## CBSE Sample Papers for Class 12 Economics Examination & on wards – 2016

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.

### SECTION A: Microeconomics

Question.1. If it is given that the total variable cost for producing 15 units of output is Rs 3,000 and for 16 units is Rs 3,500, find the value of Marginal Cost.

Question.2. Ceteris Paribus, if the government provides subsidies on electricity bills, what would be the likely change in the market demand of desert coolers?
Answer. Keeping other factors constant, demand for desert coolers will increase if government provides subsidies on electricity bills.

Question.3. Which of the following can be referred to as ‘point of satiety’?
(i) Marginal Utility is negative (iii) Total Utility is rising
(it) Marginal Utility is zero (iv) Total Utility is falling
Answer. (ii) Marginal Utility is zero.

Question.4. Which of the following is an assumption of Production Possibility Frontier?
(i)Resources are not fully employed.
(ii) Resources are not equally efficient for production of the two goods.
(iii) Resources are not efficiently employed.
(iv) Resources available are not fixed.
Answer. (ii) Resources are not equally efficient for the production of the two goods.

Question.5. State any two central problems under ‘problem of allocation of resources’.
Answer. (i) What to produce and in what quantity? To allocate resources in a manner which gives maximum aggregate satisfaction.
(ii) How to produce? To combine factors of production in a manner which gives maximum output at minimum cost using least possible scarce resources.
(iii) For whom to produce? To ensure that the urgent wants of each productive factor are
fulfilled to the maximum possible extent. (any two)

Question.6. ‘Supply curve is the rising portion of Marginal Cost curve over and above the minimum of Average Variable Cost curve’. Do you agree? Support your answer with valid reason.
Answer. Yes, we do agree with the given statement. Supply curve indicates the relationship between price and quantity supplied. In the short run, supply can be changed by changing only the variable factors. In the short run, the firm only needs to cover its variable costs and it will supply the commodity till price is either greater or equal to average variable cost. Therefore, the given statement that the supply curve is the rising portion of marginal cost curve over and above the minimum of average cost curve is true. This is because no rational producer/ seller would like to supply his output to the market if he is unable to recover his per unit variable cost as it would lead to losses between the range of minimum ?of marginal cost (additions to variable cost) and minimum of average variable cost.

Question.7. Explain ‘black marketing’ as a direct consequence of price ceiling.
Answer. Black marketing may be termed as a direct consequence of price ceiling, as it implies a situation whereby the commodity under the government’s control policy is illegally sold at a higher price than the one fixed by the government. It may primarily arise due to the presence of consumers who may be willing to pay higher price for the commodity than to go without it. Price ceiling creates shortage of a good in the market. This may lead to black marketing.
Or
Explain the concept of ‘buffer stock’ as a tool of price floor.
Answer. Buffer stock is an important tool in the hands of the government to ensure price floor/ minimum support price. If in case the market price is lower than what the government feels should be given to the farmers/ producers, it would purchase the commodity at a higher price from the farmers/producers so as to maintain stock of the commodity with itself to be released in case of shortage of the commodity in future.

Question.8. Explain any two sources of restricted entry under monopoly.
Answer. Sources of restricted entry under monopoly, may be:

1. Government license. Some monopolies are created by law in public interest. Most of the state monopolies in the public utility sector, e.g., post, telegraph and telephone services, state roadways etc. are public monopolies. By not granting licenses to new firms, the government aims to assure that only one firm operates in the market.
2. Patents, trademarks & copyrights. Another source of monopoly is the patent rights of the firm for a product or for a production process. Patent rights are granted by the government-to -a firm to produce a commodity of specified quality or to use a specified technique of production.
3. Ownership of scarce resource. Monopoly also arises due to sole ownership or  control of certain essential raw materials needed in a particular industry. Some firms acquire monopoly power from their legally granted control over certain scarce and key raw materials that are essential for the production of certain other goods. E.g., bauxite, graphite, etc. (any two)

Question.9. Comment upon the degree of elasticity of demand for Good X, in the following given situations, if the price of the commodity rises from Rs5 per unit to Rs7 per unit and the quantity demanded falls from 20 units to 16 units:
(i) Using the total household expenditure method,
(ii) Using proportionate method.

Question.10. ‘Higher indifference curve represents higher level of satisfaction to the consumer’. Explain the statement, also state the underlying assumption related to this property of indifference curve.
Answer. Higher indifference curve represents higher level of satisfaction. In other words, any combination that lies on a higher indifference curve, i.e., away from the origin represents a higher level of satisfaction.
In the diagram given , Point A on 1C1 represents the combination (OX1, OY1) and Point B on IC2 represents the combination (OX2, OY1).
Since, Combination B > Combination A OX2, OY1 > OX1 , OY1
Therefore, the consumer gets more satisfaction at IC2 as it represents more of one commodity while the amount of the other remains the same.

The underlying assumption here is the assumption of monotonic preference which represents that a consumer will prefer a combination which contains more of at least one and no less of the other.
Or
A consumer consumes two goods X and Y. Explain what will happen if $\frac { { MU }_{ X } }{ { P }_{ X } }$ is greater than $\frac { { MU }_{ Y } }{ { P }_{ XY} }$?
Answer. If $\frac { { MU }_{ X } }{ { P }_{ X } }$ is greater than $\frac { { MU }_{ Y } }{ { P }_{ Y } }$, then it means the satisfaction that the consumer derives from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y.
The consumer will reallocate his income by substituting Good X for Good Y. As the consumption of Good X increases, the marginal utility derived from it goes on diminishing (Law of diminishing marginal utility) and reverse proposition occurs for Good Y. This process will continue till $\frac { { MU }_{ X } }{ { P }_{ X } }$ becomes equal to $\frac { { MU }_{ Y } }{ { P }_{ Y } }$

Question.11. Define Marginal Opportunity Cost. Explain the concept with a hypothetical numerical example.
Answer. Marginal Opportunity Cost (MOC) of a given commodity along a PPC is defined as the amount of sacrifice of a commodity so as to gain one additional unit of the other commodity. MOC can also be termed as Marginal Rate of Transformation i.e., the ratio of number of units of a good sacrificed to produce an additional unit of the other good.

As shown in the schedule, if the economy uses all its resources to produce only guns, then a maximum of 21 units of guns and no butter can be produced. On the other hand, if all resources are used for butter, then a maximum of 6 units can be produced. In between there are various possibilities with different combinations of the two commodities.

Question.12. (a) What is meant by price rigidity, under oligopoly?
(b) Elaborate the implication of the conditions of equilibrium of a firm.
Answer. (a) Price rigidity is the price of the product fixed after deliberations and negotiations by the oligopolistic firms, to which they generally stick, with a view to avoid any sort of price, war. Firms use other methods like advertising, better services to customers, etc. to compete with each other.
(b) The equilibrium of a firm is that level of output where its profits are maximized and at that level of output, its marginal cost equals marginal revenue. Conditions of firm’s equilibrium:
(i) Marginal Revenue must be equal to Marginal Cost.
(ii) Marginal Cost must be rising after the MC = MR output level.
The conditions imply that a firm would keep on producing and maximise its profits till the slope of rising Marginal Cost Curve is equal to the slope of Marginal Revenue Curve.
In the diagram, E represents the point where the Slope of MC and MR curve are equal.
Implication of the conditions lies in the fact that beyond the equilibrium point, MC would become greater than MR, i.e., for each additional unit sold beyond output OQ, the cost of producing that unit will be more than the revenue generated by the unit. Before this output level (OQ), since MC is less than MR, it is possible to add to profits by producing more.

Question.13. (a) Distinguish between stock and supply.
(b) Complete the following schedule:

Answer. (a) Supply refers to that quantity of a commodity which a seller is willing to sell at different prices during a given period of time. It is that part of stock which is offered for sale at any time.

Question.14. Suppose the demand and supply curves of a Commodity-X is given by the following . two equations simultaneously:
${ Q }_{ d }$= 200 – p ${ Q }_{ s }$= 50 + 2p
(i) Find the equilibrium price and equilibrium quantity.
(ii) Suppose that the price of a factor of production producing the commodity has changed, resulting in the new supply curve given by the equation:
${ Q }_{ s }$= 80 + 2p
Analyse the new equilibrium price and new equilibrium quantity as against the original equilibrium price and equilibrium quantity.

Question.15. Show diagrammatically the conditions for consumer’s equilibrium, in Hicksian analysis of demand.

### SECTION B: Macroeconomics

Question.16. If an economy is to control recession like most of the Euro-Zone nations, which of the following can be appropriate:
(i) Reducing Repo Rate (ii) Reducing CRR
(iii) Both (i) and (it) (iv) None of (i) and (ii)
Answer. (iii) Both (i) and (ii)

Question. 17. Which of the following agency is responsible for issuing *1 currency note in India? 1 (i) Reserve Bank of India (ii) Ministry of Commerce
(iii) Ministry of Finance (iv) Niti Aayog

Question. 18. Flow of goods & services and factors of production across different sectors in a barter economy is known as:
(i) Circular flow (ii) Real Flow
(iii) Monetary Flow (iv) Capital Flow .

Question. 19. The government budget of a hypothetical economy presents the following information. Which of the following value represents Budgetary Deficit? (all fig. in Rs crores)
A. Revenue Expenditure = 25,000
B. Capital Receipts = 30,000
C. Capital Expenditure = 35,000
D. Revenue Receipts = 20,000
E. Interest Payments = 10,000
F. Borrowings = 20,000
(i) Rs 12,000 (ii) Rs 10,000
(iii) Rs 20,000 (iv) None of the above
Answer. (iv) None of the above .
Budgetary Deficit = Revenue Expenditure + Capital Expenditure – (Revenue Receipts + Capital Receipts)
= 25,000 + 35,000 – (20,000 + 30,000) = Rs 5,000 crores

Question. 20. Which of the following statement is true?
(i) Loans from IMF is a Revenue Receipt,
(ii) Higher revenue deficit necessarily leads to higher fiscal deficit.
(iii) Borrowing by a government represents a situation of fiscal deficit.
(iv) Revenue deficit is the excess of capital receipts over the revenue receipts.
Answer. (iii) Borrowing by a government represents a situation of fiscal deficit.

Question .21. ‘Devaluation and Depreciation of currency are one and the same thing’. Do you agree? How do they affect the exports of a country?
Answer. Devaluation is the fall in the value of domestic currency in relation to foreign currency as planned by the government in a situation when exchange rate is not determined by the forces of demand and supply but is fixed by the government of different countries. Depreciation is the fall in the value of domestic currency in relation to foreign currency in a situation when exchange rate is determined by the forces of demand and supply in the international money market.
As a general phenomena, any depreciation/devaluation of currency may result into increase in exports of the goods and services from the country since more can now be purchased from India with the same amount of dollars. Also, it would increase the global competitiveness of the goods.

Question.22. If in an economy Saving function is given by S = (-)50 + 0.2 Y and Y = Rs 2,000 crores; consumption expenditure for the economy would be Rs 1,650 crores and the auto-nomous investment is Rs 50 crores and the marginal propensity to consume is 0.8. True or False?

Or
“Economists are generally concerned about the rising Marginal Propensity to Save (MPS) in an economy”. Explain why?
Answer. Since the sum of MPC and’MPS is unity, any increase in Marginal Propensity to Save (MPS) would directly lead to a decrease in Marginal Propensity to Consume (MPC). This would mean that lesser proportion of the additional income is now being consumed. Consumption expenditure being a major factor of Aggregate Demand/Expenditure. This may further lead to fall in equilibrium level of income in the economy as reduction in aggregate demand would lead to reduction in aggregate supply.

Question.23. Explain how the economy achieves equilibrium level of income using Savings- Investment (S-I) approach.
Answer. As per the S-I approach, equilibrium is achieved where ex-ante Savings are equal to ex- ante Investments. Savings and investments indicate leakages and injections respectively, thus at equilibrium the leakages and injections are equal to each other. If there is any deviation from the equilibrium level of income, i.e., if planned saving is not equal to planned investment, than a process of readjustment will start which will bring the economy back to the equilibrium level.

Question.24. Suppose in an imaginary economy GDP at Market Price in a particular fiscal year was Rs 4,000 crores, National Income ‘was Rs 2,500 crores, Net Factor Income paid by the economy to Rest of the World was Rs 400 crores and the value of Net Indirect Taxes is Rs 450 crores. Estimate the value of consumption of fixed capital for the economy from the given data.

Question.25. What is meant by ‘official reserve transactions’? Discuss their importance in Balance of Payments.
Answer. Transactions by a Central Bank that cause changes in its official reserves are called official reserve transactions. These are usually purchases or sales of its own currency in the exchange market in exchange for foreign currencies or other foreign currency denominated assets. These accommodating transactions are meant to correct the disequilibrium between autonomous transactions, i.e., autonomous receipts and autonomous payments which may occur as deficit/surplus in Balance of Payments.

Question.26. State the various components of the Expenditiue Method that are used to calculate national income.
(i) Private Final Consumption Expenditure (ii) Government Final Consumption Expenditure (iii) Investment Expenditure
(iv) Net Exports
Or
Discuss any two differences between GDP at constant prices and GDP at current prices.
Answer. Two main differences between GDP at current prices and at constant prices are:

1. GDP at current prices is measured at current year’s prices whereas GDP at constant prices is measured at base year’s prices.
2. GDP at current prices may increase even if there is no flow of goods and services whereas GDP at constant prices will only increase when there is an increase in the flow of goods and services.

Question.27, “Governments across nations are too much worried about the term fiscal deficit”. Do you think that fiscal deficit is necessarily inflationary in nature? Support your answer with valid reasons.
Answer. The term fiscal deficit is the difference between the government’s total expenditure and its total receipts (excluding borrowings). It indicates how far the government is spending beyond its means and represents the total borrowings of the government from all sources during the current year.
Fiscal Deficit = Total expenditure .Total receipts excluding borrowings Such borrowings are generally financed by issuing new currency called as deficit financing which may lead to inflation in the economy due to more money supply. However, if the borrowings are for infrastructural developmental purposes this may lead to capacity building and may not be inflationary. If such borrowings lead to increase in productivity and capital formation, then it may not generate inflationary trends in the economy.

Question. 28. Derive a straight line saving curve using the following consumption function:  C = 20 + 0.6Y .
Presuming the income levels to be Rs 100,Rs 200 and Rs 300 crores. Also calculate that level of income where consumption is equal to income.

For Visually Impaired candidates:
Calculate savings from the following saving function: C = 20 + 0.6Y Presuming the income levels to be Rs 100, Rs 200 and Rs 300 crores. Also calculate that level of income where consumption is equal to income.

Question.29. (a) What is meant by Repo Rate? How does the Central Bank use this measure to control inflationary conditions in an economy?
(b) What is meant by Margin Requirement? How does the Central Bank use this measure to control deflationary conditions in an economy?
Answer. (a) Repo rate is the rate of interest at which the central bank lends money to commercial banks for a short-term. The central bank fixes the Repo Rate and it plays the role of 1 an indicator of the lending rate and deposit rate fixation by the banks. Under inflationary conditions central bank increases the Repo Rate. It makes borrowings by commercial banks costly and they also increase their lending rates. As a result, borrowings decrease, reducing the level of aggregate demand in the economy.
(b) Margin requirement refers to the difference between market value of the security offered for loans and the amount of loans offered by the commercial banks.The central bank fixes the margin requirements and under deflationary conditions central bank reduces the margin requirements so that the capacity to borrow is increased which will raise the level of aggregate demand in the economy to restore it at the full employment level.

Question.30. Compute (a) Domestic Income and (b) Net National Disposable Income.

= (xi) + (ii) + (iv) – (vi) + (vii) – (x) – (viii)
= Private final consumption expenditure + Government final consumption expenditure + Gross domestic fixed capital formation – Net decrease in inventories + Net Exports – Current replacement cost – Net Indirect Taxes . = 2,200 + 2,500 + 1,190 – 100 + (-420) – 145 – 470
= Rs 4,755 crores .
Net National Disposable Income
= National Income + Net Indirect Taxes + Net Current Transfers from abroad
= Domestic Income – (v) + (viii) + (ix)
= Domestic Income – Net factor income to abroad + Net Indirect Taxes + Net Current transfers from abroad
= 4,755 – 125 +’470 + 350 = Rs 5,450 crores
Or
Explain any four limitations of using GDP as a measure/index of welfare of a country.
Answer. Four limitations of using GDP as a measure/index of welfare of a country are: ,

1. Distribution of GDP. If the distribution of GDP is not uniform then even though GDP rises the welfare of the people may not rise because the rise in GDP may be concentrated in the hands of very few individuals or firms.
2. Composition of GDP. GDP only shows the total goods and services produced and does not exhibit the structure of the product. If the increase in GDP is mainly due to increase in production of war equipments, then such an increase cannot be associated with any improvement in economic welfare.
3. Non-Monetary Exchanges. Many activities in an economy are not evaluated in monetary terms and therefore are not included in estimates of GDP. This is a case of underestimation of GDP, e.g., services of a housewife.
4. Externalities. It refers to the-benefits (or harms) a firm or an individual causes to another for which it is not paid (or penalized). Positive externalities though increase economic welfare are not included in GDP. Similarly, negative externalities, though decrease the actual welfare are not considered in GDP. Hence, GDP is not a true indicator of economic welfare.