10Qy = 250 25Qx + 10(0) = 250 Qx = 250/25 = 10 units (d) If Py falls the consumer will be able to buy more of good Y in the same money income pushing the Y-intercept of the Budget Line away from origin, keeping the X-intercept constant. (shifts outwards) 11. Explain the concept of marginal opportunity cost using a numerical example. ANS. The marginal opportunity cost can be defined as the ratio of number of units of a good sacrificed to produce an additional unit of another good. It is also known as Marginal Rate of Transformation (MRT). Marginal opportunity cost of a good in terms of the other good can be estimated as:
MOC = Δ loss of output of good Y = Δ Y = Y2-Y1 (MRT) Δ gain of output of good X Δ X X2-X1 Marginal opportunity signifies the rate of sacrifice of good Y Combinations Good X Good Y MOC A 1 20 - B 2 18 2 C 3 15 3 D 4 11 4 Example: In t h e g i v e n s c h e d u l e, if we want to move from combination A to combination B, we will produce one additional unit of X, but we will have to forgo 2 units of Y. The marginal opportunity cost of X in terms of Y at this stage is 2 units, similarly for other combinations too can be worked out 12. Define Price Floor. What is the common purpose of fixation of floor price by the government? Explain any one likely consequence of this nature of intervention by the government. ANS. PRICE FLOOR A price floor is the lowest legal price of a commodity at which it can be sold, fixed by the government. Price floors are used by the government to prevent prices from being too low. The main reason for imposing the price floor policy is the welfare of the producers / farmers. Eg the minimum wages, minimum support price Consequence: Buffer Stock: In order to maintain the minimum support price, the government may have to build buffer stocks to enable producers to dispose of their surplus stocks. The government purchases the surplus stocks available with the f a r m e r s / producers; these stocks are released in case the production of the supported commodity suffers. 13. Define Price Ceiling. What is the common purpose for the price ceiling imposed by the government? Explain any one likely consequence of this nature of intervention by the government in the price determination process. ANS. PRICE CEILING Price ceiling means the maximum limit that the government imposes on the price of a commodity. Price ceilings are used by the government to prevent prices from being too high. The main reason for imposing price ceilings is to protect the interests of the consumers in situations in which they are not able to afford needed commodities. For example, during the recent rise in the prices of pulses. Consequence: Shortages of the commodity and Rationing: In case of price ceiling the q u a n t i t y actually supplied in the market will shrink; as a result, a large chunk of consumer s demand will go unsatisfied. To deal with such a situation the government may resort to rationing of the commodity.
1 4. Justify the statement, In economics, normal profits are always a part of total cost. ANS. The given statement is correct. Normal profit is defined as the minimum reward that is just sufficient to keep the entrepreneur supplying his factor service Since total cost includes payment made to primary inputs: land, labour, capital and enterprise, total cost includes rent, wages, interest and (normal) profits. 15. A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py. Explain what will happen if : a. MUx / Px is greater than MUy / Py. b. Py falls ANS. a) If MUx/Px > MUy/Py, then it means that satisfaction of Mr. Aman, derived from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y. Mr. Aman, will reallocate his income by substituting Good X for Good Y. As the consumption of Good X increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good Y, this process will continue till MUx/Px becomes equal to MUy/Py. b) If Py falls, MUx/Px < MUy/Py, then it means that satisfaction derived from spending a rupee on Good X is lesser than the satisfaction derived from spending a rupee on Good Y. Mr. Aman will reallocate his income by substituting Good Y for Good X. As the consumption of Good Y increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good X, this process will continue till MUx/Px becomes equal to MUy/Py. 16.State, with valid reasons, which of the following statement are true or false: a. Average Revenue curve under the Perfect Competition is a downward sloping curve. b. AFC curve is a rectangular hyperbola curve. c. When MR is falling but positive, TR will also be falling and positive. ANS. a) False: Since the firm under Perfect Competition is a price taker, AR curve will be a straight line parallel to X-axis. b) True: Since TFC remains unchanged / constant. c) False: When MR is falling but positive, TR will be rising. (brief explanation of each) 17. Supply of money refers to quantity of money a. As on 31 st March b. During any specified period of time c. As on any point of time d. During a fiscal year ANS.(c) as on any point of time Section B: Macroeconomics 18. Define nominal flow. ANS. Nominal Flow/Money Flow is the flow of 19. Primary deficit is equal to:
i) Fiscal Deficit less Interest Payments ii) Revenue Deficit less borrowings iii) Borrowings less interest payments iv) Borrowings less Fiscal Deficit. ANS. (i) Fiscal deficit less interest payments 20. Which of the following is not a Quantitative Method of credit control? i) Open Market Operation ii) iii) iv) Margin Requirements Variable Reserve Ratio Bank Rate Policy (iii) Margin Requirements 21. What are subsidies? ANS. Subsidies are the economic assistance given by the government to the firms and households, with a motive of general welfare. (1) 22. Explain how Depreciation of currency promotes exports of a country? ANS. When price of foreign currency in terms of domestic currency rises in the foreign exchange market it is termed as depreciation of domestic currency. Any depreciation of home currency results in increase in exports of the country since it increases the global competitiveness of the goods ie foreign countries can purchase more quantity of goods and services with the same amount of foreign currency from the domestic country. As a result exports of the domestic country rise. 23. If in an economy: a) Consumption function is given by C = 100 + 0.75 Y, and b) Autonomous investment is 150 crores. Estimate (i) Equilibrium level of income and (ii) Consumption and Savings at the equilibrium level of income. C= 100+0.75Y I = 150 (i) At equilibrium level of income: Y = C + I Y=100+0.75Y + 150 Y - 0.75Y = 250 Y = 250/0.25 = 1,000(in crores) ii) C =100+0.75Y = 100+0.75(1000) = 100 + 750 = 850 (in crores) Y = C + S or S= Y-C = 1,000-850 = 150 (in crores)
24.Explain how the economy achieves equilibrium level of income using Consumption + Investment (C+I) approach. ANS. C+I approach Aggregate demand, given by C+I, is the planned demand by the various sectors of the economy. Whether this planned demand is realized or not depends on amount of goods and services (aggregate output or Y) produced in the economy. Thus it is only when planned expenditure is equal to the aggregate output does the economy achieve equilibrium. ie AD=Y If AD>Y, inventory level with producers falls and they increase output. This happens till AD=Y Opposite happens if AD<Y 25. State under what conditions in the following statements may be true: a. GNDI is equal to GNP at market prices. b. Domestic Income is greater than National Income c. Value of output is equal to Value Added ANS. (a) When net current transfer from abroad are zero (b) When Net Factor Income from Abroad is negative (c) When intermediate consumption is zero. 26. `GDP as an index of welfare may understate or overstate welfare.` Explain the statement using examples of a positive and a negative externality GDP doesn t account for externalities Positive Externality: eg: saving commuting time due to construction of a fly-over, increases welfare, GDP as an index understates welfare Negative Externalities: eg: Pollution from factories, decreases welfare, GDP overstates welfare. 27. Define Balance of Payments. Discuss briefly the components of current account. ANS. Balance of payments is defined as the statement of accounts of a country s inflows and outflows of foreign exchange in a fiscal year. Components of Current Account: i) Visibles: refer to the merchandise/goods exported from or imported by a country. Exports which results inflows for the country are placed on the credit side whereas Imports are placed on the debit side as they result into outflow of foreign exchange from the country. ii) Invisibles: refer to the different types of services and transfers that take place between nations. They give rise to monetary receipts and payments for the nation. 28. Explain the concepts of Real GDP and Nominal GDP, using a suitable numerical example. 1. Real GDP: when GDP is measured at constant prices or the base year s price s is know n as Real GDP. GDP at const ant price s will only incre ase when there is an incre ase in the flow of good
s and services in the economy. 2. Nominal GDP: when GDP is measured at the prevailing or the current year s prices is known as Nominal GDP. GDP at current prices may increase even if there is no increase in flow of goods and services in the economy. Any suitable numerical example.
29.State the various precautions of Product Method that should be kept in mind while estimating national income. Precautions of Product Method: 1. Avoid double counting 2. Production for self consumption should be included 3. Sale of second hand goods is not to be included 4. Production from illegal activities is not to be included 5. Value of services rendered by housewives/family members is not to be included ( any four) 30. a) Fiscal deficit is necessarily inflationary in nature. Do you agree? Support your answer with valid reasons. b) Elaborate Economic Growth as an objective of government budget. ANS. (a) The term fiscal deficit is the difference between the government's total expenditure and its total receipts (excluding borrowing). Such borrowings are generally financed by issuing new currency which may lead to inflation. However, if the borrowings are for infrastructural development this may lead to capacity building and may not be inflationary. (b) The term Economic Growth refers to a sustained increase in the real GDP of the economy OR an absolute/net increase in the total volume of goods and services produced by an economy. This is an essential objective of the government budget as the budget can be a very effective instrument for targeting the economic growth. Can be achieved by providing tax rebates, infrastructural stimulation etc. 31. What is the range of values of investment multiplier? Clarify the relation of investment multiplier with marginal propensity to consume (MPC) and with marginal propensity to save (MPS). ANS. Range of Investment Multiplier = one to infinity. Relation: if MPC rises, investment multiplier : positive relation, whereas if MPS rises, investment multiplier falls: inverse relation. (Relation to be supported by numerical examples or explanation) 32. Discuss how the central bank plays the role of `controller of credit` in an economy? ANS. This is the most crucial function played by any central bank in the modern times. Central Banks are supposed to regulate and control the volume and direction of the credit by using the i) Quantitative techniques are those techniques which influence the quantum of credit in the economy like open market operations, bank rate policy, repo and reverse repo rate policy etc. ii) Qualitative techniques - or selective credit control techniques are the ones which influence the direction of credit in the economy like margin requirements and moral suasion. ( brief explanation of each) 33.Using a numerical example elaborate the credit creation process as handled by the commercial banks.
ANS. Creation of credit is one of the crucial functions performed by a commercial bank in modern times. The commercial bank is responsible for putting money (produced/created by central bank) in circulation through the process of credit creation or the lending process. Numerical Illustration, may be based on the following assumptions: i. There is only one bank in the economy. ii. Initial deposits are say 10,000 crores and the legal reserve requirement proposed by the central bank is 10%. iii. Credit Creation = Initial deposits x 1 = 10,000 / 0.1 LRR = 1,00,000 crores. Students may provide a schedule for deriving the same 34. Compute National Income S.No. Items Amount (in Crores) i) Mixed Income of Self Employed 2,500 ii) Net Factor Income from Abroad (-) 50 iii) Rent 500 iv) Private Income 4,000 v) Consumption of Fixed Capital 400 vi) Corporation Tax 700 vii) Profits 300 viii) Net Retained Earnings of Private Enterprises 500 ix) Compensation of Employees 1,600 x) Net Indirect Taxes 500 xi) Net Current Transfers from Abroad 150 xii) Net Exports (-) 40 xiii) Interest 500 xiv) Direct Taxes Paid by Households 300 ANS.(i) National Income= (ix) + [(iii) + (xiii) +( vii)] + (i) +(ii) =1600 + (500 + 500 + 300)+ 2500+ (-50) = 5350 crores