CBSE Sample Papers for Class 12 Economics Compartment Outside Delhi -2011

Time allowed : 3    hours                                                                                         Maximum marks 100

GENERAL INSTRUCTIONS

1.  All questions in both the sections are compulsory.
2. Marks for questions are indicated against each.
3. 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.
4.  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.
5.  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.
6.  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.
7.  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. Why is the study of consumer’s equilibrium a subject matter of microeconomics?
Answer. Consumer’s equilibrium is a subject matter of microeconomics because it relates to the problem of an individual unit and not of the entire economy.

Question.2. Define marginal utility.
Answer. Marginal utility may be defined as the change in total utility that takes place as a result of consuming an additional unit of a commodity.

Question.3. What causes an upward movement along a demand curve?
Answer. There will be an upward movement on a demand curve of a commodity when its price increases.

Question.4. Give the meaning of marginal revenue.
Answer. Marginal revenue is the change in total revenue that takes place by selling an additional unit of a commodity.  $MR={ TR }_{ (n) }-{ TR }_{ (n-1) }$

Question.5. Which market form has the least number of producers?

Question.6. Explain the problem of ‘for whom to produce’.
Answer. The main objective of producing a commodity in a country is its consumption by the people of the country. However, even after employing all the resources of a country, it is not possible to produce all the commodities which are required by the people. Therefore, an economy has to decide as to for whom goods should be produced. This problem is the problem of distribution of produced goods and services. Therefore, what goods should be consumed and by whom depends on how national product is distributed among various people.

Question.7. Define an indifference curve. Why is it convex to the origin?
Answer. Indifference Curve: There are many combinations of two commodities (say X1 and X2) which give equal level of satisfaction to a consumer. When these combinations are graphically, represented, the curve so formed is known as an indifference curve.
An indifference curve is convex to the origin because of the diminishing marginal rate of substitution. Marginal rate of substitution is the amount of commodity X2 which a consumer is walling to surrender for obtaining one unit of commodity X1. Because of the law of diminishing utility the amount of commodity X2 for obtaining a successive unit of commodity X1 keeps on declining. Because of this an indifference curve is convex to the origin.
Or ‘
What are the conditions of consumer’s equilibrium under utility analysis?
Answer. (i) Consumer’s equilibrium, according to utility analysis, is established at a point where marginal utility of money is equal to the price of the commodity.
Marginal utility goes on declining but price remains the same. Therefore in such a situation a consumer shall go on consuming a commodity till he reaches a point where marginal utility is equal to the price.
Consumer’s equilibrium in purchase of single good is attained when MU in money terms = Price i.e..,
$\frac { MUofaproduct }{ MUofarupee } =PriceofaProduct$
(ii) In the case of two commodities the consumer’s equilibrium will be established where marginal utilities of both the goods he consumes are equal, MU of good X = MU of good Y, assuming the price of each good is the same.
If the prices of the two goods are different, then consumer’s equilibrium is when,
[/latex]\frac { { MU }_{ X } }{ PriceofX } =\frac { { MU }_{ Y } }{ PriceofY } =MUofmoney[/latex]

Question.8. How is the demand of a commodity affected by a fall in the prices of related goods?
Answer. Related goods may be substitute goods or complementary goods. Substitute goods are those which can be used in place of one another to satisfy the same want such as pen and pencil and complementary goods are a pair of goods which are used together to satisfy a given want such as car and petrol.
If the price of a substitute good falls it becomes cheaper in comparison to the commodity in question and therefore its demand will fall. For example, fall in the demand for pen because of the fall in the price of the pencil. In case of complementary goods a fall in the price of petrol will lead to an increase in its demand and therefore the demand for cars will also increase. Therefore when there is a fall in the price of a complementary good the demand for related goods increases.

Question.9. Explain the implications of the homogeneous products feature of a perfectly competitive market.
Answer. Because of products being homogeneous in perfect competition, the price of the commodity is the same and remains unchanged. This is so because if a firm charges a higher price nobody will buy the product from that firm because the same product is available at a lesser price. On the other hand, if a firm charges lesser price than the market price, it will be an unwise decision on the part of the firm because it can get the market price which is higher than the price it fixes. In short, a competitive firm is a price taker and has no role to play in fixing the price of the commodity.

Question.10. From the following data, calculate the price at each level of output:

Question.11. Explain the effect of the following on price elasticity of demand of a good:
(i) Number of substitutes of the good
(ii) Proportion of income spent on the good.
Answer. (i) Number of substitutes. The demand for a Commodity will be very elastic if some other commodities can be used as a substitute for it. A small rise in the price of such a commodity will decrease its demand as its substitutes are available at a lesser price e.g. in case of firewood and coal, coal 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.
(ii) Proportion of total income spent on the product. If a small proportion of total income is spent on a commodity, its demand will be inelastic such as demand for salt. On the other hand, if a major portion of total income is spent on a commodity, its demand will be more or highly elastic such as demand for luxury goods.

Or
Give the meaning of price elasticity of demand. Explain the relationship between it and total expenditure.
Answer. Price elasticity of demand may be defined as the ratio of percentage change in the quantity demanded to percentage change in price of a commodity. In short, it is the degree of responsiveness of demand for a change in the price of a commodity. According to total expenditure the elasticity of demand will be as follows when price and total expenditure, change.
(i) If price and total expenditure move in opposite directions, elasticity of demand will be greater than 1.
(ii) If total expenditure remains the same whether price increases or decreases, elasticity of demand will be equal to 1.
(iii) If price and total expenditure change in the same direction, price elasticity of demand wiU be less than 1.

Question.12. State the different phases of returns to a factor in terms of total product. Represent the same on a diagram.
Answer. In the short run, units of variable factors change (or increase) for increasing the total product. In this context, three phases or situations can be possible. All the three phases have been exhibited in the given diagram. These are:
(i) In the beginning,4 when additional units of a variable
factor are employed, marginal product increases and Y total product also increases. This is phase I. I st phase ends where AP is highest or from where MP starts declining;
(ii) After this point, marginal product of the additional units of variable factor employed will start declining.
Therefore, total product increases but at a decreasing rate. This is phase II.
(iii) If additional units of variable factor are still used, marginal product becomes negative and hence total product starts declining. This is phase III.
A producer always operates in the second stage. ‘
For Blind Candidates only in lieu of Q. No. 12 State the different phases of returns to a factor in terms of total product. Represent the same in a schedule.

Question.13. The price of a commodity is 110 per unit and total revenue from it is Rs 1,000. Its price elasticity of supply is 0.8. Its price falls by 10 percent. Calculate the total revenue at the reduced price.

Question.14. Giving reasons, state whether the following statements are true or false:
(i) Marginal utility can never be negative. .
(ii) A budget set is the collection of all bundles of goods that a consumer wants to buy.
(iii) The demand for a commodity always increases with increase in the price of other goods.
Answer. (i) The statement is false. Marginal utility can be negative also. Marginal utility keeps on declining on using additional units of a commodity successively. Therefore if we go on using additional units, a stage comes, when marginal utility becomes zero and then negative.
(ii) The statement is false. The set of bundles of two goods that are available to a consumer is a budget set. This signifies that the bundles constituting budget set are available to the consumer and does not mean that these are the bundles which consumer wants to buy.
(iii) The statement is false. Increase in the prices of other goods leads to an increase in the demand for a commodity but not always.

Question.15. Complete the following table:

Answer. Total Fixed Cost = AFC x No. of Units = 18 x 4 = Rs 72

Question.16. Explain the sequence of changes that will take place when there is excess demand of a commodity.
Answer. There will be excess demand of a commodity when price is less than the equilibrium price. In the given diagram, OP is the equilibrium price where quantity demanded and supplied are equal. However, when price is reduced to OP1, demand exceeds supply, with the result that there is excess demand = Q2Q1 In such a case the demand should be reduced and supply increased. So that both these may be equal. These would be equal, when price is increased from OP1 to OP, where quantity demanded and supplied are equal.

Or
X and Y are complementary goods. Explain the sequence of effects of a fall in the price of X on the equilibrium price and quantity of Y.
Answer. X and Y are complementary goods. This means both goods are demanded simultaneously. In other words, X cannot be used without Y and Y cannot be used without X. If the price of X falls, its demand will increase because of the application of law of demand.
When demand of X increases, demand of Y will also increase, with the result that there will be a rightward shift in the demand curve of Y.
As a result of this, the equilibrium point will shift to the right from E to F, where price increases from OP to OP1 and demand increases from OQ to OQ1
Therefore, as a result of fall in the price of X, the equilibrium price and quantity of commodity Y both increase. This is clear from the diagrams given below.

SECTION B
Question.17. Define domestic product.
Answer. Domestic product is the value of final goods and services produced within the domestic territory of a country in an accounting year

Question.18. What is transfer payment?
Answer. Transfer payments are unilateral payments which recipients get without adding anything to the current flow of goods and services.

Question.19. What are demand deposits?
Answer. Demand deposits are those bank deposits which can be withdrawn by the depositors whenever they want.

Question.20. How is primary deficit calculated?
Answer. Primary deficit is the difference of fiscal deficit and interest payments .
Primary Deficit = Fiscal Deficit – Interest Payment.

Question.21. What is meant by cash reserve ratio?
Answer. Cash Reserve Ratio (CRR) is the portion of total deposits which commercial banks are required to keep as reserve with the central bank of the country.

Question.22. From the following data calculate “net value added at factor cost”:

Question.23. Explain the relationship between average propensity to consume and average propensity to save. Which of these can have a negative value and when?
Answer. Average Propensity to Consume (APC) is the ratio of total consumption expenditure to total income. Average Propensity to Save (APS) is the ratio of total savings to total income. In short,

Question.24. Explain the meaning and implications of revenue deficit.
Answer. See Q. 29, 2008 (I Outside Delhi)

Question.25. In an economy aggregate demand is less than aggregate supply. Explain the changes that will take place in this economy.
Answer. If equilibrium is established before the full employment level of output, it is a situation where aggregate demand is less than aggregate supply. The gap between the two is deflationary gap as shown by EF in the adjacent diagram.
This gap can be rectified by increasing the level of aggregate demand. In this case autonomous investment needs to be increased. This situation can be exhibited with the help of a diagram.

Or
Explain the meaning and implications of deflationary gap.
Answer. When aggregate demand and aggregate supply are in equilibrium at less than the full employment level of output, this is a situation of deficient demand.
This happens when aggregate demand in the economy is not sufficient to ensure that level of output which can give employment to all those who are willing to work.
Aggregate demand falls short of aggregate supply at full employment level of output by a certain amount, which is called deflationary gap. The extent of deficiency in demand (deflationary gap i.e., EF) at the full employment level is shown in the adjacent diagram.

Question.26. Explain why there is a rise in demand for foreign exchange when its price falls.
Answer. See Q. 23, 2008 (I Outside Delhi)

Question.27. How can distribution of income be a limitation of using gross domestic product as an index of welfare? Explain.
Answer. It is to be seen as to how the increase in national income is distributed. If national income rises, it is not necessary that income of each individual rises in the same proportion. Individual incomes may rise in different proportions. In some cases, it may fall. In other words, inequalities may rise. Rise in inequalities in incomes may adversely affect the economic welfare of the society. Therefore, for ascertaining the effect of increase in national income, it has to be seen whether it increases income inequalities or reduces income inequalities.
Or
Giving reason, categories the following into stocks and flows:
(i) Profits (ii) Capital (iii) Savings (iv) Balance in a bank account
Answer. (i) Profits are flows because they relate to a period of time.
(ii) Capital is a stock as it relates to a point of time.
(iii) Savings are flows as they relate to a period of time.
(iv) Balance in a bank account is a stock as it relates to a point of time.

Question.28. Distinguish between revenue receipts and capital receipts. Give two examples of each.
Answer. Revenue Receipts: Any receipt which does not either create a liability or leads to reduction in the value of assets is a revenue receipt. Revenue receipts may be tax revenue such as income tax and may be non-tax revenue such as fees and fines.
Capital Receipts: Capital receipts are those receipts which, the government gets either by incurring liability or disposing off some assets. Its examples are mobilising funds through loans from the public. Government may also get funds by disinvestment such as selling a public sector unit. These are examples of public receipts
Corresponding to revenue receipts, there is no liability whereas in the case of capital receipts a liability is created or an asset is sold.

Question.29. Giving reasons, state whether the following statements are true or false:
(i) Current account of Balance of Payments account records only exports and imports of goods and services.
(ii) Foreign investments are recorded in the capital account of balance of payments.
Answer. (i) The statement is false. In current account of balance of payments, besides recording export and import of services, unilateral receipts and payments are also included.
(ii) The statement is true. Foreign investments are recorded in the capital account of balance of payments.

Question.30. How is “bank rate” used by central bank in influencing credit creation by commercial banks? Explain.
Answer. Bank rate is the rate at which central bank discounts first class bills and securities of the commercial banks. In other words, the rate of interest which a central bank charges from the commercial banks, to give them credit can be called as bank rate.
(i) When bank rate is higher, commercial banks will charge higher rate of interest from their customers. Therefore, when bank rate increases, rate of interest on loans will also be more and so credit becomes expensive and the demand for credit is reduced. This . results in credit control.
(ii) With decrease in bank rate, interest rate on loans is also decreased, 50 credit becomes cheap and demand for credit increases. It is called credit expansion. ,
In short, bank rate and volume of credit are inversely related and the effects of changes in the bank rate on the volume of credit is brought about through the changes in the rate of interest.
Or
How does money overcome the problems of barter system? Explain briefly.
Answer. Money overcomes the problems of barter system by the following functions:
Medium of exchange: It means that money acts as an intermediary for the exchange of goods and services. It has helped a lot in promoting trade among people and countries. Money has removed the difficulty of double coincidence of wants.
Measure of value: Money serves as a measure of value. All the goods and services have their prices. This helps in measuring the exchange values of commodities. So value of all goods can be expressed in terms of money.
Standard of deferred payment: The value of money is more stable in comparison to the value of other commodities. It has general acceptability also. It is more durable as compared to other commodities.
Store of value: Money serves as a store of value because it can be stored without loss in its value and it is also convenient to store. Moreover, goods are perishable, whereas money is not perishable in the same sense.

Question.31. Explain the steps taken in derivation of the Consumption Curve from the Saving Curve.Use diagram.
Answer. Total income is the sum of = Consumption Expenditure + Saving. Consumption is the function of income. However, some consumption is always there even if there is no income i.e. zero level of income. This is called as autonomous consumption. Saving is that part of income which is not consumed. Therefore, if we subtract consumption from income, we get saving. When consumption is greater than income, saving is negative when consumption and income are equal, saving is zero; when consumption is less than income, saving is positive.
If we subtract consumption from income, we get saving. In the same way, if we subtract saving from income, we get consumption. In short,
Saving Income – Consumption , Consumption = Income – Saving Thus consumption and saving function can be stated as below: Y C = a + c Y S = a + cY.

In the diagram, CC is consumption curve. OY is 45 ° line. E is the point of intersection where consumption and income are equal. At this level, saving is equal to zero. Up to OQ level of income, consumption is greater than income and therefore saving is negative. Beyond OQ level of income, consumption is less than income and therefore saving is positive. Because of this SS saving curve does not start from the point of origin but from the point S.
For Blind Candidates only in lieu of Q. No. 31.
Explain the steps taken in deriving the consumption function from the Saving function.

Question.32. Calculate: (i) GroSs National Product at Market Price and (ii) Net National Disposable Income from the following data:

SET II

Note : Except for the following questions, all the remaining questions have been asked in Set I.
SECTION A
Question.8. Explain the effect of rise in income of the buyers of a commodity on its demand.
Answer. When income of the buyers increases, they demand more quantity at the same price. As a result of this, there is a shift in demand curve towards the right. This phenomenon can be explained with the help of a diagram. As a result of increase in the income of buyers, the point of equilibrium, which was at E, shifts to F, where the, quantity demanded at price OP increases from OQ to OQ1.

Question.9. Explain any two features of monopoly.
Answer. The two features of monopoly are:
(i) There is a single seller of the commodity in the market.
The monopoly firm has full control over supply of the commodity.
(ii) There are no close substitutes of the commodity sold by the monopolist.

Question.13. When the price of a commodity falls from Rs 10 per unit to Rs 9 per unit, total revenue from it falls from Rs 1,200 to Rs 918. Calculate its elasticity of supply.

Question.15. Complete the following table:

Answer. Total Fixed Cost = AFC x No. of Units = 18 x 5 = Rs 90

SECTION B
Question.17. Define intermediate goods.
Answer. Intermediate goods are those which are used during production process. These goods are not included in the estimation of national income.

Question.21. Define money.
Answer. Money may be defined as anything which is used as a medium of exchange and has general acceptability.

Question.24.Distinguish between direct tax and indirect tax.
Answer. Direct Tax: When the liability to pay a tax and the burden of that tax falls on the same person, the tax is called a direct tax. The burden cannot be shifted on others. For example, Income tax. Indirect Tax: When the liability to pay a tax is on one person and the burden of it falls on another person, it is called an indirect tax.’The burden of such a tax is shifted others. For example, series tax.

Question.26. Give the meaning of foreign exchange rate. How is it determined under flexible exchange rate regime?
Answer. The rate at which the currency of a country is exchanged for another currency is known as the rate of exchange. Rate of exchange may be fixed or flexible. Fixed exchange rate is that, – where the exchange rate is fixed by the government of the country deliberately. On the other hand, the flexible exchange rates is that which is fixed by the forces of demand for and supply of foreign exchange. These days, rates of exchange are flexible.
There is an inverse relationship between demand of a foreign currency and its price in terms of domestic currency. On the other hand, there is a direct relationship between file supply of a foreign currency and its price in terms of domestic currency.
The equilibrium exchange rate is determined at a point where demand for and supply of foreign currency is equal. As shown in the diagram, the exchange rate will be OP because at this level the demand for and supply of foreign currency is equal.

SET III

Note : Except for the following questions, all the remaining questions have been asked in Set I and Set II.
SECTION A
Question.6. Explain the problem of ‘what to produce’
Answer. The problem of ‘what to produce’ signifies what goods should be produced and in what quantities. This problem arises when due to scarcity of resources we cannot produce each and every thing which we want. Therefore, a decision has to be taken as to what goods should be produced and in what quantities. In short, we have to see whether we should produce consumer goods or producer goods or defense goods or all the goods in some quantity combination. So, on the basis of importance of various goods, an economy has to decide which goods should be produced and in what quantities.

Question.9. Explain the implication of the product differentiation feature of monopolistic competition.
Answer. Under monopolistic competition, artificial differences are created in the product by different producers on the basis of size, packing, brand name, colour, quantity, smell, etc These differences are created with a view to project the product as a separate product from the point of view of consumers. Different brands of toothpaste, such as Colgate, Meswak, Pepsodent are the examples of product differentiation. As a result of product differentiation, if a producer increases the price of his product, he does not lose all the consumers. On the other hand, if he reduces the price of his product, the number of consumers buyers of his product does not increase.

Question.13. From the following data, calculate elasticity of supply:

Question.16. Complete the following table:

Answer. Fixed cost = AFC x No. of units = 6×5= Rs 30

SECTION B
Question.17. Define capital goods.
Answer. Capital goods are those goods which form the capital stock of a country at the end of an accounting year and which are used in the production process.

Question.21. What is statutory liquidity ratio?
Answer. Statutory liquidity ratio is the proportion 6f total deposits which commercial banks are legally required to keep with them.

Question.24. Distinguish between revenue expenditure and capital expenditure with one example of each.
Answer. Revenue Expenditure: It is the expenditure of a government which does not create any asset nor reduce liabilities. Its example is the salaries of employees.
Capital Expenditure: An expenditure which results in the creation of assets or reduction in liability, such as construction of roads and bridges.

Question.26. Explain why is there a direct relationship between price and supply of a foreign currency.
Answer. There is a direct relationship between price of a foreign currency and its supply. As such, when the price of a foreign currency increases, its supply also increases and when its price declines it supply also declines. When the price of a foreign currency falls its demand increases. Naturally more and more foreign currency will be required for buying foreign goods, this would lead to a fall in the supply of the foreign currency. On the other hand, when the price of foreign currency increases its supply will also increase.

Question.30. Calculate: (i) Net Domestic Product at Factor Cost and (ii) Gross National Disposable Income from the following data: