## +CBSE Sample Papers for Class 12 Economics 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.l. Define an indifference curve.
Answer. Indifference curve refers to the graphical representation of different combinations of two goods, each combination offering the same level of satisfaction to a consumer.

Question.2. Name the characteristic which makes monopolistic competition different from perfect competition.
Answer. Product differentiation in monopolistic competition makes it different from perfect competition where there is homogeneity in product.

Question.3. Why is demand for water inelastic?
Answer. Demand for water is inelastic because it is essential to life and thus its demand will not change with the change in its price.

Question.4. State one feature of oligopoly.
Answer. In oligopoly the firms are mutually dependent to a great deal for taking price and output decisions.

Question.5. In which market form demand-curve of a firm is perfectly elastic?
Answer. In perfect competition, demand curve of a firm is perfectly elastic.

Question.6. Distinguish between ‘increase in demand’ and ‘increase in quantity demanded’ of a commodity.

Question.7. Explain the law of diminishing marginal utility with the help of a utility schedule.
Answer. Law of diminishing marginal utility states that as we consume more and more units of a , commodity, the utility derived from each successive unit goes on decreasing. This law holds true under certain assumptions, i.e. a reasonable quantity of the commodity is consumed and that consumption is a continuous process. This law can be explained with the help of the following utility schedule.

The above table shows that as the consumer consumes more units of ice cream, the marginal utility obtained from each successive unit goes on declining. Accordingly, MU curve slopes downwards from left to right.
Or
Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X.
Substitute goods are those goods which can be used in place of one another for satisfaction of a particular want like tea and coffee. Demand for a given commodity varies directly with the price of a substitute good, e.g. when price of Y falls, consumer switches over from X to Y and hence demand for X falls.
As shown in the diagram, when price of Y falls, it leads to a leftward shift in the demand curve of X indicating decrease in demand. The quantity demanded of X falls from OQ to OQ1

Question.8. At a price of 5 per unit of commodity A, total revenue is Rs. 800. When its price rises by 20 per cent, total revenue increases, by Rs. 400. Calculate its price elasticity of supply.

Question.9. Explain the implications of freedom of entry and exit of firms under perfect competititon.
Answer. In a perfectly competititve market, there are no obstacles in the way of new firms joining the industry and existing firms leaving the industry. This ensures that in the long run there are neither above-normal profits nor losses by any firm. In case of extra normal profits, new firms will join the industry raising the market supply. The market price will fall and the extra normal profits will be wiped out. In case of losses, the existing firms start leaving the industry reducing the total supply. This raises the price till all the losses are wiped out .

Question.10. Given below is the cost schedule of a firm. Its average fixed cost is Rs. 20 when it produces 3 units.

Calculate its marginal cost and average total cost at each given level of output.

Question.11. Explain the problem of ‘what to produce’.
Answer. This problem signifies that 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 – that 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 defence 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. This is a problem of allocation of resources for different goods.
Or
Explain any two main features of a centrally planned economy.
Answer. Centrally planned economy refers to an economy in which means of production are owned, controlled and operated by the Government.
Its two main features are as follows:
(1) The Government organises all economic activities and distributes various goods among the consumers on the basis of its own decisions. In this economy, die basic problems are solved by a Central Planning Authority, generally known as the Planning Commission.
(2) The basic aim, while solving the central problems, is to work for social welfare of the people.

Question.12. When the price of a commodity falls by Rs. 2 per unit, its quantity demanded increases by 10 units. Its price elasticity of demand is
(-) 1. Calculate its quantity demanded at the price before change which was Rs. 10 per unit.

Question.13. Explain the effect of increase in income of buyers of a ‘normal’ commodity on its equilibrium price.
Answer. In case of a normal commodity, an increase in die income of the consumer signifies an increase in its demand.
As shown in the diagram, point E is the equilibrium point with OP and OQ being the equilibrium price and equilibrium quantity respectively. When demand increases due to an increase in the income of the buyer of a normal good, the new equilibrium will be attained at point Ea. The equilibrium price will increase from OP to OP1 and the equilibrium quantity °- will increase from OQ to OQ1

Question.14. Using indifference curves approach, explain the conditions of consumer’s equilibrium.
Answer. Consumer’s equilibrium refers to the optimum combination of the two goods which a consumer can afford (given his income and price of two commodities) and this combination gives him maximum satisfaction he possibly can get. According to indifference curves approach, consumer’s equilibrium is established at a point where budget line is tangent to the indifference curve. At this point the slope of

Conditions for consumer’s equilibrium are:
1. Budget line should be tangent to the indifference curve i.e.
${ MRS }_{ xy }=\frac { { P }_{ x } }{ { P }_{ y } }$
i.e. Slope of Indifference curve Slope of Budget line
2. MRS is diminishing or Indifference curve is convex to the point of origin.
At equilibrium, marginal rate of substitution be equal to the ratio of prices of two goods. However, if ${ MRS }_{ xy }>\frac { { P }_{ x } }{ { P }_{ y } }$, then it means that to obtain one extra unit of X, the consumer is willing to sacrifice more than he has to sacrifice actually. The consumer gains so he goes on obtaining more and more units of X until marginal utility of X declines.
Therefore the consumer is willing to sacrifice less and less of Y each time he obtains one extra unit of X. As a result ${ MRS }_{ xy }$ falls and ultimately becomes equal to Px/Py at some combination of X and Y. At this combination the consumer is in equilibrium
${ MRS }_{ xy }<\frac { { P }_{ x } }{ { P }_{ y } }$
If the consumer attempts to obtain more units of X beyond the equilibrium level, ${ MRS }_{ xy }$will become less than Px/Py and he will start losing. So he will not try to obtain more of X.

Question.15. State whether the following statements are true or false. Give reasons for your answer.
(a) When total revenue is constant, average revenue will also be constant.
(b) Average variable cost can fall even when marginal cost is rising,
(c) When marginal product falls, average product will also fall.
Answer. (a) False. Because when TR is constant AR will fall, as shown in the following table:

(b) True. Because near the point of intersection AVC falls and MC rises, as shown in the diagram (a)

(c) True. Because if marginal product (MP) falls, total product (TP) increase at decreasing rate and finally average product (AP) falls. See diagram (b).

Question.16. Explain the law of variable proportions with the help of total product and marginal – product curves.
Answer. See Q. 15, 2008 (I Delhi)
Or
Explain producer’s equilibrium with the help of a marginal cost and marginal revenue schedule.
Answer. Producer’s equilibrium is established at a point where marginal cost and marginal revenue are equal and marginal cost should be rising. Any deviation from this position will either increase the loss or reduce the profit. Therfore, as long as the cost of an additional unit produced, i.e. marginal cost is less than the additional revenue obtained from its sale, i.e. marginal revenue, the firm goes on increasing its output. But it stops at that point where MC and MR are equal. If the fjrm goes beyond this point, MC will exceed MR and the firm will incur loss. Therefore, the producer’s equilibrium is always at a point, where MC and MR are equal.
According to cost-revenue schedule^equilibrium output will be 4 units, because at this level MC and MR are equal and MC is rising.

Note: MC = MR at 2 units of output also, but there the MC is falling with increase in output. Hence equilibrium is not at the level of output equal to 2 units but at the level of output equal to 4 units.

SECTION B
Question.17. State the components of money supply.
Answer. Components of money supply are currency held by the public and demand deposits.

Question.18. Give the meaning of ex-ante savings.
Answer. Ex-ante savings mean planned savings.

Question.19. How is primary deficit calculated?
Answer. Primary deficit = Fiscal deficit – Interest payments

Question.20. Give the meaning of deflationary gap.
Answer. The deficiency in aggregate demand in comparison to aggregate supply at the full employment level is deflationary gap.

Question.21. State two sources nffupply of foreign exchange.
Answer. Two sources of supply of foreign exchange:
(i) Payments available from the supply of goods and services to foreign countries.
(ii) Investment by foreign companies in the domestic market.

Question.22. Explain how distribution of gross domestic product is its limitation as a measure of economic welfare.
Answer. It is not only the quantum of GDP which affects economic welfare but also the pattern of the distribution of GDP. If GDP is distributed in a manner which increases income-inequalities, it will adversely affect economic welfare. This is so because the utility of income is more for the poor than for the rich.
Or
Explain the basis of classifying goods into intermediate and final goods. Give suitable examples.
Answer. Intermediate goods refer to those goods and services which are purchased during the year by one
production unit from other production units and completely used up, or resold during the same year. Example : Tyres used by car manufacturers.
Final goods are goods and services purchased, or own-produced for the purpose of consumption and investment. Example : Bread purchased by household, machine purchased by a firm.

Question.23. Explain the ‘lender of last resort’ function of the Central Bank.
Answer. When commercial banks exhaust all resources to supplement their funds at the time of liquidity crisis, they turn to the central bank as a last resort.
As the lender of last resort, central bank guarantees solvency and provides financial support to commercial banks
(i) by rediscounting their eligible securities and bills of exchange and
(ii) by providing loans against their securities. This saves the banks from failure and the banking system from a breakdown.

Question.24. How can Government budget be helpful in altering distribution of income in an economy? Explain.
Answer. Government budget can be ah effective instrument of changing the pattern of distribution of income with a view to help weaker section of society and promoting social justice. It does so by taxing the rich and providing subsidies to the low income group people. It also tries to incur public expenditure on such schemes which help the poor the most such as providing health care and education.

Question.25. Explain the meaning of deficit in balance of payments.
Answer. The balance of payments (BOP) will be in deficit when autonomous receipts are less than autonomous payments. The deficit in the BOP is restored by way of borrowing from IMF (International Monetary Fund), which is an accommodating item, so that BOP is always balanced.

Question.26. Distinguish between devaluation and depreciation of domestic currency.
Answer. When Government decides to lower down the value of its currency in terms of a foreign currency, it is called devaluation. In this case Government reduces the external value of its currency. As such our currency becomes cheaper in terms of file foreign currency.
A raise in exchange rate due to increase in the demand for foreign currency leads to appreciation of foreign currency (say, US dollar) and depreciation of domestic currency (say, Indian rupee). In this situation more rupees will have to be paid for buying goods worth one dollar from United States.

Question.27. Explain the proems of money creation by Commercial Banks.
Answer. Commercial banks accept deposits from the public known as primary deposits and keeping a percentage of these deposits in reserve as loans (known as Legal Reserve Ratio), the banks ‘ advance the balance of the deposits to other customers. While advancing them loans banks deposit the amount in their accounts and again keeping a percentage of the deposits (Legal Reserve Ratio), further advance the balance amount to others. This process continues and is known as credit creation by banks. In this way banks create credit many times more than the primary deposits.
The phenomenon of credit creation can be explained by taking a hypothetical example, where primary deposit is Rs. 1,000 and legal reserve ratio (LRR) is 20%. Say, Mr A. deposits Rs. 1,000 with the Bank. Keeping Rs. 200 (20%) in reserve, the balance Rs. 800 is advanced as loan to B, keeping Rs. 160 (20%) in reserve, the balance Rs. 640 is advanced as loan to C. This process cpntinues and finally total deposits created are five times more. So money multiplier is 5. This process becomes clftar, looking at the schedule given below:

(or)
How do changes in bank rate affect money creation by Commercial Banks? Explain.
Answer. Bank rate is the rate of interest which central bank charges from commercial banks for giving them credit. Thus, when bank rate increases, rate of interest also increases and the demand for credit goes down and vice-versa. As such, by increasing bank rate, volume of credit can be reduced and by lowering bank rate volume of credit can be increased.

Question.28. State whether the following statements are true or false. Give reasons for your answer.
(a) When marginal propensity to consume is greater than marginal propensity to save, the value of investment multiplier will be greater than 5.
(b) The value of marginal propensity to save can never be negative.

Question.29. Distinguish between:
(a) Capital receipts and revenue receipts.
(b) Direct tax and indirect tax.
Answer. (a) Capital receipts are those which are available to the Government for incurring liabilities such as takinjpfoans. On the other hand, reveittte receipts are those for which Government is under no liability to pay them back Such as tax receipts etc.
(b) Direct taxes are those whose real burden is borne by those upon whom they are levied. Income-tax is a direct tax. Its burden cannot be shifted. On the other hand, indirect taxes are those whose real burden is not felt in real frame by those upon whom these are levied. Excise duty and sales tax are the examples of indirect taxes. These taxes are levied upon traders and manufacturers but their burden is passed on to the users of these goods, who use the goods which are taxed.

Question.30. How will you treat the following while estimating National Incoine Of India?
(a) Dividend received by an Indian from his investment in shares Of a foreign Company.
(b) Money received by a family in India from relatives working abfoad.
(c) Interest received on loans given to a friend for purchasing a car.
Answer. (a) Dividend is a part of profit and comes as factor income from abroad and is a part of domestic income, therefore it will be included in the estimation of National Income.
(b) It is not included in the National Income, because it is not a result of flow of goods and services.
(c) Loan given for the consumption purpose is not included in the estimation of National Income because it does not relate to flow of goods and services.

Question.31. From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor Income to Abroad.

Question.32. In an economy 75 per cent of the increase in income is spent on consumption. Investment is increased by crores. Calculate:
(a) Total increase in income
(b) Total increase in consumption expenditure

### SET II

Note : Except for the following questions, all the remaining questions .
SECTION A
Question.1. Define an indifference map.

Answer. It is a set of indifference curves representing different levels of satisfaction, as shown in the diagram.

Question.6. Distinguish between ‘decrease in demand’ and ‘decrease in quantity demanded’.
Answer. When demand decreases due to factors other than price, such a fall in demand is said to be decrease in demand. In this case, as shown in diagram (i) below, a leftward shift takes place in the demand curve.
When demand falls due to increase in the price of a commodity, there is an upward movement on the demand curve. This situation is shown in diagram (ii) below.

Question.8. Price of commodity A is Rs. 10 per unit and total revenue at this price is Rs. 1,600. When its price rises by 20 per cent, total revenue increases by Rs. 800. Calculate its price elasticity of supply.

Question.11. When the price of commodity falls by Rs. 2 per unit, its quantity demanded increases by 10 units. Its price elasticity of demand is (-) 1. Calculate its quantity demanded at the puce before change which was Rs. 10 per unit

Question.12. Explain the effect of increase in income of buyers of a ‘normal’ commodity on its equilibrium price.
Answer. An increase in income would result in an increase in the demand for ‘normal’ commodity. So the demand curve will shift to the right. Given the supply curve as SS in the diagram new equilibrium will be ${ E }_{ 1 }$ and the equilibrium price will now be higher at ${ P }_{ 1 }$ and quantity will also be larger.

Question.15. State whether the following statements are true or false. Give reasons for your answer
(i) When there are diminishing returns to a factor, total product first increases and then starts falling,
(ii) When marginal revenue falls to zero, average revenue becomes maximum.
(iii) The difference between total cost and total variable cost falls with increase in output.
Answer. (i) True. In this case first total product increases at diminishing rate and later starts declining; see diagram(i).
(ii) False. When MR. is zero, total revenue is maximum and not the AR; see diagram (ii).
(iii) False. The difference between TC and TVC is total fixed cost (TFC) which remains . constant; see diagram (iii).

SECTION B
Question.21. Howis primary deficit calculated?
Answer. Primary deficit is the difference of fiscal defidt and interest payments. In short, if we subtract interest payments from fiscal defidt, we get primary defidt.
Primary Defidt = Fiscal Defidt – Interest Payments

Question.22. Distinguish betweertreal and nominal gross domestic product.
Answer. Real gross domestic product may be defined as the gross money value of final goods and services produced within the domestic territory of a country. Gross money value is calculated at constant prices and therefore real gross domestic produd indicates real changes. On the other hand, nominal gross domestic product is the money value of final goods and services produced within the domestic territory of a country. Gross money Value in the case of nominal GDP is calculated at current prices. Therefore the only difference between real GDP and nominal GDP is that while real GDP is calculated using constant prices, nominal GDP is calculated using current prices.
Or
Distinguish between consumer goods and capital goods. Which of these are final goods?

Note: Goods cannot be classified absolutely as consumer goods or capital goods because it depends upon the use a good is meant for. For example, a washing machine used for a household is a consumer good but a washing machine used in a factory is a capital good.

Question.23. Explain the ‘banker to the government’ function of the central bank.
The RBI conducts the banking accounts of government departments and performs the same banking functions as a commercial bank performs for its customers.
RBI manages public debt and as agent of die government undertakes payment of interest on debt and other such services.
It gives expert advice to government on economic policy matters and money market.
Question.29. Giving reasons classify the following into direct and indirect tax:
(i) Welath tax (ii) Value added tax
Answer. (i) Wealth tax is a direct tax because its real burden is borne by those upon whom it is levied. In short, its burden cannot be transferred to others as happens in the case of indirect taxes.
(ii) Value’added tax is an indirect tax because it is generally paid by producers and sellers and they transfer its burden to consumers. In short, the burden of this tax falls on the shoulde of the consumers.

Question.31. From the following data, calculate (a) Gross Domestic Product at Factor Cost and (b) Factor Income to Abroad.

Calculate Net National Product at Factor Cost and Gross National Disposable Income from the following:

### SET III

Note: Except for the following questions, all the remaining questions have been asked in Set I and Set II.
SECTION A
Question.1. What is law of demand?
Answer. Law of demand explains the relationship between the price and quantity demanded of a commodity. This law states that price and quantity demanded are inversely related, other things being constant. According to the Law of Demand, demand for a commodity rises with a fall in its price and falls with a rise in its price, other factors remaining constant.

Question.6. Explain any two factors that affect price elasticity of demand.
Answer. Two factors affecting price elasticity of demand:
(1) Price level. Generally the demand for very costly and cheap goods is inelastic. Highly priced commodities, such as diamonds, have a low price elasticity since a change in their prices has very little effect on their consumers. Cheap commodities like pencils also have low price elasticity as the demand for these does not change when price changes.
(2) Availability of substitutes. The demand for a commodity will be very elastic if some other commodities can be used in its place. When a commodity has a 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 commodities is inelastic which have no substitutes at all, such as salt. u- y

Question.8. Total revenue at a price of Rs. 4 per unit of a commodity is Rs. 480. Total revenue increases by Rs. 240 when its price rises by 25 per Cent. Calculate its price elasticity of supply.

Question.9. Explain the implication of ‘homogeneous products’ feature of perfect competition.
Answer. An important characteristic of perfect competition is that he products are homogeneous. As a result of this feature all sellers of the commodity charge the same price. If a seller charges’ a price less than the market price, all the buyers will buy things from him. With the result, the other sellers will also reduce their price. On the other hand, if a seller charges a price higher than the market price no buyer will buy his product. As such, in all situations and cases, market price fixed by supply and demand of the industry is accepted by all the sellers.

Question.14. State and explain the characteristics of indifference curves.
Answer. (i) An indifference curve always slopes downwards to the right. In other words, it has a negative slope. To consume more of one good, the consumer must give up some quantity of the other good so that total utility remains the same.

(ii) Higher,, indiference curve denotes higher level of satisfaction. This is becuase higher IC represents more of atleast one commodity, which means more utility as more is preferred to less.
(iii) Two indifference curves never intersect each other because at the point of intersection, the level of satisfaction is the same hut at other points it is not the same. It is not possible. Therefore, it is wrong to suggest they intersect as shown in Diagram 3.

SECTION B
Question.18. Give the meaning of aggregate demand.
Answer. Aggregate demand refers to the total expenditure which is incurred on consumption and investment goods.

Question.25. Distinguish between autonomous and accommodating transactions of balance of payments account.
Answer. Autonomous transactions refer to those international economic transactions which are taken with the motive of profit. These transactions are not dependent on or linked with the country’s balance of payments position.
Accommodating transactions refer to those transactions which are taken up by the Government in order to keep the balance of payments balanced.
For example, to meet its deficit, Government borrows money from IMF.

Question.26. Giving two examples, explain the relation between the rise in price of a foreign currency and its demand.
Answer. There is an inverse relationship between price of a foreign currency and its demand. Therefore if there is an increase in the price of a foreign currency its demand will fall. This we can explain with the help of an example.
For example,
(i) If value of the American dollar increases in terms of Indian rupees, then we will have to pay more for buying the same amount of goods from America. As a result of this, imports will fall meaning thereby that the demand for US dollar will fall.
(ii) If price of the foreign currency, say US dollar, in terms of rupee rises, then demand for US services by Indians, such as banking, insurance, etc., will fall resulting in fall in the demand for US dollar.

Question.28. Giving reasons, state whether the following statements are true or false:
(i) Average propensity to save is always greater than zero.
(ii) Value of investment multiplier varies between zero and infinity.
Answer. (i) The statement is noj; true. APS can be negative when APC is more than income and APC is greater thanl. This happens when consumption is more than income.
(iii) The statement is true. If MPC is 0, then the value of multiplier will be 1, and, if MPG is 1 then value of multiplier will be $\infty$