## CBSE Sample Papers for Class 12 Economics Compartment Delhi 2010

Time allowed : 3    hours                                                                                         Maximum marks 100

GENERAL INSTRUCTIONS
(i) All questions in both the sections are compulsory.
(ii) Marks for questions are indicated against each.
(iii) Questions No. 1-5 and 17-21 are very short-answer questions carrying 1 nick each. They are required to be answered in one sentence each.
(iv) Questions No. 6-10 and 22-26 are? short-answer questions carrying 3 marks each. Answers to them should normally not exceed 60 words each.
(v) Questions No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answers to them should normally not exceed 70 words each.
(vi) Questions No. 14-16 and 30-32 are long-answers questions carrying 6 marks each. Answers to them should normally not exceed 100 words each.
(vii) Answers should be brief and to the point and the above word limit should be adhered to as far as possible.

### SET I

SECTION A

Question.1. What is an economy.
Answer. An economy is a system which provides people with the means to work and earn their livelihood.

Question.2. Give meaning of consumer’s equilibrium.
Answer. Consumer’s equilibrium refers to the optimum combination of two goods which, gives a consumer maximum satisfaction given his income and prices of the two goods.

Question.3. What are monotonic preferences?
Answer. Consumer’s preferences are monotonic if and only if between two bundles, consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.

Question.4. Define marginal cost.
Answer. Marginal cost is the change in the total cost that takes place when an additional unit of output is produced. In short,
MC = ${ TC }_{ n }$${ TC }_{ n-1 }$

Question.5. Define oligopoly.
Answer. Oligopoly is a market situation where there are few sellers of the commodity and the demand is indeterminate.

Question.6. Explain the difference between a planned economy and a market economy.
Answer. A market economy is an economic system based on private property and private profit. In this economy there is freedom of enterprise and all economic activities are guided by profit motive. Central problems are solved through price mechanism.
A planned economy, also known as a socialist economy, is an economic system where there is public ownership of property. In this system there is no economic freedom of enterprise. All central problems are solved by a central planning authority constituted by. the government. This authority has complete control on all the economic activities. Central problems are solved keeping in view the welfare of the people.
(or)
Explain properties of a production possibility curve.
Answer. A production possibility curve refers to different combinations of two goods that can be produced fully utilising die given resources in an economy under given technological conditions.
The main features of PP-curve are:
(i) The shape of PP curve is concave to the origin. It is because the marginal rate of transformation or marginal opportunity cost is increasing. This means the Quantity of good Y which is sacrificed or given up for obtaining an additional unit of good X increases. See diagram.

(ii) Given the full utilisation of resources, and technological conditions, all efficient combinations will lie on the PP frontier. In other words, any point (or combination) inside the PP frontier will indicate that either the resources are not fully utilised or inefficiently use.

Question.7.Explain by giving an example.
Answer. The demand for a commodity will be very elastic if some other commodities can be used in place of it. A small rise inâ€˜the price of such a commodity will induce consumers to use its substitutes. When a commodity has large number of close substitutes, demand for it is usually very elastic. For example, gas, kerosene oil, coal, etc. will be used more as fuel if the price of wood increases. On the other hand, the demand of such commodities is inelastic which have no substitutes such as salt.

Question.8. What is an ‘inferior’ good? In what manner is the demand curve of such a good affected when income of the consumer increases?Use diagram.
Answer. Inferior goods are those goods whose demand decreases with rise in the level of income. Therefore when the income of the consumer increases the demand for inferior good decreases as shown in the diagram, in the given situation, DD curve shifts u Quantity to DJDJ curve.

Question.9. Explain any two causes of’decrease’ in supply of a commodity.
Answer. Decrease in supply means decrease in the quantity supplied of a commodity because of factors other than change in the price. The two factors which cause decrease in the supply are:
(i) Government levies tex on every unit : of a commodity sold or bought. Due to levy of taxes, cost of production increases. By implication; “supply decreases at the same price.
(ii) Increase in the price of factor inputs leads to an increase in the cost of production which adversely affects the supply of a commodity. With the result that supply of a commodity will be less at the same price, i.e supply will decrease.

The effect of these two factors, causing decrease in supply, becomes evident by looking at the diagrams.

Question.10.Explain why the equilibrium price of a commodity is determined at that level of output at which its demand equals its supply?
Answer.Equilibrium price is defined as the price at which the consumers are willing to buy the same quantity of a good which the producers are willMg to sell.
• The two opposite forces determining the price of a good are demand and supply,
• Demand for a good is inversely related to price i.e. when the price falls the demand for that good rises and vice versa.
• Supply of a good is directly related to its price, This means that producers are willing to supply more only at a higher price.
• Diagrammatically- equilibrium price is determined at the intersection of demand and supply curves.
• If market price is not the same as equilibrium price
the Quantity demanded will not be equal to Quantity supplied.
Such a situation would lead to interaction between demand and supply in such a manner that price has a tendency to move towards equilibrium.

Question.ll. On the basis of the following schedule, calculate price elasticity of demand by the percentage method:

Question.12. A producer can sell any quantity of output of the good he produces at a given price.
Prepare a Total Revenue and Marginal Revenue Schedule for four output levels.
Answer. Let us assume that die given price is Rs. 5 per unit. On this basis total revenue and marginal revenue at four output levels will be as given in the schedule:

Question.13. What is the likely behaviour of Total Product when only one input is increased for increasing production? Use diagram.
Answer. This question relates to the production function related to a short period where for increasing total product, units of a variable factor (one input) are increased. In short, this question pertains to the law of variable proportions. As shown in the diagram, total product passes through three phases:
(i) Total product increases at increasing rate, when marginal , product is increasing.
(ii) Total product increases when marginal product is positive but decreasing.
(iii) Total product starts decreasing. This happens when
marginal product becomes negative. Total product is maximum when marginal product is zero (see diagram). units

Or
what is the likely behaviour of Marginal Product when only one input is increased for increasing production? Use diagram.
Answer. This question relates to the production faction related to a short period where, for increasing total product units of a variable factor (one input), are increased. In short this question pertains to law of variable proportions. As shown in the diagram, marginal product passes through three phases:

(i) Marginal product increases. It is because of the fact that fixed inputs are better utilised.
(ii) Marginal product starts declining and becomes zero.
(iii) Marginal product becomes negative. However, no firm operates in this phase. Every firm operates during second stage wtere MP is dedining fsee diagram).

Question.14. Explain the conditions of consumer’s equilibrium using Indifference Curve Analysis. Use diagram.
Answer. See Q. 14,2010 (I Delhi)

Question.15. Is a producer in equilibrium under the following situations?
(i) When marginal revenue is greater than marginal cost.
(ii) When marginal revenue is equal to marginal cost Give reasons for your answer.
Answer. (i) Producer will not be in a position of equilibrium when marginal revenue is greater than marginal cost. As shown in die diagram (i), in this stage the producer foregoes
profit amount equal to $\Delta$EFM when his output is OQ1 Therfore his output should be OQ where marginal cost = marginal revenue. We have explained this case taking the example of a competititve firm (see diagram).Output

(ii) Marginal revenue (MR) befog equal to marginal cost (MC) is a necessary but not sufficient condition for the equilibrium. The sufficient condition is that at the equilibrium/ the MC should be rising. Thus the firm may or may not be at the equilibrium when MR = MC. fo the adjacent diagram, MR = MC at both the points A and B but the equilibrium occurs at point B.

Question.16. Explain the implications of the following features of a perfectly competitive market:
(ii) large number of sellers.
Answer. (i) The number of buyers under perfect competition is very large. The number is so large that no individual buyer can influence the demand in the market. It is an important factor highlighting the fact that price fo perfect competition is the same for all buyers and sellers.
(ii) The number of sellers is very large under perfect competition. The number is so large that no seller can influence the supply. The share of each seller in the total-market supply is so small that no single seller can influence the price and has to sell the product at the price given by the industry. On the prevailing market price, a firm can sell as much as it likes.

SECTION B
Question.17.Define final product.
Answer.A final product is that which is used for consumption and investment purposes.

Question.18.Define money supply.
Answer.Money supply is the stock of money in circulation at a particular point of time. It includes currency with the public and demand deposits.

Question.19.What are time deposits?
Answer.Those deposits which cannot be withdrawn before the expiry of the stipulated time period for which they are made are called time deposits. Generally the term for these deposits is more than 15 days.

Question.20.What is a ‘revenue expenditure’ in a government budget?
Answer.Expenditure which does not lead to creation of any asset or discharge of any liability is called revenue expenditure such as payment of salaries.

Question.21.Name two ‘invisibles’ of the balance of payments account.

Question.22.In an economy, the ratio of average propensity to consume and average propensity to save is 5 : 3. The level of income is 6000. How much are the savings? Calculate.

Question.23. In an economy, as a result of increase in investment by Rs. 100 crams, national income rises by Rs. 1,000 crores. Find marginal propensity to consume.

Question.24. Distinguish between capital receipts and revenue receipts in a government budget. Give an example of each.
Answer. See Q. 26, 2008, 1 Delhi

Question.25. What are autonomous and accommodating transactions in the Balance of Payments account? Give an example of each.
Answer. See Q. 25, 2010, III Delhi

Question.26. Give meanings of fixed, flexible and managed floating exchange rates.
Answer. Fixed and Flexible Exchange Rate: See Q. 26, 2010, II Outside Delhi
Managed floating Exchange Rate: Managed floating is a hybrid of fixed and flexible exchange rates. It is characterised by some intervention in exchange rate movement by monetary authorities. However, intervention is discretionary.

Question.27. Explain why subsidies are added to and indirect taxes deducted from domestic product at market price to arrive at domestic product at factor cost.
Answer. Subsidy is a grant which is given to the producer by the government with the objective that the prices paid by the consumers may be kept low. Subsidies do not involve any burden on the producer like indirect tax rather it is a grant given to the producers. Therefore it is not connected directly with the cost of production, hence not included in the cost like indirect tax. Since it is a grant, therefore it is subtracted from net indirect tax. In short, net indirect tax is the difference of indirect tax and subsidy.
Or
Giving reason, explain how are the following treated in estimating national income by the  income method:
(i) Interest on a car loan paid by an individual.
(ii) Interest on a car loan paid by a government-owned company.
Answer. (i) Interest on a car loan paid by an individual is included in the national income because it is taken for consumption purposes.
(ii) It will be included in the national income whether it is taken for consumption purpose or investment purpose.

Question.28. Calculate ‘Net National Disposable Income’ and ‘Personal Income’ from the following data:

Question.29. What is the revenue deficit? Explain its implications.
Answer. Revenue deficit may be defined as the excess of total revenue expenditure of the government over its total revenue receipts.
Revenue Deficit = Total Revenue Expenditure – Total Revenue Receipts Expenditure incurred on the payments of salaries, pensions, interests etc. and maintenance ot services like administrative services and defence services are examples of revenue expenditures. The sources of revenue receipts are tax revenue and non-tax revenue. Implications:
• If there is a revenue deficit, finis means that there is a gap between revenue expenditure and revenue receipts. This gap is to be breached by the surplus of capital budget which involves incurring liabilities or reduction in assets.
• High revenue deficit gives a warning to the government either to cut its expenditure or to increase its tax/non-tax receipts.
• Revenue deficit indicates the fiscal policy of the government. Its simple implication is that fine government is financing its normal expenditure through loans other than normal income.

Question.30. Calculate National Income by the (a) expenditure method and (b) production method from the following data:

Question.31. Explain the process of money creation by commercial banks with the help of a numerical example.
Answer. See Q. 27, 2010 (I Delhi)

Question.32. Define and represent ‘inflationary gap’ on a diagram. Explain the role of the ‘varying reserves requirement’ in removing the gap.
Answer. Inflationary gap relates to a situation of excess demand. In such a case, real aggregate demand at the full employment level is more than the aggregate demand which is required to maintain the full employment level. The excess of real aggregate demand over fie full employment level aggregate demand is called inflationary gap. In other words gap is the measure of excess demand.
The concept of inflationary gap can be explained with the help of the given diagram. At full employment level OZ, real aggregate demand is GZ, whereas aggregate demand required to maintain the full employment is FZ. Thus, real aggregate demand exceeds by FG and this is inflationary gap or measure of excess demand.
For removing excess demand, central bank should limit the credit creating capacity of commercial banks. For attaining this objective, reserve ratio should be increased so that the banks are required- to-maintain more cash reserves with the central bank and thus are able to create less credit. So decline in credit availability in the economy will tend to reduce AD and remove the inflationary gap.

Or
How is ‘saving and investment’ approach derived from the ‘aggregate demand and supply’ approach of income determination? Use diagram.
Answer. The equilibrium level of national income is determined at the point where aggregate demand (AD) equals aggreage supply (AS)
In a two sector Economy aggreage demand (Expenditure) is on consumption (C) and Investment (I) and aggregate supply is value of flow of goods and services (national income) which is either consumed or saved
C + I = C + S as C + I = AD and C + S = AS
I = S or S = I …(2)

Equation (1) and (2) are the two approaches for basic equilibrium for determination of national income.
At the equilibrium level of national income actual saving and investment are also equal. This implies that at equilibrium level of income, the part of income which is left after consumption is demanded by business firms for investment.
At equilibrium level of income, equality of aggregate supply (AS) and aggregate demand (AD) and that of S and I can be explained with the help of the diagram given.
In the diagram, OY is aggregate supply line and (C + I) is aggregate demand line which intersect each other at point E where equilibrium level of income is ${ OY }_{ E }$. In the same diagram saving (SS) and investment (${ I }_{ 0 }$I) lines intersect at point R, where the level of income is ${ OY }_{ E }$. Therefore, at ${ OY }_{ E }$ level of income AS is equal to AD and S is equal to I.

### SET II

Note : Except for the follounng questions, all the remaining questions have been asked in Set I.
SECTION A
Question.6. When will a good be called inferior or normal? Explain by giving an example.
Answer. If demand for a good increases when income of the consumer increases, die good is a normal good; for example, milk. On the other hand, if the increase in the income of a consumer leads to a fall in the demand of a good, that good is called as inferior; for example toned milk.

Question.9. Explain the relation between Marginal Revenue and Average Revenue.
Answer. (i) When AR is declining, AR is greater than MR. This is the case of monopoly mid monopolistic competition, (diagram (i))
(ii) When AR is constant throughout, MR is equal to AR. This is a case of perfect competition (diagram(ii))

Question.10. Explain the changes that will take place when in a market the demand for a good is greater than its supply at the prevailing price.
Answer. Quantity demanded and supplied will be equal in the case of equilibrium. However, if at the prevailing price demand is greater than supply, then either the demand should decrease or supply should increase, so that there may be equality between supply and demand.

According to the diagram, equilibrium price is OP and equilibrium quantity is OQ. However, if the prevailing price happens to be OPj, demand will be more than supply. As such there will be excess demand (FG). Therefore, for bringing equality between supply and demand, demand needs to be increased and supply decreased.

Question.12. From the following schedule, calculate price elasticity of demand by comparing total expenditures on the good:

Since expenditure before and after the change in price remains the same therefore it is unitary elastic, Ed = 1.

SECTION B
Question.18. Define capital expenditure.
Answer. Capital expenditure. An expenditure which leads to creation of assets or reduction in liabilities is called capital expenditure. For Example, expenditure bn acquisition of assets like land, building, equipment, investment in shares etc.

Question.23. If marginal propensity to save is one, what is the value of multiplier? What can you say about the change in national income, given change in investment?

Question.29. Calculate ‘Gross National Disposable Income’ and ‘Personal Disposable Income’ from the – following data: