(Q1) DD' is a demand curve, A and B are two points on it.
Price elasticity of demand at point A is :
(a) less than elasticity of demand at B
(b) equal to elasticity of demand at B.
(c) greater than elasticity of demand at B.
(d) less than 1.
(A1) (c) Greater than elasticity of demand at B
(Q2) What economic measure can the Government take to reduce demand for commodity x which is harmful for health ?
(A) Put a tax on it so that its price rises. (any other relevant measure)
(Q3) The average fixed cost at 4 units of output is Rs 20. Average variable cost at 5 units of output is Rs 40. Average cost of producing 5 units is rupees :
A) (c) Rs. 56
(Q4) Describe the problem of ‘what to produce’.
A) The economy has to decide which commodities should be produced with given resources and the resources are scarce, and have alternative uses.
(Q5) Explain the meaning and need for ‘maximum price-ceiling’.
A) When government imposes an upper limit on the price of a good , it is called price ceiling. It is generally imposed on essential items and is fixed below the market determined price. The reason being the equilibrium price is too high for the common people to afford.
(Q6) The Government establishes a large number of Institutes of science and technology. How will it affect the production possibility frontier ? Explain.
A) By these institutes skill development will improve. This would result in increase in the production potential of the country. So the PP will shift to the right.
(Q7) Explain the changes that take place in total product and marginal product under diminishing returns to a factor.
A) Under diminishing returns to a factor marginal product initially falls and remains positive but ultimately it becomes negative. Accordingly total product increases at a diminishing rate and ultimately starts falling.
(Q8) Explain the significance of ‘barriers to entry’ feature of monopoly.
Explain the significance of ‘product differentiation’ feature of monopolistic competition.
A) The significance of ‘barriers to entry’ feature of monopoly is that since the monopolist is the only producer, he can always exercise significant influence over market price by changing the supply. It makes monopolist a price maker.’
The significance of this feature is that the buyer differentiates between the product produced by different firms which are close substitutes. In such a market there is some element of monopoly enjoyed by a firm, who is in a position to influence the market price of the product it produces to some extent.
(Q9) Explain with the help of a numerical example, the meaning of diminishing marginal rate of substitution.
Explain the Law of Diminishing Marginal Utility with the help of an example.
A) The following table shows four such bundles of commodity X and Y which gives the consumer same satisfaction –
For each additional unit of X the consumer is willing to sacrifice less of Y. This is diminishing marginal rate of substitution.
(any other relevant numerical example)
(Q 10) Explain the difference between ‘change in demand’ and ‘change in quantity demaned’.
A) When demand for a good changes due to change in price of the given good it is called ‘change in quantity demanded’ when demand changes due to a factor other than own price it is called ‘change in demand’.
(11) Explain the effect of the following on market supply of a good :
(i) Increase in input prices
(ii) Reduction in per unit tax
State the relationship between :
(a) Marginal cost and average variable cost
(b) Total cost and marginal cost
A) (i) When input price increases, cost of production rises. Price of the product remaining the same, profit falls. This will reduce market supply.
(ii) Reduction in per unit tax will reduce the cost of production. Price remaining the same, profits will increase. So the producers will produce
more and market supply will increase.
(a) When MC < AVC, AVC falls
When MC = AVC, AVC constant
When MC > AVC, AVC rises
(b) When TC increases at a diminishing rate MC falls
When TC increase at an increasing rate MC rises.
When TC increases at a constant rate MC is constant
(Q12) Explain the effect of the following on the demand for a good :
(i) Increase in income of its consumer
(ii) Rise in price of its substitute good
A). (i) When the good is normal, increase in income of its consumer raises his purchasing power, so he buys more of it.
When the good is inferior, then with an increase in income the demand for such good will fall.
(ii) Rise in the price of substitute goods makes the given good relatively cheaper. So its demand increases and demand for substitute good falls.
(Q13) Giving reasons, state whether the following statements are true or false :
(i) The supply curve of a good shifts to the right when prices of other goods rise.
(ii) The difference between average cost and average variable cost is always constant
A) (i) False, When price of other goods rise, it becomes more profitable to produce them in place of the given good, so supply curve will shift to left.
(ii) False, The difference between AC and AVC is due to AFC. As output is increased AFC falls, so the difference between AC and AVC falls.
(Q14) Explain with the help of a diagram the chain of effects of a rightward shift in demand curve of a good on its equilibrium price, quantity demanded and supplied.
The following question is for blind candidates only in lieu of Q. No. 14.
Explain the meaning of excess demand of a good. Explain its chain of effects on equilibrium price.
When the demand curve DD shift to DD’. There is excess demand (AB) at OP price. Thy buyers compete, price starts rising thus demand starts falling(Contraction) and supply starts rising (expansion). These changes continue till price reaches OP1. At this price equilibrium quantity is OQ1.
For Blind Candidates :
Excess demand refers to a situation when quantity demanded is more than quantity supplied at the prevailing market price.
Same explanation as given above without diagram.
[ SECTION B (SET - 1) ]
(Q15) Who regulates money supply ? (Choose the correct alternative)
(a) Government of India
(b) Reserve Bank of India
(c) Commercial Banks
(d) Planning Commission
A) (b) Reserve Bank of India
(Q16) What are demand deposits ?
A) Deposits that are withdrawn by cheque.
(Q17) Which of the following is not a revenue receipt ?
(a) Recovery of loans
(b) Foreign grants
(c) Profits of public enterprises
(d) Wealth tax
A) (a) Recovery of loans
(Q18) Which of the following is a correct measure of primary deficit ?
(a) Fiscal deficit minus revenue deficit
(b) Revenue deficit minus interest payments
(c) Fiscal deficit minus interest payments
(d) Capital exp. minus revenue expenditure
(Q19) Which of the following is a stock ? (Choose the correct alternative)
A) (a) Wealth
(Q20) Describe any three sources of demand for foreign exchange.
Give the meanings of ‘devaluation and depreciation’ of domestic currency.
A) (i) For imports
(ii) For investment in other countries.
(iii) For Foreign travel etc .
(any other relevant source)
When price of domestic currency falls under fixed exchange rate system, it is called ‘devaluation’. When price of domestic currency falls under flexible exchange rate system, it is called ‘depreciation’.
(Q21) In an economy investment increases from 300 to 500. As a result of this equilibrium level of income increases by 2000. Calculate the marginal propensity to consume.
(Q22) Explain the meaning of deflationary gap with the help of a diagram.
The following question is for Blind Candidates only in lieu of Q. No. 22 :
Distinguish between inflationary gap and deflationary gap.
When AD falls short of AS at the full employment income level (OF), the difference (FG) is called deflationary gap.
For Blind Candidates
The excess of aggregate demand over aggregate supply at full employment is called inflationary gap when aggregate demand is less than aggregate supply at full employment, the difference is called deflationary gap.
(Q23) In the context of balance of payments account, state whether the following statements are true or false. Give reasons for your answer.
(i) Profits received from investments abroad is recorded in capital account.
(ii) Import of machines is recorded in current account.
A) (i) False, it is recorded in current account as it neither affects foreign exchange assets nor foreign exchange liabilities.
(ii) True, all imports and exports of goods are recorded in trade account which is a part of current account, because it is simply import/export of a good.
(Q24) Describe the expenditure method of calculating gross domestic product at market
What precautions (any four) should be taken while estimating national income by
A) To Calculate GDPmp by the expenditure method, we add up final expenditures on the goods and services produced by all the economic sectors of an economy. Expenditures incurred on consumption and investment are final expenditures. These are classified into:
(i) Private final consumption expenditure.
(ii) Government final consumption expenditure.
(iii) Gross domestic capital formation.
(iv) Net exports (=Exports less imports)
The sum total of these expenditures is GDPmp.
(Q25) Calculate gross value added at factor cost.( rs in crores)
(Q26) The Government decides to give budgetary incentives to investors for making investments in backward regions. Explain these possible incentives and the reasons for the same.
A) Budgetary incentives refer to concession in taxation and granting subsidies to those production units which set up their units in economically backward areas. Tax concessions, like lower excise duties aim at reducing cost and thus raising profits. Subsidies aim at reducing prices of products to encourage sales and earning more profits. Thus both aim at raising profits.
(Q27) Explain any two functions of money.
Explain any two main functions of Central Bank.
A) Functions of money
1. Medium of exchange.
2.Store of value
3. Unit of account
4. Standard of deferred payments.
(Statement : any two)
Functions of central bank
1. Bank of issue
2. Government’s Banker
3. Banker’s bank.
4. Controller of credit.
(Statement : any two)
(Q28) In an economy planned spending is greater than planned output. Explain all the changes that will take place in the economy.
Planned spending refers to people planning to purchase final goods and services during the year. Planned output means the production units planning to produce final goods and services during the year.
When planned spending is higher than planned output, the producers find the stocks falling below the desired level. They start raising production. This raises income levels till inventories (stocks) reach the desired level and economy is in equilibrium.
(Q29) From the following data calculate ( rs in crores) (6)
(a) Gross national product at market price and
(b) Net national disposable income :