Class 12 Economics Solved Paper (2016 Delhi Set-I) | Economics for Grade 12 PDF Download

Ques 1: What is the relation between marginal cost and average variable cost when marginal cost is rising and average variable cost is falling?
Ans: Marginal cost lies below the average variable cost when marginal cost is rising and average variable cost is falling. In other words as long as marginal cost is below the average variable cost, the AVC continues to fall, no matter the MC is rising.

Ques 2: Suppose total revenue is rising at a constant rate as more and more units of a commodity are sold, marginal revenue would be: (choose the correct alternative).
(a) Greater than average revenue
(b) Equal to average revenue
(c) Less than average revenue
(d) Rising
Ans: (b) Equal to Average Revenue

Ques 3: When does 'increase' in demand take place?
Ans: Increase in demand: Rise in demand Takes place due to change in factors other than price of the commodity. 

Ques 4: 'Homogenous products' is a characteristics of: (Choose the correct alternative)
(a) Perfect competition only
(b) Perfect oligopoly only
(c) Both (a) and (b)
(d) None of the above
Ans: (c) Both perfect competition and perfect oligopoly.

Ques 5: There is inverse relation between price and demand for the product of a firm under : (Choose the correct alternative)
(a) Monopoly only
(b) Monopolistic competition only
(c) Both under monopoly and monopolistic competition
(d) Perfect competition only
Ans: (c) Both under monopoly and Monopolistic competition.

Ques 6: A consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5 and 4 respectively. The prices of X and Y are Rs. 4 per unit and Rs. 5 per unit respectively. Is the consumer in equilibrium? What will be the further reaction of the consumer? Explain.
Ans: Marginal utility of X = 5
Price of X = Rs. 4
Marginal utility of Y = 4
Price of Y = Rs. 5
MUx÷Px=5÷4=1.25
MUy÷Py=4÷5=0.8
No, the consumer is not in an equilibrium because the marginal utility of X is more than the marginal utility of Y and to reach the equilibrium level, the consumer should increase the consumption of good X and decrease the consumption of good Y.

Ques 7: Price elasticity of demand of good X is 2 and of good Y is 3. Which of the two goods is more price elastic and why?
Ans: Price elasticity of good X=2
Price elasticity of good Y=3
Good Y is more price elastic as compared to good X. There is inverse relationship between price and demand. For elasticity, negative sign is ignored and hence,
=3>2
Thus, price elasticity of good Y is more.

Ques 8: What is maximum price ceiling? Explain its implications.

Or

Explain the chain effects, if the prevailing market price is below the equilibrium price.
Ans: A price ceiling occurs when the government puts a legal on how high the price of the product can be. In order for the price ceiling to be effective, it must be set below the natural marker equilibrium. It is also known as maximum price .This maximum price is fixed below the equilibrium price for the welfare of poor and vulnerable sections of the society.
Implications of price ceiling:
(a) When prices are lowered below the equilibrium price, than the demand increases more as compared to available supply. This leads to the situation of excess demand.
(b) With price ceiling, all the necessity products come under the reach of poorer and vulnerable sections of the society.
(c) Due to price ceiling, there is the situation of more demand and less of supply, since there is less supply, goods are made available to people in a fixed quantity (quota), otherwise this at times lead to a problem of shortage.
or
When the prevailing market price is below the equilibrium price, then there is a condition of excess demand. This excess demand increases the competition among the buyers and buyers tend to buy the output at higher prices which increases the market price. As the market price starts rising, demand contracts and supply expands. This market price tend to rise till the equilibrium is restored.

 In the above fig, it is assumed that the market price P_s is below the equilibrium price p_e. According to demand curve, quantity demanded q_d, quantity supplied q_s, there emerges the situation of excess demand (q_d−q_s).
The excess demand pushes the price up from the OP_s price level. With rise in price, the quantity demanded contracts and quantity supplied expands. This process continues till the equilibrium gets established at point E at OP_e price level and OQ_e quantity.

Ques 9:  Explain in effect of change in prices of the related goods on demand for the given good.
Ans: Goods are said to be related when price of one good (say ′X′) causes change in demand for other good (say ′Y′).
Related goods are of two types:
(a) Substitute goods (direct relationship): Substitute goods are a pair of goods which can be used (substituted) in place of each other. They are competitive good. Like Pepsi and coca - cola or tea and coffee. Demand for a given commodity is affected if the price of its substitute rises or falls. For the case of tea and coffee, the demand for tea will fall when the price of its substitute coffee falls. A fall in the price of substitute good (tea) reduces the consumers demand for given good (coffee).
If related good is a substitute of a given good, then a rise in price of substitute good will lead to rise in demand for given good because it becomes relatively cheaper.

 As can be seen is the above graph that when the price of coffee is OP₁, the demand for tea is OQ₁. When the price of coffee rises to OP2, the demand for tea increased to OQ₂. Hence there is direct relationship between price of coffee and demand for tea.

(b) Complementary goods (inverse relationship): Complementary goods are pair of goods which are used together to satisfy a given want. They are complementary to each other in the sense that they complete the deficiencies of each other. For eg fountain pen and ink. A fall in the price of one commodity leads to rise in the demand for the other commodity also. If the price of ink falls, demand for its complementary good fountain pen will rise. Thus, a fall in price of one complementary good increases the demand for the other complementary good.
If related good is complementary to the given good, then a rise in price of complementary good will result in fall in demand of given good.


As can be seen is the above graph that when price of the ink was OP₁, the demand for pen was OQ₁. When the price of ink falls to OP₂, the demand for pen rises to OQ₂. Hence there is an inverse relationship between price of ink and demand for pen.

Ques 10: Define production function. Distinguish between short run and long run production functions.
or
Define cost. Distinguish between fixed and variable costs. Give one example of each.
Ans: Production function: Production has been defined as ?transformation of inputs into output?. The physical relationship between inputs and outputs under given technology is called production function.
Q=f(F₁,F₂..........F_n)

or
Cost: The sum of explicit cost (cash payments made by firms to outsiders for hiring factor services and buying raw materials) and implicit costs (cost of self?owned and self?supplied inputs) constitute total cost of production of a commodity.

Ques 11: A producer supplies 80 units of a good at a price of Rs. 10 per unit. Price elasticity of supply is 4. How much will he supply at Rs. 9 per unit?
Ans:  Given: Q₁=80 units, Q₂=? P,= Rs. 10/unit and P₂= Rs. 9/unit and E_s = 4
Let Q₂ be x
ΔQ=(Q₂−Q₁)
=(x−80)
ΔP=(P2−P1)
=(910)
=1
E_s=(ΔQ÷ΔP)×(P÷Q)
4=(x−80÷(−1)×(10÷80)
4=x÷80÷8
−32=x−80
x=48 units
Thus, a producer will supply 48 units at Rs. 9 per unit.

Ques 12: Assuming that no resource is equally efficient in production of all goods, name the curve which shows production potential of the economy. Explain, giving reasons, its properties.
Ans: The curve which shows the production potential of the economy, assuming that no resource is equally efficient in production of all goods is ?Production Possibility Curve (PP Curve)?.

Production possibly curve: It is a curve which depict all possible combinations of two goods which an economy can produce with available technology and with full and efficient use of its given resources.

Properties of PP Curve:
(a) Downward sloping curve from left to right: PP Curve is downward sloping from left to right because in a situation of full employment of resources, production of one good can be increased only after sacrificing some quantity of the other good.

(b) PP curve is concave to the origin: The shape of PP Curve is concave to the origin because of increasing marginal opportunity cost.
(c) Optimum utilisation of resources: When economy is producing on PP Curve, every point on it (A, B, C, D, E, F) reflects situation of full and efficient employment of resources i.e., optimum utilisation of resources.

Ques 13: Explain the condition of consumer's equilibrium using indifference curve analysis.
Ans: Consumer's equilibrium using indifference curve analysis ? According to indifference curve analysis, a consumer attains equilibrium at a point where budget line is tangent to indifference curve. Consumer equilibrium is achieved where slope of indifference curve (MRS) = slope of budget line (Px/Py)
MRS = Px÷Py(Ratio of prices of two goods)
Given the indifference map (preference schedule) of the consumer and budget or price line, we can find out the combination which gives the consumer maximum satisfaction. The aim of the consumer is to obtain highest combination on his indifference map and for this he tries to go to the highest indifference curve with his given budget line. He would be in an equilibrium only at such point which is common point between budget line and the highest attainable indifference curve. A consumer is in equilibrium at a point where budget line is tangent to indifference curve. At this point, slope of indifference curve (called MRS) is equal to slope of budget line.

 In the above fig, P is the equilibrium point at which budget line M just touches the highest attainable indifference curveIC2within consumer budget. Combinations on IC₃ are not affordable because his income does not permit whereas combinations on IC₁ gives lower satisfaction than IC₂. Hence, best combination is at point P where budget line is tangent to the indifference curve IC₂. It is at this point that consumer attains the maximum satisfaction at the state of equilibrium.
For consumer's equilibrium, two conditions are necessary:

(a) Budget line should be tangent to indifference curve (MRS = Px/Py).

(b) Indifference curve should be convex to the point of origin (i.e., MRS should be diminishing at a point of equilibrium.)

Ques 14: Explain the distinction between 'Change in quantity supplied' and 'Change in supply'. Use diagram.
Ans:

Change in Quantity Supplied	Change in supply
When supply rises or falls because of change in the price of the commodity and other things remaining constant, is called change in quantity supplied.	When there is increase or decrease in supply because of change in factors other than price, it is called change in supply.
When supply of a commodity rises with rise in price, other things remaining constant is expansion in supply	When supply of a commodity rises due to change in factors other than price, it is called increase in supply.
Other things remaining constant, when supply of a commodity falls with fall in the price, it is termed as contraction in supply.	When supply of a commodity falls due to change in factors other than price, is called decrease in supply.
Change in quantity supplied is depicted by movement along the supply curve.	Change in supply is depicted by shift in supply curve.
Types of change in quantity: (a) Expansion of supply (b) Contraction of supply	Types of change in supply: (a) Increase in supply (b) Decrease in supply.

Ques 15: Explain the implication of the following in a perfectly competitive market:
(a) Large number of buyers
(b) Freedom of entry and exit to firms
or
Explain the implications of the following in an oligopoly market:
(a) Inter dependence between firms
(b) Non price competition
Ans:  Implications of the following in perfectly competitive market:
(a) Large number of buyers: There are very large number of buyers in perfectly competitive market that no individual buyer can influence the price or demand of any commodity. An individual buyer is the price taker and not the price maker,
(b) Freedom of entry and exit to the firms; No firm in the perfectly competitive market can earn above normal profit in the long run, i.e., a firm earns zero abnormal profit. In other words, each firm earns just normal profit, i.e., minimum profit which is necessary to carry out business.
or
Implications of the following in oligopoly market:
(a) Interdependence between firms: There are very few large firms in oligopoly market and these firms are mutually dependent on each other and hence influence the market price and output. To fix the price and its output, every firm has to consider the decision of the rival firm also as all the firms are mutually dependent on each other.
(b) Non  price competition: Since the firms in oligopolistic market are interdependent and they fix the prices together, so there is no price competition among the firms as they fix the price after taking into consideration the decision of all the firms together.

Ques 16: Define Stocks.
Ans: Stock: A stock is a quantity which is measured at a point of time, eg. Population.

Ques 17: Depreciation of fixed capital assets refers to: (Choose the correct alternative)
(a) Normal wear and tear
(b) Foreseen obsolescene
(c) Normal wear and tear and foreseen obsolescene
(d) Unforeseen obsolescence
Ans: (c) Normal wear and tear and foreseen obsolescence.

Ques 18: What is revenue expenditure?
Ans: Revenue Expenditure: An expenditure which neither creates assets nor reduces liabilities is called revenue expenditure.

Ques 19: Fiscal deficit equals: (Choose the correct alternative)
(a) Interest Payments
(b) Borrowings
(c) Interest payments less borrowing

(d) Borrowings less interest payments
Ans: (b) Borrowings.

Ques 20: Foreign exchange transactions dependent on other foreign exchange transactions are called: (choose the correct alternative)
(a) Current account transactons
(b) Capital account transactions
(c) Autonomous transactions
(d) Accomodating transaction
Ans: (d) Accommodating transactions.

Ques 21: Find net value added at factor cost:

Ans:Value of output = sales + change in stock =20+2=22 lakh.
Gross value added at market price = value of output - intermediate consumption (single use producer goods) =225=17 lakh.
Depreciation = (Cost of producers good - no. of life in years) =(10÷10)=1
Net Indirect taxes = Taxes on production - subsidy =10=1
Net value added at FC = GVA mp - Depreciation - Net indirect taxes =1711  = 15 lakhs.

Ques 22: Distinguish between marginal propensity to consume and average propensity to consume. Give a numerical example.
or
Explain the role of taxation in reducing excess demand.
Ans:

or
Role of taxation to reduce excess demand: Important part of fiscal policy is revenue policy which is expressed in terms of taxes. During inflation, government should raise rates of all taxes especially on rich people because taxation withdraws purchasing power from the tax payers and to that extent reduces effective demand. The non?discretionary elements refer to in?built stabilizers of income which operate automatically in reducing excess demand like progressive income tax, subsidies, old ?age pension and others such as transfer payments.

Ques 23: In an economy investment is increased by Rs. 300 crore. I marginal propensity to consume is 2/3, calculate increase in national income.
Ans: MPC=2/3
ΔI= Rs. 300 crores
k=[1÷(1MPC)]
=[1÷(12/3)]


k=ΔY/ΔI
3=ΔY/300
ΔY=300×3
= Rs. 900 crore
Increases in national income is Rs. 900 crore.

Ques 24: Government incurs expenditure to popularize yoga among the masses. Analyse its impact on gross domestic product and welfare of the people.
Ans: Impact on GDP: With the help of yoga, people will be in good state of health as well as in a good state of mind and it is rightly said that healthy mind stays in a healthy body. When a person has healthy mind and healthy body, he/she will work hard towards producing good and increased quantity of goods which will help in increasing the GDP of the economy. People with healthy mind will provide their efficient services to the economy which will have a positive impact on the GDP of the country and will help in increasing the standards of the economy.
Impact on the welfare of people:
Yoga keeps the body, mind and soul healthy and happy. With healthy body, mind and soul people are able to work in an efficient manner and help the others in society, rooting up the welfare of all the people in the society.

Ques 25: Explain how open market operations are helpful in controlling credit creation.
Ans: Open market operations: Open market operations refer to buying and selling of government securities by central bank to public and banks .This is done to influence money supply in the country. Sale of government securities to commercial bank means flow of money into central bank which reduces cash reserves. Consequently, credit availability of commercial banks is controlled.
On the other hand, if R.B.I purchases government securities, it will increase the money supply with commercial banks that will increase their lending capacity and flow of money into the economy.

Ques 26: What is government budget? Explain how taxes and subsidies can be used to influence allocation of resources.
Ans: Government budget: A government budget is an annual financial statement of estimated revenue and estimated expenditure during a financial year. Government budget is a statement of its income and expenditure.
Through budgetary policy, government aims to allocate resources in accordance with economic (profit maximisation) and social (public welfare) priorities of the country.
To encourage investments, government can give tax concessions, subsidies, etc to the producers. For example: government discourages the production of harmful consumption goods like liquor or cigarettes, etc. through levying heavy taxes and encourages the use and production of "khaadi" products by providing subsidies.
Government budget can be used to bring price stability or economic stability in the economy:
Government can bring price/economic stability i.e.., control fluctuations in the general price level through taxes, subsidies and expenditure. For instance, when there is inflation (continuous rise in price), government can reduce its own expenditure. When there is depression, government can reduce taxes and grant subsidies to encourage spending by the people.

Ques 27: Given Consumption curve, derive saving curve and state the steps taken in the process of derivation. Use diagram.
Ans: Consumption + saving is always equal to income because income is either consumed or saved. It implies that consumption and saving curves representing consumption and saving functions are complementary curves.
In part A, CC curve shows consumption function whereas 45^o line represents income. C curve intersects 45^o line at point B at which BR = OR i.e.., consumption = income. Point B is the breakeven point showing zero saving. It states that saving curve must intersect X-axis at the same income level where consumption curve and 45^o line intersects. Left of point B is negative saving and to the right of point B is positive saving.
In part B, we derive saving function in the form of saving curve. In part A, the amount of saving is the vertical distance between C curve and 45^o line. By plotting, the vertical distances of saving /dis saving and by joining them, we derive a saving curve. In part A the vertical distance OC (dissaving) is plotted as OS₁ below X-axis in part-B. At OR level of income in Part A, vertical distance at point B is shown as point B₁ on X-axis in lower part of figure is nil. LM of part A is shown as L₁M₁ in part -B. By joining points S, B₁ and L₁ in lower segment, we get saving curve. Thus saving curve is I derived from consumption curve.
Part - A

Part- B


Ques 28: (a) In which sub 'account and on which side of balance of payments account will foreign investments in Indian be recorded' Give reasons.

(b) What will be the effect of foreign investment in India on exchange rate? Explain.
Ans: (a) Foreign investments in India will be recorded in the capital account on the credit side of Balance of Payments accounts. It is recorded as the positive item in the capital account of BOP because foreign investments is an inflow of foreign currency into our country.
(b) Foreign investment in India will increase the supply of foreign currency in our country. This increase in supply is reflected as shift in the supply curve. With the shift, new equilibrium point is established, where exchange rate falls and thus the demand and supply of foreign currency rises and exchange rate falls. This will continue till the equilibrium is reached.

As can be seen in the above diagram that the supply curve of foreign exchange is SS. As the foreign investment in India increases, the supply curve of foreign exchange shifts to rightward and now the new supply curve is S'S'. This shift in supply curve from SS to S'S' changes the equilibrium from E to E₁ where the exchange rate falls from OR to OR₁ and demand and supply quantity of foreign exchange rises from OQ to OQ₁. Hence the new equilibrium gets established at OR₁ exchange rate and OQ₁ quantity of foreign exchange.

Ques 29: 

Ans:  NNP_fc = Wages and salaries + Social security contributions by employers + Rent interest + profit + royalty - Net factor income paid to abroad.
NNP_fc=1000+100+200+300+400+5010  =205010
= Rs. 2040 crores.