Page 1 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics re-examination 2018 | 1011, , Economics re-examination 2018, Time allowed : 3 hours, , Maximum marks : 80, , (–) 2, 300 Units, ?, New Qty., — Original Qty, () = 300 – 200, = 100 Units, New Price (P1) = DP – P (Change in, Price – Original Price), Utilizing the formula :, ∆θ P, ×, Ed =, ∆P Q, Where,, Ed = Price elasticity of demand, Dq = Change in Qty., DP = Change in Price, P = Original Price, Q = Original Qty., Change in Qty (q) = New Qty – Original Qty., = 300 – 200, = 100 Units, , , , , ita, , , , b, , , , , , , , , , , , , , , , , , , , , , , , Elasticity of demand (Ed) =, New Qty. (q1) =, New Price (P1) =, Change in Qty =, , , , General Instructions :, (i) All questions in both the sections are compulsory., (ii) Marks for questions are indicated against each question., (iii) Questions Nos. 1 – 4 and 13 – 16 are very short-answer, questions carrying 1 mark each. They are required to be, answered in one sentence each., (iv) Question Nos. 5 – 6 and 17 – 18 are short-answer, questions carrying 3 marks each. Answers to them should, normally not exceed 60 words each., (v) Question Nos. 7 – 9 and 19 – 21 are also short-answer, questions carrying 4 marks each. Answers to them should, normally not exceed 70 words each., (vi) Question Nos. 10 – 12 and 22 – 24 are long-answer, questions carring 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 limits should be adhered to as far as possible., , , , , , , , , , , 5., , , , , , 100 20, ×, ∆P 200, , , , , , , , , , , , , , , , , 4., , , , , , , , 3., , op, , , , , , 2., , (–) 2 =, , (– 2) DP = 10, 10, =5, \, (– 2) DP =, 2, (–) sign is ignored since it tells only the inverse, relationship between Price and Qty. demanded., New Price (P1) = P – DP, = ` 20 – ` 5 = ` 15, Hence New Price (P1) will be ` 15 at New Qty. of 300, units., Ans. ` 15, 6. Explain the central problem of “What is produced, and in what quantities”., [3], OR, In what circumstances may the production, possibility frontier shift away from the origin ?, Explain., Answer : It is the problem of choosing which, goods and services should be produced and in, what quantities. The economy can not have more, of everything with available resources at the same, time. Thus, society has to decide between consumer, goods and producer goods etc. Since resources are, limiteded , all goods and services desired can not, be produced at the same time. So, the society has to, decide which goods are to be produced and also the, quantities in which they should be produce. Hence,, • Follow us on Telegram - https://t.me/copymykitab1, , C, , , , , , , , 1., , , , yM, yK, , SECTION — A, 30, Which of the following measures of price elasticity, shows elastic supply ?, (Choose the correct alternative), [1], (a) 0, (b) 0.5, (c) 1.0, (d) 1.5, Answer : (d) 1.5 shows the elastic supply., Define opportunity cost., [1], Answer : Opportunity cost is the cost of availing, one opportunity in terms of the loss of the other, opportunity., At what level of production is total cost equal to, total fixed cost ?, [1], Answer : At zero level of production, total cost is, equal to total fixed cost., Which of the following does not cause shift of supply, curve of a good ? (Choose the correct alternative), (a) Price of input, (b) Price of the good, (c) Goods and services tax, (d) Subsidy, Answer : (b) Price of good does not cause shift in, supply of good., A consumer buys 200 units of a good at a price of, ` 20 per unit. Price elasticity of demand is (–) 2. At, what price will he be willing to purchase 300 units ?, Calculate., [3], Answer : Original Price (P) = ` 20 Per Unit, Original Quantity (q) = 200 Units

Page 2 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1012 | Economics re-examination 2018, the problem is related with two aspect .e., (i) Which, commodity should be produced ? (ii) In how much, Quantity ?, , , , Shifting away of PPC from the origin means the, right-ward shift of production possibility frontier. It, takes place because of two main reasons., , , , , , It may be in the form of discovery of new natural, resources, availability of new machinery through, saving and investment and increase in skilled and, unskilled labour through population growth., , , , , , , , (i) When resources of an economy increase-, , , , , , OR, , , , ita, , b, , , , 10X1 + 5X2 = 100, OR, , Marginal Rate of Substitution (MRS)., MRS is the rate at which the consumer is ready to, sacrifice some amount of good 1 for obtaining one, more unit of his another good 2 without affecting his, total utility., , C, , op, , , , yM, yK, , , , It happens as a result of the work of a scientist,, engineers and inventors over a long period of time., In this case, more of the two goods can be produced, with the given amount of resources, causing shift of, PPC to the right. Rightward shifting can be shown, through the following :, , , , , , (ii) When there is an improvement in technology , , 8. Write a budget line equation of a consumer if the, two goods purchased by the consumer, Good X and, Good Y are priced at ` 10 and ` 5 respectively and, the consumer’s income is ` 100., [4], OR, Define marginal rate of substitution. Explain its, behaviour along an indifference curve., Answer : Lets take Price of Good X P1, Price of Good Y P2, Consumer’s income= Y, according to the sum—, P1 = ` 10, P2 = ` 5, Y = ` 100, hence budget equation is—, P1 X1 + P2 X2 = Y, , For example a consumer has a bundle of two goods,, say, 2x + 10y and shifts to another bundle of 3x + 6y, maintaining the same level of satisfaction (total utility)., Here, MRS is 4 (10 – 6) units of y which the consumer, is willing to giving up to obtain an extra unit of, x = (3x – 2x). It can also be illustrated with the help of, the figure., , Answer : Freedom of entry and exit—A firm can, enter or leave the industry any time. The free entry, and exit of the firm is possible only in the long period,, not in the short period. Because of free entry and exit,, firms in the long run earn only normal profits. (TR, = TC or AT = AC). In case of super normal profits, are earned, new firms will get attracted and join the, industry. Market supply will increase and extra profit, will wipe out. In case of super normal losses, some, of the existing firms will leave the industry. Market, supply will decrease and hence, price will increase so, extra losses will wipe out. In this way firms can earn, normal profit in a long run only., , , , , , 7. Explain the implications of “Freedom of entry and, exit of firms” under perfect competition., [4], , The two points A & B are taken on IC curve . At point, A, a consumer gets combination of OR (= MA) of, good y and OM (= RA) of good. X. Suppose he shifts, from point A to point B where he gets combination of, OS (= MC) of good y and ON (= SB) of good X. By, this change, he loses AC (MA – MC) a maint of good, y and gains CB (ON – OM) amount of good X which, means he is willing to substitute good X for goods y., , • Follow us on Telegram - https://t.me/copymykitab1

Page 3 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , The slope of MRS can be understood as —, ∆ good y, ∆ good x, 9. Explain the conditions of producer’s equilibrium, under perfect competition., [4], Answer : Meaning of Producer’s equilibrium—A, producer is said to be in equilibrium at that level of, output which gives him maximum profit and he, has no incentive to increase or decrease further. A, producer attains equilibrium when following two, conditions are fulfilled simultaneously., (i) MC = MR (It is expressed as P = MC under perfect, competition), (ii) MC is greater than MR after MC = MR output level, or MC curve cuts MR curve from below., It can be explained with the help of schedule and its, graph., 10, , 8, , 2, , 10, , 10, , 3, , 10, , 8, , 4, , 10, , 5, , 10, , , , , , b, , 1, , , , 10, , , , , , , , , op, , In the above schedule Price (P) is constant and, P = AR = MR . In the above schedule, Condition 1, is satisfied initially at 2 level of units but the second, condition is not satisfied thereafter since MC is below, than. MR at the next level so, producer is not in, equilibrium., Again at unit 4 MR = MC and MC is greater than, MR thereafter so, producer will be in equilibrium at, unit 4., , , , 12, , C, , , , Relation between MC and AVC—, (i) When AVC falls, MC < AVC or AVC falls only, when MC < AVC. (Diagrammatically MC curve, lies below AVC curve till their intersection), , ita, , MC (`), , , , MR (`), , , , Units sold, , = MC at two places. But point B is only satisfying, both the conditions essential for equilibrium, hence, producer will be in equilibrium at B., 10. Draw Average Variable Cost (AVC), Average Total, Cost (ATC) and Marginal Cost (MC) curves in a, single diagram. State the relation between MC, curve and AVC & ATC curves., [6], Answer :, , yM, yK, , , , , , , , , , Economics re-examination 2018 | 1013, , (ii) When AVC is minimum, MC = AVC or AVC, is constant or minimum when MC = AVC, (Diagrammatically the point where MC curve, intersects AVC curve is the minimum point of, AVC), (iii) When AVC rises, MC is more than AVC or AVC, rises when MC > AVC. (Diagrammatically MC, lies above AVC curve after intersecting AVC at its, minimum point), Relation between MC and ATC, (i) When AC (i.e., ATC) falls, MC < AC, (ii) When AC is constant , MC = AC, (iii) When AC rises, MC > AC, , , , 11. Define price floor. Explain the implications of price, floor., [6], , , , OR, , Answer : When Government fixes prices of a product, at a level higher than the equilibrium price, it is called, support price (or floor price). It is the minimum price, The situation is also shown in the graph. Under, at which the producer must be paid for their products, perfect competition, Price line is parallel to X-axis, support price is generally fixed for agricultural, because it is constant and therefore. P = AR = MR, products like food grains, sugar etc to safeguard the, MC curve is as usual V-shaped which intersects MR, interest of producers (farmers). For instance, Food, (Price) curve at two points A and B. It means MR, Corporation of India (FCI) purchases wheat from the, • Follow us on Telegram - https://t.me/copymykitab1, , , , , Market of a good is in equilibrium. Demand for the, good ‘decreases’. Explain the chain of effects of this, change.

Page 4 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1014 | Economics re-examination 2018, (v), , b, , ita, , , , , , At the existing Price OP1, demand falls from, E to F., (vi) As an immediate impact, there is excess supply, in the market. It is EF (at the existing price.), (vii) Due to excess supply, Price fall from OP1 to OP2, Due to fall in price the quantity supplied tends, to contract. The contraction of supply occurs, from E to K., (viii) The above process remains continue till excess, supply is fully eliminated, and the market, clears itself once again., (ix) The net effect of decrease in demand is, (a) decrease in equilibrium Price from OP1 to, OP2 and, (b) decrease in equilibrium quantity from OQ1, to OQ2., 12. A consumer consumes only two goods X and Y., Explain the conditions of consumer’s equilibrium, using Utility Analysis., [6], Answer : When the consumer is consuming, two commodities (say X and Y) he can reach the, equilibrium when ratio of MV of a commodity to its,  MUx , price  px  becomes equal to the ratio of MV of the, , ,  MUy , other commodity to its price , . Symbolically,  py , it can be expressed as -, , , , op, , , , yM, yK, , This diagram shows OP as the equilibrium price, and OQ as equilibrium quantity of wheat. The, government fixes price at OP, slightly above, equilibrium price OP1. Traders in the market are, now bound to pay at OP1, But, a rise in price causes, market demand to contract from OQ to OQ, on the, other hand market supply expands from OQ to OQ2., There emerges excess supply -ab= Q1Q2 (OQ2 –, OQ1). The government buys this surplus and stores, it as a buffer stock., OR, , C, , , , , , , , farmers at its fixed price and stores it in godown as, buffer stock. The aim of support price is to insulate, farmers from the fluctuations in their incomes caused, by the price variations in the free market., , MUx MUy, =, px, py, , This equation also implies that if the price of the, commodity x is equal to the price of the commodity y, (Px = Py) the consumer will attain equilibrium when, MUX = MUY., It also means that satisfaction is maximum when a, rupee worth of MU is same in both the goods X and, Y. Suppose a consumer has ` 20 with him to spend, on two goods X and Y. Further suppose price of each, unit of X is ` 5 and that of Y is ` 2. Now consumer may, attain his equilibrium by utility approach in this way., Utility schedule in case of two goods :, , (i), , D1D1 is the initial demand curve and SS is the, supply curve., , (ii), , Both curves are cutting at point E which is the, equilibrium point., , (iii) At point E OP1 is the equilibrium price and OQ1, is the equilibrium Quantity., (iv) As the demand decreases D1D1 shifts to D2D2 in, left., , Unit of MUx, goods (Utile), , Nux/Px, (A rupee), worth of, No), , MUy, (Utile), , MUy/Py, (worth of, MU), , 1, , 50, , 50 ÷ 5 = 10, , 24, , 24÷2 = 12, , 2, , 40, , 40 ÷ 5 = 8, , 22, , 22 ÷ 2 = 11, , 3, , 30, , 30 ÷5 = 6, , 20, , 20 ÷ 2 = 10, , 4, , 20, , 20 ÷ 5 = 4, , 18, , 18 ÷ 2 = 9, , 5, , 10, , 10 ÷ 5 = 2, , 16, , 16 ÷ 2 = 8, , 6, , 0, , 14, , 14 ÷ 2 = 7, , • Follow us on Telegram - https://t.me/copymykitab1, , –

Page 5 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics re-examination 2018 | 1015, , , , ∆Y, ∆Y, 1, =, =, ∆Y ∆C, 1, −, MPC, −, ∆Y ∆Y, There is a direct relation between K and MPC. If MPC, is high, K will also be high but if MPC is low K will, also be small., 18. Distinguish between stock and flow variables with, suitable examples., [3], OR, What are capital goods ? How are they different, from consumption goods ?, Answer : Difference between stock and flow :, , , SECTION B, [1], , , , 13. Define aggregate supply., , Answer : Aggregate supply is the total production of, goods and services in the economy during the year., , , , , (Dividing this equation by DY we get), ∆Y, K =, ∆Y − ∆C, , , , for obtaining maximum satisfaction from spending, his given income of ` 20 the consumer will buy 2 units, of X, by spending ` 10 and 5 units of Y by spending `, 10. This combination of goods brings him maximum, satisfaction because a rupee worth of MU in case of,  MU 40 , good X is 8  px = 5  and in case of good Y is also 8, , , MUy,  MU = 16 , MUx, since per rupee MU,  i.e. P = P,  P, 2, x, x, y, is same, there is no incentive for consumer to buy, more of one good and less of the other good., , Stock, , Flow, , (i) Stock relates to a, point of time, e.g., your saving as an, January 1, 2014 are `, 10,000., , Flow relates to the, period of time, e.g. your, pocket expenses of ` 20, per day., , (a) Cash Reserve Ratio (CRR), , yM, yK, , , , , , , , , , , , 15. Credit creation by commercial banks is determined, by (Choose the correct alternative), , b, , Answer : The two components of M1, measure of, Money Supply are currency and demand deposits., , ita, , , , , , 14. State the two components of M1 measure of Money, Supply., [1], , (ii) Stock is not time- Flow is time dimensional, dimensional., as per hour, per month,, per year., , (b) Statutory Liquidity Ratio (SLR), (c) Initial Deposits, (d) All the above, Answer : (d) All the above, , (iii) Stock, influences, the flow, Greater, the stock of capital,, greater is the flow of, goods and services., , op, , Answer : Example : If you produce chemicals and, cause pollution as a side effect, then local fisherman, will not be able to catch fish. This loss of income will, be the negative externality., , C, , , , 16. Give one example of negative externalities., , , , (iv) Example - Popula- expenditure of money,, tion of a country, interest on capital etc., Bank deposit etc., , 17. Define investment multiplier. How is it related to, marginal propensity to consume ?, [3], , OR, Answer : The no of times by which income increases, Difference between capital goods and consumption, or a result of increase in investment is called, goods :, investment multiplier. Investment multiplier shows a, Consumption Goods, Capital Goods, relationship between initial increment in investment, (i) Goods which are Capital goods are fixed, and the resulting increment in national income., consumed for their assets of producers, ∆Y, K =, own sake to satisfy which are repeatedly, ∆I, current needs of the used in production, where, K = multiplier, consumers directly of other goods and, DY = change in income, are, consumption services., DI = change in investment, goods., Relation of multiplier with MPC :, (ii) These are used These are used for, ∆Y, K =, for, achieving generating income by, ∆I, satisfaction., production units., ∆Y, K = ∆I, • Follow us on Telegram - https://t.me/copymykitab1, , , , , , , , , , , , , , Flow influences the, stock. For example,, monthly increase in the, supply of money leads, to an increases in the, quantity of money.

Page 6 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Capital, goods, are, producer’s, goods, which are repeatedly, used in production, process for generating, income., , (iv) For example-Food, For e.g. -Machine, Tools,, shoes,, retailers, Technology etc., barbers etc., , b, , ita, , , Induced consumption, , When consumption increases by increase in, income, It is known as, induced consumption., , , , 20. What is monetary policy ? State any three, instruments of monetary policy., [4], Answer : Monetary Policy : It is the policy of the, central bank of a country to regulate and control, money supply and credit in the economy., Measurer of Monetary Policy, , , , , , , , C, , (i) When consumption, occurs event at zero, level of income this, is called as Autonomous, Consumption., , , , Bank Open, rate market, Operations, , cash, reserve, ratio, , Qualitative, measures, , , , , Quantitative measure, , Bank rate : Bank rate is the rate of interest charged, by the central bank on loans given to the commercial, banks. In a situation of excess demand leading to, inflation, central bank raises bank rate This raises, cost of borrowing which discourages commercial, banks in borrowing from the central bank. Raising, bank rate forces the commercial banks to raise their, lending rate of interest to consumers and investors., Thus, makes credit costlier. As a result, demand for, loans falls or vice-versa., Open Market Operations : It refers to the sale and, purchase of government securities and bonds in the, open market by the central bank. Sale of securities, by central bank brings flow of money to central bank, from commercial banks thereby restricting their, lending capacity. During inflation, central bank sells, Government securities to commercial banks which, lose equivalent amount of cash reserve thereby, affecting their capacity to offer loans. This absorbs, liquidity from the system. As a result, there is a fall, in investment and aggregate demand. Thus, it is an, effective measure to control credit., Cash Reserve Ratio (CRR) : It is the ratio of bank, deposits that a commercial bank must keep as reserve, in cash with the central bank. It is compulsory for, each commercial bank. When there is an inflationary, situation, central bank raises the rate of CRR there by, making the banks to keep more cash reserve with RBI, which curtails the lending capacity of commercial, banks Opposite takes place at the time of recursion,, In this way the central bank Keeps control on the, flow of money in an economy., 21. Define full employment in an economy. Discuss, the situation when aggregate demand is more than, aggregate supply at full employment income level., OR, What are two alternative ways of determining, equilibrium level of income ? How are these, related ?, Answer : Full employment : Full employment refers, to a situation in which every able bodied person who, is willing to work at the prevailing rate of wages is, in, fact, employed., Excess demand or Inflationary gap : when in an, economy, aggregate demand is in excess of aggregate, supply at full employment, the situation is termed, as excess demand and the gap created is called, inflationary gap., For example : Lets suppose on imaginary economy., where by employing all of its available resources,, can produce 10,000 qtls of rice. If aggregate demand, , yM, yK, , Autonomous, Consumption, , op, , , , , , , , , , , , , , , , , , 19. What is ex-Ante consumption ? Distinguish, between autonomous consumption and induced, consumption., [3], Answer : Ex-Ante Consumption - This refers to, planned or desired consumption expenditure of, households. Consumption function is represented, by., C = C + by, Where,, C = Consumption expenditure, C = Autonomous consumption, b = Marginal propensity to consume (MPC), Y = National Income, Difference between Autonoums and Induced, consumption :, , , , (iii) Consumption goods, meet, the, basic, objective, of, an, economy, i.e., to, sustain, the, consumption, of, entire population of, the economy., , , , 1016 | Economics re-examination 2018, , Margin, Moral, requirements science, • Follow us on Telegram - https://t.me/copymykitab1

Page 7 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , , , , , for rice is, say 12,00 qtls, this demand will be called, as excess demand and the gap between demand &, supply is called inflationary gap., The situation is shown through a graph :, , The two different alternatives to reach at the, equilibrium level of income are :, , b, , ita, , , , op, , (ii) Central bank should buy Govt. bonds and, securities from commercial banks to increase cash, stocks of banks for lending. By doing this money, flow will increase in the economy. People will, take loans from the banks to install new projects., More people will get jobs thus, income will, increase, in turn, consumption will also increase, and economy will move towards achieving, equilibrium level of income., , , , During the period of deficiency of demand, the, Government should make large investments in public, works like-construction of roads, bridges, buildings,, railways, canals and provide free education and, medical facilities although it may enlarge budget, deficit. The aim is to give more money is the hands of, people so that they should depend more., , , , , , (i) Increase in Govt. Expenditure to Pump more, money in the system to increase demand., , , , Equilibrium level of income is that level of in come, at which aggregate demand equals aggregate supply., (and planned savings equals planned investment), , C, , , , , , OR, , , , In the graph, Point E lying on the 45° line is the full, equilibrium point. This is an ideal situation because, aggregate demand represented by EM is equal to full, employment level of output represented by OM. The, actual aggregate demand is for a level of output BM, which is greater than full employment level of output, EM (OM). Thus, the difference between the two is EB, =(BM-EM) which is measure of inflationary gap., , 22. Discuss briefly the meanings of :, (i) Fixed Exchange Rate, (ii) Flexible Exchange Rate, (iii) Managed Floating Exchange Rate, Answer : (i) Fixed Exchange Rate : Fixed exchange rate, is the rate which is officially fixed by the government/, monetary authority on a daily or monthly basis. In, this system, foreign central banks stand ready to buy, and sell their currencies at a fixed price. A typical kind, of this system was used under gold standard system, in which each country committed itself to convert, freely its currency into gold at a fixed price., (ii) Flexible exchange Rate : It is the rate which is, determined by market force of supply and demand, in the foreign exchange market. There is no official, intervention. Here, the value of a currency is left, completely free to be determined by market force, of demand and supply of the currencies concerned., Under this system, the central banks, without, intervention, allow the exchange rate to adjust so, as to equate the supply and demand for foreign, currency., (iii) Managed floating Exchange Rate : It is also called, Dirty floating exchange rate. It is a system of floating, exchange rate (where exchange rate is determined by, the forces of demand and supply) but the one which, the central bank of the country tries to manage by way, of planned sale and purchase of foreign currencies in, the international money market., 23. What is government budget ? Explain its major, components., [6], OR, Explain (a) allocation of resources and (b) economic, stability as objectives of government budget., Answer : Govt. Budget : “A government budget is, an annual financial statement showing estimated, receipts and estimated expenditure of the government during a fiscal year.”, Components of the budget : The budget is divided, into two main parts :, (i) Revenue Budget, (ii) Capital Budget, Components, , yM, yK, , , , , , , , , , Economics re-examination 2018 | 1017, , Revenue, Budget, Revenue, expenditure, , Direct Tax, , Capital Budget, , Revenue, Receipt, , Capital, Expenditure, , Tax, Revenue, , non Tax, Revenue, , Indirect Tax, , • Follow us on Telegram - https://t.me/copymykitab1, , Capital, Receipt

Page 8 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , over Government allocates more funds for the, production of socially useful goods and draws, away resources from some other sectors to, promote balanced economic growth of different, regions. Moreover Govt. also undertakes, production directly when necessary., (b) Economic Stability : Government can bring, economic stability i.e. can control fluctuations, in general price level through taxes, subsidies, and expenditure. For instance, when there is, inflation, govt. can reduce its own expenditure, and when there is depression characterized by, falling output and prices, govt. can reduce taxes, and grant subsidies to encourage spending by, people., , ita, , b, , , , 24. Calculate (a) Operating Surplus, and (b) Domestic, Income :, (` in crores), (i) Compensation of employees, 2,000, (ii) Rent and interest, 800, (iii) Indirect taxes, 120, (iv) Corporation tax, 460, (v) Consumption of fixed capital, 100, (vi) Subsidies, 20, (vii) Dividend, 940, (viii) Undistributed profits, 300, (ix) Net factor income to abroad, 150, (x) Mixed income, 200, , , , , , , , , , , , Answer : (a) Operating Surplus :, OS = Corporation tax + Rent + Interest + Dividend, + Undistributed profits., OS = (iv) + (ii) + (vii) + (viii), = 460 + 800 + 940 + 300, = 2,500 crores, (b) Domestic income, NDPFC = CoE + operating surplus + Mixed income, = 2000 + 2500 + 200, = 4,700 crore, Answer. OS= 2,500 crore, DI = 4,700 crore, , , op, , yM, yK, , Revenue Budget : It comprises of current revenue, receipts and current expenditure met from such, revenues. It includes the following components., Revenue Receipt : It includes tax revenue and non, tax revenue., Tax Revenue : Tax revenue consist of proceeds of taxes, and other duties levied by the union government. It, may be direct or indirect taxes., (i) Direct tax : When (i) liability to pay a tax and (ii), the burden of that tax falls on and (ii) the burden, of that tax falls on the same person. The tax is, called a direct tax. For ex–income tax, corporate, tax etc., (ii) Indirect Tax : When liability to pay a tax is on one, person and the burden of that tax falls on some, other person, the tax, is called an indirect tax. for, ex-custom duty, excise duty etc., Non-tax Revenue : Income from sources other than, taxes is called non-tax revenue. For ex–interest, fees, and fine, grant in aid etc., Revenue Expenditure : An expenditure which, neither creates assets nor reduces liability is called, Revenue expenditure. For ex- salaries of employees,, interest, payment on past debt, subsidies pen sun etc., Capital Receipt : Government receipts which either, Create liabilities or reduces assets are called capital, receipts. For example Borrowings, Raising of funds, from PPF and small saving deposits., Capital Expenditure : An expenditure which either, creates an asset or reduces a liability is called capital, expenditure. This type of expenditure adds to the, capital stock of the economy and raises its capacity to, produce more in future., OR, (a) Allocation of Resources : To allocate resources, in line with social and economic objectives,, Government provides more resources into, socially productive sectors where private sector, is not involved eg. sanitation, water supply,, rural development, education, health etc. More-, , C, , , , , , , , , , , , , , , , 1018 | Economics re-examination 2018, , ll, , • Follow us on Telegram - https://t.me/copymykitab1

Page 9 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2018 | 1019, , , Economics 2018, , b, , yM, yK, , , , 4, 20, ×, 100 1, , = 0.8, , It is not elastic, as elasticity is less than one., 8. What is meant by price ceiling ? Explain its implications., [4], , , op, , C, , =, , Answer : Definition of ‘Price Ceiling’ : Price ceiling, is a situation when the price charged is more than or less, than the equilibrium price determined by market forces, of demand and supply. It has been found that higher price, ceilings are ineffective. Price ceiling has been found to be of, great importance in the house rent market., , , , , , , , , , , , , , , , , , , , , , , , 1. When the total fixed cost of producing 100 units is ` 30, and the average variable cost ` 3, total cost is : (Choose, the correct alternative), [1], (a) ` 3, (b) ` 30, (c) ` 270, (d) ` 330, Answer : (d) ` 330., 2. When the Average Product (AP) is maximum, the, Marginal Product (MP) is :, (Choose the correct alternative), [1], (a) Equal to AP, (b) Less than AP, (c) More than AP, (d) Can be any one of the above, Answer : (a) Equal to AP, 3. State one example of positive economics., [1], Answer : Increasing the interest rate to encourage people to, save is an example of positive economics., 4. Define fixed cost., [1], Answer : Fixed costs are those costs which do not vary with, the level of output. For Ex.—Rent of factory., 5. Explain the central problem of “choice of technique”., OR, Explain the central problem of “for whom to produce”., [3], Answer : How to Produce : This is the second major, central problem faced by the economy ever. Basically, there, are, two choices of techniques i.e.,, (i) Capital intensive technique. This is the technique, in, which capital is required more than the labour., (ii) Labour intensive Technique. This is the technique, in, which labour is required more than the capital., OR, For whom to produce : An economy faces major central, problem i.e., for whom the production is to be done., Production/Income is distributed among., (i) Functional Distribution, (ii) Personal Distribution., 6. What is meant by inelastic demand ? Compare it with, perfectly inelastic demand., [3], Answer : Elasticity is a measure of the responsiveness of the, quantity demanded to a change in price. Inelastic demand, means elasticity less than 1., There, percentage change in quantity demanded is less than, a percentage change in price., , , , SECTION—A, , Maximum marks : 80, For Ex.—Percentage change in quantity demanded is 10%., Percentage change in price = 20%, So, Elasticity (Ed < 1) = 0.5, Perfectly inelastic demand., When increase are decrease in price does not effect the, quantity demanded, it is known as perfectly inelastic, demand., For Ex.—Price change by 10% but quantity demanded, remains the same i.e.,, Percentage change in quantity demand = 0, Percentage change in price = 20%, So, elasticity is 0., 7. When the price of a commodity changes from ` 4 per, unit to ` 5 per unit, its market supply rises from 100, units. Calculate the price elasticity of supply elastic ?, Given reason., [4], P ∆Q, ×, Answer : Ed =, Q ∆P, , ita, , Time allowed : 3 hours, , Implications of ‘Price Ceiling’, (i) Price ceiling enables the availability of basic goods at, reasonable price to the poor. This enable to increases the, welfare of the people., • Follow us on Telegram - https://t.me/copymykitab1

Page 10 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Y-axis = Good y, , , , (ii) When there is a fall in the price level, the demand for, a good increases more than the supply of the good., Hence, it creates an excess demand for the good., 9. Given the price of a good, how will a consumer decide, as to how much quantity to buy of that good ? Explain., OR, What is Indifference Curve ? State three properties of, indifference curves., [4], Answer : Consumer equilibrium : Consumer equalibrium, is the situation through which a consumer decides how, many units of the goods to consume., It refers to the situation when consumer sets maximum, satisfaction/utility from the goods it consumes., , Properties :, (i) Higher IC gives higher level of satisfaction., (ii) Two Indifference Curves never intersect each other., (iii) Indifference curves is convex to the origin., 10. State three characteristics of monopolistic competition., Which of the characteristics separates it from perfect, competition and why ?, OR, Explain the implications of the following :, (a) Freedom of entry and exit of firms under perfect, competition., (b) Non-price competition under oligopoly., [6], Answer : The main features of monopolistic competition, are as under :, (1) Large Number of Buyers and Sellers : There are large, numbers of firms but not as large as under competition., That means each firm can control its price-output, policy to some extent. It is assumed that any priceoutput policy of a firm will not get reaction from other, firms that means each firm follows the independent, price policy., (2) Less Mobility : Under monopolistic competition both, the factors of production as well as goods and services, Price retains constant, when MU of Goods is more than its, are not perfectly mobile., price, then consumer will decide not to purchase that good., (3) More Elastic Demand : Under monopolistic, Also, when MU is less than its price, then also consumer, competition, demand curve is more elastic. In order to, will give up its consumptions., sell more, the firms must reduce its price., A consumer will consume only when, MU is equal to price., The characteristics which separates monopolistic, MUx = Px, competition from perfect competition are :, In the diagram,, (1) Nature of Firms : Under perfect competition an, X-axis = Consumption, industry consists of a large number of firms. Each firm, Y-axis = Price, in the industry has a very little share in the total output., E = Consumer Equilibrium, The firms have to accept the price determined by the, OR, industry. On the other hand, under monopolistic, Indifference Curve, competition the number of firms is limited. The firms, A curve on a graph (the axis of which represent quantities of, can influence the market price by their individual, two commodities) linking those combinations of quantities, actions., which the consumer regards as of equal value., (2) Nature of Price and Output : Under perfect, competition price is equal to marginal cost as well as, marginal revenue whereas under imperfect competition, it is not so. Although, under monopolistic competition, marginal cost and marginal revenue are equal yet not, equalising the price., (3) Nature of Product : Under perfect competition, firms, produce homogeneous products. The cross elasticity of, demand among the goods is infinite. Under imperfect, competition, all the firms produce differentiated, products and the cross elasticity of demand among, them is very small., OR, IC—Indifference Curve., (a) Freedom of entry and exit of firms under perfect, X-axis = Good x, competition : There is freedom of entry and exit of, • Follow us on Telegram - https://t.me/copymykitab1, , , , , , op, , C, , , , , , , , , , yM, yK, , ita, , b, , , , , , , , , , , , 1020 | Economics 2018

Page 11 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , IC2 within consumer budget. Combinations on IC3 are, not affordable because his income does not permit whereas, combinations on IC1 gives lower satisfaction than IC2., Hence, best combination is at point P where budget line is, tangent to the indifference curve IC2. It is at this point that, consumer attains the maximum satisfaction at the state of, quilibrium., For consumer’s equilibrium, two conditions are necessary :, (a) Budget line should be tangent to indifference curve, (MRS = Px/Py)., (b) Indifference curve should be convex to the point of, origin (i.e., MRS should be diminishing at a point of, equilibrium.), 12. Explain the conditions of producer’s equilibrium in, terms of marginal revenue and marginal cost., [6], , b, , Answer : Producer’s equilibrium referes to the state in, which a producer earns his maximum profit or minimise its, losses. According to MR-MC approach, the producer is at, equilibrium, when the Marginal Revenue (MR) is equal to, the Martinal Cost (MC) and Martinal Cost curve must cut, the Marginal Reveneu curve from below :, , ita, , firms in perfect competition. This implies that under, perfect competition, in long–run, firms earn only, normal profits, so new firms does not enter or exit the, market in long–run. The firms in this competition do, not earn supernormal profits or losses in long–run. It is, only in short–run that the firms enter or exit the market., (b) Non-price competition under oligopoly : In an, oligopoly market, firms do not compete each other with, changes in the price. If the firm increases the price, rival, firms may not increase it, so it will lead to a loss of the, market., Consumers will shift to rival firms. On the other hand, if, the firm decreases the price, the rival firms may decrease, it, so it will lead to a loss of total revenue. There will, not be increase in the demand for the product. They, take into consideration the decisions of rival firms, and, hence, the price does not move freely and it leads to, non-price competition. High selling cost prevails in the, market, resources are not fully used and welfare is not, maximised., 11. Explain the conditions of consumer’s equilibrium using, Indifference Curve Analysis., [6], Answer : Consumer’s equilibrium using indifference, curve analysis–According to indifference curve analysis, a, consumer attains equilibrium at a point where budget line, is tangent to indifference curve. Consumer equilibrium is, achieved where slope of indifference curve (MRS) = slope of, budget line (Px/Py)., MRS = Px ÷ Py (Ratio of prices of two goods), Given the indifference map (preference schedule) of, the consumer and budget or price line, we can find out, the combination which gives the consumer maximum, satisfaction. The aim of the consumer is to obtain highest, combination on his indifference map and for this he tries to, go to the highest indifference curve with his given budget, line. He would be in an equilibrium only at such point, which is common point between budget line and the highest, attainable indifference curve. A consumer is in equilibrium, at a point where budget line is tangent to indifference curve., At this point, slope of indifference curve (called MRS) is, equal to slope of budget line., , Two conditions under this approach are :, , C, , op, , yM, yK, , , , , , Economics 2018 | 1021, , (i) MR = MC, (ii) MC curve should cut the MR curve from below, or MC, should be rising., MR is the addition to TR from the sale of one more unit, of output and MC is the addition to TC for increasing the, production by one unit. In order to maximise profits, firms, compare its MR with its MC., As long as the addition to revenue is greater than the, addition to cost. It is profitable for a firm to continue, producing more units of output. In the diagram, output is, shown on the X-axis and revenue and cost on the Y-axis., The Marginal Cost (MC) curve is U-shaped and P = MR =, AR, is a horizontal line parallel to X-axis., , MC = MR at two points R and K in the diagram, but profits, are maximised at point K, corresponding to OQ level of, In the above fig, P is equilibrium point at which budget line, output. Between OQ. and OQ levels of output, MR, M just touches the highest attainable indifference curve, • Follow us on Telegram - https://t.me/copymykitab1

Page 12 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1022 | Economics 2018, exceeds MC. Therefore, firm will not stop at point R but, will continue to produce to take advantage of additional, profit. Thus, equilibrium will be at point K, where both the, conditions are satisfied., Situation beyond OQ level., MR < MC when output level is more than OQ, MR <, MC, which implies that firm is making a loss on its last unit, of output. Hence, in order to maximise profit a rational, producer decreases output as long as MC > MR. Thus, the, firm moves towards producing OQ units of output., , \ Real Income =, , (i) It is a intermediate good decause it is used by producer, during production process that is making tea and not, for final consumption., (ii) It is a final good as, it is purchased by school for final, consumption., , SECTION — B, , ita, , yM, yK, , , , , , Answer : An inflationary gap, in economics, is the amount, by which the actual gross domestic product exceeds, potential full-employment GDP. It is one type of output, gap, the other being a recessionary gap., Three measures to reduce this gap are :, 1. Fiscal Policy : Fiscal policy is the expenditure and, revenue (taxation) policy of the government to, accomplish the desired objectives., , , C, , op, , , , b, , , , , , , , , , , , , , , , , (iii)It is a final good as, it is purchased by a student for final, consumption., 18. Define multiplier. What is relation between marginal, propensity to consume and multiplier ? Calculate, the marginal propensity to consume if the value of, multiplier is 4., [3], Answer : In economics a multiplier is the factor by, which gains in total output are greater than the change in, spending that caused it. It is usually used in reference to the, relationship between investment and total national income., Relationship between marginal propensity to consume, and multiplier, There is a direct relationship between MPC and Multiplier, as, the higher the MPC, the higher the multiplier and vice, versa., 1, ⇒, Multiplier =, 1 − MPC, 1, ⇒, 4=, 1 − MPC, ⇒, MPC = 0.75, \, MPC = 0.75, 19. What is meant by inflationary gap ? State three measures, to reduce this gap., OR, What is meant by aggregate demand ? State is, components., [4], , , , , 13. Define money supply., [1], Answer : Money supply is the total amont of money in, circulation or in existence in a counter at a specific time., 14. Which of the following affects national income ?, (Choose the correct alternative), [1], (a) Goods and Services tax, (b) Corporation tax, (c) Subsidies, (d) None of the above, Answer : (d) None of the above., 15. Why does consumption curve not start from the origin ?, [1], Answer : As consumption includes autonomous consumption, and autonomous consumption can never be zero., 16. The central bank can increase availability of credit by :, (Choose the correct alternative)., [1], (a) Raising repo rate, (b) Raising reverse repo rate, (c) Buying government securities, (d) Selling government securities, Answer : (c) Buying government securities., 17. Given nominal income, how can we find real income ?, Explain., OR, Which among the following are final goods and which, are intermediate goods ? Given reasons., [3], (a) Milk purchased by a tea stall, (b) Bus purchased by a school, (c) Juice purchased by a student from the school, canteen, Answer : Real income can be calculated by applying the, following formula :, Real Income =, Nominal Income, × Price Index of Base year, Price Index of current year, , Nominal Income, × 100, PDP deflator, OR, , In case of excess demand (when current demand is more, than agreegate supply at full employment), the objective, of fiscal policy is to reduce agreegate demand., 2. Monetary Policy (Raise bank rate and CRR) :, Monetary policy of the central bank of a country to, control money supply and credit in the economy., Therefore, it is also called Central Bank’s Credit Control, , Consider price index of base year as 100, When nominal income is given, we can convert it into real, income with the help of GDP deflator., • Follow us on Telegram - https://t.me/copymykitab1

Page 13 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2018 | 1023, Policy. Money broadly refers to currency notes and, coins whereas credit generally means loans, i.e., finance, provided to others at a certain rate of interest. Monetary, measures (instruments) affect the cost of credit (i.e.,, rate of interest) and availability of credit. Thus, it helps, in checking excess demand when credit availability is, restricted and credit is made costlier., 3. Miscellaneous : Other anti-inflationary measures are, import promotion, wage freeze, control and blocking, of liquid assets, compulsory savings scheme for, households, increase in production by utilising idle, capacities, etc., OR, , the right. The exchange rate and trade policy affects net, exports., 20. The value of marginal propensity to consume is 0.6 and, initial income in the economy is ` 100 crores. Prepare, a schedule showing Income, Consumption and Saving., Also show the equilibrium level of income by assuming, autonomous investment of ` 80 crores., [4], Answer : Given that,, Marginal propensity to consume (MPC) = 0.6, Initial income = ` 100 crores, Autonomous investment = ` 80 crores, C = C + c( Y ), , Aggregate demand (AD) or domestic final demand (DFD) is, the total demand for final goods and services in an economy, at a given time. It specifies the amount of goods and services, that will be purchased at all possible price levels., , C = 0 + 0.6(Y), Income (`) Consumption Saving (`) Investment, 100, 60, 40, 80, 200, 120, 80, 80, 300, 180, 120, 80, 400, 240, 160, 80, 500, 300, 200, 80, , b, , Components of aggregate demand, AD = C + 1 + G + (x + m), , ita, , 1. Consumption, 2. Investment, , Aggregate Demand (AD) = Aggregate Supply (AS), , 1. Consumption : This is made by households, and, sometimes consumption accounts for the larger portion, of aggregate demand. An increase in consumption shifts, the AD curve to the right., , , , Therefore, the equilibrium level of income is ` 200 crores., 21. Explain the role of the Reserve Bank of India as the, “lender of last resort”., [4], Answer : A person or organisation which is ready to help, the individual or organisation who is in need of immediate, financial help to come out of the financial struggles is the, lender of the last resort. It means that if a commercial bank, fails to get financial accommodation from anywhere, it, approaches the Reserve Bank as a last resort. Reserve Bank, advances loan to such banks against approved securities., By offering loan to the commercial bank in situations of, emergency, the Reserve Bank ensures that :, , C, , op, , 2. Investment : Investment, second of the four, components of aggregate demand, is spending by firms, on capital, not households. However, investment is, also the most volatile component of AD. An increase, in investment shifts AD to the right in the short run, and helps improve the quality and quantity of factors of, production in the long run., , (i) The banking system of the country does not suffer from, any set back., , , , 3. Government : Government spending forms a large total, of aggregate damand, and an increase in government, spending shifts aggregate demand to the right. This, spending is categorized into transfer payments and, capital spending. Transfer payments include pensions, and unemployment benefits and capital spending is on, things like roads, schools and hospitals. Governments, spend to increase the consumption of health services,, education and to re-distribute income. They may also, spend to increase aggregate demand., , AD = C + 1 and AS = C + S, , (ii) Money market remains stable., 22. (a) Explain the impact of rise in exchange rate on, national income., (b) Explain the concept of ‘deficit’ in balance of, payments., [6], , , 4. Net Export, , yM, yK, , 3. Government Spending, , Answer : (a) If the exchange rate of a country falls with, respect to other country then its exports becomes cheap, 4. Net Exports : Imports are foreign goods bought by, while imports become expensive. For example : If exchange, consumers domestically, and exports are domestic, rate was US$1 = INR 60, and if the exchange rate decreased, goods bought abroad. Net exports is the difference, to US$1 = INR 70, then businesses that are selling their, between exports and imports, and this component can, products in the US will receive more money. So, if my, be net imports too, if imports are greater than exports., product was priced at US$5, I was receiving 5*60 = INR, An increase in net exports shifts aggregate demand to, 300, now the exchange rate depreciated to INR 70, so for, • Follow us on Telegram - https://t.me/copymykitab1

Page 14 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , , , , , , , , , , , ita, , b, , , , NNPMP = ` 9600 + (– 70) + 100, NNPMP = ` 9630 Crores, (b) GDPFC = NDPFC + Consumption of fixed capital, GDPFC = ` 9600 + 50, GDPFC = ` 9650 Crores, 24. Explain the meaning of the following :, [1], (a) Revenue deficit, (b) Fiscal deficit, (c) Primary deficit, OR, Explain the following objectives of government budget:, (a) Allocation of resources, (b) Reducing income inequalities., Answer : (a) Revenue Deficit : A revenue deficit occurs, when the net income generated, revenues less expenditures,, falls short of the projected net income. This happens when, the actual amount of revenue received and/or the actual, amount of expenditures do not correspond with budgeted, revenue and expenditure figure., (b) Fiscal Deficit : A fiscal deficit occurs when a government’s, total expenditures exceed the revenue that it generates,, excluding money from borrowings. Deficit differes from, debt, which is an accumulation of yearly deficits., (c) Primary Deficit : The deficit can be measured with, or without including the interest payments on the debt, as expenditures. The primary deficit is defined as the, difference between current government spending on goods, and services and total current revenue from all types of taxes, net of transfer payments., OR, (a) Allocation of Resources : Government budget helps, in allocating resources efficiently resources our scarce., Thus, budget allocate resources in such a manner. So, that country attains economic growth., (b) Reducing Income inequalities : Government, budget make every possible effort to reduce income, inequalities. Income inequalities are so much prevalent, in an economy like India., Thus, government budget reduces income inequalities., , op, , yM, yK, , the same priced product in the US that is priced at US$5,, I will be receiving 5*70 = INR 350. Similarly, for imports,, as the exchange rate depreciated to INR 70 and if I want, to purchase a Smartphone worth US$200; earlier I was, paying 200*60 = INR 12,000. Now I will pay, 200*70 =, INR 14,000., Exactly opposite will happen when exchange rate will, appreciate. For example : when US$1 = INR 60 will become, US$1 = INR 50., (b) The deficit in the Balance of Payment (BOP) is, governed by the balance of autonomous transactions in the, BOP. The BOP would show a deficit if the autonomous, receipts are lesser than the autonomous payments. As, autonomous receipts implies a receipt of foreign exchange, and autonomous payment implies a payment of foreign, exchange, so, it can be said that BOP would show a deficit, when the foreign exchange receipts are less than foreign, exchange payment which also means that the BOP deficit, would reflect depletion of foreign exchange reserves of the, country., 23. Calculate (a) Net National Product at market price, and, (b) Gross Domestic Product at factor cost :[4 + 2 = 62], (` in crores), (i) Rent and interest, 6,000, (ii) Wages and salaries, 1,800, (iii) Undistributed profit, 400, (iv) Net indirect taxes, 100, (v) Subsidies, 20, (vi) Corporation tax, 120, (vii) Net factor income to abroad, 70, (viii) Dividends, 80, (ix) Consumption of fixed capital, 50, (x) Social secutiry contribution by employers 200, (xi) Mixed income, 1,000, Answer : NDPFC = Wages and salaries + SSC by employer, + Rent and interest + Dividend + Corporation tax +, Undistributed profit + Mixed income, NDPFC = 1800 + 200 + 6000 + 80 + 120 + 400 + 1000, NDPFC = ` 9600 Crore, (a) NNPMP = NDPFC + NFIA + NIT, , , , C, , , , , , , , , , , , , , , , , , , , , , , , 1024 | Economics 2018, , ll, , • Follow us on Telegram - https://t.me/copymykitab1

Page 15 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET I, , , , Economics 2017 (Outside Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , (b) PPF is concave to the origin : The PPF is concave to, origin shows the tendency of increasing MRT., , SECTION–A, 1. Any statement about demand for a good is considered, complete only when the following is/are mentioned in it, (Choose the correct alternative) :, (a) Price of the good, (b) Quantity of the good, (c) Period of time, (d) All of the above, [1], , 7. Explain the problem of “how to produce”., , Answer : ‘How to produce’ refers to the choice of technique, of production. It has two categories :, (1) Labour-intensive technique : Which implies greater use, of labour than capital. It promotes employment., (2) Capital-intensive technique : Which implies greater, use of capital than labour. It promotes efficiency and, accelerates the pace of growth., , Answer : (a) Price of the good., , , , The choice of technique depends on the type of product, manufactured by a company. For eg.–A food and, beverage company can use hundreds of workers with, little application of capital (machinery) or can use more, machines with few workers in order to produce the, desired quantity of biscuits and soft drinks., , yK, ita, b, , 2. Demand for a good is termed inelastic through the, expenditure approach when if (Choose the correct, alternative), (a) Price of the good falls, expenditure on it rises, (b) Price of the good falls, expenditure on it falls, (c) Price of the good falls, expenditure on it remains unchanged, (d) Price of the good rises, expenditure on it falls., [1], , [3], , 3. Define indifference curve., , yM, , [1], , 8. Distinguish between ‘increase in demand’ and ‘increase in, quantity demanded’ of a good., OR, , C, , 4. A seller cannot influence the market price under (Choose, the correct alternative), (a) Perfect competition, (b) Monopoly, (c) Monopolistic competition, (d) All of the above, [1], Answer : (a) Perfect competition., 5. State any one feature of monopolistic competition., , [1], , Answer : Product differentiation is one of the main features, of monopolistic competition., 6. Give the meaning and characteristics of production, possibility frontier., [3], Answer : PPF is a curve showing different possible, combinations of two goods which can be produced with the, available resources., The main characteristics of PPF are:, (a) PPF always slopes downward from left to right : PPF, has a negative slope which implies that more than one, good can be produced only by loss of another good., , Explain the meaning of ‘Budget set’ and ‘Budget line’. [3], Answer : Difference between ‘increase in demand’ and, ‘increase in quantity demanded’ of a good :, Increase in Quantity, demaned, (1) Increase in demand refers (1) It refers to increase in, to increase in quantity, quatity demanded duce to, demanded due to change, decrease in own price of the, in other factors when, commodity when all other, own price of commodity, factors remains contant., remains constant., (2) It leads to forward shift- (2) It leads to downward moveing of demand curve., ment along the demand, curve from left to right., (3) For example–, (3) For example–, Increase in demand, , P (x)`, , op, , Answer : Indifference curve is a diagrammatic presentation of, an indifference set of a consumer. It is a locus of all such points, which show different combinations of two commodities, offering the same level of satisfaction to the consumer., , 10, O, , B, , A, D1, , Price, D2, , 10, 20, Q(Units), , Px(`), , Answer : (c) Price of the good falls, expenditure on it remains, unchanged., , A, , P, , B, , P1, , x, , D1, O, , 10, , 20 30, Qx unit, , x, , In the above graph price is, constant at `10. But demand In the above graph demand is, increases from A to B due to increasing from A to B due to, other factors., changes in own price of a commodity from op to op1., , • Follow us on Telegram - https://t.me/copymykitab1

Page 16 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1026 | Economics 2017 (Outside Delhi), , Market Supply Schedule, , OR, Meaning of Budet set : Budget set refers to attainable, combinations of a set of two goods, given prices of goods and, income of the consumer. The budget set equation is :, P1 X1 + P2 X2 ≤ Y, Where P1 = Price of good 1 ; X1 Quantity of good 1 ; P2 Price, of good 2 ; X2 = Qunatity of good 2, , 9. Explain with the help of a numerical example, the meaning, of diminishing marginal rate of substitution., [4], , Qx (firm’B), (units), , 5, , 0, , 0, , yK, ita, b, , Answer : Suppose a consumer consumes two goods X and Y. He, wants one more unit of X in exchange for some amount of Y. It, is explained in the following numerical example :, , Y, , Price, , Marginal rate of, substitution (MRS), —, 4Y : 1X, 3Y : 1X, , Qx (firm ‘A’), (Units), , Give the behaviour of marginal product and total product, as more and more units of only one input are employed, while keeping other inputs as constant., [4], , , , Answer : Market supply is a table showing various amount of, a commodity that all the firms/producers in the industry are, willing to sell at different possible prices of that commodity., For example : The table is showing market supply. It is based, on the ansumption that there are only two firms (A and B), supplying Good-X in the market, , S2, Quantity, , op, , 10. Define market supply. Explain the factor ‘input prices’, that can cause a change in supply., OR, , P, , S1, , , , C, , Hence, we can say that marginal rate of substitution is always, diminishing., , Supply curve shifts, backward, in case of, increase in, input price, K, , S3, , yM, , Since marginal utility of good X goes on falling with every, increase in units of X, therefore, consumer will be willing to, sacrifice lesser quantity of good Y for obtaining additional, units of X., Initially for getting an additional unit of X, consumer is, willing to sacrifice (20-16)=4 units of Y. So MRS is 4Y : 1X., When one more unit of X in acquired then (16-13) = 3 units, of Y are sacrificed. MRS has fallen to 3Y : 1X. The reason is,, as more and more units of X are consumed, marginal utility, from each successive unit of X goes on falling this makes the, consumer to sssacrifice less and less units of Y to get additional, unit of X., , Market, supply, (Units), 0, , 10, 10, 5, 10 + 5 = 15, 15, 20, 10, 20 + 10 = 30, 20, 30, 15, 30 + 15 = 45, The above table shows the total market supply assuming only, two firms in the market., Effect of ‘input prices’ causing change in supply : Input, price may increase or decrease. In case of increase in input, price. Cost of production tends to rise hence producers will, supply less of the commodity at its existing price. It will cause, the backward shifting of the supply surve. Opposite will, happen in case of decrease in input price. Cost of production, tends to decline hence more supply of the commodity will, be given at the existing price of the commodity. In such case, forward shifting of supply curve will take place., , Meaning of Budget line : Budget line is a line showing, different possible combinations of good 1 and good 2, which, a consumer can buy, given his budget and the prices of good1 and good-2. Anywhere on the budget line, a consumer is, spending his entire income either on good 1 or on good 2 or, on both good 1 and good 2, , Combination of goods, X and Y, 8X + 20Y, 9X + 16Y, 10X + 12Y, , Px (Price of, Good-x)( `), , Supply curve shifts, forward in case of, decrease in input price, X, , OR, Consider a situation when land is a fixed factor and labour, is a variable factor and the farmer is producing wheat. Since, land is a fixed factor, he can produce more of wheat only by, using more and more of labour. As more and more labour is, applying on a fixed piece of land total productivity increases, but at a diminishing rate. It occurs due to the operation of law, of variable proportion. It can be understood by the following, table :, Law of variable proportions, Units of Units of, Total, Marginal, Remarks, Land, Labour Product Product, 1, 1, 2, 2, Increasing MP, implying increas1, 2, 5, 3, ing returns to a, 1, 3, 9, 4, factor, 1, 4, Diminishing MP, 12, 3, implying dimin1, 5, 14, 2, ishing returns to, 1, 6, 15, 1, a factor, 1, 7, 15, 0, Negative, MP, implying, negative, 1, 8, 14, –1, returns to a factor, , • Follow us on Telegram - https://t.me/copymykitab1

Page 17 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2017 (Outside Delhi) | 1027, , O, , Price elasticity of demand (Ed) = ?, , , , , , , , Change in Quantity demanded (∆Q) = 20%, , K, , Change in prices (∆P) = New price - Original price, 12 – 10 = ` 2, , , , TP, , Stage I, , Stage II, S, Diminishing, return, , X, Negative, return, , Ed = 20, 20, Ed = 1, S, , X, , Now, further takes this elasticity of demand in another, situation when price changes from `10 to `13 per unit, , MP, , yK, ita, b, , Percentage change in price =, , C, , Answer : Original Price (P) = `10 per unit, , Change in price, × 100, Original price, , 13 – 10, × 100, 10, = 3 × 100 = 30%, 10, , =, , Price elasticity of demand =, , Percentage change in quantity demanded, Percentage change in price, , 1 =, , Percentage change in quantity demanded, 30, , Percentage change in quantity demanded = 30 × 1, = 30%, , , op, , yM, , The above figure shows :, (1) MP tends to rise till OL units of labour are used. This, corresponds to point E on the MP curve. It shows increasing returns to a factor., (2) When MP is rising TP tends to rise at an increasing rate., This occurs till point K on the TP curve. This corresponds, to the situation of increasing returns to a factor., (3) Beyond OL units of labour. MP tends to decline and, TP increases only at diminshing rate. It occurs between, E and S on MP curve and between K and T on TP curve., This is a situation of diminishing returns to a factor., (4) When employment of labour exceeds OS units, MP becomes negative. Accordingly, TP starts declining. This is, a situation of negative returns to a factor, occured beyond, point T. TP curve and beyond S on MP curve., 11. Explain “perfect knowledge about the markets” feature of, perfect competition., [4], Answer : Perfect knowledge means that both the buyers, and sellers have full knowledge about the prices and costs, prevailing in the different parts of the market. All firms have, equal access to technology and inputs. This ensures the same, per unit cost of production by all the firms in the industry., Implication of perfect knowledge : No firm is in position to, change a different price and no buyer will pay a higher price., As a result, uniform price prevails. Since, there is uniform, price and uniform cost, all firms earn uniform profits because, profit equals price-cost., 12. When the price of a good rises from ` 10 per unit to `, 12 per unit, its quantity demanded falls by 20 percent., Claculate its price elasticity of demand. How much would, be the percentage change in its quantity demanded, if the, price rises from ` 10 per unit ` 13 per unit ?, [6], , , , L, , Units of variable factor, (Labour), , , , Percentage change in quantity demanded, Percentage change in Pr ice, , , , Marginal Product, O, , Price elasticity of demand =, , E, , Change in price, × 100, Original price, , = ∆P × 100, P, 2, =, × 100, 10, = 20%, , , , L, Increasing, return, , Percentage change in price =, , Stage III, , , , Y, , Profit of, inflexion, , , , Total Product, , Y, , 13. Complete the following table :, Output, (units), 1, 2, 3, 4, 5, , Average, Fixed, Cost (`), 60, —, 20, —, 12, , [6], , Marginal Average, Cost (`) Variable, Cost (`), 20, —, —, 18, —, , —, 19, 18, —, —, , Average, Cost (`), —, —, —, —, 31, , Answer :, Output, (units), 1, 2, 3, 4, 5, , AFC (`) MC (`) AVC (`), 60, 30, 20, 15, 12, , New price (P1) = `12 per unit, • Follow us on Telegram - https://t.me/copymykitab1, , 20, 18, 16, 18, 23, , 20, 19, 18, 18, 19, , AC (`), 80, 49, 38, 33, 31

Page 18 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1028 | Economics 2017 (Outside Delhi), , 14. From the following total cost and total revenue schedule, of a firm, find out the level of output, using marginal cost, and marginal revenue approach, at which the firm would, be in equilibrium. Give reasons for your answer., 1, 2, 3, 4, 5, Answer :, , Total Revenue (`), , Total Cost (`), , 10, 18, 24, 28, 30, , 8, 15, 21, 25, 33, , Output TR (`) TC (`) MR MC, 1, 10, 8, 10, 8, 2, 18, 15, 8, 7, 6, 6, 3, 24, 21, 4, 4, 4, 28, 25, 5, 2, 8, 30, 33, , Remark, , In the above figure, OP is the equilibrium price and OP1 is, the market price. At OP1 price quantity demanded is OQ, and quantity supplied is Q2. Thus there is excess demand, equal to AB = (OQ1– OQ2). This will result in competition, among buyers. Price will rise leading to rise in supply and fall, in demand as shown by arrows along DD1 and SS1 curves., This change will contiune till price rises to OP which is the, equilibrium price., , yK, ita, b, , = in equilibrium, , The firm will be in equilibrium at output unit 4, where, MC = MR i.e. 4., , At this point the two conditions of MC= MR approach, fulfills. These conditions are :, (i) MC should be equal to MR., , yM, , (ii) At the point of equilibrium, MC should be rising i.e. MC, should rise just after the equilibrium unit., , Both these conditions are fulfilled at output unit 4., Where MC = MR and MC is rising on the next unit, than revenue. Hence firm will be in equilibrium at output, unit 4., , op, , , , When there is excess demand : Excess demand refers to a, situation where at a given price, quantity demanded exceeds, quantity supplied. The situation of excess demand can be, explained with the help of following graph and schedule :, , C, , 15. Distinguish between perfect oligopoly and Imperfect, oligopoly. Also explain the “interdependence between the, firms” feature of oligopoly., OR, Explain the meaning of excess demand and excess supply, with the help of a schedule. Explain their effect on, equilibrium price., [6], Answer : Difference between perfect oligopoly and, imperfect oligopoly :, In an oligopoly market when firms produce homogenos, products, it is called perfect oligopoly. When firms produce, differentiated products it is called imperfect oligopoly., Interdependence between the firms : There is, interdependence of firms for taking decision about price and, output. Since there are a few firms, a change in price and, output of a product by any firm is likely to influence the, output and profit of rival firms whose reaction may prove, counter productive.This makes the firms mutually dependent, on each other in case of decisions about price and output., , Price, 14, 12, 10, , Quantity, Demanded, 1, 2, 3, , 7, 6, 5, , 8, 6, 4, 2, , 4, 5, 6, 7, , 4, 3, 2, 1, , Quantity Supplied, , , , , , , Excess Supply, = Market Equilibrium, , , , , , , , Excess Demand, , When there is excess supply : Excess supply refers to a, situation where quantity supplied exceeds quantity demanded., The situation of excess supply can be explained with help of, following graph :, D, , Price, , Output (units), , For example, there is interdependence of decision about price, between pepsi and cola. If pepsi reduces price, cola-cola may, do the same substantially., OR, , P1, , S1, E, , P, , D1, , S, O, , Q1 Q Q 2, Quantity, , In the above figure, OP is the equilibrium price and OP1 is, the market price. At OP1 price, quantity supplied is OQ2, and quantity demanded is QQ1. Thus there is excess supply, , • Follow us on Telegram - https://t.me/copymykitab1

Page 19 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2017 (Outside Delhi) | 1029, , equal to AB = (QQ2 – OQ1). This will lead to competition, among sellers. Price will fall leading to fall in supply and rise, in demand as shown by arrows along DD1 and SS1 curves., Process of this change will contiune till price falls to OP, which is equilibrium price., , Section–B, 16. Demand deposits include (Choose the correct alternative), (a) Saving account deposits and fixed deposits, (b) Saving account deposits and current account deposits, (c) Current account deposits and fixed deposits, (d) All types of deposits, [1], Answer : (b) Saving account deposits and current account, deposits., 17. Define marginal propensity to consume., [1], , (ii) Intermediate goods : All goods which are used as raw, material for further production of other goods, or for resale in, the same year are known as intermediate goods. For example, flour, milk, sugar, salt, fuel, etc. When purchased by a firm, in order to prepare biscuits are intermediate goods. The cloth, if purchased by a dress maker is also an intermediate good., Machine if purchased by a firm for resale in the same year is, an intermediate good., 22. Explain “difficulty in storing wealth” problem faced in the, barter system of exchange., OR, , [1], , op, , 19. Define Government budget., , yM, , , , , , yK, ita, b, , Answer : MPC is the ratio of change in consumption to, ∆C, change in income. Symbolically, MPC =, ∆Y, ∆C = change in consumption, Where,, ∆Y = change in income, MPC = Marginal propensity to consume., 18. If the marginal propensity to consume is greater than, marginal propensity to save, the value of the multiplier, will be (Choose the correct alternative), [1], (a) greater than 2, (b) less than 2, (c) equal to 2, (d) equal to 5, Ans : (d) equal to 5, , consumers for satisfaction of their wants and by producers, for capital formation. For examples, biscuits, flour, cloth are, final goods when purchased by a consumer for their personal, use or for satisfaction of their wants. Machine bought by a, household is final good but machine bought by a firm for its, use in production is a final good., , C, , Answer : Government budget is a detailed statement of the, estimates of government receipts and government expenditure, during a financial year., 20. What is meant by depreciation of domestic currency ? [1], Answer : Depreciation of domestic currency means fall in the, value of domestic currency in relation to foreign currency i.e.,, a situation where exchange rate is determined by the market, forces of supply and demand for foreign exchange in the, international money market., 21. Explain with the help of an example, the basis of classifying, goods into final goods and intermediate goods., [3], Answer : The basis of classifying goods into final goods and, intermediate goods is that whether the good is purchased or, for final use or for use in further production., (i) Final goods : All goods which are meant either for, consumption by consumers or for investment by firms are, called final goods. They are meant for final use and the final, use of a product is only for consumption or investment. In, other words, final goods are acquired for own use i.e. by, ** Answer is not given due to change in syllabus, , Explain the “medium of exchange” function of money. **, [3], , Answer : In the barter system of exchange it is difficult for, the people to store wealth or generalise purchasing power for, future use in the form of goods like cattle, wheat, potatoes, and other perishable items, etc. Holding of stocks of such, goods involve costly storage and deterioration., , 23. Distinguish between direct taxes and indirect taxes. Give, an example of each., [3], Answer : Difference between direct and indirect taxes :, Direct Tax, Indirect tax, (1) When liability of paying (1) When liability of paying, a tax and the burden of, tax is on one person but, that tax fall on the same, the, burden of that, person, the tax is called, tax falls on other person., a direct tax., The tax is called an indirect tax., (2) The burden of direct tax (1) The burden of indirect, cannot be shifted on to, tax can be shifted on to, the others., the others., (3) Examples are-income (1) Examples are-sales tax,, tax, corporate tax, gift, custom duty, service tax,, tax, etc., etc., 24. Explain the “bankers’ bank” function of the central, bank., [4], OR, Explain the process of credit creation by commercial, banks., Answer : As a banker’s bank it works in a similar way as, commercial banks deals with its customers. It accepts deposits, from the commercial banks and offers them loans. The central, , • Follow us on Telegram - https://t.me/copymykitab1

Page 20 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1030 | Economics 2017 (Outside Delhi), , bank also provides ‘clearing house’ facility to the commercial, banks. It is a cheque clearing facility provided at one centre, to all the banks. Central bank is the custodian of their cash, reserves. Banks of the country are required to keep a certain, percentage of their deposits with the central bank and in, this way the central bank is the ultimate holder of the cash, reserves of commercial banks., OR, , 26. Explain how government budget can be helpful in bringing, economic stabilization in the economy., [4], Answer : Government budget can be helpful in bringing, economic stabilization in the economy. Economic instability, occurs where there is frequent price fluctuations in the, economy. Such price fluctuations can be controlled through, budget by taxes, subsidies and expenditure. For instance, if, there is the condition of inflation (continuous rise in prices),, government can reduce its own expenditure and tax rates can, be increased or subsidies can be withdrawn or reduced to, control the expenditure on the part of consumer and producer, both. While in the condition of depression characterised by, falling output and prices, government can reduce taxes and, grant subsidies to encourage spending by people., 27. Distinguish (a) between current account and capital, account, and (b) between autonomous transactions and, accommodating transactions of balance of payments, account., [6], Answer : (a), , op, , yM, , yK, ita, b, , The process of credit creation by commercial bank can be, easily understood by taking an example. Suppose a person,, say X, deposits ` 2000, with a bank and the LRR is 10%, which means the bank keeps only the minimum required, ` 200 as cash reserve. The bank can use remaining amount, ` 1800 (= 2000–200) for giving loan to someone. The bank, lends ` 1800 to, say F, for their purpose an account is opened, in the name of Y and amount is credited in his account. This, is the first round of credit creation in the form of secondary, deposit (` 1800). Which equals 90% of the initial deposit., Now again from the deposit of Y bank keep 10% or LRR, i.e. 180 and remaining ` 1620 is advanced to, say Z. The, bank get new demand deposit. This is the second round of, credit creation till secondary deposit becomes zero. In the end, volume of total credit created in this way becomes multiple, of initial deposit. The quantitative outcome is called money, multiplier. In short, money (or credit) creation by commercial, banks depends on two factores (i) amount of initial deposit, (ii) and, LRR. Symbolically :, 1, Total credit creation = Initial deposit X, LRR, 25. An economy is in equilibrium. From the following data,, calculate the marginal propensity to save :, [4], , Hence the value of MPS = 0.25, , (a) Income = 10,000, , C, , (b) Autonomous consumption = 500, , (c) Consumption expenditure = 8,000, Answer : Applying the equation :, , , c = c + by, , , , , , , , , , , , , , , , , , , , , , , , Where,, , c = consumption expenditure (8, 000), c = autonomous consumption (–500), , b, y, 8,000, 8000, 8000 – 500, 7,500, , =, =, =, =, =, =, , MPC (marginal propensity to consume), Income (10,000), 500 + b × 10, 000, 500 + 10, 000b, 10,000b, 10,000b, 7,500, b =, 10,000, b = 0.75, MPC = 0.75, , Now,, MPS + MPC =, =, =, =, , 1, 1 – MPC, 1 – 0.75, 0.25, , Current Account BOP, Capital Account BOP, (1) It records exports and (1) It records all such transimports of goods and, actions between resiservices and current, dents of country and, transfers., rest of the world which, causes a change in the, ownership of the assets., (2) Transactions of current (2) Transaction of capital, account does not affect, account affect the asset, asset liability status of, liability status of the, the country in relation, country in relation to, of rest of the world, rest of the world., (3) Current account trans- (3) Capital account transactions impact capital, actions impact current, account transactions,, account transactions., Example : Deficit on Example : FDI leads to factor, current account often, income to rest of the world., leads to borrawing., (4) Principal components (4) Principal components, of current account BOP, of capital account BOP, are :, are :, (a) export and import of, (a) borrowing, and, goods, (b) export and import of, (b) foreign investment, services, and, (c) current transfers, , (b), Autonomous, Accommodating, transactions, transactions, (1) Autonomous transa- (1) Accommodating transtions refer to such BOP, actions are free from the, transations which are, considerations of profit., undertaken for consideration of profit., , • Follow us on Telegram - https://t.me/copymykitab1

Page 21 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2017 (Outside Delhi) | 1031, , earned by the company within India’s domestic territory, irrespective of ownership of the company., (b) Salaries of Indians working in Russian embassy in, India : No, it is not included in domestic product of, India because Russian emabssy in India is not a part of, domestic teritory of India (but a part of domestic territory of Russia)., (c) Profits earned by a branch of State Bank of India in, Japan : No, It is not included in domestic income of, India because it is not earned in Indian domestic territory., , (2) Autonomous items are (2) Accomodating item are, the cause of BOP imbalmeant to restore BOP, ance (BOP surplus or, balance., BOP deficit), (3) Autonomous items may (3) Accommodating items, involve the movement of, do not involve the movegoods across the borders, ment of goods across the, (like export and import, borders. These items, of consumer goods or, only involve the movecapital good), ment of official reserves, with the RBI., (4) Autonomous items are (4) Accomodating items are, classified as above the, classified as ‘below the, line items of BOP., line’ items of BOP., , , , , Answer :, NI = NDPfc + NFIA (Net factor income from abroad), NDPfc = COE + Mixed income + operating surplus, = COE + M I + (Rent + Royalty + interest + profit), = 2,000 + 7,000 + 400 + 500 + 900, = ` 10,800 crores, NNPfc or NI = NDPfc – Net factor income to abroad, = 10,800 – 50 = 10,750 crore., , , 30. Given a consumption curve, outline the steps required to, be taken in deriving a saving curve from it. Use diagram., [6], Answer :, , (3) Expenditure on purchase of second-hand goods is, excluded from national income because this type of, expenditure is not on currently produced goods., (4) Expenditure on purchase of old shares/bonds or new, shares/bonds, etc., is excluded because it is not payment, for goods and services currently produced. It shows, mere transfer of property from one person to another., If its from abroad, being transfer payment are also not, included., (6) Imputed expenditure on own account output (e.g.-owner, occupying his house, self-consumed output by a farmer), should not be included., , I (income), C (Consumption), , Y, B, C, , S1, (Saving), , 45°, O, , B1, , S, , X, (income), , In the above diagram :, CC = Consumption function, OI = 45° degree line showing income drawn from the, origin O., ­, , OR, , Consumption/Saving, , , , C, , (2) Government expenditure on all transfer payments such, as scholarship, unemployment allowance, old age, pension, etc., , , , op, , yM, , Answer : The following precautions need to taken for correct, estimation of national income by expenditure method :, (1) To avoid double counting, expenditure on all intermediate goods and services is excluded. For example, purchase, of vegetables by a restaurant, expenses on electricity by a, factory., , , , , , yK, ita, b, , 28. Explain the precautions that should be taken while, estimating national income by expenditure method. [6], OR, Will the following be included in the domestic product of, India ? Give reasons for your answer., (a) Profits earned by foreign companies in India., (b) Salaries of Indians working in the Russian Embassy, in India., (c) Profits earned by a branch of State Bank of India in, Japan., , 29. Calculate (a) National Income, and (b) Net National, Disposable Income : **, [6], (`) in crores, (i) Compensation of empolyees, 2,000, (ii) Rent, 400, (iii) Profit, 900, (iv) Dividend, 100, (v) Interest, 500, (vi) Mixed income of self-employed, 7,000, (vii) Net factor income to abroad, 50, (viii) Net exports, 60, (ix) Net indirect taxes, 300, (x) Depreciation, 150, (xi) Net current transfers to abroad, 30, , (a) Profit earned by foreign companies in India : Yes, it is, included in domestic income of India, because profits are, , ** Answer is not given due to change in syllabus, , • Follow us on Telegram - https://t.me/copymykitab1

Page 22 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1032 | Economics 2017 (Outside Delhi), , B = Breakeven point where consumption = income, i.e, a, point where there is no saving., , Take a point B on consumption curve and from it, draw a perpendicular on x-axis intersecting it a point, B1., , Economics 2017 (Outside Delhi), , (3), , Join points S and B, and extend the straight line upward and thus we get saving curve SB1S1., , In this way saving curve is diagrammatically drawn from, consumption curve., , SET II, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining questions have been asked in previous sets., , Output (units), , 1, , 2, , 3, , 4, , 5, , Total Revenue (`), , 16, , 30, , 42, , 52, , 60, , Total Cost (`), , 14, , 27, , 39, , 49, , 61, , 0, 1, 2, 3, 4, 5, , 30, —, 78, —, —, 150, , Average, Variable, (`), , Marginal, Cost (`), , —, —, 23, —, —, , 25, —, —, 23, —, , Average Fixed, Cost (`), , 30, —, 10, —, 6, , Answer : The equilibrium level of output will be 4 units. This, is because at this point the two conditions of equilibrium (using MR-MC approach) are met. This can be seen as follows :, We are given the Toal Revenue (TR) and Total Cost. From, here, we can find Marginal Revenue (MR) and Marginal Cost, (MC), as given in the following schedule., Total Revenue, Units, (TR), , Marginal, Revenue, (MR), , Total, Cost, (TC), , Marginal, Cost, (MC), , 1, , 16, , –, , 14, , –, , 2, , 30, , 14, , 27, , 13, , 3, , 42, , 12, , 39, , 12, , 4, , 52, , 10, , 49, , 10, , 5, , 60, , 8, , 61, , 12, , Here, as we can see, the first and other conditions of, equibrium through MR-MC approach are being met at unit, 4. That is, First Condition : MR = MC = 10, Second Condition : MC is rising from this point and meets, MR from below., Thus, equilibrium output is 4 units., , Answer :, Output, Total, (units) Cost (`), 0, 1, 2, 3, 4, 5, , 30, 55, 78, 99, 122, 150, , Average, Variable, (`), , Marginal, Cost (`), , 25, 24, 23, 23, 24, , 25, 23, 21, 23, 28, , Average, Fixed Cost, (`), 30, 15, 10, 7.5, 6, , , , , , Total, Cost (`), , C, , Output, (units), , op, , yM, , yK, ita, b, , 7. Explain the problem of “for whom to produce”., [3], Answer : The problem of ‘for whom to produce’ focuses on, the distribution of the final goods and services produced., The distribution of the final goods and services is equal to, the distribution of National Income among the factors of, production such as land, labour, capital and entrepreneur., The economy needs to decide a mechanism of distributing, the final goods and services among the different segments of, population, to reduce the inequality of income. This problem, is concerned about who gets more or who gets less ? Which, goods should be made available free or at low (nominal) price, and to which segment ?, 13. Complete the following table :, [6], Complete the following table :, , Maximum Marks : 100, 14. From the following table find out the level of output at, which the producer will be in equilibrium (use marginal, cost and marginal revenue approach). Give reasons for, your answer., [6], , , , (1), , Take OS on Y-axis of lower part as equal to OC (OS, = OC). This gives point S from where saving curve, will start., , , , , , Following are the steps used in drawing saving curve, from consumption function :, , (2), , 21. Explain the circular flow of income., , [3], , Answer : Circular flow of income refers to continuous circular, flow of goods, services and money income among different, sectors of an economy. Flow of money is the aggregate, value of goods and services either as factor payments or, as expenditure on goods and services. It is circular since it, has neither any beginning nor an end. It can be explained, as household sector supply factor services and spend their, , • Follow us on Telegram - https://t.me/copymykitab1

Page 23 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2017 (Outside Delhi) | 1033, , income on consumption. The firms used these services in, producing goods and other services. The households as owner, of factors for production receive the payments in terms of, money or reward for rendering productive services. The, recipients of these incomes (i.e. households) in turn, spend, their incomes on purchase of goods and services to satisfy, their wants. In short, income is first generated by production, units, then distributed among households for rendening, productive services and ultimately comes back to production, units by way of expenditure by the households., Circular flow works on two principles :, , (6) Sale of bonds by a company should also be excluded, since it is merely a financial transaction which does, not contribute directly to the flow of goods and, services., (7) Income of a smuggler should also be excluded from, national income., OR, , , , (a) Financial assistance to flood victims : This will not, be included in the national income since it is a part of, transfer payment., (b) Profits earned by the branches of a foreign bank in, India : This is not to be included in the national income, of India since it is earned by a foreign bank., , (1) In an exchange process, the seller (producer) receives the, same amount which the buyer (or consumer) spends., (2) Goods and services flow in one direction and the money, payments to acquire them flow in the return direction, giving rise to a circular flow., , OR, , yK, ita, b, , 28. Explain the precautions that are taken while estimating, national income by value added method., [6], , (c) Salaries of Indians working in the American Embassy, in India : It is included in national income of India since, Indian employees of American embassy are the normal, resident of India, , 29. Calculate the (a) Net National Product at market price,, and (b) Gross National Disposable Income : **, [6], Answer :, , Will the following be included in the national income of, India ? Give reasons for your answer., , (i), , Mixed income of self-employed, , , , (a) Financial assistance to flood victims, , (` in crores), 8,000, , (ii) Depreciation, , (c) Salaries of Indians working in the American Embassy, in India, Answer : Precautions that are taken while estimating, national income by value added method :, , (iv) Rent, , 600, , (v), , 700, , , , , , , , op, , , , (vii) Net indirect taxes, , , , , (x), , 60, (–) 50, , Net current transfers to abroad, , Answer : Calculate (a) NNPmp (b) GDI, (a) NNPmp (Net national product at market price), , , , , , , , NDPfc = COE + NI + OS (Rent + interest + profit), = (vi) + (i) + (iv) + (v) + (iii), = 3,000 + 8,000 + 600 + 700 + 1,000, = 13, 300 crores, NNPmp = NDPfc (viii) + (vii), , , (5) But the value of sale and purchase of second hand, goods should be excluded., , 500, , , , , , (ix) Net exports, , , , (4) Value of own-account production of fixed assets by, enterprises, government and the households should, be included., , 3,000, , (viii) Net factor income to aborad, , (2) Imputed value of goods and services produced for, self consumption or for free distribution should be, included., (3) Only value added and not value of output by production units should be included., , Interest, , (vi) Compensation of employees, , (1) Imputed rent of owner occupied houses be included, because all houses have rental value irrespetive of its, use by self or tenant., , 200, 1,000, , , , (iii) Profit, , C, , , , yM, , (b) Profits earned by the branches of a foreign bank in, India, , = 13,300 – 60 + 500, = 13,740 crores., , • Follow us on Telegram - https://t.me/copymykitab1, , 20

Page 24 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET III, , , , Economics 2017 (Outside Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the, remaining questions have been asked in previous sets., , SECTION–A, 7. Explain the problem of “what to produce”., , Output (units), , 1, , 2, , 3, , 4, , 5, , Total Cost (`), , 9, , 17, , 24, , 29, , 36, , Total Revenue (`), , 11, , 20, , 27, , 32, , 35, , Answer :, , [3], , Total Total, Output, MC, cost Revenue, (Units), (`), (`), (`), , Answer : Problem of ‘what to produce’ : The problem of, what to produce means which goods and services and in, , MR, (`), , Profit, (TRTC), , what quantities are to be produced by an economy. We can, , 1, , 9, , 11, , 9, , 11, , 2, , produce a number of commodities with our limited resources,, , 2, , 17, , 20, , 8, , 9, , 3, , for example, the choice can be between consumer goods and, , 3, , 24, , 27, , 7, , 7, , 3, , decide whether to produce luxirious or necessities. More of, , 4, , 29, , 32, , 5, , 5, , 3, , one commodity can be produced only at the lost of another., , 5, , 7, , 3, , –1, , yK, ita, b, , capital goods. Within consumer goods, it is neecessary to, , The guiding principle while choosing goods and services, is to, obtain maximum utility., 13. Complete the following table :, Fixed, , Average, Variable, Cost (`), , Marginal, Cost (`), , Total, Cost, (`), , 40, , —, , —, , —, , 232, , —, , —, , 54, , —, , —, , 1, , 2, , 60, , 56, , 3, , —, , 54, , 4, , 30, , —, , 5, , —, , Answer :, , C, , 1, , Cost (`), 120, , yM, , (units), , Average, , —, , 35, , equilibrium, point, , The producer will get the maximum profit at the point where, firm is in equilibrium. From the above data it is clear that, firm is in equilibrium at unit 4 where, MC=MR. i.e. 5. At, this point the two conditions of MC=MR approach fulfills., These conditions are :, , [6], , op, , Output, , 36, , Remark, , (i) MC should be equal to MR., (ii) At the point of equilibrium. MC should be rising i.e., MC, should be rising just after the equilibrium point. Both, these conditions are fulfilled at output unit 4. Where,, MC = MR and MC is rising on the next unit than revenue., Hence, firm will be in equilibrium at output unit 4., , SECTION–B, , AFC (`), , AVC (`), , MC (`), , T C (`), , 1, , 120, , 40, , 160, , 160, , 2, , 60, , 56, , 72, , 232, , 3, , 40, , 54, , 50, , 282, , 4, , 30, , 54, , 54, , 336, , 5, , 24, , —, , —, , 1, , 16. Define revenue deficit., , Answer : Marginal propensity to save (MPS) is the ratio of, change in saving to change in income. It can be shown as :, MPS = ∆S, ∆Y, Where, , , 14. From the following data find out the level of output that, will give the producer maximum profit (use marginal cost, and marginal revenue approach). Give reasons for your, answer., [6], , [1], , Answer : Revenue deficit is the excess of revenue expenditure, over revenue receipt. Symbolically it is represented as Revenue, deficit = Revenue expenditure - Revenue Receipt, 20. Define marginal propensity to save., [1], , , , Output, (units), , ∆S = change in saving, ∆Y = change in income, , 21. Distinguish between stocks and flows. Give an example of, each., [2], , • Follow us on Telegram - https://t.me/copymykitab1

Page 25 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2017 (Outside Delhi) | 1035, , (v) Rent, (vi) Interest, (vii) Net factor income from abroad, (viii) Net current transfers to abroad, (ix) Net indirect taxes, (x) Depreciation, (xi) Net exports, , Answer :, , (2), (3), , (2), (3), , (4), , Answer : Calulate (a) GNPmp (b) NNDI, (a) GNPmp = ?, , , , NDPfc = COE + MI + OS (Rent + profit + interest), (i) + (iii) + (v) + (ii) + (vi), = 2500 + 7500 + 400 + 700 + 350, = ` 11,450 crores, NNPmp = NDPfc + NFIA + Net indirect tax., = NDPfc + (vii) + (ix), , , , , , , , , = 11, 450 + 50 + 150, = ` 11,650 crores, , GNPmp = NNPmp + Depreciation, = NNPmp + (x), = 11,650 + 70, = ` 11,720 crores., , C, , op, , yM, , 29. Calculate the (a) Gross National Product at market price,, and (b) Net National Disposable Income : **, [6], (` in crores), (i) Compensation of employees, 2,500, (ii) Profit, 700, (iii) Mixed income of self-empolyed, 7,500, (iv) Government final consumption expenditure 3,000, , , , yK, ita, b, , Answer : Non-debt creating capital receipts are the receipts, which do not create any liability of repayment on the, government rather it makes only addition to the existing, capital account. For example-recovery of loans, proceeds, from sale of public enterprises (i.e. disinvestment etc.). These, do not give rise to debt., , , , 26. What are non-debt creating capital receipts ? Give two, examples of such receipts., [4], , , , , , (4), , (1), , Flow, Flow refers to the value, of a variable during a, period of time., It is measured per hour,, per month or per year., Flow impacts the stock,, greater the flow of income greater is the stock, of wealth with the people, Example : Export and, imports, , , , (1), , Stock, Stock refers to the value, of a variable at a point of, time., It is measured at a specific, point of time., Stock impacts the flow., Greater the stock of capital, greater is flow of, goods and services., Example : Capital and, quantity of money., , 400, 350, 50, 100, 150, 70, 40, , ** Answer is not given due to change in syllabus, , • Follow us on Telegram - https://t.me/copymykitab1

Page 26 :
Downloaded from CopyMyKitab, , SET I, , , , Economics 2017 (Delhi), , Visit our Site - https://copymykitab1.blogspot.in/, , Maximum marks : 100, , , , Time allowed : 3 hours, , SECTION–A, , C, , op, , yM, , yK, ita, b, , 1. The demand of commodity when measured through the, expenditure approach is inelastic. A fall in its price will, result in : (Choose the correct altemative), [1], (a) no change in expenditure on it., (b) increase in expenditure on it., (c) decrease in expenditure on it., (d) any one of the above., Answer : (c) decrease in expenditure on it., 2. As we move along a downward sloping straight line, demand curve from left to right, price elasticity of, demand : (Choose the correct alternative), [1], (a) remain unchanged, (b) goes on falling, (c) goes on rising, (d) falls initially then rises, Answer : (d) Falls initially then rises., 3. Define market demand., [1], Answer : Market demand refers to the sum total of individual, demand., 4. Average revenue and price are always equal under : (choose, the correct alternative), [1], (a) perfect competition only, (b) monopolistic competition only, (c) monopoly only, (d) all market forms, Answer : (d) all market forms., 5. State any one feature of oligopoly., [1], Ans : Oligopoly has few but large majority of market share., 6. Distinguish between microeconomics and macroeconomics., [3], Answer :, , Answer : Production possibilities Frontier refers to the frontier, which shows the production combination of commodities by, available resources and techniques., Properties of production posibilities frontier :, (a) Concave to the origin : PPF is convave to the origin as, to increase one additional unit of output, more and more, units of another good is sacrificed., (b) Downward sloping from left to right : PPF is downward, sloping from left to right because more and more units of, good are sacrificed to gain one additional unit of another, good., 8. Show that demand of a commodity is inversely related to, its price. Explain with the help of utility analysis., [3], OR, Why is an indifference curve negatively sloped ? Explain., Answer : Demand refers to the quantity which a consumer is, willing to purchase through the given income of the consumer, during a specific period of time.The demand of a commodity, is inversely related to its price. If the price of commodity, increases then the demand of the commodity decreases. On, the contrary, if the price of commodity decreases then the, demand of the commodity increases., This happens because of law of marginal utility. As more and, more units of a good are consumed then MU deriven from, that commodity tends to diminesh. As a result, demand of a, commodity is inversely related to its price., OR, Indifference curve refers to the curve showing consumption, combinations of two commodities which yield the same level, of satisfaction to the consumer., , Microeconomics, (a) Studies about individual, economics units like, households, firms, consumers, etc., (b) It deals with how consumers or make their, decisions depending on, their given budget and, other variables., (c) It uses the method of, partial equalibrium, i.e.,, equilibrium in one market., 7. State the meaning and, possibilities frontier., , Macroeconomics, It studies about an economy, as a whole., , It deals with how different, economic sectors can make, their decisions., , It uses the method of, general equilibrium, i.e.,, equilibrium in all markets of, an economy as a whole., properties of production, [3], , An indifference curve is negatively sloped because :, if the quantity of one good is decreased then the quantity of, other good will increase. It means that with the additional, consumption of one commodity, a consumer has to sacrifice, less and less units of other commodity. This slope of, indifference curve is also called Marginal Rate of Substitution, of Good X and Good Y, denoted as MRS xy = ∆Y ., ∆X, 9. Explain the conditions of consumer’s equilibrium under, indifference curve approach., [4], Answer : Intensity of desire a commodity, tends to decrease as, more and more units of a commodity are consumed. In other, words, successive units of consumption offer less satisfaction., It is considered as the law of diminishing marginal rate of, substitution., In other words, it is a ratio of number of unit of goods, sacrificed to produce one additional unit of other goods by, substituting, the resources :, , • Follow us on Telegram - https://t.me/copymykitab1

Page 27 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2017 (Delhi) |, For ex :, Good, 1, 2, 3, 4, , Good, 10, 7, 5, 4, , 1037, , Therefore, elasticity of supply should have three situations :, (a) Es = 1, (b) Es > 1, (c) Es < 1, (a) Es = 1 ⇒ When a straight line positively sloped supply, curve starts from the point of origin., , MRS, –, 3, 2, 1, , 10. State different phases of the law of variable proportions, on the basis of total product. Use diagram., [4], OR, Explain the geometric method of measuring price, elasticity of supply. Use diagram., Answer : Law of Variable Proportion is enforced during, short-run. It states that as more and more variable factors are, used with the fixed factors. So, a stage must ultimately comes, when MP of variable factors starts declining., T.P (Units), , MP (Units), , 1, , 2, , 2, , 2, , 5, , 3, , 3, , 9, , 4, , 4, , 12, , 3, , 5, , 14, , 2, , 6, , 15, , 1, , 7, , 15, , 0, , 8, , 14, , –1, , yK, ita, b, , (c) Es < 1 ⇒ When a straight line positively sloped supply, curve starts from X-axis., , TP, , TP/MP, , C, , op, , Y, , (b) Es > 1 ⇒ When a straight line positively sloped supply, curve starts from Y-axis., , yM, , , , Units of Labour, , K, , O, , X, Units of labour, , T, MP, , According to the schedule and figure from origin to point K,, TP is increaing at increasing rate and MP is also increasing., From point K to T, MP is diminishing while TP is increasing, at diministing rate., At point T, MP is zero and TP is optimum., Beyond point T, TP starts falling while MP becomes negative., OR, Price elasticity of supply refers to the proportionate, relationship between the percentage change in quantity, supplied and percentage change in price., According to Geometric Method elasticity of supply depends, on the origin of supply curve., , 11. Explain the ‘free entry and exit of firms’ feature of, monopolistic competition., [4], Answer : Monopolistic competition is a form of market in, which large number of sellers sell different kind of product., There is a difference in their Trade. Mark, Brand Name,, packaging, etc. The commodities produced by each firm are, close substitute of one another., , • Follow us on Telegram - https://t.me/copymykitab1

Page 28 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1038 | Economics 2017 (Delhi), 14. Good Y is a substitute of good X. The price of Y falls., Explain the chain of effects of this change in the market, of X., [6], OR, Explain the chain of effects of excess supply of a good on, its equilibrium price., Answer : Good Y is a substitute of Good X. If the price of, Y falls, then the markert of X will change in the maner that, people will diminish its demand. They will consume Good X, which is the substitute of Good Y., For Eg : Tea and Coffee both are the substitutes of each other., If the price of tea falls then the demand for tea will rise and, demand for coffee will diminish., The Chain of effect is shown below :, Y, , d, d1, , , , , , , , , , Free Entry and Exit of firms, ⇓, The new firms to enter into a market and the existing, firms can leave the market as per their own willingness but, sometimes, they face a monopolist restriction i.e., Cartel., 12. When price of a commodity X falls by 10 percent, its, demand rises from 150 units to 180 units. Calculate its, price elasticity of demand. How much should be the, percentage fall in its price so that its demand rises from, 150 to 210 units ?, [6], Answer : Percentage change in Price = (–) 10%, Q = 150 units, Q1 = 180 units., % ∆ Qd, Ed = (–) % ∆ P, Ed = 20%, 10%, Thus, price elasticity = Z0, And, if Ed = 2,, , O, , 0, 1, 2, 3, 4, 5, , 30, –, 68, 84, –, 125, , P (Coffee), , d1, , d, X, , Demand, , Let us suppose that the initial equilibrium is at point E1,, where the equilibrium price is OP1 and the equilibrium, output is Oq1., , [6], , Average, variable, cost Rs., , Marginal, cost Rs., , Average, fixed cost, Rs., , –, –, 18, –, 19, , 20, –, –, 18, –, , –, –, –, –, 6, , Average, variable, cost Rs., –, 20, 19, 18, 13, 19, , Marginal, cost Rs., , Average, fixed cost, Rs., –, 30, 15, 10, 7·5, 6, , C, , Total, cost Rs., , op, , , , x = – 20 %, Therefore percentage fall in price will be 20%., 13. Complete the following table :, Output, units, , Decrease, , Price, , yK, ita, b, , % change in quantity demanded = 210 –150 × 100, 150, 60, =, × 100 = 40 %, 150, Ed = (–) 40 %, x, 40, 2 = (–) %, x, 2x = (–) 40 %, , yM, , , , , , , , , , , , , , Q = 150 units, Q1 = 210 units, , Answer :, Output, units, , Total, cost Rs., , 0, 1, 2, 3, 4, 5, , 30, 50, 68, 84, 102, 125, , –, 20, 18, 16, 18, 23, , Now, let us suppose that market supply increases (say, due, to a fall in the input prices). This shifts the curve parallely, rightwards to S2S2 from S1S1 with no change in demand, at the initial price OP1, there exist excess supply equals to, (Oq1, – Oq1) units of output. This excess supply will increase, competition among the producers and consequently they, would be willing to sell their output at a lower price. The, price will continue to fall until it reaches OP2, where, the, new supply curve S2S2 intersects the initial demand D1D1., The new equilibrium is established at point E2, where the, equilibrium output is Oq2 and the equilibrium price is OP2., , • Follow us on Telegram - https://t.me/copymykitab1

Page 29 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2017 (Delhi) |, Thus, at the new equilibrium, the equilibrium quantity has, risen whereas, the equilibrium price has fallen., 15. Given below is the cost schedule of a product produced, by a firm. The market price per unit of the product at all, levels of output is ` 12. Using marginal cost and marginal, revenue approach, find out the level of equilibrium, output. Give reasons for your answer :, [6], Output (Units), , 1, , 2, , 3, , 4, , 5, , 6, , Average Cost (`), , 12, , 11, , 10, , 10, , 10.4, , 11, , 18., , 19., , Answer :, Output, , MR, 20, , MC, 22, , 20, 20, 20, 20, 20, , 20, 22, 26, 20, 36, , 20., , 21., , yM, , , , 1, 2, 3, 4, 5, 6, , TC (`), 22, 42, 60, 76, 96, 120, , Equilibrium, , 22., , C, , op, , At 5th unit of output, the producer will be in equilibrium, because at this unit, MR is equal to MC and MC curve cuts, MR from below., , SECTION–B, , 16. The ratio of total deposits that a commercial bank has, to keep with Reserve Bank of India is called. (choose the, correct alternative), [1], (a) Stautory liquidity ratio, , , (b) Deposit ratio, (c) Cash reserve ratio, , , , (d) Legal reserve ratio, 17. Aggregate demand can be increased by : (choose the, correct alternative), [1], (a) Increasing bank rate, (b) Selling government securities by Reserve Bank of, India, , , , Answer : (c) Cash Reserve ratio., , ** Answer is not given due to change in syllabus, , (c) Increasing cash reserve ratio, (d) None of the above, Answer : (d) None of the above., Give the meaning of involuntary unemployment., [1], Answer : Involuntary unemployment refers to the situation, of unemployment when a person is willing to work but does, not get any work., Primary deficit indicate the amount of borrowigs requinal, by the government to meet the expenditure other than, trtrest payment., [1], Primary deficit =, Fiscal deficit – trterest payment, Answer : (c) Cash Reserve Ratio., Give the meaning of balance of payments., [1], Answer : Balance of Payments refers to the accounting, statement that provides a systematic record of all the economic, transactions between residents of a country and the rest of the, world in a given period of time., Distinguish between final goods and intermediate goods., Give an example of each., [3], Answer : Final Goods, (a) These are those goods which are either used for, consumption or for investment purpose., (b) They are included in both national and domestic income., (c) For e.g., milk purchased by households., Intermediate Goods, (a) These goods are those goods which are used either for, resale or for further production in the same year., (b) They are neither included in national income nor in, domestic income., (c) For Eg. milk used in dairy for resale., Explain the store of value function of money. **, [3], OR, State the meaning and components of money supply., Answer : Money supply refers to the total value of money, held by public at a particular point of time., Components of Money Supply, (a) M1 = It is the first and basic measuer of money supply., M1 = Cusrrency and coins with Public + Demand, deposits of commercial banks + Othere deposits., (b) M2 = It is the broader concept., M2 = M1 + saving deposits with Post Office Saving Bank, (c) M3 = Broader concept, M3 = M1 + Net time deposits with banks., (d) M4 = M3 + Total deposits with post office saving bank, (Excluding NSC), Explain the basis of classifying taxes into direct and, indirect tax. Give examples., [3], Answer : Direct Taxes are those taxes that are imposed on, property and income of individuals and companies and are, paid directly by them to govt., , yK, ita, b, , AR (`), 20, 20, 20, 20, 20, 20, , 23., , 1039, , • Follow us on Telegram - https://t.me/copymykitab1

Page 30 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1040 | Economics 2017 (Delhi), 27. Why does the demand for foreign currency fall and supply, rises when its price rises ? Explain., [6], Answer : Demand for foreign currency, comes from the, people who need it to make payment in foreign currency., Supply of foreign currency comes from the people who, receive it due to follwoing reasons :, (a) Exports of goods and services, (b) Foreign Investment, (c) Speculations, Resons for rise in supply :, (i) When price of a foreign currency rises, domestic goods, become relatively cheaper. It induces the foreign country, to increase their imports from the domestic country. As a, result, supply of foreign currency rises. For Eg., If price of, U.S dollar rises from ` 45 to ` 50, then exports to USA, will increase as Indian goods will become cheaper. It will, raise the supply of U.S dollars., (ii) When price of a foreign currency rises, supply of foreign, currency rises as people want to make gains from, speculative activities., , Price of Dollar in Terms of `, , Y, , O, , D, S, , D1, , S1, E, E1, , S, , D1, , S1, Demand and Supply, of Foreign Exchange, , D, X, Output, (Units), , 28. Explain ‘non-monetary exchanges’ as a limitation of using, gross domestic product as an index of welfare of a country., [6], , , , C, , op, , yM, , yK, ita, b, , For Eg,. Income Tax, Corporate tax, etc., Indirect Taxes are those taxes that affect the income and, property of individuals and companies through their, consumption., For Eg,. Sales Tax, Service Tax., 24. Explain ‘banker to the government’ function of the central, bank., [4], OR, Explain the role of reverse repo rate in controlling money, supply., Answer : The Reserve Bank of India acts as a Banker, agent, and a financial advisor to the Central Govt., As banker, it carries out all banking business of the Govt., (a) It maintains a current account for keeping their Cash, Balances., (b) It accepts receipts and makes payments for the Govt. and, carries out exchange and other banking operations., (c) It also gives loans and advances to the Govt., OR, Reverse Repo Rate is the rate at which RBI borrows money, from commercial banks., (a) RBI makes use of this tool when it feels that there is, excess money supply in the banking system., (b) Banks are always happy to lend money to RBI as there, money is in safe hands with a good interest., 25. Explain how government budger can be used to influence, distribution of income ?, [4], Answer : Govt. budget is an annual statement, showing, estimation of receipts and expenditure during a fiscal year., Govt. Budget would influence the distribution of income, when, Govt. will spend less to control the level of income in, the economy. On the contrary, will spend more to decrease, the level of income in the economy., 26. An economy is in equilibrium. From the following data, about an economy calculate autonomous consumption., (a) Income = 5000, (b) Marginal propensity to save = 0·2, (c) Investment expenditure = 800, [4], Answer :, Given that,, Income (y) = 5000, Marginal Propensity to save (s) = 0.2, Therefore, marginal propensity to consume, = 1 – MPS, = 1 – 0.2 = 0.8, ∴, Y = C + by + I, ⇒, 5000 = C + 0.8 × 5000 + 800, ⇒, 5000 = C + 4000 + 800, ⇒, 5000 = C + 4800, ⇒, 5000– 4800 = C, ⇒, 200 = C, ∴, Autononous Consumption = 200, , , , , , , , , , , OR, How will you treat the following while estimating domestic, product of a country ? Give reasons for your answer :, (a) Profits earned by branches of country’s bank in other, countries, (b) Gifts given by an employer to his employees on, independence day, (c) Purchase of goods by foreign tourists, Answer : Many activities in an economy are not evaluated, in monetary terms, for Eg., Non-market transactions like, services of house wife, kitchen gardening, etc. are not included, in GDP due to non-availability of data., , • Follow us on Telegram - https://t.me/copymykitab1

Page 31 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2017 (Delhi) |, , 1041, , OR, (a) Not included in domestic income as it’s earned outside, the domestic territory of the country., (b) Included as its a factor income., (c) Included as the expenditure is done within the domestic, territory., , 30. Assuming that increase in invesment is ` 1000 crore and, marginal property to consume is 0.9. Explain the working, of multiplier., [6], , 29. Calculate (a) net domestic product at factor cost and (b), gorss national disposable income : **, , Multiplicr (K) is the ratio of increase in national income (∆ y), due to incrcase in investment (∆I)., , , , Round1, , Increasein, , Increasein, , Increasein, , 1, , Investment, 900, , Income, 900, , Consumption, 540, , 2, , 900, , 540, , 374, , 3, , 900, , 374, , 224·4, , 4, , 900, , 224·4, , —, , 5, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , —, , yK, ita, b, , 100, 40, 90, 700, 50, (–) 30, , Increase in consumption =, , 900 × 0·6, 10, , , , = 540, =, , 540 × 0·6, 10, , , , = 374, , , , =, , 374 × 0·6, 10, , = 224·4, , , , C, , op, , Answer : GDPMP ⇒ GFCE + PFCE + GDFCF + Consumption of fixed capital + Net Exports + Change in stock, GDPMP = 11390, – 40 (dep), + (–80) (NFIA), NNPMP = ` 11270 Crore, , , Economics 2017 (Delhi), , ∆Y, K = ∆I, , SET II, , , , , , , , 120, 60, 500, , yM, , Imports, Consumption of fixed capital, Gross domestic fixed capital, formation, (vii) Change in stock, (viii) Factor income to abroad, (ix) Factor income from abroad, (x) Indirect taxes, (xi) Subsidies, (xii) Net current transfer to abroad, , , , (iv), (v), (vi), , Marginal propensity to consume = 0·6, , , , Rs. in crore, (i) Private final Consumption Ex5000, penditure, (ii) Government final Consumption, 1000, Expenditure, (iii) Exports, 70, , Answer : Increase in investment = ` 900 crore, , Maximum marks : 100, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining questions have been asked in previous sets., 6. Explain the problem of ‘what to produce’., , [3], , Answer : What to produce refers to the most important, central problem. There are two types of commodities which a, consumer has to produce :, ** Answer is not given due to change in syllabus, , (1) War – Time commodities, (2) Peace – Time commodities, An economy has to decide from these two commodities., 9. A consumer consumes only two goods : Explain the, conditions of consumer’s equillibrium using utility analysis., [4], Answer : A consumer gets equilibrium while consumig two, commodities at the point where marginal utility of two, commodities are equal to each other., , • Follow us on Telegram - https://t.me/copymykitab1

Page 32 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1042 | Economics 2017 (Delhi), Y, , Y, , E, Mu, , Mu, Mux, , Muy, , new demand curve D2D2 intersects the supply curve S1S1., Observe that, at the new equilibrium both market price and, quantity demanded are more than the initial equilibrium., The new equilibrium quantity supplied Oq2 and the new, equilibrium price is OP2. Hence, an increase in demand with, supply remaining constant, results in rise in the equilibrium, price as well as the equilibrium quantity., OR, , Units, , Thus, E is the Equilibrum point., 14. X and Y are complementary goods. The price of Y falls., Explain the chain of effects of this change in the market, of X., [6], OR, , yK, ita, b, , Explain the chain of effect of excess demand of a good on, its equilibrium price., , C, , op, , yM, , Answer : If X and Y are complementary goods, then a fall in, the price of good Y will lead to a rise in the demand of good, X. Graphically, the effect of this change can be seen as follows, :, , Here, suppose D1D1 and S1S1 are the initial market demand, curve and market supply curve, respectively. The initial, equilibrium is established at point E1, where the market, demand curve and the market supply curve intersects each, other. Accordingly, the equilibrium price is OP1 and the, equilibrium quantity demanded is Oq1., Now, as the market demand of good X increases, this shifts, the market demand curve parallely rightwards to D2D2 from, D1D1, while the market supply curve remains unchanged at, S1S1. This implies that at the initial price OP1, there exist, excess demand equivalent to (Oq’3-Oq1) units. This excess, demand will increase competition among the buyers and they, will now be ready to pay a higher price to acquire more units, of good. This will further raise the market price. The rise in, the price will continue till the market price becomes OP2., The new equilibrium is established at point E2, where the, , 3, , Suppose D1D1 and S1S1 are the initial market demand curve, and market supply curve, respectively. The initial equilibrium, is established at point E1, where the market demand curve and, the market supply curve intersects each other. Accordingly,, the equilibrium price is OP1 and the equilibrium quantity, demanded is Oq1., , Now, assume that market demand increases (may be due, to an increase in the consumer’s income). This shifts the, market demand curve parallely rightwards to D2D2 from, D1D1, while the market supply curve remains unchanged at, S1S1. This implies that at the initial price OP1, there exist, excess demand equivalent to (Oq’3 - Oq1) units. This excess, demand will increase competition among the buyers and they, will now be ready to pay a higher price to acquire more units, of good. This will further raise the market price. The rise in, the price will continue till the market price becomes OP2., The new equilibrium is established at point E2, where the, new demand curve D2D2 intersects the supply curve S1S1., Observe that at the new equilibrium both market price and, quantity demanded are more than the initial equilibrium., The new equilibrium quantity supplied Oq2 and the new, equilibrium price is OP2. Hence, an increase in demand with, supply remaining constant, results in rise in the equilibrium, price as well as the equilibrium quantity., To summarise,, Excess demand at the existing ⇒ Competition among the, buyers ⇒ Rise in the price level ⇒ New equilibrium ⇒ Rise, in both quantity demanded as well as price., 17. What is revenue deficit ?, , [1], , Answer : Revenue dificit refers to excess of revenue expenditure over revenue receipts during the given financial year., , • Follow us on Telegram - https://t.me/copymykitab1

Page 33 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , , , , , or,, So,, , Investment + = Y – C, , , , Answer : The working of multiplier can be explained as follows :, , yK, ita, b, , yM, , op, , 800, 640, 512, 409.6, 327.68, , Induced, Savings, Change in, ∆S, Consumption, ∆C, 640, 160, 512, 128, 409.6, 102.4, 327.68, 81.92, 264.14, 63.54, , C, , 800, —, —, —, —, , The table shows that initial increase in investment of ` 800, will lead to change in income by ` 800 in the first round., As MPC is 0.8, so people will consume 0.8 of the increased, income (i.e. ` 640), there by, saves ` 160. This will be termed, as leakage (as it is not ploughed back into the economy)., , , , , , , In the third round, similarly the increased consumption, expenditure of ` 512 will cause a change in the income by, ` 512. They will spend a part of this income on consumption, i.e., ` 409.6 and will save the rest of the increased income, ` 102.4., , Shefihere, , Rs. In Crore, , (a), , Net factor income to abroad, , (–) 50, , (b), , Net indirect taxes, , 800, , (c), , Net current transfers from rest of, the world, , 100, , (d), , Net imports, , 200, , (e), , Private, final, expenditure, , consumption, , 5000, , (f ), , 3000, , (g), , Government final consumption, expenditure, Gross domestic capital formation, , (h), , Consumption of fixed capital, , 150, , (i), , Change in stock, , (–) 50, , (j), , Mixed income, , 4000, , (k), , Scholarship to students, , 1000, , 80, , Answer : GDPMP = Private final consumption expenditure, + Government final consumption Expenditure + Gross, domestic capital formation + Net export, , , , In the next round, due to the increase in the consumption, expenditure by ` 640, there will be an increase in income, ` 640. The people will again spend the increased income i.e., ` 512 and save the rest part of the income ` 128., , = 4,000, , 29. Calculate (a) national income (b) net national disposable, income : **, , We are given that the valure of MPC = 0.8 and also that, initial increase in investment is ` 800 crore. This implies that, with every increase of ` 1 in the income, people consume 0.8, part of the increased income. That is, people consume ` 0.80, and save ` 0.20., Round Increase in Change, Investment in Income, ∆I, ∆Y, , ∆Y, , Thus, we can observe that an initial increase in the investment, by ` 800 crore results in increase of income and output by, ` 4000 crore., , , , ⇒ 10,000 – 9, 100, ⇒ ` 900, 27. Assuming that increase in investment is ` 800 crore, and marginal propensity to consume is 0.8, explain the, working of multiplier., [6], , 1, 2, 3, 4, 5, , Y, 1, = ∆, 1 – 0.8 800, 1 = ∆Y, 800, 0.2, , k =, , , , = 100 + 0·9 × 10000, 10, C ⇒ ` 9,100, , 1043, , This process will continue and the income will go on increasing, as a result of increase in consumption. The total change (∆Y), = ` 4000 (approx) and the change in the investment (∆I) will, be 800., Y, 1, k =, = ∆, 1 – MPC, ∆I, , , , 26. An economy is in equilibrium. From the following data, about an economy calculate investment expenditure :, (i) Income = 10000, (ii) Marginal propensity to consume = 0.9, (iii) Autonomous consumption = 100, Answer :, C = c + bY, , , , Economics 2017 (Delhi) |, , = 5000 + 3000 + 1000 + (–200), = 9000 – 200, = ` 8800 crores, NNP FC = GDPMP – Dep – NIT + (Nf1A), = 8800 – 150 – 800 – 50, = ` 27800 crores, , ** Answer is not given due to change in syllabus, , • Follow us on Telegram - https://t.me/copymykitab1

Page 34 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET III, , , , Economics 2017 (Delhi), , Maximum marks : 70, , , , Time allowed : 3 hours, , 3, 20, , 4, 20, , 5, 20, , Total Cost (`), , 22, , 42, , 60, , 76, , 96 120, , MC, 12, 10, 8, 10, 10.4, 16.4, , 6, 20, , AR, 12, 12, 12, 12, 12, 12, , op, , yM, , MR, 12, 12, 12, 12, 12, 12, , C, , AC, 12, 11, 10, 10, 10.4, 11, , , , , , = 1 – 0.2, , , , = 0.80, , , , C = c + bY, , , , 8500 = c + 0.80 × 10,000, , , , 8500 = c + 8000, , , , c = 8500 – 8000, , SECTION–B, , 26. An economy is in equilibrium. From the following data, calculate autonomous consumption., [4], Answer : (a) Income = 10,000, (b) Marginal Propensity to save = 0.2, (c) Investment = 1500, , = ` 500, `, , 2, 20, , Answer :, , MPC = 1 – MPS, , , , Average Revenue (`), , 1, 20, , Output, 1, 2, 3, 4, 5, 6, , C = 8500, , yK, ita, b, , 6. Explain the problem of ‘how to produce.’, [3], Answer : Micro economics refers to that branch of economics, which study individual unitis., For Eq., Demand, supply etc., Macro economics refers to that branch of economics which, study the economy as a whole., For Eq., Aggreatc demand, etc., 15. Using marginal cost and marginal revenue approach,, find out the level of output at which producer will be in, equilibrium. Give reasons for your answer., Output (Units), , 100 = C + 1500, , , , SECTION–A, , Y = C+I, , , , Note : Except for the following questions, all the remaining questions have been asked in previous sets., , 29. Calculate (a) net national product at market price and (b), gross national disposable income : **, Rs. In crores, , (i), , Gross domestioc fixed capital, formation, , 400, , (ii), , Private final consumption, expenditure, , 8000, , (iii), , Government final consumption, expenditure, , 300, , (iv), , Change in stock, , 50, , (v), , Consumption of fixed capital, , 40, , (vi), , Net indirect taxes, , 100, , (vii) Net exports, , (–) 60, , (viii) Net factor income to abroad, , (–) 80, , (ix), , Net current transfers from, abroad, , 100, , (x), , Dividend, , 100, , ** Answer is not given due to change in syllabus, , • Follow us on Telegram - https://t.me/copymykitab1

Page 35 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET I, , , , Economics 2016 (Outside Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , SECTION A, , , , C, , Answer : For equilibrium, , , , Marginal utility of X = 3, , MUy, MUx, =, Py, Px, , Price of X = ` 4, Marginal Utility of Y = 4, , , , , , Price of Y = ` 4, MUx = MUy, Py, Px, 3, 4, =, 4, 4, , MUy, MUx, ≠, Py, Px, , , , , , , , Hence Consumer is not in equilibrium, To reach equilibrium level, consumer should decrease the, consumption of good X., 7. What will be the effect of 10 percent rise in price of a, goods on its demand if price elasticity of demand is (a), Zero, (b) –1, (c) –2., [3], Answer : Percentage change in price = 10%, (a) Ed = 0, Ed =, , Percentage change in quantity demanded, , Percentage change in pricce, , 0 = percentage change in quantity demanded ÷ 10, Percentage change in quantity demanded is 0., (b) Ed = –1, , yK, ita, b, Ed =, , Percentage change in quantity demanded, , Percentage change in pricce, , –1 = percentage change in quantity demanded ÷ 10, Percentage change in quantity demanded is – 10%, (c) Ed = –2, Ed = Percentage change in quantity demanded ÷ Percentage, change in price, –2 = Percentage change in quantity demanded ÷ 10, Percentage change in quantity demanded is –20%, 8. What is minimum price ceiling ? Explain its implications., OR, If the prevailing market price is above the equilibrium, price, explain its chain of effects., [3], Answer : Minimum price ceiling : Minimum price ceiling, is also known as price floor, which is the minimum allowable, price set above the equilibrium price by the government., The need for minimum price ceiling arises when government, finds that equilibrium price is too low for the producers., This policy is in the interest of producers. It leads to surplus, and illegal selling below the equilibrium price, For effective minimum support price or price floor, it, must be accompanied by government purchases either to, increase its buffer stocks or exports., Implication of Minimum Price Ceiling :, (a) Minimum price ceiling ensures the farmers that they will, get the minimum price for their production which helps, them to produce more in order to earn their bread and, butter with the help of government. It also states that, their whole produce will be sold in the market., (b) With the minimum price given by the government to the, farmers, increases the income of the poor people., OR, When the prevailing price is above the equilibrium price ,, then there is condition of excess supply. Excess supply induces, seller to sell more and in order to sell more , seller has to reduce, , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , op, , , , yM, , , , , , , , 1. What is the relation between Average Variable Cost and, Average Total Cost, If Total Fixed Cost is zero ?, [1], Answer : Average variable cost is a part of average total cost, because average variable cost and average fixed cost together, make average total cost but when total fixed cost is zero, than :, AVC = ATC, 2. A firm is able to sell any quantity of a good at a given, price. The firm's marginal revenue will be :, [1], (Choose the correct alternative), (a) Greater than Average Revenue, (b) Less than Average Revenue, (c) Equal to Average Revenue, (d) Zero, Answer : (c) The firm's marginal revenue will be equal to, average revenue., 3. When does ‘Change in demand’ take place ?, [1], Answer : Change in demand takes place when there are, changes in factors other than price., 4. Differentiated products is a characteristic of, (choose correct answer) :, (a) Monopolistic competition only, (b) Oligopoly only, (c) Both monopolistic competition and oligopoly, (d) Monopoly, [1], Answer : Differentiated product is a characteristic of both, monopolistic competition and oligopoly., 5. Demand curve of a firm is perfectly elastic under :, [1], (Choose the correct alternative), (a) Perfect competition, (b) Monopoly, (c) Monopolistic Competition, (d) Oligopoly, Answer : (a) Demand curve of a firm is perfectly elastic under, perfect competition., 6. A consumer consumes only two goods X and Y. Marginal, utilities of X and Y are 3 and 4 respectively. Prices of X and, Y are `4 per unit each. Is consumer in equilibrium ? What, will be further reaction of the consumer ? Give reasons., [3], , Since

Page 36 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1046 | Economics 2016 (Outside Delhi), , 10. Define fixed cost. Give an example. Explain with reason, the behaviour of Average Fixed cost as output is increased., OR, Define marginal product. State the behaviour of marginal, product when only one input is increased and other, inputs are held constant., [4], Answer : Fixed cost : Fixed cost is the cost which does, not change with the change in the level of output. This is, incurred on fixed factors like machines, building. Fixed cost, does not change with the change in the level of output. For eg., a sugar mill usually remains closed for about 3 months in a, year for want of raw material but still the mill owner has to, incur certain cost like rent of the building, interest on past, borrowings, salaries of permanent employees, taxes, etc., On the other hand AFC is fixed cost per unit of output, , , the price of their output. The fall in price will continue till, the price reaches the equilibrium price where market demand, and market supply equals and the equilibrium price is fixed., As can be seen in the above graph that at price OP2, the, quantity supplied is OQ3 while the quantity demanded is, OQ2 so there is the excess supply of Q2Q3 is the market, Hence this leads to the seller to sell their output or lower, prices. With the fall in price the quantity demanded of the, commodity increases. The price continues to fall till is reaches, OP1. At OP1 price the quantity demanded becomes equal, to quantity supplied OQ1 and the equilibrium establishes at, Point E., , AFC = TFC/Output produced, For eg., TFC, , AFC, , 0, 1, 2, 3, 4, , 150, 150, 150, 150, 150, , ∞, 150, 75, 50, 37.5, , yK, ita, b, , No of units produced, , , , 9. Define demand. Name the factors affecting market, demand., [4], , Y, , Factors affecting Market demand :, , yM, , Answer : Demand : Demand for a commodity refers to the, quantity of a commodity which a consumer is willing to buy, at a given price and in a given period of time., , op, , (1) Population : Increase in the population increases the, demand., , C, , Composition of the population also affects the demand., Composition of the population means the distribution of, the population on the basis of sex, age etc. A change in the, composition of the population has an effect on the demand, of the commodity., (2) Season and weather : The season and weather conditions, also affect Consumer’s demand. Example : Demand for, woolen clothes rises in winter season., (3) Government policy : The government of the country, can also affect the demand for a commodity through taxation, and subsidies It may reduce the demand for the commodities, by imposing tax on it or increases by lowering the prices, through subsidies., (4) State of business : The prevailing business condition in, a country also affects the level of demand. Level of demand, increases during boom period while decreases during the, period of depression., (5) Distribution of income : If the national income is, equally distributed, then the demand for the necessities will, increase. If it is unequally distributed, there will be more, demand for luxury goods., , 150, , 125, 100, Cost (`), , 75, 50, , AFC, , 25, O, , X, 1, , 2, 3, 4, Output (units), , 5, , The shape of AFC curve is downward sloping curve from left, to right because average fixed cost goes on falling with every, increase in the output because TFC remains constant. AFC, curve neither touches X-axis because AFC always remain, positive nor touches Y-axis because AFC approaches infinity, when production is zero., OR, Marginal product : Marginal product is an addition to the, total product when an additional unit of only variable factor is, used , keeping other things same. Marginal product measures, extra output per extra unit of input holding all other inputs, fixed., Land (fixed, Labour, factor ), (variable factor), 1, 0, , • Follow us on Telegram - https://t.me/copymykitab1, , TP, , AP, , MP, , 0, , –, , –

Page 37 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Outside Delhi) | 1047, , 1, 2, 3, 4, 5, 6, 7, 8, 9, , 2, 6, 12, 20, 25, 29, 31, 31, 29, , 2, 4, 6, 8, 5, 4, 2, 0, –2, , TPP Maximum, , y, , B, , 30, , C, TP, , A, , 25, 20, 15, L, , 10, 5, , R, AP, , O, , 1, , 2, , 3 4 5 6 7 8, Units of variable factor, , Main causes of central problems are :, (1) Unlimited wants., (2) Limited resources., (3) Alternative uses of resources., For Whom to produce : This is the third problem of, allocation of resources. It is related to distribution of income., This problem refers to the decision regarding the share of, different factors of production in the national product of the, country. Goods and services are produced for the people who, can purchase them, and purchasing power depends upon, their income. We know that the output in an economy is the, result of the combined efforts of various factors of production., Hence, the output should be distributed or how the shares, of different factors of production should be determined., Thus, this problem is basically the problem of distribution of, income and wealth in the society., In case of capitalistic economy the decision is taken on the, basis of the purchasing power of the consumers. Socialist, economy takes decision regarding goods or services to be, produced on the basis of the requirements of the individuals., Thus, this problem deals with the distribution of output, among the people of a country., 13. Explain three properties of indifference curves., [6], Answer : Indifference curve : An indifference curve is a, curve which shows all the combinations of two goods that, give equal satisfaction to the consumer. Indifference curve, shows consumers behaviour is indifference towards various, combination of two goods because they give same level of, satisfaction., Properties of indifference curve :, (1) Indifference curve slopes down to the right. It implies, that consumer is willing to give up some units of one, commodity to get more units of another commodity so as, to stay at the same level of satisfaction., , yK, ita, b, , APP/MPP/TPP, , 2, 3, 4, 5, 5, 4.8, 4.4, 3.9, 3.2, , x, , 9 10, MP, , TP increases continuously from point O to B . It increases at, an increasing rate from O to A and at diminishing rate from, A to B. TP is maximum at point B and remains up to point C., , yM, , MP (MPP) curve initially rises , reaches its maximum and, ultimately declines taking the shape of inverted –U ., , op, , AP (APP) curve first rises, reaches its maximum and then, declines taking the shape of an inverted –U ., , , , C, , 11. When price of a commodity falls from `12 per unit to, `9 per unit, the producer supplies 75 percent less output., Calculate price elasticity of supply., [4], , , , 1, 1, 1, 1, 1, 1, 1, 1, 1, , , , , , , , , , , , , , , , , , Answer : Percentage change in quantity supplied = –75%, Old price = `12, New price = `9, Change in price = 9 – 12, = –3, Percentage change in price = (–3 ÷ 12) × 100, = –25%, Es = Percentage change in quantity supplied ÷ Percentage, change in price, = –75 % ÷ –25%, = 75% ÷ 25 % = 3., , , 12. Why do central problems of an economy arise ? Explain, the central problem of “for whom to produce”?, [6], Answer : Central problems : The problem of making choices, among alternative uses of resources is called central problems, of the economy. Scarcity of resources having alternative, uses in relation to unlimited wants has given rise to central, problems., , (2) Higher Indifference curves represent higher level of, satisfaction and indifference curve cannot meet or intersect., Two indifference curves can never intersects. In the, diagram, point A and B lies on the same indifference curve, IC1 giving same level of satisfaction while point A and C, also lie on the same indifference curves IC2 giving same, level of satisfaction. This implies that combination B and, C should also give same level of satisfaction, but this is, not possible because combinations C lies on the higher, indifference curve than B., , • Follow us on Telegram - https://t.me/copymykitab1

Page 38 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1048 | Economics 2016 (Outside Delhi), , as the downward movement along the supply curve. For, example movement from point 1 to point 2 on the SS supply, curve is downward movement along the supply curve., , Y, , Highest level of, satisfaction, , Good-y, , Y, , IC3, IC2, IC1, , , O, , X, , Good-x, , X, , Y, , yK, ita, b, , Good-y, , (b) Rise in tax rate on good X on the supply curve–It leads to, decrease in supply. Supply of the commodity falls due to, factors other than price. The leftward shift in the supply, curve indicates decrease in the supply. In case of decrease in, supply, supply curve shifts to the left from S1S1 to S2S2., Y, , X, , O, , IC2, , C, B, , IC1, X, , Good-x, , yM, , (3) Indifference curves are always convex to the origin O, because of diminishing MRS. It implies that marginal rate, of substitution diminishes along an indifference curve., This implies that as consumer gets more and more of one, good, he is willing to give up less and less of another., , Good-y, , C, , op, , Y, , Convex to, origin, , IC, O, , Good-x, , X, , , , 14. Examine the effect of (a) fall in the own price of good X, and (b) rise in tax rate on good X, on the supply curve., Use diagrams., For blind candidates in lieu of Q. No. 14., Examine the effect of (a) fall in the own price of good X, and (b) rise in tax rate on good X on supply of a good. Use, schedule., [6], Answer : (a) Fall in the own price of good X–It leads to, contraction in supply. When the quantity supplied of the, commodity falls with fall in the price and other things, remaining same is called contraction in supply. It is the, movement along the supply curve. Contraction is shown, , X, , 15. Explain the implications of the following in a perfectly, competitive market :, [6], (a) Large number of sellers, (b) Homogeneous products., OR, (a) Barriers to entry of new firms, (b) A few or a few big sellers, Answer : Implications in a perfectly competitive market :, (a) Large number of sellers : The number of sellers is so, large that individually they can't influence the existing price, in the market. Large number of sellers in the market implies, that the share of each seller in total market supply is so small, that no single seller can influence the price and each firm is, the price taker., (b) Homogeneous product : Products sold in the perfectly, competitive market is that they are identical in all respects, like quality , colour , size and all are the perfect substitutes of, each other. Homogeneous products implies that all the firms, have to charge the same price for the product i.e uniform, priced prevail in the market., OR, Implications in an oligopoly market :, (a) Barriers to entry of new firms : There is very tough, competition among the firms, so it is very difficult for the, new firm to enter into the oligopoly market., , • Follow us on Telegram - https://t.me/copymykitab1, , , , A

Page 39 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Outside Delhi) | 1049, , , , , , , , , , 22., , , , Y, , AD curve, , d, , C, , an, , C, , Expenditure, , em, , te, , C+l, , ve, , ur, , D, , a, , eg, , io, , n, , r, gg, , Co, , ns, , um, , pt, , A, , R, , Investment, O, , Income, , I, X, , OR, When the planned aggregate expenditure is greater than, the available output at full employment level, this situation, is termed as excess demand. It leads to inflationary gap in, the economy. It arises because of increase in money supply, due to deficit financing leading to increase in consumption, demand or an increase in autonomous investment without, the corresponding increase in savings. So, there is a need to, reduce the money supply in the economy in order to curb, the demand levels in an economy. As the purchasing power, will reduce, aggregate demand levels will come down. This, can be done both by using monetary and fiscal policy., 23. An economy is in equilibrium. Calculate Marginal, Propensity to consume :, [3], National income = 1000, Autonomous consumption expenditure = 200, Investment expenditure = 100, Answer : National income = 1000, , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , , , , , , , , , 21., , OR, Explain how controlling money supply is helpful in, reducing excess demand., [3], Answer : Aggregate demand : Aggregate demand is the total, demand for final goods and services in the economy. It also, refers to the total amount of money which all sectors are ready, to spend on purchase of goods and services. Aggregate demand, is the total expenditure on consumption and investment., Components of AD are :, (a) Household (or private) consumption demand (C) : Value, of goods and services that households are able and willing, to buy., (b) Private Investment demand (I) : This refers to planned, expenditure on buying of new capital assets like machines,, buildings and raw material by private entrepreneur. This, investment is done to increase production capacity in future., (c) Government demand for goods and services (G) : It, is the government expenditure on purchase of consumer, and capital goods to fulfil common needs of the society., (d) Net exports (exports-imports) demand (X-M) : Net, exports is the difference between exports of goods and, services and imports of goods and services during a, given period . Net exports show the demand of foreign, countries for our goods and services over our demand for, foreign countries goods and services. This strengthens the, income, output and employment process of our economy., AD = C + I + G + (X – M), , yK, ita, b, , yM, , C, , , , 20., , op, , 19., , , , 18., , , , , , 17., , , , 16., , (b) A few or few big sellers : There are few large firms who, rule the oligopoly market and control the prices and output, of the market. They are the major part who contribute in the, market supply and thus the market is controlled by them., SECTION B, Define flows., [1], Answer : Flows : A flow is a quantity which is measured over, a period of time. Eg. National Income., National income is the sum of factor incomes accuring to :, (Choose the correct alternative), [1], (a) Nationals, (b) Economic territory, (c) Residents, (d) Both residents and non-residents, Answer : (c) Residents., What are revenue receipts in a government budget ? [1], Answer : Revenue Receipts are the government receipts which, neither create liabilities nor reduce assets. Tax revenue and, non-tax revenue are the revenue receipts in the government, budget., Primary deficit equals :, [1], (Choose the correct alternative), (a) Borrowings, (b) Interest payments, (c) Borrowings less interest payments, (d) Borrowings and interest payments both, Answer : (c) Borrowings less interest payments., Foreign exchange transactions which are independent of, other transactions in the Balance of Payments Account are, called :, [1], (Choose the correct alternative), (a) Current transactions, (b) Capital transactions, (c) Autonomous transactions, (d) Accomodating transactions, Answer : (c) Autonomous transaction., Assuming real income to be `200 crore and price index to, be 135, calculated nominal income., [3], Answer : Real income = `200 crores, Price index = 135, Let the base year's price index be 100, Nominal Income = ?, Real income = (Nominal income ÷ Price index, of current year), X Price index of base year., 200 = (Nominal income ÷ 135) × 100, Nominal Income = (200 × 135) ÷ 100, = 27000 ÷ 100, = `270 crores., What is aggregate demand ? State its components.

Page 40 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , yM, , Impact of rising sale of petrol and diesel cars on the welfareThe increased sale of petrol and diesel car in big cities is, continuously increasing the level of pollution in big cities and, is turning out to be a life threat for the people living there., This high level of pollution is making people suffer with, many vulnerable diseases like asthma, heart diseases, lung, problems, cancer, respiratory diseases, etc . Thus reducing the, welfare of the people., , op, , 25. Explain the ‘medium of exchange’ function of money., How has it solved the related problem created by barter?, , , , , , , , C, , OR, Explain the ‘standard of deferred payment’ function of, money. How has it solved the related problem created by, barter ? **, [4], 26. Explain how ‘Repo Rate’ can be helpful in controlling, credit creation., [4], Answer : Repo rate : The rate at which the central bank (RBI), lends money to commercial banks is called repo rate . It is an, instrument of monetary policy. Whenever banks have shortage, of funds, they can borrow from RBI . When the repo rate falls,, it helps the banks get money at cheaper rate and vice versa., When the repo rate is increased, banks are compelled to, pay higher interest to RBI which prompts them to raise the, interest rates on the loans that they offer to their consumers.It, becomes costlier for the consumers to take loans , which leads, to shortage of money in the economy and less liquidity. This, way repo rate helps in controlling the credit creation., Thus, a rise in repo rate restricts the flow of money and credit, in an economy., 27. What is the difference between revenue expenditure and, capital expenditure ? Explain how taxes and government, expenditure can be used to influence distribution of, income in the society., [6], , ** Answer is not given due to change in syllabus., , , , yK, ita, b, , Answer : Impact of rising sale of petrol and diesel cars on, gross domestic product-GDP will increase because there is, increasing demand of petrol and diesel cars in the big cities, and to fulfil this increasing demand , the companies have to, produce more and have to increase their level of production, which will lead to increase in GDP., , Revenue Expenditure, 1. Revenue, expenditure, refers to the expenditure that does not, result in the creation of, assets or reduction of, liabilities., 2. It is used for normal, running of government, departments, and, maintenance., 3. The recurring expenditure is of two types :, (a) Plan revenue expenditures., (b) Non-plan revenue, expenditure., 4. It’s recurring in nature, and incurred regularly., 5. It is short-period expenditure., 6. Examples : Salaries of, govt. employees, pensions, interest payments, etc., , Capital Expenditure, 1. Capital expenditure refers, to the expenditure which, leads to creation of assets, or reduction in liabilities., 2. It is used for acquiring, capital assets., 3. The capital expenditure is, also of two types :, (a) Plan capital expenditure., (b) Non-plan capital expenditure., , , , , 24. Sale of petrol and diesal cars is rising particularly in big, cities. Analyse its impact on gross domestic product and, welfare., [4], , OR, What is the difference between direct tax and indirect tax ?, Explain the role of government budget in influencing, allocation of resources., Answer : Difference between Revenue expenditure and, capital expenditure :, , , , Autonomous consumption expenditure = 200, Investment expenditure = 100, National Income = consumption + Investment Expenditure, Y = C̅ + cY +I, 1000 = 200 +c(1000) + 100, 1000 = 300 +c(1000), 1000 – 300 = c(1000), 700 = c(1000), c = 700 / 1000, c = 0.7, Marginal propensity to consume = 0.7., , , , , , , , , , , , , , , , , , , , 1050 | Economics 2016 (Outside Delhi), , 4. It is not recurring in, nature., 5. It is long period expenditure., 6. Examples : defence capital,, purchasing land, building,, machinery etc., , To reduce inequalities of income and wealth , government, can influence distribution of income by levying taxes on, the rich people and granting subsidies to the poor people., Government levies higher rate of tax on rich and lowers the, rate on the low income group people. Government provides, subsidies and amenities to people whose income level is, low . Fiscal instruments like taxation , subsidies and public, expenditure can be made use of to influence distribution of, income in the society., OR, Difference between Direct tax and Indirect tax, Direct Tax, When the liability to pay, tax and the burden of, that tax falls on the same, person, it is called direct, tax. or we can say when, impact & incidence of tax, is on same person., , Indirect Tax, When the liability to pay, tax is on one person and the, burden of that tax falls on, some other person, the tax is, called an indirect tax. Hence, impact and incidence is on, different persons., , A direct tax is the tax, whose burden is borne by, the person on whom it is, imposed., It is progressive in nature, Eg : Income tax, wealth tax, , Indirect tax is a tax whose, burden can be shifted to, others, , • Follow us on Telegram - https://t.me/copymykitab1, , It is regressive in nature., Eg : Excise duty, custom duty.

Page 41 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Outside Delhi) | 1051, , Answer : (a) Sub-account – Capital Account., Balance of payment account – Debit Side., Lending to abroad by Indian investor will be recorded in, the capital account on the debit side of balance of payment, account. It is recorded on the debit side because it is the, negative item in the capital account of balance of payment as, it shows outflow of foreign currency from our country., (b) This lending will reduce the supply of foreign currency,, because lending is the outflow of foreign currency from our, country. This reduction in the supply will shift the supply, curve from SS to S'S'. The new equilibrium is at point E', where the exchange rate rises from OR to OR1., , , , Role of government budget in influencing allocation of, resources :, To achieve the social and economic objectives, government, provides more resources into socially productive sectors like rural, electrification, education, health , etc . Moreover government, allocates more funds in the production of socially useful, products and draws resources from some other areas to, promote balanced economic growth of regions., 28. Given saving curve, derive consumption curve and state, the steps in doing so. Use diagram., [6], Answer : Derivation of the consumption curve from saving, curve :, In the given figure, a straight line saving curve is plotted, showing saving function at different levels of income . It shows, negative saving at zero level of income and zero saving level at, OR level of income. At point R, consumption expenditure =, income, whereas to the left of R, consumption expenditure is, less than income., At zero level of income , consumption expenditure is shown, as OC which is equal to dis-saving of OS, OC = OS. Thus C, is the starting point of consumption curve.. At OR level of, income, saving is zero, it shows that consumption expenditure, must be equal to income of OR. This enables to plot OD as, consumption expenditure equal to OR, which in turn gives a, point B on 45 degree line showing OD equal to OR. Thus B, becomes the point on proposed consumption curve ., B is the point on consumption curve at which total consumption expenditure (C) is equal to income (Y). At point B , APC, (C/Y) = 1., , Exchange Rate, , Y, S', D, , S, E', , R1, R, , E, , C, , op, , D, , S, , O, , Q1, , Q, , X, Demand and supply of, foreign currency, , , , 30. Find Gross National Product at Market Price and (Private, Income**) :, [6], (` Crores), (i) Private final consumption expenditure, 800, (ii) Net current transfers to abroad, 20, (iii) Net factor income to abroad, (–) 10, (iv) Government final consumption expenditure 300, (v) Net indirect tax, 150, (vi) Net domestic capital formation, 200, (vii) Current trasfers from government, 40, (viii)Depreciation, 100, (ix) Net imports, 30, (x) Income accuring to government, 90, (xi) National debt interest, 50, , , yM, , yK, ita, b, , S', , Answer : GDP mp = Private Final Consumption Expenditure, + Government Final Consumption Expenditure + (net, domestic capital formation+ depreciation) -net imports, , , GDP mp = 800+300+(200+100)-30, , , , = 1100 +(300) -30, , , , = 1400 - 30 = `1370 crores., GNP mp = GDP mp - net factor income to, abroad, , , , , , , , , , 29. Indian investors lend abroad. Answer the following, questions :, [6], (a) In which sub-account and on which side of the Balance, of Payments Account such lending is recorded ? Give, reasons., (b) Explain the impact of this lending on market exchange, rate., , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , = 1370 – (–10) = `1380 crores.

Page 42 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET II, , , , Economics 2016 (Outside Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , Law of Diminishing marginal utility : This law states, that with the consumption of every additional unit of a, commodity, marginal utility derived from the successive unit, goes on diminishing. Utility from first glass of water for a, thirsty man is maximum, utility from second glass is lesser and, third is still lesser and thus intensity of want goes on falling., Demand for a commodity depends on its utility or usefulness, to the consumer. If the consumer gets more satisfaction , he, will pay more and if he gets less satisfaction, he will buy the, additional units at lower price. A consumer matches price, with marginal utility before buying the additional unit of a, commodity., SECTION B, , Note : Except for the following questions, all the remaining, questions have been asked in previous set., , , , , , yK, ita, b, , , , 19. Define Fiscal deficit., [1], Answer : Fiscal deficit : It refers to the difference between, total expenditure and total receipt of the government budget,, apart from its borrowings and liabilities., , , , , , , , Es = 10÷20, =1÷2, = 0.5, , , , 10. Define utility. Explain the Law of Diminishing Marginal, Utility., [4], Answer : Utility : Utility is the power or capacity of a, commodity to satisfy human want. It is the want satisfying, power of a commodity., , , , National income, , = 1200, , Autonomous consumption expenditure = 150, Marginal Propensity to consume, Answer :, , = 0.8, , Y = C + MPC (Y) + I, , , , 1200 = 150 + (0.8 × 1200) + I, , , , , , I = 1200 – 150 – 960, = 90, , , , 22. If nominal income is ` 500 and price index is 125,, calculate real income., [3], Answer :, , Let the base year 's price index be 100., Real Income = (500÷125) × 100, , , , , , , , , , Real Income = (Nominal income ÷ Price, index of current year) ×, Price Index of base year., , = 4 × 100, , , , yM, , op, , Percentage Change in price, , 21. An economy is in equilibrium. Find investment expenditure :, [3], , = ` 400, , , , , , , , , , , , , , , , , , 9., , C, , , , , , , , , , , , , , 7., , 24. Explain the role of Cash Reserve Ratio in controlling, credit creation., [4], , , 5., , , , 4., , SECTION A, When does “Change in quantity demanded” take place ? [1], Answer : Change in quantity demanded takes place, when price of the goods changes, other things being same, (unchanged)., What happens to the difference between Average Total, Cost and Average Variable Cost as production is increased ? [1], Answer : The difference between Average Total Cost (ATC), and Average Variable Cost (AVC) diminishes as production is, increased., A consumer consumes only two goods X and Y. Marginal, utilities of X and Y are 4 and 3 respectively. Price of X and, price of Y is `3 per unit. Is consumer in equilibrium ? What, will be further reaction of the consumer ? Give reasons. [3], Answer : Marginal utility of X = 4, Price of X = `3, Marginal Utility of Y = 3, Price of Y = `3, MUx ÷ Px = 4÷3 = 1.33, MUy÷ Py = 3÷3 = 1, No, the consumer is not in equilibrium and to reach, the equilibrium level , the consumer should increase the, consumption of good X., When price of a good rises from ` 10 to ` 12 per unit,, the producer supplies 10 percent more. Calculate price, elasticity of supply., [4], Answer : Percentage Change in quantity supplied = 10%, Original price (P) = `10/ unit, New Price (P1) = `12/ unit, Change in price (∆P) = `2/ unit (`12 – `10), Percentage change in price = (∆P ÷ P) ×100, = (2 ÷ 10) × 100, = 20%, Price Elasticity of Supply =, P ercentage Change in quantity supplied, , Answer : Cash Reserve Ratio : Commercial banks have, to keep a certain percentage of their total deposits with the, Central bank in the form of cash reserves. It is very effective, in credit controlling and lending capacity of the banks., To control the credit giving capacity of the banks, central, bank raises CRR and to enhance the credit giving powers, of the bank, central bank reduces CRR. When the lending, capacity of the bank reduces, it leads to fall in money supply, and when CRR falls, it increases the Money supply., , • Follow us on Telegram - https://t.me/copymykitab1

Page 43 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Outside Delhi) | 1053, , , , , , Answer : GDPMP = Private Final Consumption Expenditure, + Government Final Consumption Expenditure + (Net, Domestic Capital Formation+ Depreciation) + Net Exports, = 500 + 100 + (80 + 0) + (–20), = 600 + 80 – 20, = 680 – 20, = `660 crores., NNPMP = GDP mp – Depreciation – Net, Factor Income to abroad, = 660 – 0 – 20, = 660 – 20, = `640 crores., , , , , , , , (i) Net current transfers to abroad, 10, (ii) Private final consumption expenditure, 500, (iii) Current transfers from government, 30, (iv) Net exports, (–) 20, (v) Net indirect tax, 120, (vi) National debt interest, 70, (vii) Net domestic capital formation, 80, (viii) Income accuring to government, 60, (ix) Income accruing to government, 60, (x) Government final consumption expenditure 100, , , , , , 27. Calculate Net National Product at Market Price and, (Private income**) :, [6], , SET III, , , , Economics 2016 (Outside Delhi), , , , , , , , Answer : Change in quantity supplied (∆Q) = 40 units, Old price = `8/ unit, New price = `10/ unit, Price elasticity of supply is `2, Quantity = ?, ∆P = new price – old price, = 10 – 8, = 2/ unit, Es = (∆Q÷∆P) X (P÷Q), 2 = (40÷2) X( 8÷Q), 2 = (20) X (8 ÷Q), 2 = 160 ÷ Q, , , , , , Maximum marks : 100, , , , 2Q = 160, , , , Q = 160÷2, , , , = 80units, Hence, quantity supplied before price change was 80 units., , , , 11. Distinguish between individual's demand and market, demand. Name the factors affecting demand for a good, by an individual., [4], Answer : Individual Demand – Individual Demand for a, commodity means the quantity an individual is willing to, buy at different prices in a given period of time., Market Demand – Market Demand means the total demand, of all the consumers in the market taken together. It is the, sum total of all the individual demands., Factors affecting demand for a good by an individual :, (1) Price of a commodity itself (inverse relationship), (2) Price of related goods :, , , , , , , , , , , , , , , , C, , , , op, , yM, , , , SECTION A, 3. What happens to the difference between Total Cost and, Total Variable Cost as output is increased ?, [1], Answer : The difference between Total Cost and Total, Variable Cost is total Fixed Cost. Fixed cost remains the same, as output is increased. Hence the difference between TC and, TVC remains the same as the output increares., 5. When does ‘shift’ in supply curve take place ?, [1], Answer : Shift in supply curve takes place when there is, change in supply due to change in any of the factors other, than the price of the good., 8. A consumer consumes only two goods X and Y. The, marginal utilities of X and of Y is 3. Prices of X and Y are, `2 and `1 respectively. Is consumer in equilibrium ? What, will be further reaction of the consumer ? Give reasons. [3], Answer : Marginal utility of X = 3, Price of X = 2, Marginal utility of Y = 3, Price of Y = 1, MUx ÷ Px = 3 ÷ 2 = 1.5, MUy ÷ Py = 3 ÷ 1 = 3, The ratio of Marginal utility to the price of good Y is more, than the ratio of marginal utility to the price of good X., Hence, the consumer is not in an equilibrium and to, reach equilibrium level, the consumer should increase the, consumption of Y and decrease the consumption of X., 10. When price of a good rises from `8 per unit to `10 per, unit, producer supplies 40 units more. Price elasticity of, supply is 2. What is the quantity supplied before the price, change ? Calculate., [4], , , , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , , , yK, ita, b, , Time allowed : 3 hours, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 44 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1054 | Economics 2016 (Outside Delhi), , , , Nominal Income = (400 × 105) ÷ 100, , , , = `420., , , 29. Calculate National Income and (Personal Disposable, Income**) :, [6], (i), (ii), (iii), (iv), (v), (vi), (vii), (viii), (ix), (x), (xi), , , , , , SECTION B, 20. What are capital receipts in a government budget., [1], Answer : Capital Receipts : Government receipts which, either create liabilities or reduce assets. Thus, when, government raises funds either by incurring a liability or by, disposing off its assets , it is called capital receipts ., 22. An economy is in equilibrium. Find investment, expenditure :, [3], National Income, = 1000, Autonomous Consumption, = 100, Marginal Propensity to consume = 0.8, Answer : National Income (Y) = 1000, Autonomous Consumption (C) = 100, Marginal propensity to consume (c) = 0.8, At Equilibrium, Y = C + I, Y = C + cY + I, 1000 = 100 + (0.8 × 1000) + I, 1000 = 100 + (800) + I, 1000 = 900 + I, 1000 – 900 = I, I = `100., Investment expenditure = `100, 23. If real income is ` 400 and price index is 105, calculate, nominal income., [3], Answer : Real Income = (Nominal income ÷ Price index of, current year) X price index of base year., Let base year 's price index be 100, , 400 = (nominal income ÷105) × 100, , , , 2.1. Substitute goods (direct relationship), 2.2. Complementary goods (Inverse relationship), (3) Income of the consumer, 3.1. Normal goods (Direct relationship), 3.2. Inferior goods (inverse relationship), (4) Taste and Preference of the consumer (Direct, relationship)., , (`Crores), Corporation tax, 100, Private final consumption expenditure, 900, Personal Income tax, 120, Government final consumption expenditure 200, Undistributed profits, 50, Change in stocks, (–) 20, Net domestic fixed capital formation, 120, Net imports, 10, Net indirect tax, 150, Net factor income from abroad, (–) 10, Private income, 1000, , , , , , , = 900+ 200+(120+0+(-20)-10), = 1100+(120-20)-10, = 1100 + (100) -10, = 1200-10, , , , = 1190., NNPFC = GDPMP + Net factor income from abroad – net, indirect tax – depreciation, , , , = 1190 +(-10)-150-0, , , , = 1190 + (-160), , , , = 1190-160, = 1030, , , , , , , C, , , , op, , , , , , , , , , yM, , , , , , , , yK, ita, b, , Answer : GDP mp = Private final consumption expenditure +, Government final consumption expenditure + ( net domestic, fixed capital formation + depreciation + change in stock ) –, net imports, , National income = `1030 crores., , SET I, , , , Economics 2016 (Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , , , SECTION A, 1. What is the relation between marginal cost and average, variable cost when marginal cost is rising and average, variable cost is falling ?, [1], Answer : Marginal cost lies below the average variable cost, when marginal cost is rising and average variable cost is, , ** Answer is not given due to change in syllabus., , falling. In other words as long as marginal cost is below the, average variable cost, the AVC continues to fall, no matter the, MC is rising., 2. Suppose total revenue is rising at a constant rate as more, and more units of a commodity are sold, marginal revenue, would be : (choose the correct alternative)., [1], (a) Greater than average revenue, (b) Equal to average revenue, (c) Less than average revenue, (d) Rising, Answer : (b) Equal to Average Revenue., , • Follow us on Telegram - https://t.me/copymykitab1, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets.

Page 45 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Delhi) | 1055, , yM, , op, , C, , , , , , , , Y, , X, , O, , In the above fig, It is assumed that the market price ps is, below the equilibrium price pe. According to demand curve,, quantity demanded qd, quantity supplied qs , there emerges, the situation of excess demand (qd-qs)., The excess demand pushes the price up from the OPs price, level. With rise in price, the quantity demanded contracts, and quantity supplied expands. This process continues till the, equilibrium gets established at point E at OPe price level and, OQe quantity., 9. Explain in effect of change in prices of the related goods, on demand for the given good., [4], Answer : Goods are said to be related when price of one good, (say 'X') causes change in demand for other good (say 'Y')., Related goods are of two types :, (a) Substitute goods (direct relationship) : Substitute goods, are a pair of goods which can be used ( substituted) in place of, each other. They are competitive good. Like pepsi and cocacola or tea and coffee. Demand for a given commodity is, affected if the price of its substitute rises or falls. For the case, of tea and coffee-the demand for tea will fall when the price, of its substitute-coffee falls. A fall in the price of substitute, good (tea) reduces the consumers demand for given good, (coffee)., If related good is a substitute of a given good, then a rise in, price of substitute good will lead to rise in demand for given, good because it becomes relatively cheaper., , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , , , , , , , , the natural market equilibrium. It is also known as maximum, price .This maximum price is fixed below the equilibrium price, for the welfare of poor and vulnerable sections of the society., Implications of price ceiling :, (a) When prices are lowered below the equilibrium price,, than the demand increases more as compared to available, supply. This leads to the situation of excess demand., (b) With price ceiling, all the necessity products come under, the reach of poorer and vulnerable sections of the society., (c) Due to price ceiling, there is the situation of more demand, and less of supply, since there is less supply, goods are made, available to people in a fixed quantity (quota), otherwise this, at times lead to a problem of shortage., OR, When the prevailing market price is below the equilibrium, price, then there is a condition of excess demand . This excess, demand increases the competition among the buyers and, buyers tend to buy the output at higher prices which increases, the market price. As the market price starts rising, demand, contracts and supply expands. This market price tend to rise, till the equilibrium is restored., , yK, ita, b, , , , , , , , 3. When does ‘increase’ in demand take place ?, [1], Answer : Increase in demand : Rise in demand Takes place, due to change in factors other than price of the commodity., 4. ‘Homogenous products’ is a characteristics of : (choose, the correct alternative), [1], (a) Perfect competition only, (b) Perfect oligopoly only, (c) Both (a) and (b), (d) None of the above, Answer : (c) Both perfect competition and perfect oligopoly., 5. There is inverse relation between price and demand for the, product of a firm under : (Choose the correct alternative), [1], (a) Monopoly only, (b) Monopolistic competition only, (c) Both under monopoly and monopolistic competition, (d) Perfect competition only, Answer : (c) Both under monopoly and Monopolistic, competition., 6. A consumer consumes only two goods X and Y. Marginal, utilities of X and Y are 5 and 4 respectively. The prices of, X and Y are `4 per unit and `5 per unit respectively. Is, the consumer in equilibrium? What will be the further, reaction of the consumer ? Explain., [3], Answer : Marginal utility of X = 5, Price of X = `4, Marginal utility of Y = 4, Price of Y = `5, MUx ÷ Px = 5÷4 = 1.25, MUy ÷ Py = 4÷ 5 = 0.8, No, the consumer is not in an equilibrium because the, marginal utility of X is more than the marginal utility of Y and, to reach the equilibrium level , the consumer should increase, the consumption of good X and decrease the consumption of, good Y., 7. Price elasticity of demand of good X is –2 and of good Y is, –3. Which of the two goods is more price elastic and why?, [3], Answer : Price elasticity of good X = –2, Price elasticity of good Y = –3, Good Y is more price elastic as compared to good X. There is, inverse relationship between price and demand. For elasticity,, negative sign is ignored and hence,, = 3>2, Thus, price elasticity of good Y is more ., 8. What is maximum price ceiling ? Explain its implications., [3], OR, Explain the chain effects, if the prevailing market price is, below the equilibrium price., Answer : A price ceiling occurs when the government puts, a legal limit on how high the price of the product can be. In, order for the price ceiling to be effective , it must be set below

Page 46 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1056 | Economics 2016 (Delhi), Y, , Y, Price of Pen, (` ), , D1, D2, , P1, , D2, , O, , Q2, , X, , Q1, , D1, , X, Quantity of Pen, (Units), , Increase in the Price of Complementary Good, Y, , Y, , D2, , Price of Pen, (`), , D1, , P1, , D1, , yK, ita, b, , O, , Y, , D, O, , C, , Price of, coffee, , op, , A, , Q1 Q2, Quantity of Tea, , X, , As can be seen is the above graph that when the price of, coffee is OP1, the demand for tea is OQ1. When the price, of coffee rises to OP2, the demand for tea increased to OQ2., Hence there is direct relationship between price of coffee and, demand for tea., (b) Complementary goods (inverse relationship) : Complementary goods are pair of goods which are used together, to satisfy a given want. They are complementary to each, other in the sense that they complete the deficiencies of, each other. For eg fountain pen and ink. A fall in the price, of one commodity leads to rise in the demand for the other, commodity also. If the price of ink falls, demand for its, complementary good - fountain pen will rise. Thus, a fall in, price of one complementary good increases the demand for, the other complementary good., If related good is complementary to the given good, then, a rise in price of complementary good will result in fall in, demand of given good., , s, As can be seen is the above graph that when price of the ink, was OP1, the demand for pen was OQ1. When the price of, ink falls to OP2, the demand for pen rises to OQ2. Hence, there is an inverse relationship between price of ink and, demand for pen., 10. Define production function. Distinguish between short, run and long run production functions., [4], OR, Define cost. Distinguish between fixed and variable costs., Give one example of each., Answer : Production function : Production has been, defined as “transformation of inputs into output”. The, physical relationship between inputs and outputs under given, technology is called production function., Q = f (F1, F2............Fn), , , P1, , yM, , D, B, , X, Q2 Quantity of Pen, (Units), , Decrease in the Price of Complementary Good, , X, , P2, , Q1, , D2, , Short - Run Production, Function, Short-run production function is when one factor is, varied while all other factors, are kept fixed (constant)., , • Follow us on Telegram - https://t.me/copymykitab1, , Long-Run Production, Function, Long- run production function is when all factors are, varied (changed) in same, proportion.

Page 47 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Delhi) | 1057, , It leads to changes in level It leads to the changes in, of production., scale of production., , produce with available technology and with full and efficient, use of its given resources., Production possibilities, (combinations), , Wheat (lakh, tonnes), , Tanks, (thousands), , A, , 0, , 15, , B, , 1, , 14, , C, , 2, , 12, , D, , 3, , 9, , E, , 4, , 5, , F, , 5, , 0, , OR, Cost : The sum of explicit cost (cash payments made by firms, to outsiders for hiring factor services and buying raw materials), and implicit costs (cost of self owned and self supplied inputs), constitute total cost of production of a commodity., Fixed Cost, Fixed cost does not increase, or decrease with increase or decrease in the level of production., In short period , fixed cost, cannot be changed ., Fixed cost curve is parallel to, X-axis ., , Variable Cost, Variable cost rises or falls with, the increase or decrease in, the level of production., In short period variable, cost can be changed., Variable cost curve is upward sloping., , Properties of PP Curve :, (a) Downward sloping curve from left to right : PP Curve, is downward sloping from left to right because in a situation, of full employment of resources , production of one good can, be increased only after sacrificing some quantity of the other, good., Y, , C, , , , , , , , , , , , , , , , , , , , op, , , , Full employment, of resources, , P1, , A, , B, , 15, , Tanks (thousands), , yM, , , , 11. A producer supplies 80 units of a good at a price of `10, per unit. Price elasticity of supply is 4. How much will, he supplyh at `9 per unit ?, [4], Answer : Given : Q1 = 80 units, Q2 = ? P1 = `10/unit and, P2 = `9/unit and Es = 4, Let Q2 be x, ∆Q = (Q2 – Q1), = (x – 80), ∆P = (P2 – P1), = (9 – 10), = –1, Es = (∆Q ÷ ∆P) × (P ÷ Q), 4 = (x – 80 ÷ (–1) × (10 ÷ 80), 4 = x – 80 ÷ –8, – 32 = – 80, = 48 units, Thus, a producer will supply 48 units at `9 per unit., 12. Assuming that no resource is equally efficient in, production of all goods, name the curve which shows, production potential of the economy. Explain, giving, reasons, its properties., [6], Answer : The curve which shows the production potential of, the economy , assuming that no resource is equally efficient, in production of all goods is " Production Possibility Curve, (PP Curve)"., Production possibility curve : It is a curve which depicts all, possible combinations of two goods which an economy can, , , Production Possibility Curve, , yK, ita, b, , Fixed cost can never be zero Variable cost is zero when, even if the production is production is stopped., stopped., Eg- Rent of a building., Cost of raw material., , Growth of, resources, , C, , 12, , 9, , D, G, , H, E, , 6, 3, , Underutilisation, of resources, P1, , F, O, , 1, , 2, 3, 4, 5, Wheat (lakh tonnes), , X, , 6, , (b) PP curve is concave to the origin : The shape of PP, Curve is concave to the origin because of increasing marginal, opportunity cost., (c) Optimum utilisation of resources : When economy is, producing on PP Curve , every point on it (A, B, C, D, E ,F), reflects situation of full and efficient employment of resources, i.e.. optimum utilisation of resources., 13. Explain the condition of consumer's equilibrium using, indfference curve analysis., [6], Answer : Consumer's equilibrium using indifference curve, analysis - According to indifference curve analysis, a consumer, attains equilibrium at a point where budget line is tangent to, indifference curve. Consumer equilibrium is achieved where, slope of indifference curve (MRS) = slope of budget line (Px/Py), MRS = Px ÷ Py( Ratio of prices of two goods), Given the indifference map (preference schedule) of the, consumer and budget or price line, we can find out the, combination which gives the consumer maximum satisfaction., The aim of the consumer is to obtain highest combination on, his indifference map and for this he tries to go to the highest, indifference curve with his given budget line. He would be, in an equilibrium only at such point which is common point, between budget line and the highest attainable indifference curve., , • Follow us on Telegram - https://t.me/copymykitab1, , , , The law which operates The law which operates in, here is known as “law of such a situation is known as, returns to a factor”., “law of returns to scale”.

Page 48 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1058 | Economics 2016 (Delhi), , A consumer is in equilibrium at a point where budget line is, tangent to indifference curve. At this point, slope of indifference, curve (called MRS) is equal to slope of budget line., Good 2, Y, , Types of change in quan- Types of change in supply :, tity supplied :, (a) Increase in supply., (a) Expansion of supply., (b) Decrease in supply., (b) Contraction of supply., Y, Y, , N, , P, , X, , X, , IC3, IC2, , Y, , Y, , IC1, M, , Consumer's Equilibrium, (Optimum), , X Good 1, , X, , Change in, Supply, When there is increase or decrease in supply because of, change in factors other than, price , it is called change in, supply., , C, , Change in Quantity, Supplied, When supply rises or falls, because of change in the, price of the commodity, and other things remaining, constant , is called change, in quantity supplied., When supply of a, commodity rises with, rise in price , other things, remaining constant is, expansion in supply, Other things remaining, constant , when supply of, a commodity falls with fall, in the price , it is termed as, contraction in supply., Change, in, quantity, supplied is depicted by, movement, along, the, supply curve., , op, , , , yM, , yK, ita, b, , In the above fig , P is the equilibrium point at which budget, line M just touches the highest attainable indifference curve, IC2 within consumer budget . Combinations on IC3 are, not affordable because his income does not permit whereas, combinations on IC1 gives lower satisfaction than IC2., Hence, best combination is at point P where budget line is, tangent to the indifference curve IC2. It is at this point that, consumer attains the maximum satisfaction at the state of, equilibrium., For consumer's equilibrium , two conditions are necessary :, (a) Budget line should be tangent to indifference curve, (MRS = Px / Py)., (b) Indifference curve should be convex to the point of origin, ( i.e.. MRS should be diminishing at a point of equilibrium.), 14. Explain the distinction between “Change in quantity, supplied” and “Change in supply”. Use diagram., [6], Answer :, , When supply of a commodity rises due to change in, factors other than price, it is, called increase in supply., When supply of a commodity falls due to change in factors other than price, is called, decrease in supply., Change in supply is depicted, by shift in supply curve., , X, , 15. Explain the implication of the following in a perfectly, competitive market :, [6], (a) Large number of buyers, (b) Freedom of entry and exit to firms, OR, Explain the implications of the following in an oligopoly, market :, (a) Inter-dependence between firms, (b) Non-price competition, Answer : Implications of the following in perfectly, competitive market :, (a) Large number of buyers : There are very large number, of buyers in perfectly competitive market that no individual, buyer can influence the price or demand of any commodity., An individual buyer is the price taker and not the price maker., (b) Freedom of entry and exit to the firms : No firm in the, perfectly competitive market can earn above normal profit in, the long run, i.e., a firm earns zero abnormal profit. In other, words, each firm earns just normal profit, i.e., minimum, profit which is necessary to carry out business., OR, Implications of the following in oligopoly market :, (a) Inter-dependence between firms : There are very few, large firms in oligopoly market and these firms are mutually, dependent on each other and hence influence the market, price and output. To fix the price and its output , every firm, has to consider the decision of the rival firm also as all the, firms are mutually dependent on each other., (b) Non -price competition : Since the firms in oligopolistic, market are inter- dependent and they fix the prices together,, so there is no price competition among the firms as they fix, the price after taking into consideration the decision of all the, firms together., , • Follow us on Telegram - https://t.me/copymykitab1, , , , O

Page 49 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Delhi) | 1059, , SECTION B, , , 16. Define Stocks., [1], Answer : Stock : A stock is a quantity which is measured at a, point of time, eg. population., 17. Depreciation of fixed capital assets refers to : (Choose the, correct alternative), [1], (a) Normal wear and tear, (b) Foreseen obsolescene, (c) Normal wear and tear and foreseen obsolescene, (d) Unforeseen obsolescence, Answer : (c) Normal wear and tear and foreseen obsolescence., 18. What is revenue expenditure ?, [1], Answer : Revenue Expenditure : An expenditure which, neither creates assets nor reduces liabilities is called revenue, expenditure., 19. Fiscal deficit equals : (Choose the correct alternative) [1], (a) Interest Payments, (b) Borrowings, (c) Interest payments less borrowing, (d) Borrowings less interest payments, Answer : (b) Borrowings., 20. Foreign exchange transactions dependent on other foreign, exchange transactions are called : (choose the correct, alternative), [1], (a) Current account transactons, (b) Capital account transactions, (c) Autonomous transactions, (d) Accomodating transaction, Answer : (d) Accommodating transactions., 21. Find net value added at factor cost :, (` Lakh), (i) Durable use producer goods with a, 10, life span of 10 years, (ii) Single use producer goods, 5, (iii) Sales, 20, (iv) Unsold output produced during the year, 2, (v) Taxes on production, 1, [3], Answer : Value of output = sales + change in stock, = 20 + 2 = 22 lakh., Gross value added at market price = value of output intermediate consumption ( single use producer goods), = 22 – 5 = 17 lakh., Depreciation = (Cost of producers good ÷ no., of life in years), = (10 ÷ 10) = 1, Net Indirect taxes = Taxes on production - subsidy, = 1–0=1, Net value added at FC = GVA mp – Depreciation –, Net indirect taxes, = 17 – 1 – 1, = 15 lakhs., 22. Distinguish between marginal propensity to consume and, average propensity to consume. Give a numerical example., [3], , OR, Explain the role of taxation in reducing excess demand., Answer :, , , , , , , , , , , , , , , , op, , C, , , , , , , , , , yM, , , , , , , , , , , , , , , Average Propensity to, Consume, The ratio of total consumption expenditure to total, income is called average propensity to consume., , APC = C/Y, APC can be greater or less, than 1 but can never be, zero because at zero income,, survival needs minimum, consumption., MPC falls more rapidly APC falls as income rises., with rise in income., Eg - if income of a Eg - Aggregate income of the, country increases from economy = `5000 crores and, `5000 crores to `5500 agrregote consumption is, crores,, consumption `4500 crores, then :, expenditure goes up from, `4000 crores to `4300, crores, then :, APC = C/Y = 4500/5000 =, MPC = ∆C/∆Y= 300/500 0.90 or 90 %., =3/5 = 0.6 or 60 paise., OR, Role of taxation to reduce excess demand :, Important part of fiscal policy is revenue policy which is, expressed in terms of taxes. During inflation, government, should raise rates of all taxes especially on rich people because, taxation withdraws purchasing power from the tax payers, and to that extent reduces effective demand. The nondiscretionary elements refer to in-built stabilizers of income, which operate automatically in reducing excess demand like, progressive income tax, subsidies, old -age pension and others, such as transfer payments ., 23. In an economy investment is increased by `300 crore. If, marginal propensity to consume is 2/3, calculate increase, in national income., [3], Answer :, MPC = 2/3, ∆I = `300 crores, k = [1 ÷ (1 – MPC)], = [1 ÷ (1 – 2/3)], 1, 1, =, 2, 1 – MPC, 1–, 3, 1, = 3, 1, 3, k = ∆Y/∆I, 3 = ∆Y/ 300, ∆Y = 300 × 3, = `900 crore, Increase in national income is `900 crore., , yK, ita, b, , , , , , , , Marginal Propensity to, Consume, The ratio of change in, consumption (∆C) due to, change in income (∆Y) is, called marginal propensity, to consume., MPC = ∆C/∆Y, MPC is always greater than, zero but less than 1., , • Follow us on Telegram - https://t.me/copymykitab1

Page 50 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1060 | Economics 2016 (Delhi), , 24. Government incurs expenditure to popularize yoga among, the masses. Analyse its impact on gross domestic product, and welfare of the people., [4], , levying heavy taxes and encourages the use and production of, "khaadi" products by providing subsidies., Government budget can be used to bring price stability or, economic stability in the economy :, , , , Impact on the welfare of people :, Yoga keeps the body, mind and soul healthy and happy. With, healthy body, mind and soul people are able to work in an, efficient manner and help the others in society, rooting up the, welfare of all the people in the society., , Explain the ‘unit of account’ function of money. How has, it solved the related problem created by barter ?**, 26. Explain how open market operations are helpful in, controlling credit creation., [4], , , [6], Answer : Consumption + saving is always equal to income, because income is either consumed or saved. It implies that, consumption and saving curves representing consumption, and saving functions are complementary curves., In part A , CC curve shows consumption function whereas, 45˚ line represents income. C curve intersects 45˚ line at point, B at which BR=OR i.e..,consumption = income. Point B is, the break even point showing zero saving. It states that saving, curve must intersect X-axis at the same income level where, consumption curve and 45˚ line intersects. Left of point B is, negative saving and to the right of point B is positive saving., In part B, we derive saving function in the form of saving, curve. In part A , the amount of saving is the vertical distance, between C curve and 45°line. By plotting, the vertical, distances of saving /dis saving and by joining them, we derive, a saving curve. In part A the vertical distance OC (dissaving), is plotted as OS1 below X-axis in part-B. At OR level of, income in Part A, vertical distance at point B is shown as, point B1 on X-axis in lower part of figure is nil. LM of part A, is shown as L1M1 in part -B. By joining points S, B1 and L1, in lower segment, we get saving curve. Thus saving curve is, derived from consumption curve., , C, , op, , yM, , Answer : Open market operations : Open market operations, refer to buying and selling of government securities by, central bank to public and banks .This is done to influence, money supply in the country. Sale of government securities, to commercial bank means flow of money into central bank, which reduces cash reserves. Consequently, credit availability, of commercial banks is controlled., , On the other hand, if R.B.I purchases government securities,, it will increase the money supply with commercial banks that, will increase their lending capacity and flow of money into, the economy., , PART-A, , 27. What is government budget ? Explain how taxes and, subsidies can be used to influence allocation of resources., [6], , Y, , Through budgetary policy, government aims to allocate, resources in accordance with economic (profit maximisation), and social ( public welfare) priorities of the country., , C, , C, M, Consumption, function, , B, , Di, ss, , To encourage investments, government can give tax concessions, subsidies, etc to the producers. For example :, government discourages the production of harmful, consumption goods like liquor or cigarettes, etc. through, , Saving, , av, , Answer : Government budget : A government budget is an, annual financial statement of estimated revenue and estimated, expenditure during a financial year. Government budget is a, statement of its income and expenditure., , Consumption, , , , L, Break-even point, (zero saving, , in, g, , OR, , 28. Given Consumption curve, derive saving curve and state, the steps taken in the process of derivation. Use diagram., , yK, ita, b, , , , 25. Explain the ‘store of value’ function of money. Ho,w has it, solved the related problem created by barter ?**, [4], , Government can bring price/economic stability i.e.., control, fluctuations in the general price level through taxes, subsidies, and expenditure. For instance, when there is inflation, (continuous rise in price), government can reduce its own, expenditure. When there is depression, government can, reduce taxes and grant subsidies to encourage spending by, the people., , , , Answer : Impact on GDP : With the help of yoga, people, will be in good state of health as well as in a good state of, mind and it is rightly said that healthy mind stays in a healthy, body. When a person has healthy mind and healthy body,, he/she will work hard towards producing good and increased, quantity of goods which will help in increasing the GDP of, the economy. People with healthy mind will provide their, efficient services to the economy which will have a positive, impact on the GDP of the country and will help in increasing, the standards of the economy., , 45≥, , O, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , R, , S, , X

Page 51 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2016 (Delhi) | 1061, Y, , Exchange Rate, , PART-B, Y, , S, , D, , S', E, , Saving, , R, R1, , L1, , Saving, , E1, , S, S, S', O, , O, , B1, , ing, , X, , M1, , Disposable income, , v, sa, , s, , Di, S, , Q, , Q1, , X, Demand and supply of, foreign currency, , As can be seen in the above diagram that the supply curve, of foreign exchange is SS. As the foreign invesment in India, increases, the supply curve of foreign exchange shifts to, rightward and now the new supply curve is S'S'. This shift in, supply curve from SS to S'S' changes the equilibrium from, E to E1 wher the exchange rate falls from OR to OR1 and, demand and supply quantity of foreign exchange rises from, OQ to OQ1. Hence the new equilibrium gets established at, OR1 exchange rate and OQ1 quantity of forign exchange., 30. Find national income and (private income**) :, (` Crores), (i) Wages and salaries, 1000, (ii) Net current transfers to abroad, 20, (iii) Net factor income paid to abroad, 10, (iv) Profit, 400, (v) National debt interest, 120, (vi) Social security contributions by employers 100, (vii) Current transfers from government, 60, (viii) National income accuring to government, 150, (ix) Rent, 200, (x) Interest, 300, (xi) Royalty, 50, [6], Answer : NNPfc = Wages and salaries + Social security, contributions by employers + Rent +interest + profit + royalty, - Net factor income paid to abroad., NNPfc = 1000 + 100 + 200 + 300 + 400 + 50 – 10, = 2050 – 10, = `2040 crores., , yK, ita, b, , 29. (a) In which sub-account and on which side of balance of, , D, , payments account will foreign investments in Indian, be recorded ? Give reasons., , Answer : (a) Foreign investments in India will be recorded in, , yM, , the capital account on the credit side of Balance of Payments, , accounts. It is recorded as the positive item in the capital, account of BOP because foreign investments is an inflow of, , op, , foreign currency into our country., , (b) Foreign investment in India will increase the supply of, foreign currency in our country. This increase in supply is, , C, , reflected as shift in the supply curve. With the shift, new, equilibrium point is established, where exchange rate falls and, thus the demand and supply of foreign currency rises and, exchange rate falls. This will continue till the equilibrium is, , , , , , , , reached., , , , [6], , , , on exchange rate ? Explain., , , , , , (b) What will be the effect of foreign investment in India, , SET II, , , , Economics 2016 (Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , [1], , Answer : Increase in supply : When supply of a commodity, rises due to change in factors other than the price , it is called, increase in supply. Increase in supply is the rightward shift of, the supply curve., 5. What is the relation between marginal cost and average, cost when average cost is constant ?, [1], , , SECTION A, 4. When does ‘increase’ in supply take place ?, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 52 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1062 | Economics 2016 (Delhi), , , , yM, , , , , , op, , , , New quantity (Q1) = 80 units, New price (P1) = ?, Change in quantity supplied, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , (∆Q) = Q1 – Q, = 80 – 100, = –20 units., Es = (∆Q ÷ ∆P) × (P ÷ Q), 2 = (–20 ÷ ∆P) × (20 ÷ 100), 2 = (–20/(–∆P) × (1/5), (–∆P is taken because prices are fallen splly is falling), 2 = (–4/(–∆P)), 2∆P = –4, –∆P = –4/2, –∆P = –2, ∆P = 2, ∆P = (P – P1), 2 = ( 20 – P1), P1 = 20 – 2 = `18, Hence, the seller will supply 80 units at `18 per unit., 10. Explain the effects of change in income on demand for a, good., [4], Answer : Effects of change in income on demand for a good :, Relationship between income and demand is direct in case of, normal good but negative in case of inferior good., (a) In case of normal good, an increase in income of the, buyer will increase the demand at the same price because he, can afford to buy more and shift the demand curve to the, right but fall in the income will decrease the demand and, shift the demand curve to the left., (b) In case of an inferior good , an increase in income, usually leads to decrease in demand at the same price and, shift the demand curve to the left but decrease in income, leads to increase in demand at the same price and shifts the, demand curve to the right., , , yK, ita, b, , , , , , , , , , , , , , Answer : Relation between marginal cost and average cost, when average cost is constant is , marginal cost is also constant, because at this point MC curve cuts the AC curve which implies, that MC = AC, and AC curve is at its minimum point., 7. A consumer consumes only two goods X and Y. If marginal, utilities of X and Y are 4 and 5 respectively, and if price, of X is `5 per unit and that of Y is `4 per unit, is the, consumer in equilibrium ? What will be further reaction, of the consumer ? Explain., [3], Answer : Marginal utility of X = 4, Price of X = `5, Marginal utility of Y = 5, Price of Y = 4, MUx ÷ Px = 4 ÷ 5 = 0.8, MUy ÷ Py = 5 ÷ 4 = 1.25, The ratio of MUy to the price of Y is greater than the ratio of, MUx to the price of X , so the consumer is not at equilibrium, and to reach equilibrium level, consumer should increase the, consumption of good Y and decrease the consumption of, good X., 9. Price elasticity of supply of a good is 2. A producer, supplies 100 units of a good at a price of `20 per unit. At, what price will he supply 80 units., [4], Answer : Elasticity of supply (Es) = 2, Quantity supplied (Q) = 100 units, Price (P) = `20/unit, , SET III, , , , C, , Economics 2016 (Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , = 1/1 – 0.8 = 1/0.2 = 5, 5 = 2000÷ ∆I, ∆I = 2000/5, ∆I = 400 crores, , ** Answer is not given due to change in syllabus., , , , , , , , , , , , , , 5∆I = 2000, , , , , , , , , , , , , , , , , , k = 1/1 – MPC, , , , Change in income = `2000 crore, , , , , , Answer : Marginal propensity to consume (MPC) = 0.8, , , , , , 21. Suppose marginal propensity to consume is 0.8. How, much increase in investment is required to increase, national income by `2000 crore ? Calculate., [3], , k = ∆Y÷∆I, , 22. Find net value added at market price :, (` lacs), (i) Fixed capital good with a life span of 5 years., 15, (ii) Raw materials, 6, (iii) Sales, 25, (iv) Net change in stock, (–) 2, (v) Taxes on production, 1, [3], Answer :, Value of output = sales + change in stock, = 25 + (–2), = 25 – 2, = 23 lakh, Gross value added at market price = Value of output intermediate goods (intermediate goods = raw materials), GVAmp = 23–6, = 17 lakh., , , SECTION B, , • Follow us on Telegram - https://t.me/copymykitab1

Page 53 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , (` crores), (i) Rent, 200, (ii) Net current transfers to abroad, 10, (iii) National debt interest, 60, (iv) Corporate tax, 100, (v) Compensation of employees, 900, (vi) Current transfers by government, 150, (vii) Interest, 400, (viii) Undistributed profits, 50, (ix) Dividend, 250, (x) Net factor income to abroad, (–) 10, (xi) Income accruing to government, 120, [6], Answer : NDPfc = rent + corporate tax + compensation of, employees + interest + undistributed profits + dividend., = 200 + 100 + 900 + 400 + 50 + 250, = ` 1900 crore., , C, , op, , yM, , yK, ita, b, , , , , , , , , , , , , , , , , , NVAmp = GVA mp - depreciation, = 17 – (15/5), = 17 – (3), = 14 lakh, Net Value Added at market price = ` 14 lakh., 24. Explain how ‘bank rate’ is helpful in controlling credit, creation ?, [4], Answer : Bank Rate : Bank rate is the rate of interest at, which the central bank lends funds to commercial banks. It is, in a way, cost of borrowing ., In a situation of an inflationary pressure, central bank, increases the bank rate. High bank rate forces the commercial, bank to raise the rate of interest which makes credit dearer. As, a result, demand for loans fall. Increase in bank rate by central, bank adversely affects credit creation by commercial bank. A, decrease in bank rate will have opposite effect., 27. Find net domestic product at factor cost and (personal, income)** :, , , , Economics 2016 (Delhi) | 1063, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 54 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2015 (Outside Delhi), , SET I, Maximum marks : 100, , , , Time allowed : 3 hours, , SECTION A, , The following figure depicts the shape of PPC., , , , Good Y (units), 30, 27, 21, 12, 0, , C, , Good X (units), 0, 1, 2, 3, 4, , op, , yM, , , , yK, ita, b, , , , , , 1. Define indifference curve., [1], Answer : Indifference curve is a curve that depicts various, combinations of two goods that provides a consumer with, the same level of satisfaction. In other words, it shows those, combinations of two goods between which the consumer is, indifferent., 2. If due to fall in the price of good X, demand for good Y, rises, the two goods are : (choose the correct alternative), [1], (a) Substitutes, (b) Complements, (c) Not related, (d) Competitive, Answer : If due to fall in the price of good X, demand for, good Y rises, the two goods are complements. This is because, demand for a good moves in the opposite direction of the, price of its complementary goods., Hence, the correct answer is option (b)., 3. If Marginal Rate of Substitution is increasing throughout,, the Indifference Curve will be : (choose the correct, alternative), [1], (a) Downward sloping convex, (b) Downward sloping concave, (c) Downward sloping straight line, (d) Upward sloping convex, Answer : If Marginal Rate of Substitution is increasing, throughout, the Indifference Curve will be downward sloping, concave., Hence, the correct answer is option (b)., 4. Giving reason comment on the shape of Production, Possibilities curve based on the following schedule : [3], , Answer : Based on the below schedule, we can say that PPC is, concave to origin. This is because as the production increases,, to produce each additional unit of Good X, more and more, units of Good Y need to be sacrificed. In other words, the, opportunity cost of producing one good in terms of another, increases., Good X (units), , Good Y (units), , Opportunity, Cost, , 0, , 30, , –, , 1, , 27, , 3, , 2, , 21, , 6, , 3, , 12, , 9, , 4, , 0, , 12, , Thus, the shape of PPC is concave which can be attributed to, the law of increasing opportunity cost., 5. What is likely to be the impact of "Make in India" appeal, to the foreign investors by the Prime Minister of India, on, the production possibilities frontier of India ? Explain., OR, What is likely to be the impact of efforts towards reducing, unemployment on the production potential of the, economy? Explain., [3], Answer : "Make in India" appeal to the foreign investors, by the Prime Minister of India will lead to the large scale, inflow of foreign capital which will result in the increase in, the availability of resources in the economy, thereby shifting, the Production Possibility Curve (PPC) parallelly to the right, from AB to CD as shown in the following diagram., , Impact of "Make in India" appeal on PPC, OR, , • Follow us on Telegram - https://t.me/copymykitab1

Page 55 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1065, , Due to the efforts towards reducing unemployment. The, point which was earlier below the Production possibility curve, (indicating under utilisation of resources) will shift close to or, on the PPC (indicating better utilisation of resources). This, movement is being depicted in the below graph with the help, of the arrow from point P., , The following are the consequences, and effects of price floor., , , , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , C, , op, , yM, , , , yK, ita, b, , Impact or efforts towards reducing, unemployment on PPC, 6. Explain the significance of 'minus sign' attached to the, measure of price elasticity of demand in case of a normal, good, as compared to the 'plus sign' attached to the, measure of price elasticity of supply., [3], Answer : The measure of price elasticity of demand of normal, good carries minus sign as there exists an inverse relationship, between demand and price of the good. That is, other things, remaining constant, as the price of a good rises (or falls), the, quantity demanded of the good falls (or rises). On the other, hand, price elasticity of supply carries plus sign as there exists, a positive relationship between the supply of a commodity, and its price. To put in other words, when the price of a good, rises (or falls), then the quantity supplied will increase (or, decrease), other things remaining unchanged., 7. In a perfectly competitive market the buyers treat products, of all the firms as homogeneous. Explain the significance, of this feature., [3], Answer : In a perfectly competitive market, the buyers treat, products of all the firms as homogeneous. This implies, that all the firms in perfect competitive market produces, homogeneous product. This further implies that the product, of each and every firm in the market is perfect substitute, to other product in terms of quantity, quality, colour, size,, features, etc. This indicates that the buyers are indifferent, between the products of different firms. Due to homogeneity, of the products, existence of uniform price is guaranteed., Implication : The products of different firms are qualitatively, and quantitatively homogeneous., 8. What are the effects of 'price-floor' (minimum price, ceiling) on the market of a good? Use diagram., [3], Answer : Price floor implies legislated or government fixed, minimum price that should be charged by the seller. Since, price floor is above the equilibrium price (OPe), thus the, imposition of the price floor leads to excess supply as shown, in the diagram below., , Assurance to the farmers : The imposition of the price floor, assures the farmers that, whatever they produce will get sold, in the market. This implies that the farmers can produce to, their maximum., Assurance of returns : Due to the price floor, the farmers, need not to bother about the sale of their output. This, ensures a minimum guaranteed return to their investment in, the production process., Higher income : The minimum guaranteed returns in form, of minimum price and minimum wage to labourers, result in, increase in the income of the poor people., Burden on consumers : Price floor exerts additional pressure, on the consumers and the traders, as they need to buy the, products at comparatively higher price (OPc in the figure), instead of the equilibrium price (OPe)., Burden on government : It also puts extra burden on, the government revenues. It becomes mandatory for the, government to purchase the excess produce, even if it runs a, sufficient volume of buffer stocks., Higher taxes : The government tries to shift the burden, (associated with purchasing the excess produce at higher, price) to the consumers and the traders in form of higher, taxes., 9. A consumer spends `1,000 on a good priced at 10 per, unit. When its price falls by 20 percent, the consumer, spends `800 on the good. Calculate the price elasticity of, demand by the Percentage method., [4], Answer : Given :, Initial Total Expenditure (TE0) = `1000, Final Total Expenditure (TE1) = `800, Initial Price (P0) = `10, Percentage change in price = – 20, P –P, Percentage change in price = 1 0 ×100, P0, P1 – 10, – 20 =, × 100, 10, = P1 – 10, P1 = 8

Page 56 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1066 | Economics 2015 (Outside Delhi), , Price (P), , Total Expenditure, (TE) = Price (P) ×, Quantity (Q), , P0 = `10, , TE0 = `1000, , Quantity (Q), TE, =, P, Q0 = 100, , P1 = `8, , TE1 = `800, , Q1 = 100, , AVC =, , TVC, Q, , Now,, , Percentage change in quantity demanded, , Ed = (-), , AVC is a U-shaped curve, That is, as output increases, the, AVC curve falls and reaches its minimum point 'K' and then, rises up. The reason behind the U-shape of AVC curve is the, Law of Variable Proportion., OR, Average Revenue(AR) is defined as revenue earned per unit of, output sold. AR is same as that of price (P) of the output (Q)., Algebraically,, TR, AR =, Q, where, TR is total revenue, Q = Output, We know that TR = P × Q, P×Q, P×Q, /, \, AR =, ⇒ AR =, Q, Q, /, AR = P, , C, , op, , , , yM, , , , yK, ita, b, , , , , , , , , , Percentage change in price, Q1 – Q 0, ×100, Q0, Ed = (-), – 20, 100 – 100, ×100, 100, Ed = (-), – 20, Ed = 0, \, Ed = 0, Thus, the price elasticity of demand is 0., 10. What is the behaviour of (a) Average Fixed Cost and (b), Average Variable Cost as more and more units of a good, are produced ?, OR, Define Average Revenue. Show that Average Revenue and, Price are same., [4], Answer : (a) Average Fixed cost is defined as the fixed cost per, unit of output produced. It is derived by dividing the total, fixed cost produced. That is,, TFC, AFC =, Q, , Thus, AR is always equal to the price of the output., 11. A consumer consumes only two goods X and Y, both priced, at `2 per unit. If the consumer chooses a combination of, the two goods with Marginal Rate of Substitution equal, to 2, is the consumer in equilibrium? Why or why not?, , , , What will a rational consumer do in this situation?, Explain., [6], OR, , , , , , As more and more units of output are produced, the, shape of AFC becomes that of rectangular hyperbola., That is, AFC is downward sloping rectangular hyperbola., This is because at any point on AFC curve, if AFC is, multiplied by corresponding unit of output, then we, get TFC. For example, at point A in the above figure, AFC, is `2.5 and corresponding output produced is 2 units,, hence, TFC is ` 5 (i.e. `2.5 × 2), (b) Average Variable Cost is defined as the variable cost per, unit of output produced. It is derived by dividing the Total, Variable Cost by quantity of output produced. That is,, , A consumer consumes only two goods X and Y whose, prices are `5 and `4 respectively. If the consumer chooses, a combination of the two goods with marginal utility of, X equal to 4 and that of Y equal to 5, is the consumer, in equilibrium? Why or why not? What will a rational, consumer do in this situation? Use utility analysis., Answer : At the point of consumer equilibrium the following, equality should be met :, P, MRS = x, Py, According to the question,, MRS = 2, 2, Px, =, =1, 2, Py, , • Follow us on Telegram - https://t.me/copymykitab1

Page 57 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1067, , So, MRS is greater than the price ratio. Thus, to reach the, equilibrium point a rational consumer would decrease, the consumption of good y., OR, According to the utility approach, a consumer reaches, equilibrium where the following equality is met., MU y, MU x, =, Px, Py, According to the given question, MU x, 4, =, Px, 5, MU y, 5, =, 4, Py, MU x, MU y, So,, is greater than, . Thus, to reach the, Px, Py, , This stage starts from point K and continues till point B on, the TP curve. During this stage, the TP increases but at a, decreasing rate and attains its maximum point at B, where, it remains constant. On the other hand (in the figure ii), the, MP curve continues to fall. When TP attains its maximum, point, corresponding to it, MP becomes zero. AP, in this stage, initially rises, attains its maximum point at Z and thereafter, starts falling., Reasons for decreasing returns to a factor, (1) Fuller utilisation of fixed factor—In this stage, the, fixed factor is utilised to its maximum level as more and more, of labour inputs are employed. Imperfect substitutability, between labour and capital, the variable factors are imperfect, substitute for the fixed factor. Therefore, the firm cannot, substitute labour for capital and as a result diminishing retuns, takes place., (2) Optimum proportion/ideal factor ratio : The optimum, proportion (or ideal factor ratio) is a fixed ratio in which the, labour and capital inputs are employed. These factors will, be most efficient if they are employed as per the optimum, proportion. If this proportion is disturbed (by combining, more of labour inputs to the fixed units of capital), then, the efficiency of the factors will fall, thereby leading to the, diminishing retuns to the factor., IIIrd Stage : Negative returns to a factor, This stage begins from the point B on the TP curve., Throughout this point, TP curve is falling and MP curve, is negative. Simultaneously, the AP curve continues to fall, and approaches the X-axis (but does not touch it). Like the, first stage, this stage is also known as non- economic zone as, any rational producer would not operate in this zone. This, is because the addition to the total output by the additional, labour unit (i.e. marginal product) is negative. This implies, that employing more labour would not contribute anything, to the total product but will add to cost of the production in, form of additional wage. Hence, the cost of the additional, labour input is greater than the benefit of employing it., Reasons for Negative Returns to a Factor, (1) Over utilisation of the fixed factors : In the third stage, of production, the variable factor is in excessive relative to, the fixed factors. This leads to the over utilisation of the fixed, factor, thereby negative returns to a factor sets in., (2) Negative marginal product : Throughout this stage the, TP curve is continuously falling, consequently, the additional, product by the additional unit of labour becomes negative., This implies that in this stage of production, the cost of, employing labour is substantially higher than its contribution, to the total product., , C, , op, , yM, , yK, ita, b, , equilibrium, a rational consumer would increase the, consumption of good y and decrease that of good x., 12. What are the different phases in the Law of Variable, Proportions in terms of marginal product? Give reason, behind each phase. Use diagram., [6], Answer : The Law of Variable Proportions states that if more, and more of variable factor (labour) is combined with the, same quantity of fixed factor (capital), then initially the total, product will increase but gradually after a point, the total, product will become smaller and smaller. Also, a point will be, reached thereafter, the marginal product of the variable factor, will start falling and after this point the marginal product, of any additional variable factor can be zero and even be, negative., The following are the three phases (stages) of the Law of, Variable Proportions., 1st Stage : Increasing returns to a factor, This stage starts from the origin point O and continues till, the point M on the TP curve. During this phase, TP increases, at an increasing rate and is also accompanied by rising MP, curve (in figure ii). The MP curve attains its maximum point, (U) corresponding to the point of inflexion (K). Throughout, this stage, AP continues to rise., Reasons for Increasing Returns to a Factor, (1) Underutilization of the fixed factor : In the first stage of, production, there are not enough labour units to fully utilise, the fixed factor. Therefore, the firm can increase its output, just by combining more and more of labour inputs with the, fixed factor, thereby; the output of the additional unit of, labour (i.e. MP) tend to rise., (2) Division of labour : The increase in the labour input, enables the division of labour, which further increases the, efficiency and productivity of the labour., (3) Specialisation of labour : Due to the division of, labour, specialisation of individual labour unit increases,, which in turm raises the overall efficiency and productivity., Consequently, the MP curve rises and TP curve continues to, rise., , IInd Stage : Diminishing returns to a factor, , (3) Problem of management : With the increased number of, labour units employed, it becomes hard for the management, , • Follow us on Telegram - https://t.me/copymykitab1

Page 58 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1068 | Economics 2015 (Outside Delhi), , of the firm to efficiently manage them. Thus, due to the, mismanagement and lack of responsibility, inefficiency is, infused in the system., Let us understand the various stages with the help of, following schedule and graph., Units, Units, of, of, TP, Capital Labour, , AP =, , Units of Labour, , MP =, ∆TP, ∆L, , Total Product, , 0, , 0, , 0, , –, , 1, , 1, , 7, , 7, , 7, , 1, , 2, , 18, , 9, , 11, , 1, , 3, , 33, , 11, , 15, , 1, , 4, , 44, , 11, , 11, , 1, , 5, , 48, , 9.6, , 4, , 1, , 6, , 51, , 8.5, , 3, , 1, , 7, , 51, , 7.4, , 0, , 1, , 8, , 49, , 6.1, , –2, , 'At output OQ1,. price is KQ1, and the marginal cost is, LQ1, such that KQ1, > LQ1. Therefore, OQ1, is not the profit, maxmising output. This is due to the fact that the firm can, increase profit by increasing the production of output to, OQ2., At output OQ3, price is HQ3 and the marginal cost is GQ3,, such that HQ3 < GQ3. Therefore, OQ3 is not the profit, maximizing output. This is due to the fact that the firm, can increase its profit by reducing its output level to OQ2., Thus, we can conclude that at profit maximization, output, the equilibrium price (or MR) must be equal to, the MC curve and it cannot be greater or lesser than the, MC curve., The equality of MR and MC is only the necessary, condition. The sufficient condition is that the MC should, be rising at the point of intersection with MR., Case B : If Price (MR) < MC, , C, , op, , yM, , yK, ita, b, , 1, , 2. MC is rising at the point of intersection with MR, Now, let us evaluate what would happen if the two, conditions are not met., Case A : If Price (MR) > MC, , , , 13. Explain Why will a producer not be in equilibrium if the, conditions of equilibrium are not met., [6], Answer : According to MR-MC approach, the firm (or, producer) will attain its equilibrium, where the following two, necessary and sufficient conditions are fulfilled., 1. MR = MC, , In the figure, the MC curve cuts the price line (or MR) at two, different points i.e., at 'Z' and 'E'. The first order condition, of profit maximization, i.e., Price (or MR) = MC is fulfilled, at both of these points. Now let us evaluate which of the, following two cases fulfills the second order condition of, profit maximization., Case A : At point 'Z', At point 'Z', price is equal to MC but MC is falling and, is negatively sloped. At this point, any output level slightly, more than the OQ0, the firm is facing price that exceeds, the MC. This implies that the profit can be maximized by, increasing output level beyond OQ0. Therefore, OQ0 is not, a profit maximisation output., , • Follow us on Telegram - https://t.me/copymykitab1

Page 59 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1069, , Case B : At point 'E', , 1, . Here, MPC, 1 − MPC, refers to the Marginal propensity to consume., Answer : The value of multiplier is, , As we are given the value of MPC as 1. Thus, the value of, multiplier becomes infinity., Hence, the correct answer is option (d)., , , 17. Primary deficit in a government budget is : (Choose the, correct alternative)., [1], (a) Revenvue expenditure – Revenvue receipts, (b) Total expenditure – Total receipts, (c) Revenvue dificit – Revenvue payments, (d) Fiscal dificit – Interest payments, Answer : Primary deficit in a government budget is Fiscal, Deficit - Interest Payments. Primary deficit indicates the, amount of borrowings required by the government to meet, the expenditure other than interest payments., Hence, the correct answer is option (d)., 18. Direct tax is called direct because it is collected directly, from: (Choose the correct alternative), [1], (a) The producers on goods produced, (b) The sellers on goods sold, (c) The buyers of goods, (d) The income earners, Answer : Direct tax refers to the tax that is directly collected, from the individuals on whom the tax has been imposed., Out of the given options, option (d), i.e. the income earners,, fulfills the criteria of the direct tax., Hence, the correct answer is option (d)., 19. Other things remaining the same, when in a country the, market price of foreign currency falls, national income is, likely: (Choose the correct alternative), [1], (a) to rise, (b) to fall, (c) to rise or to fall, (d) to remain unaffected, , As the market supply decreases, the initial supply shifts, leftwards to the new supply curve S2S2 from S1S1. Now at the, initial market price of OP1. There exists excess demand. This, excess demand will increase competition among the buyers, and they will now be ready to pay a higher price to acquire, more units of a good. This will further raise the market, price. The rise in the price will continue till the market price, becomes OP2. The new market supply curve intersects the, initial demand curve. The total quantity supplied will fall to, Oq2 and the new equilibrium price will rise to OP2., , Hence, the correct answer is option (b)., 20. If the Real GDP is `400 and Nominal GDP is `450,, calculate the Price Index (base = 100)., [3], Answer : We know,, Real GDP =, 400 =, , , , , , , , , , , , SECTION B, 15. What is 'aggregate demand' in macroeconomics ?, [1], Answer : Aggregate demand refers to the total value of final, goods and services which all the sectors of an economy are, planning to buy at a given level of income during a period of, an accounting year., 16. If MPC = 1, the value of multiplier is : (Choose the correct, altemative), [1], (a) 0, (b) 1, (c) Between 0 and 1, (d) Infinity, , Answer : When the prices of foreign currency falls, the, national income is likely to fall. This is because a fall in foreign, prices will lead to a decrease in the one of the components, of national income i.e., net exports exports will decrease and, imports will increase (as imports have become cheaper), this, will ultimately lead to decrease in national income., , , , C, , , , op, , yM, , yK, ita, b, , To the left of the point 'E', if the firm produces slightly lesser, level of output than OQ2, then the firm is facing price that, exceeds the MC. This implies that higher profits can be, achieved by increasing the level of output to OQ2. On the, other hand, to the right of the point 'E'. If the firm produces, slightly higher level of output than OQ2, then the firm is, facing price that falls short of the MC. This implies that, higher profits can be achieved by reducing the output level, to OQ2. Thus, the point E is the producer's equilibrium and, OQ2 is the profit maximizing output level, where Price = MC, and also MC curve is rising., 14. Market for a good is in equilibrium. The supply of good, "decreases". Explain the chain of effects of this change.[6], Answer : When the market is in equilibrium, this implies, that the market demand is equal to the market supply at the, equilibrium point. Now, in case the market supply decreases,, this leads to a leftwards shift in the market supply curve. This, is because a decrease in supply refers to a fall in the supply, of the given commodity due to change in factors other than, price. Thus, in the given case the supply curve will shift, towards left. As a result, there will exist a situation of excess, demand at the equilibrium point. This can be shown in the, following diagram., , Price Index =, , • Follow us on Telegram - https://t.me/copymykitab1, , Nominal GDP, × 100, Price Index, 450, × 100, Price Index, 450, × 100 = 112.50, 400

Page 60 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1070 | Economics 2015 (Outside Delhi), , , , backed by the central bank. However, the currency issued, by the central bank is its monetary liability. In other words,, the central bank is obliged to back the currency issued with,, assets of equal value such as gold coins and bullions, foreign, exchange, etc. In addition to issuing currency to the general, public, the central bank also issues currency to the central, government of the country. That is, the central government, if required, can sell its securities to the central bank and in, return gets the required cash currency., 24. Currency is issued by the central bank, yet we say that, commercial banks create money. Explain. How is this, money creation by commercial banks likely to affect the, national income? Explain., [4], Answer : We know that RBI prints new money, while on, the other hand, commercial banks multiplies money supplied, by the RBI through the process of credit creation. People, deposit money in their respective bank accounts. As per the, central bank guidelines, the commercial banks are required to, maintain a portion of total deposits in form of cash reserves., With the help of the past experiences, the commercial banks, know that not all the depositors will turn-up for withdrawal, at the same day. Consequently, the commercial banks lends, the remaining portion (left after maintaining cash reserves) of, the total deposits to the general public in form of credit, loans, and advances. It is the second portion of the total deposits, that is responsible for the credit creation (credit money)., The process of creation of credit money begins as soon as the, commercial banks start the lending process. The amount of, the credit money increases as the banks lend loans to more, and more number of people in the economy. The deposit of, money by the people in the banks and the subsequent lending, of loans by the commercial banks is a recurring process. This, lending process of the commercial banks increases the rate of, investment and production in the economy, which in turn, helps in improving the national income in the economy., , Marginal Propensity to Save = 0.3, Autonomous Consumption = 100, Answer : Given, , , , , Bank of issue function of central bank implies that Central, Bank has the exclusive authority to issue the currency (notes, + coins). The currency issued by the central bank is known, as 'legal tender money' i.e., the value of such currency is, , Y = 800, MPS(s) = 0.3, MPC (c) = 1 – MPS = 1 - 0.3 = 0.7, C = 100, We know that at equilibrium,, Y = C+I, C = ab + by, = 100 + 0.7y, By putting the value of Y & C, 800 = 100 + 0.7 (800) + I, 800 = 100 + 560 + I, i.e., , , , OR, , National Income = 800, , , , Answer : Banker’s Bank : Central bank is the apex bank, of all the commercial banks and financial institutions in the, country. It holds the same relationship with the commercial, banks as commercial bank holds with its customer. The, central bank accepts deposits from the commercial banks, and holds it as reserves for them. The commercial banks, are compulsorily required to hold a part of their deposits as, reserves with the central bank in accordance with the cash, reserve ratio (CRR). In addition to the CRR requirements,, the commercial banks hold reserves with the central bank for, clearing their settlements with other banks and to fulfil their, requirements of inter-bank transfers., , , , Explain the "Bank of Issue function" of the central bank., , 25. An economy is in equilibrium. Calculate the Investment, Expenditure from the following :, [4], , , , OR, , , , C, , , , op, , yM, , yK, ita, b, , 21. What are fixed and flexible exchange rates?, [3], OR, Explain the meaning of Managed Floating Exchange Rate., Answer : Fixed exchange rate refers to a system where the, exchange rate is held constant or fixed by the monetary, authority of the country. Under this regime, the monetary, authority of the country pegs (or, fixes) the value of its, currency against various other currencies. This system of, exchange rate avoids frequent fluctuations in the exchange, rate and makes international trade more predictable., On the other hand, a flexible exchange rate refers to, a system where the exchange rate is determined by, the market forces (demand for foreign exchange and, supply of foreign exchange) with minimum or no, government intervention. The equilibrium exchange rate, is determined where the demand for foreign currency is, equal to the supply of foreign currency., OR, Managed floating system of exchange rate combines the, features of both the fixed exchange rate as well as the flexible, exchange rate. On one hand, the foreign exchange market is, allowed to operate freely and on the other hand, there is an, official declaration of rules or guidelines for the intervention, by the monetary authority. In other words, the managed, floating exchange rate regime determines the exchange rate, through the market forces with intervention of the monetary, authority as and when required., 22. Where is 'borrowings from abroad' recorded in the, Balance of Payments Accounts? Give reasons., [3], Answer : Borrowings by a country from the foreign countries, or from the international money market are recorded in the, Capital Account of the BOP. As these borrowings results in, inflow of foreign exchange into the country. Hence, they are, recorded as positive items in the Capital Account of BOP., 23. Explain the "Banker’s Bank as a function" of the central, bank., [4], , • Follow us on Telegram - https://t.me/copymykitab1

Page 61 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1071, , Bank rate refers to the rate at which the central bank, provides loans to the commercial banks. In case of deficit, demand, central bank reduces the bank rate, which, reduces the cost of borrowings for the commercial, banks. This implies that people can get loans at cheap, rates from the commercial banks. This increases the, demand for loans and credits in the market, Therefore,, the consumption expenditure increases and finally the, aggregate demand increases., OR, Excess demand refers to a a situation where the actual aggregate, demand for output (AD2) is above the full employment level, of output (AD1), then there exists excess demand. That is,, if AD2 > AD1 (situation of Excess Demand), , C, , op, , if AD2 < AD1 (situation of Deficit Demand), , In the figure, AD1 and AS represents the aggregate, demand curve and aggregate supply curve. The, economy is at full employment equilibrium at point 'E',, where AD1 intersects AS curve. At this equilibrium point,, or represents the full employment level of output and EY, is the aggregate demand at the full employment level of, output., Let us suppose that, the actual aggregate demand for, output is only CY, which is lower than EY. This implies that, actual aggregate output demanded by the economy CY, falls short of the potential (full employment) aggregate, output EY. Thus, the economy is facing a deficiency in, demand. This situation is termed as deficit demand., , In the figure, AD1 and AS represents the aggregate demand, curve and aggregate supply curve respectively. The economy, is at full employment equilibrium at point 'E', where AD1, intersects AS curve. At this equilibrium point, OY represents, full employment level and EY is aggregate demand at the full, employment level of output., Let us suppose that, the actual aggregate demand for, output is FY, which is higher than EY. This implies that, actual aggregate output demanded by the economy FY, is more than the potential (full employment) aggregate, output EY. Thus, the economy is facing surplus demand., This situation is termed as excess demand., Reverse repo rate refers to the rate at which the Central, Bank borrows from the commercial banks. In situation, of excess demand, the Central Bank would increase the, reverse repo rate. An increase in the reverse repo rate, reduces the money supply in the economy, thereby, aggregate demand falls., 28. Explain how the government can use the budgetary policy, in reducing inequalities in incomes., [6], Answer : The govenment through its budgetary policy, attempts to promote fair and right distribution of income in, an economy. This is done through taxation and expenditure, policy. On one hand, through its taxation policy, the, government taxes the higher income group and on the other, hand, through the expenditure policy (subsidies, transfer, payments, etc.), it transfers the purchasing power in the, hands of the poor sections of society. With the help of these, policies, the government aims at fair distribution of income, in the society., , • Follow us on Telegram - https://t.me/copymykitab1, , , , yM, , , , yK, ita, b, , , , , , I = 800 – 660, I = `140, Thus, the Investment expenditure is `140., 26. Giving reason explain how the following should be treated, in estimation of national income :, [6], (i) Payment of interest by a firm to a bank, (ii) Payment of interest by a bank to an individual, (iii) Payment of interest by an individual to a bank, Answer : (i) Payment of interest by a firm to bank will be, included in the national income. This is because the firm, would have taken loan for productive purposes., (ii) Payment of interest by a bank to an individual will be, included in the national income. This is because the bank, would have used the savings of the individuals ( on which the, loan is paid) for productive purposes., (iii) Payment of interest by an individual to a bank will, not be included in the national income. This is because the, individual is expected to have taken a loan for consumption, purposes rather than for productive purposes., 27. What is 'deficient demand' ? Explain the role of 'Bank, Rate' in removing it., [6], OR, What is 'excess demand' ? Explain the role of 'Reverse, Repo Rate' in removing it., Answer : Deficit demand refers to a situation where the actual, or equilibrium level of demand for output (AD2) is less than, the full employment level of output (AD1). That is,

Page 62 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1072 | Economics 2015 (Outside Delhi), , 29. Calculate the 'National Income' and 'Private Income'** :, [6], (` crores), (i) Rent, 200, (ii) Net factor income to abroad, 10, (iii) National debt interest, 15, (iv) Wages and salaries, 700, (v) Current transfers from govemment, 10, (vi) Undistributed profits, 20, (vii) Corporation tax, 30, (viii) Interest, 150, , , , , (ix), (x), (xi), (xii), , Social security contributions by employers, 400, Net domestic product accruing to govemment 250, Net current transfers to rest of the world, 5, Dividends, 50, , Answer : National Income = Wages and salaries + Social, security contributions by employers + Rent + Interest +, Dividends + Corporation tax + Undistributed profits – Net, factor income to abroad, NNPFC = 700 + 100 + 200 + 150 + 50 + 30 + 20 –10, = ` 1240 crore, , , , Economics 2015 (Outside Delhi), , SET II, Maximum marks : 100, , yK, ita, b, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, 2. Define budget line., , [1], , 1, , 12, , 4, , 2, , 8, , 4, , 3, , 4, , 4, , 4, , 0, , 4, , The following figure depicts the shape of PPC., , op, , yM, , Answer : A budget line represents the different combinations, of two goods that are affordable and are available to a consumer;, while being aware of his/her income level and market prices, of both the goods. The budget line is represented by the, following equation.,   , , M = Px . Q x + Py . Q y, , Good Y (units), 16, 12, 8, 4, 0, , Answer : Based on the below schedule, we can say that, PPC is a downward sloping straight line. This is because the, opportunity cost of producing one good (i.e. Good X) in, terms of another (i.e. Good Y) remains the same, that is, 4, (ignoring the minus sign)., Good X (units), , Good Y (units), , Opportunity Cost, , 0, , 16, , -, , ** Answer is not given due to change in syllabus., , Thus, the shape of PPC is downward sloping straight line, which can be attributed to the constant opportunity, cost., 8. Explain the implication of non-price competition in an, oligopoly market., [3], , , Good X (units), 0, 1, 2, 3, 4, , , , C, , 5. Giving reasons comment on the shape of Production, Possibilities curve based on the following schedule: [3], , Answer : Non-price competition in an oligopoly implies, that the demand curve faced by an oligopolistic firm cannot, be determined as it is uncertain to forecast its sales. This, is because any change in the price or output decisions by, a firm sets in a series of reaction of the rival firms. That is, why the demand curve is indeterminate and indefinite. The, oligopolistic firm faces a kinked demand curve at any given, price. The following figure shows the demand curve faced by, an oligopolistic firm., , • Follow us on Telegram - https://t.me/copymykitab1

Page 63 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1073, , supply of the given commodity due to change in factors other, than price. Thus, in the given case the supply curve will shift, towards right. As a result, there will exist a situation of excess, supply at the equilibrium point. This can be shown in the, following diagram., , The upper portion of this demand curve is more elastic, than the lower portion of the demand curve., 10. A consumer spends `100 on a good priced at `4 per unit., When its price falls by 25 percent, the consumer spends, `75 on the good. Calculate the price elasticity of demand, by the Percentage method., [4], Initial Total Expenditure TE0 = `100 Final Total Expenditure, TE1 = `75 Initial Price P0 = `4 Percentage change in price =, –25, P −P, Percentage change in price = 1 0 × 100, P0, , yK, ita, b, , Total Expenditure TE, = Price P × Quantity, Q, , P0 = `4, , TE0 = `100, , Q0 = 25, , P1 = `3, , TE1 = `75, , Q1 = 25, , C, , op, , Quantity Q =, TEP, , Now,, Ed = Percentage change in quantity demanded ÷, Percentage change in price, Q1 − Q 0, Percentage change in Q =, × 100, Q0, 25 − 25, =, × 100 = 0, 25, 0, Ed =, =0, 1, Thus, the price elasticity of demand is 0., , SECTION B, 21. If the Real GDP is `500 and Price Index (base = 100) is, 125, calculate the Nominal GDP., [5], Answer :, Real GDP =, 500 =, or,, , , , Price (P), , , , yM, , , , , , , , As the market supply increases, the initial supply shifts, rightwards to the new supply curve S2S2 from S1S1. Not at, the initial market price of OP1, there exists excess supply., Due to the excess supply, some of the existing firms are, ready to sell the output at comparatively lower prices to, increase their sale, therefore, the market price will tend, to fall. The fall in the market price will continue until it, reaches OP2. The new market equilibrium will occur at, point E2, where the new market supply curve intersects, the initial demand curve. The total quantity supplied will, be equal to the quantity demanded at Oq2 and the new, equilibrium price will fall to OP2., , , , P1 − 4, × 100, 4, 100 = P1 – 4 × 100, 100, = P1 – 4, 100, P1 = 4 – 1 = 3, 25 =, , , , , , Answer : Given :, , Nominal GDP, × 100, Price Index, Normal GDP, × 100, 125, , Nominal GDP = `625, , 23. An economy is in equilibrium. Calculate the Marginal, Propensity to Save from the following:, National income = 1,000, Autonomous consumption = 100, Investment = 120, , 11. Market for a good is in equilibrium. The supply of the, good 'Increases'. Explain the chain of effects of this, change., [6], , Answer : Given :, , , , National Income (Y) = 1000, Autonomous Consumption (a) = 100, , , , Investment (I) = 120, , , , Answer : When the market is in equilibrium, this implies, that the market demand is equal to the market supply at the, equilibrium point. Now, in case the market supply increases,, this leads to a rightward shift in the market supply curve., This is because, an increase in supply refers to a rise in the, , Y = C+I, C = a + bY, , • Follow us on Telegram - https://t.me/copymykitab1

Page 64 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1074 | Economics 2015 (Outside Delhi), , (iv) Net domestic fixed capital formation, , , , Y = 100 + b × 1000 + 120, , , , 1000 – 120 = 100 + b, , , , 880 = 100 + 1000 b, , , , 880 – 100 = 1000 b, , , , , , 780 = 1000 b, 780, b =, = 0.78, 1000, \, , , , , , , , MPC = 0.78, MPS = 1 – MPC, = 1 – 0.78, = 0.22, , (`crores), (ii) Government final consumption expenditure, , (vi) Private income, , 280, , (vii) Net factor income to abroad, , (-)5, , (viii) Closing stock, , 8, , (ix) Opening stock, , 8, , (x) Depreciation, , 12, , (xi) Corporate tax, , 60, , (xii) Retained earnings of corporations, , 20, , = 300 + 50 + 60 + 12 + (8 – 8) – (–10) – 12 – (–5), Net National Product at Market Price = `425 crore, , (-)10, , yK, ita, b, , (iii) Net imports, , 50, , 300, , Net National Product at Market Price, , 7, , , Transfer payments by government, , (v) Private final consumption expenditure, , Answer : Net National Product at Market Price = Private final, consumption expenditure + Government final consumption, expenditure + (Net domestic fixed capital formation +, depreciation) + Change in stock - Net imports - depreciation, - Net factor income to abroad, , 29. Calculate 'Net National Product at Market Price' and, 'Personal Income'** :, [6], (i), , 60, , , , op, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, 3. Define Indifference Map., , [1], , C, , Answer : Indifference map is a family or collection of, indifference curves that depicts the different levels of, satisfaction and preferences of a consumer. Each indifference, curve in an indifference map depicts a particular level of, satisfaction., , , , 5. Distinguish between co-operative and non-cooperative, oligopoly., [3], Answer : Co-operative oligopoly is the oligopoly in which, firms might decide to collude together and not to compete, with each other. Thus, in such a case the firms would behave, as a single monopoly and aim at maximising their collective, profits rather than their individual profits. On the other hand,, non-cooperative oligopoly is the oligopoly where each firm, aims at maximising its own profits and decides how much, quantity to produce assuming that the other firms would not, change their quantity supplied., , SET III, Maximum marks : 100, , 8. Giving reason comment on the shape of Production, Possibilities Curve based on the following table :, [3], , , , , Time allowed : 3 hours, , yM, , Economics 2015 (Outside Delhi), , Good X (units), 0, 1, 2, 3, 4, , Good Y (units), 10, 9, 7, 4, 0, , Answer : Based on the below schedule, we can say that PPC is, concave to origin. This is because as the production increases,, to produce each additional unit of Good X, more and more, units of Good Y need to be sacrificed. In other words, the, opportunity cost of producing one good in terms of another, increases., Good X (units), , Good Y (units) Opportunity Cost, , 0, , 10, , -, , 1, , 9, , 1, , 2, , 7, , 2, , 3, , 4, , 3, , 4, , 0, , 4, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 65 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Outside Delhi) | 1075, , The following figure depicts the shape of PPC., , Thus, the price elasticity of demand is 0., SECTION B, 22. If the Nominal GDP is `600 and Price Index (base = 100), is 120, calculate the Real GDP., [3], Solution : We know,, , , Real GDP =, , , , Answer : Given, , , , , , , , , TE0 = `400, , Q0 = 50, , P1 = `10, , TE1 = `500, , Q1 = 50, , Percentage change in quantity demanded, Percentage change in price, Q1 − Q 0, × 100, Q0, , = 50 − 50 × 100, 50, =0, Percentage change in quantity demanded, Ed =, Percentage change in price, 0, =, 25, Ed = 0, , ** Answer is not given due to change in syllabus., , Y=?, Y =C + I, , , , , = 120 + 0.8Y, Y = 120 + 0.8Y + 150, 1Y – 0.8 Y = 270, 0.2Y = 270, , , , P0 = `8, , C, , Quantity, Q = TEP, , Percentage change in Quantity =, , , , , , op, , , , , Total Expenditure, Te = Price P × Quantity Q, , Ed =, , I = 150, , C = a + by, , , , yM, , P –8, ×100, 25 = 1, 8, 200, = P1 – 8, 100, P1 = 10, , Now, , (b) MPC = 1 – MPS = 1 – 0.20 = 0.86, , , , Percentage change in price = + 25, P –P, Percentage change in price = 1 0 × 100, P0, , , , , , Initial Price P0 = `8, , a = 120, , MPS = 0.20, , , , Final Total Expenditure TE1 = `500, , yK, ita, b, , Solution :, , Initial Total Expenditure TE0 = `400, , Price (P), , 24. An economy is in equlibrium. Calculate the national, Income from the following :, [4], Autonomous Consumption = 120, Marginal Propensity to Save = 0.2, Investment Expenditure = 150, , , 9. A consumer spends `400 on a good priced at `8 per unit., When its price rises by 25 percent, the consumer spends, `500 on the good. Calculate the price elasticity of demand, by the Percentage method., [4], , = 600 × 100 = `500, 120, , , , Thus, the shape of PPC is concave which can be attributed, to the law of increasing opportunity cost., , Nominal GDP, × 100, Price Index of current year, , 270, = 1350, 0.20, 29. Calculate 'Net Domestic Product at Market Price' and, 'Gross National Disposable Income'**:, (`crores), (i) Private final consumption expenditure, 400, (ii) Opening stock, 10, (iii) Consumption of fixed capital, 25, (iv) Imports, 15, \, , Y=, , (v) Government final consumption expenditure, , 90, , (vi) Net current transfers to rest of the word, , 5, , (vii) Gross domestic fixed capital formation, , 80, , (viii) Closing stock, , 20, , (ix) Exports, , 10, , (x) Net factor income to abroad, , • Follow us on Telegram - https://t.me/copymykitab1, , (–) 5

Page 66 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1076 | Economics 2015 (Delhi), , Answer : Net Domestic Product at Market Price = Private final, consumption expenditure + Government final consumption, expenditure + Gross domestic fixed capital formation +, change in stock + Net exports - depreciation, , Net Domestic Product at Market Price = 400 + 90 + 80 +, (20 – 10) + (10 - 15) - 25, Net Domestic Product at Market Price = `550 crore, , , , Economics 2015 (Delhi), , SET I, Maximum marks : 100, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , , , C, , op, , yM, , , , yK, ita, b, , , , SECTION A, 1. Give equation of Budget Line., [1], Answer : The equation for budget line is as follows., P1X1 + P2X2 = M, Where,, P1 represents price of good 1 X1 Quantity of good 1, P2 represents price of good 2 X2 Quantity of good 2, M represents income of the consumer, 2. When income of the consumer falls the impact on pricedemand curve of an inferior good is : (choose the correct, alternative), [1], (a) Shifts to the right., (b) Shifts to the left., (c) There is upward movement along the curve., (d) There is downward movement along the curve., Answer : Demand for inferior goods shares a negative, relationship with consumer's income. So, when the income of, the consumer falls, the demand for an inferior good increases, leading to the rightward shift of the demand curve., Hence, the correct answer is option (a)., 3. If Marginal Rate of Substitution is constant throughout,, the Indifference curve will be : (choose the correct, alternative., [1], (a) Parallel to the x-axis., (b) Downward sloping concave., (c) Downward sloping convex., (d) Downward sloping straight line., Answer : If Marginal Rate of Substitution is constant, throughout, the indifference curve will be downward sloping, straight line. Hence, the correct answer is option (d)., 4. Giving reason comment on the shape of Production, Possibilities Curve based on the following schedule : [3], , Answer : The PPC would be concave in shape. This is because, of the increasing opportunity cost. 'With increase each, additional unit of production of good X of the amount of, good Y that must be sacrificed increases. For example, as the, production of good X moves from first unit to second unit,, 2 units of good Y must be sacrificed (9 - 7). Further, as the, production moves from second unit to third unit, the units, of good Y that must be sacrificed increases to three. Thus, the, opportunity cost of producing one additional unit of good X, goes on increasing. This increasing opportunity cost gives rise, to concave shape of PPC., 5. What will be the impact of recently launched 'Clean India, Mission' (Swachh Bharat Mission) on the Production, possibilities curve of the economy and why?, [3], OR, What will likely be the impact of large scale outflow of, foreign capital on Production Possibilities curve of the, economy and why?, Answer : The 'Clean India Mission' (Swachh Bharat Mission), will lead to better waste-management technique. Consequent, to this, there will be drastic reduction in the number of people, falling ill. Both these factors will lead to better and efficient, utilisation of existing resources of an economy. Accordingly,, the economy will move higher and closer to initial PPC. This, movement is being depicted in the below graph with the help, of the arrow from point P., , Good X (units), , Good Y (units), , 0, , 10, , 1, , 9, , 2, , 7, , 3, , 4, , 4, , 0, , Impact of Clean India Mission on PPC, OR, The large scale outflow of foreign capital will lead to a decrease, in the availability of resources, thereby shifting the Production, Possibility Curve (PPC) parallelly to the left from AB to CD, as shown in the following diagram. Hence, we can say that, leftward shift of PPC results in fall in output and resources., , • Follow us on Telegram - https://t.me/copymykitab1

Page 67 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Delhi) | 1077, , C, , op, , yM, , yK, ita, b, , Impact of Large Scale Outflow on PPC, 6. The measure of price elasticity of demand of a normal, good carries minus sign while price elasticity of supply, carries plus sign. Explain why?, [3], Answer : The measure of price elasticity of demand carries a, minus sign because it shows an inverse relationship between, price and quantity demanded i.e., Other things remaining, constant, as the price of a good rises or falls, the quantity, demanded of the good falls (or rises). On the other hand,, price elasticity of supply carries plus sign as there exists a, positive relationship between the supply of a commodity and, its price. To put in other words, when the price of a good, rises (or falls), then the quantity supplied will increase (or, decrease), other things remaining unchanged., 7. There are large number of seller in a perfectly competitive, market. Explain the significance of this feature., [3], Answer : There exists a large numbers of buyers and sellers in, a perfect competitive market. The number of sellers is so large, that no individual firm owns the control over the market price, of the commodity. Due to the existence of large number of, sellers in the market, there exists perfect and free competition, in the market. The firm acts as a price taker. That is, the firms, have no control over the existing market price and cannot, influence it. If an individual firm raises its price, then it will, lose all its buyers to other firms and vice-versa. Thus, firms, have no role to play other than supplying the required output, at the existing market price and therefore a firm is a price, taker and not a price maker., 8. Explain the effects of 'maximum price ceiling' on the, market of a good. Use diagram., [3], Answer : Price ceiling is the legislated or government, imposed maximum level of price that can be charged by the, seller. Since price ceiling is lower than the equilibrium price, (OPe), thus the imposition of the price ceiling leads to excess, demand as shown in the diagram below., , Excess demand : Due to artificially lowering the price, the, demand becomes comparatively higher than the supply. This, leads to the emergence, of the problem of excess demand., Enhances welfare : The imposition of the price ceiling, ensures the access of the necessity goods within the reach of, the poor people. This safeguards and enhances the welfare of, the poor and vulnerable sections of the Society., Fixed quota : Each consumer gets a fixed quantity of good (as, per the quota). The quantity often falls short of meeting the, individual's requirements. This further leads to the problem, of shortage and the consumer remains unsatisfied., Inferior goods : Often it has been found that the goods that, are available at the ration shops are usually inferior goods and, are adulterated and infiltrated., Black marketing—The needs of a consumer remain, unfulfilled as per the quota laid by the government., Consequently, some of the unsatisfied consumers get ready, to pay higher price for the additional quantity. This leads to, black-marketing and artificial shortage in the market., 9. A consumer spends `1000 on a good price at ` 8 per unit., When price rises by 25 percent, the consumer continues to, spend same amount on the good. Calculate price elasticity, of demand by percentage method., [4], Answer : Given :, Initial Total Expenditure (TE0) = `1000, Final Total Expenditure (TE1) = `1000, Initial Price (P0) = `8, Percentage change in price = +25%, P –P, Percentage change in price = 1 0 ×100, P0, P1 – 8, 25 =, × 100, 8, 200, = P1 – 8, 100, P1 = 10, Quantity (Q) =, TE, P, , P0 = `8, , TE0 = `1000, , Q0 = 125, , P1 = `10, , TE1 = `1000, , Q1 = 100, , Now,, , , Ed = (–), , Percentage change in quantity demanded, Percentage change in price, , , , Q1 – Q 0, × 100, Q0, Ed = (–), 25, , , , 100 – 125, × 100, 125, Ed = (–), 25, –20, Ed =, 25, ∴, , , , The following are the consequences and effects of price, ceiling., , Price (P), , Total Expenditure, (TE) = Price (P), × Quantity (Q), , Ed = 0.8, , Thus, the price elasticity of demand is 0.8, , • Follow us on Telegram - https://t.me/copymykitab1

Page 68 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1078 | Economics 2015 (Delhi), , 2. Under imperfect competition market : As output increases, both AR and MR falls. However, AR remains greater than, MR at all levels of output. Also, when AR curve becomes, zero, then the MR curve is negative. Graphically, both AR, curve and MR curve are downward sloping but the AR, curve remains above the MR curve., , (`), , (In units), , , , yK, ita, b, , MC=, , ∆TC ∆TVC, =, ∆Q, ∆Q, , C, , op, , yM, , (`), , OR, Revenue is the money income for a firm which it receives, from the sale of goods produced. In other words, revenue, refers to the sale proceeds or sales receipts., Relationship between MR and AR, The relationship between AR and MR can be studied under, two forms of market- under Perfect Competition market and, under Imperfect Competition market., 1. Under perfect competition market : AR equals MR, throughout all output levels. Graphically, MR curve is a, straight horizontal line parallel to the x-axis and coincides, with the AR curve., , (`), , 11. A consumer consumes only two goods X and Y both priced, at `3 per unit. If the consumer chooses a combination of, these two goods with Marginal Rate of Substitution equal, to 3, is the consumer in equilibrium ? Give reasons. What, will a rational consumer do in this situation ? Explain. [6], OR, A consumer consumes only two goods X and Y whose, prices are `4 and `5 per unit respectively. If the consumer, chooses a combination of the two goods with marginal, utility of X equal to 5 and that of Y equal to 4, is the, consumer in equilibrium? Give reason. What will a rational, consumer do in this situation? Use utility analysis., Answer : At the point of consumer equilibrium the following, equality should be met :, P, MRS = x, Py, According to the question,, MRS = 3, Px, 3, = =1, Py 3, So, MRS is greater than the price ratio. Thus, to reach the, equilibrium point a rational consumer would decrease the, consumption of good y., OR, According to the utility approach, a consumer reaches, equilibrium where the following equality is met., MU x MU y, =, Px, Py, According to the given question,, MU x, 5, =, 4, Px, MU y, 4, =, 5, Py, MU y, MU x, So,, is greater than, . Thus, to reach the, Px, Py, equilibrium, a rational consumer would increase the, consumption of good x and decrease that of good y., , • Follow us on Telegram - https://t.me/copymykitab1, , , , 10. Define cost. State the relation between marginal cost and, average variable cost., [4], OR, Define revenue. State the relation between marginal, revenue and average revenue., Answer : Cost or cost of production refers to the expenditures, incurred or payments made by a firm to various factors of, production (such as, land, labour, capital and entrepreneur), and also non-factors of production (such as, raw materials,, etc.), Relationship between AVC and MC, (1) When AVC is falling, MC falls at a faster rate and stays, below AVC curve., (2) When AVC is rising, MC rises at a faster rate and remains, above AVC curve., (3) When AVC is at minimum point (y), MC is equal to, AVC., MC curve cuts AVC curve at its minimum point., (4) The minimum point of MC curve (x) will always lie left, to the minimum point of AVC curve (y)., (5) AVC and MC both are derived from TVC., TVC, AVC =, Q

Page 69 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Delhi) | 1079, , C, , op, , Units of, Capital, , Units of, Labour, , TP, , AP, , MP, , 1, , 0, , 0, , 0, , –, , 1, , 1, , 7, , 7, , 7, , 1, , 2, , 18, , 9, , 11, , 1, , 3, , 33, , 11, , 15, , 1, , 4, , 44, , 11, , 11, , 1, , 5, , 48, , 9.6, , 4, , 1, , 6, , 51, , 8.5, , 3, , 1, , 7, , 51, , 7.4, , 0, , 1, , 8, , 49, , 6.1, , –2, , 13. Why is the equality between marginal cost and marginal, revenue necessary for a firm to be in equilibrium? Is it, sufficient to ensure equilibrium? Explain., [6], Answer : According to MR-MC approach, the firm (or, producer) will attain equilibrium where the following two, necessary and sufficient conditions are fulfilled., , , yM, , yK, ita, b, , 12. State the different phases of changes in Total Product and, Marginal Product in the Law of Variable Proportions., Also show the same in a single diagram., [6], Answer : The different phases of changes in Total Product, (TP) and Marginal Product (MP) can be understood with the, help of Law of Variable Proportions. As per this law, if more, and more of variable factor (labour) is combined with the, same quantity of fixed factor (capital), then initially the total, product will increase but gradually after a point, the total, product will become smaller and smaller. The following are, the three phases (stages) of the Changes in the two variables., 1st Stage : Increasing returns to a factor, This stage starts from the origin point 0 and continues till the, point of inflexion (K) on the TP curve. During this phase,, TP increases at an increasing rate and is also accompanied, by rising MP curve (in figure ii). The MP curve attains its, maximum point (U) corresponding to the point of inflexion., Throughout this stage, AP continues to rise., lInd Stage : Diminishing returns to a factor, This stage starts from point K and continues till point B on, the TP curve. During this stage, the TP increases but at a, decreasing rate and attains its maximum point at B, where it, remains constant. On the other hand (in the figure (ii)), the, MP curve continues to fall and cuts AP from its maximum, point Z, where MP equals AP. When TP attains its maximum, point, corresponding to it, MP becomes zero. AP, in this stage, initially rises, attains its maximum point at Z and thereafter, starts falling., IIIrd Stage : Negative Returns to a Factor, This stage begins from the point B on the TP curve., Throughout this point, TP curve is falling and MP curve, is negative. Simultaneously, the AP curve continues to fall, and approaches the x-axis (but does not touch it). Like the, first stage, this stage is also known as non-economic zone as, any rational producer would not operate in this zone. This, is because the addition to the total output by the additional, labour unit (i.e. marginal product) is negative. This implies, that employing more labour would not contribute anything, to the total product but will add to cost of the production in, form of additional wage. Hence, the cost of the additional, labour input is greater the benefit of employing it., The law of variable propotion can be easily understood with, the help of following schedule and diagram., , Case A : If Price (MR) > MC, , At output OQ1, price is KQl and the marginal cost is LQ1, such, that KQ1 > LQ1. Therefore, OQl is not the profit maximising, output. This is due to the fact that the firm can increase its, profit by increasing the production of output to OQ2., Case B : If Price (MR) < MC, At output OQ3, price is HQ3 and the marginal cost is GQ3,, such that HQ3 < GQ3. Therefore, OQ3 is not the profit, maximising output. This is due to the fact that the firm can, increase its profit by reducing its output level to OQ2., , • Follow us on Telegram - https://t.me/copymykitab1

Page 70 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1080 | Economics 2015 (Delhi), , Thus, we can conclude that at profit maximisation output,, the equilibrium price (or MR) must be equal to the MC, curve and it cannot be greater or lesser than the MC, curve. The equality of MR and MC is only the necessary, condition, The sufficient condition is that the MC should, be rising at the point of intersection with MR., , , , , , , , C, , op, , yM, , yK, ita, b, , In the figure, the MC curve cuts the price line (or MR) at two, different points i.e., at 'Z' and 'E'. The first order condition, of profit maximisation, i.e., Price (or MR) " MC is fulfilled, at both of these points. Now let us evaluate which of the, following two cases fulfill the second order condition of profit, maximisation., Case A: At point'Z', At point 'Z', price is equal to MC but MC is falling and, is negatively sloped. At this point, any output level slightly, more than the OQ0, the firm is facing price that exceeds, the MC. This implies that, the profit can be maximised by, increasing output level beyond OQ0. Therefore, OQ0 is not, a profit maximisation output., Case B : At point 'E', To the left of the point 'E', if the firm produces slightly lesser, level of output than OQ2, then the firm is facing price that, exceeds the MC. This implies that higher profits can be, achieved by increasing the level of output to OQ2. On the, other hand, to the right of the point 'E', if the firm produces, slightly higher level of output than OQ2, then the firm is, facing price that falls short of the MC. This implies that, higher profits can be achieved by reducing the output level, to OQ2. Thus, the point E is the producer's equilibrium and, OQ2 is the profit maximizing output level, where Price = MC, and also MC curve is rising., 14. Market for a good is in equilibrium. The demand for, the good 'increases'. Explain the chain of effects of this, change., [6], Answer :, , Suppose D1D1 and S1S1 are the initial market demand curve, and market supply curve, respectively. The initial equilibrium, is established at point E1, where the market demand curve and, the market supply curve intersects each other. Accordingly,, the equilibrium price is OP1 and the equilibrium quantity, demanded is Oq1., Now, assume that market demand increases (may be due, to an increase in the consumer's income). This shifts the, market demand curve parallel rightwards to D2D2 from, D1D1. While the market supply curve remains unchanged, at S1S1. This imples that at the initial price OP1. There exist, excess demand equivalent to (Oq1 - Oq3) units. This excess, demand will increase competition among the buyers and they, will now be ready to pay a higher price to acquire more units, of good. This will further raise the market price. The rise in, the price will continue till the market price becomes OP2., The new equilibrium is established at point E2. Where the, new demand curve D2D2 intersects the supply curve S1S1., Observe that at the new equilibrium both market price and, quantity demanded are more than the initial equilibrium., The new equilibrium quantity supplied Oq2 and the new, equilibrium price is OP2 Hence, an increase in demand with, supply remaining constant, results in rise in the equilibrium, price as well as the equilibrium quantity., To summarise,, Increase in demand ⇒ Excess demand at the existing price ⇒, Competition among the buyers ⇒ Rise in the price level ⇒, New equilibrium ⇒ Rise in both quantity demanded as well, as price., SECTION B, 15. What is 'aggregate supply' in macroeconomics?, [1], Answer : Aggregate supply refers to the total output produced, in the country or the total national product of the country at, a given level of employment., 16. The value of multiplier is : (choose the correct alternative), [1], 1, (a), MPC, 1, (b), MPS, 1, (c), 1 – MPS, 1, (d), MPC – 1, 1, 1 , , Answer : The value of mulitiplier is,  or, ., 1, –, MPC, , MPS , Here, MPS refers to the Marginal propensity to save. MPS =, 1 - MPC, 17. Borrowing in government budget is: (choose the correct, alternative), [1], (a) Revenue deficit, (b) Fiscal deficit, (c) Primary deficit, (d) Deficit in taxes, , • Follow us on Telegram - https://t.me/copymykitab1

Page 71 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Delhi) | 1081, , FDI and Portfolio Investment cause an inflow of foreign, exchange into the country. Thus, they are recorded as, positive items in the Capital Account of BOP. It should, also be noted that FDI and Portfolio Investment are the, non-debt creating capital transactions., 2. Loans and Borrowings : Loans and borrowings by, a country from the foreign countries or from the, international money market are recorded in the Capital, Account of the BOP. These borrowings can be in the form, of commercial borrowings or in the form of assistance., When a country borrows with the consideration of, assistance, the transaction would involve a lower rate of, interest as compared to the prevailing market rate of, interest. As against this, commercial borrowings involve, open market rate of interest. Loans and borrowings result, in inflow of foreign exchange into the country. Hence, they, are recorded as positive items in the Capital Account of, BOP. Unlike FDI and Portfolio Investments, loans and, borrowings are debt creating capital transactions., 3. Banking Capital Transactions : Another form of Capital, Account transactions are banking capital transactions., Such transactions refer to the transactions of external, financial assets and liabilities of the commercial banks and, co-operative banks that operate as authorised dealers in the, foreign exchange market., , C, , , , op, , yM, , yK, ita, b, , , , , , Answer : Borrowing in the government is the fiscal deficit., The fiscal deficit basically shows the borrowing requirement, of a country. It is defined as the excess of government, expenditure over government revenue., Hence, the correct answer is option (b)., 18. The non-tax revenue in the following is: (choose the, correct alternative), [1], (a) Export duty, (b) Import duty, (c) Dividends, (d) Excise, Answer : The non-tax revenue is dividends. This is because, the import duty, export duty and excise are different kinds of, tax revenues for the government. Hence, the correct answer is, option (c)., 19. Other things remaining unchanged, when in a country, the price of foreign currency rises, national income is :, (choose the correct alternative), [1], (a) Likely to rise, (b) Likely to fall, (c) Likely to rise and fall both, (d) Not affected, Answer : When the prices of foreign currency rises, the, national income is likely to rise. This is because rise in foreign, prices will lead to increase in the one of the components of, national income i.e. net exports. That is, exports will increase, and imports will decrease (as imports have become expensive),, this will ultimately lead to increase in national income., Hence, the correct answer is option (a)., 20. If Real GDP is `200 and Price Index (with base = 100) is, 110, calculate Nominal GDP., [3], Answer : We know,, NominalGDP, Real GDP =, ×100, Price Index of Current Year, Nominal GDP, ×100, 110, Nominal GDP = 220, 21. Name the broad categories of transactions recorded in the, 'capital account' of the Balance of Payments Accounts.[3], OR, Name the broad categories of transactions recorded in the, 'current account' of the Balance of Payments Accounts., Answer : The following are the three broad categories of, transactions recorded under capital account of BOP., 1. Foreign direct investment (FDI) and portfolio, investment : Foreign Direct Investment refers to the, investment in the assets of a foreign country. By investing,, the government or any resident of domestic country owns, the control over the asset of the foreign country. On the, contrary, Portfolio Investment refers to the investment in, the assets of a foreign country without any control over, that asset., 200 =, , OR, The following are the broad categories of transactions, recorded under current account of BOP., 1. Export and import of goods : The transactions of a country, in the form of export and import of goods is recorded in, the current account of the BOP. This record of export and, import of goods is also called the 'Balance of Visible Trade'., The export of goods is recorded as a positive item in the, Current Account of BOP. This is because exports result, in the inflow of foreign exchange into the country. On, the other hand, imports of goods are recorded as negative, items in the Current Account of BOP, as they result in an, outflow of the foreign exchange from the country., 2. Export and import of services : Another component of, the Current Account is the export and import of services., The record of export and import of services is also called, the 'Balance of invisible trade'. Similar to the export of, goods, export of services is also recorded as positive items, in the Current Account of BOP. As against this, the import, of services is recorded as negative items in the Current, Account of BOP. The following are some of the major, services that are included in the Current Account of BOP., (a) Shipping services, insurance and banking services, etc., (b) Income from investment (i.e. income from profits and, dividends), (c) Foreign travel, (d) Miscellaneous transactions such as royalties, consultancy, services, telephone services, etc., 3. Unilateral Transfers : Unilateral transfers refer to the onesided transfers such as gifts, donations, grants from foreign, governments, etc. A country makes such transfers to the, rest of the world as well as receives transfers from the rest, , • Follow us on Telegram - https://t.me/copymykitab1

Page 72 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1082 | Economics 2015 (Delhi), , , , savings account with the commercial banks. In this way,, the commercial banks are able to tap greater savings which, in turn can be used to lend loans for investment purposes., Thus, the yojna indirectly helps in increasing the investment, and production in the economy which in turn would help in, improving the national income., 25. An economy is in equilibrium. Calculate national income, from the following., [4], Autonomous consumption = 100, Marginal propensity to save = 0.2, Investment expenditure = 200, Answer : Given, Autonomous consumption ( C ) = 100, MPS(s) = 0.2, i.e. MPC (c) = 1 – MPS = 1- 0.2 = 0.8, 1 = 200, y = ??, We know that at equilibrium,, Y=C+I, i.e. Y = ( C ) + cY + I, ⇒ Y = 100 + 0.8Y + 200, ⇒ Y = 0.8Y +300, ⇒ Y – 0.8Y = 300, ⇒ 0.2Y = 300, so, Y = 1,500, , , , , , , , , , , , 26. Giving reason explain how should the following be treated, in estimation of national income :, [6], (i) Expenditure by a firm on payment of fees to a, chartered accountant, (ii) Payment of corporate tax by a firm, (iii) Purchase of refrigerator by a firm for own use, Answer : (a) The services of chartered accountant hired, by the firm should not be included in the estimation of, national income. This is because it forms a part of the firm's, intermediate consumption., (b) Payment of corporate tax is not included in the national, income as it is a mere transfer payment from the firm to the, government. It is a part of corporate profits which already, form part of national income, therefore, it should not be, separately included in national income (in addition to, corporate profits)., (c) Purchase of refrigerator by a firm for own use will be, included in the national income as it is regarded as final, consumption expenditure., 27. Explain the concept of Inflationary Gap. Explain the role, of Repo Rate in reducing this gap., [6], , , , , C, , op, , yM, , yK, ita, b, , , , of the world. Receipts of unilateral transfers are recorded, as positive items in the Current Account of BOP, while, payments of unilateral transfers are recorded as negative, items in the Current Account of BOP., 22. Where will sale of machinery to abroad be recorded in the, Balance of Payments Accounts? Give reasons., [3], Answer : Sale of machinery to abroad (exports) will be, recorded as positive item in the current account of BOP,, The current account of BOP is that account which, maintains the records of imports and exports of goods, and services as well as record of unilateral transfers., Those transactions that result in an inflow of foreign, exchange in the country are recorded as positive items, in the current account of BOP. On the other hand, those, items that lead to an outflow of foreign exchange from, the country are recorded as negative items in the current, account of BOP. Therefore, as sale of machinery abroad, leads to an inflow of foreign exchange in the country it, will be recorded as a positive item in the current account, of BOP., 23. Explain the 'bank of issue' function of the central bank.[4], OR, Explain 'Government's Bank' function of central bank., Answer : Bank of issue function of central bank implies that, the central bank of a country has the exclusive authority to, issue the currency (notes + coins). The currency issued by the, central bank is known as 'legal tender money' i.e. the value, of such currency is backed by the central bank. However, the, currency issued by the central bank is its monetary liability. In, other words, the central bank is obliged to back the currency, issued by it by assets such as gold coins and bullions, foreign, exchange. In addition to issuing currency to the general, public, the central bank also issues currency to the central, government of the country. That is, the central government, if required, can sell its securities to the central bank and in, return gets the required cash currency., OR, Central bank acts as a banker and financial advisor to the, government. As a banker to the government, it performs the, following functions., (a) It manages the account of the government., (b) It accepts receipts from the government and makes, payment on behalf of it., (c) It grants short-term loans and credit to the government., (d) It performs the task of managing the public debt., (e) The central bank advises the government on all the banking, and financial related matters., 24. Government of India has recently launched 'Jan-Dhan, Yojna' aimed at every household in the country to have, at least one bank account. Explain how deposits made, under the plan are going to affect national income of the, country., [4], Answer : With the ‘Jan Dhan Yojna’ a greater number of, individuals are brought under the ambit of banking system., Those individuals who earlier did not have savings account, now have access to banking facilities and have opened, , OR, Explain the concept of Deflationary Gap and the role of, 'Open Market Operations' in reducing this gap., , • Follow us on Telegram - https://t.me/copymykitab1

Page 73 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Delhi) | 1083, , of deficiency in the level of aggregate demand. Graphically, it, is represented by the vertical distance between the aggregate, demand at the full employment level of output (ADE) and the, actual level of aggregate demand (ADf ). In the figure below,, EY denotes the aggregate demand at full employment level, of output and CY denotes the actual aggregate demand. The, vertical distance between these two represents deflationary, gap. That is,, EY – CY= EC (Deflationary Gap), Let us understand the situation of deficit demand and, concept of deflationary gap with the help of the following, figure., , yK, ita, b, , Answer : Due to the excess of aggregate demand, there exists, a difference (or gap) between the actual level of aggregate, demand and full employment level of demand. This difference, is termed as inflationary gap. This gap measures the amount, of surplus in the level of aggregate demand. Graphically, it is, represented by the vertical distance between the actual level, of aggregate demand (ADE) and the full employment level of, output (ADF). In the figure, EY denotes the aggregate demand, at the full employment level of output and FY denotes the, actual aggregate demand. The vertical distance between these, two represents inflationary gap. That is,, FY – EY = FE (Inflationary Gap), Let us understand the situation of excess demand and concept, of inflationary gap with the help of the following figure., , In the figure, AD1 and AS represents the aggregate demand, curve and aggregate supply curve. The economy is at full, employment equilibrium at point 'E', where AD1 intersects, AS curve. At this equilibrium point, OY represents the full, employment level of output and EY is the aggregate demand, at the full employment level of output., , Let us suppose that the actual aggregate demand for output, is only CY, which is lower than EY. This implies that actual, aggregate output demanded by the economy CY falls short of, the potential (full employment) aggregate output EY. Thus,, the economy is facing a deficiency in demand. This situation, is termed as deficit demand. As a result of the deficit demand,, deflationary gap arises. The deflationary gap is measured by, the vertical distance between the potential (or full employment, level) aggregate demand and the actual aggregate demand for, output. In other words, the distance between EY and CY, i.e., EC represents the deflationary gap., To correct deflationary gap, the central bank purchases the, securities in the market, thereby, increasing the flow of money, and subsequently enhancing the purchasing power of the, people. The higher purchasing power increases the aggregate, demand., 28. Explain the role the government can play through the, budget in influencing allocation of resources., [6], , , C, , op, , yM, , Output/Income, In the figure, AD1 and AS represents the aggregate demand, curve and aggregate supply curve respectively. The economy, is at full employment equilibrium at point 'E', where AD1, intersects AS curve. At this equilibrium point, OY represents, full employment level and EY is aggregate demand at the full, employment level of output., Let us suppose that the actual aggregate demand for, output is FY, which is higher than EY. This implies that, actual aggregate output demanded by the economy FY, is more than the potential (full employment) aggregate, output EY. Thus, the economy is facing surplus demand., This situation is termed as excess demand. As a result, of the excess demand, inflationary gap arises. The, inflationary gap is measured by the vertical distance, between the actual aggregate demand for output, and the potential (or full employment level) aggregate, demand. In other words, the distance between FY and EY,, i.e. FE represents the inflationary gap., Repo rate refers to the rate at which the central bank lends, to the commercial bank. In such inflationary gap, the central, bank would increase repo rate. An increase in the repo rate, increases the cost of borrowings for the commercial banks., This discourages the demand for loans and borrowings., Thereby, the consumption expenditure falls, and hence, aggregate demand falls., OR, Due to the deficiency in the aggregate demand, there exists, a difference (or gap) between the actual level of aggregate, demand and full employment level of demand. This difference, is termed as deflationary gap. This gap measures the amount, , Answer : The government through its budgetary policy can, reallocate the resources to different areas. In a mixed economy,, the private producers aim towards profit maximisation,, while, the government aims towards welfare maximisation., , • Follow us on Telegram - https://t.me/copymykitab1

Page 74 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1084 | Economics 2015 (Delhi), , The private sector always tend to divert resources towards, areas of high profit, while, ignoring areas of social welfare. In, such a situation, the government through its budgetary policy, reallocates resources to maintain a balance between the social, objectives of welfare maximisation and economic objective of, profit maximisation. For example- government levies taxes, on socially harmful goods such as tobacco, etc., and provides, subsidies for the socially desirable goods such as food grains,, kerosene, etc., 29. Calculate National Income and (Personal Disposable, Income**)., [6], (` crores), (i), , Personal tax, , (ii), , Private, final, expenditure, , (iii), , Undistributed profits, , 30, , (iv), , Private income, , 650, , Government, expenditure, , (vi), , Corporate tax, , final, , consumption, , 100, 50, , (vii) Net domestic fixed capital formation, , 70, , (viii) Net indirect tax, , 60, , (ix), , Depreciation, , 14, , (x), , Change in stocks, , (xi), , Net imports, , (-) 10, 20, , (xii) Net factor income to abroad, , 10, , Answer : National Income = Private final consumption, expenditure + Government final consumption expenditure, + (Net domestic fixed capital formation + depreciation +, change in stock) - net imports - depreciation - Net Indirect, Taxes - Net factor income to abroad National income = 600, + 100 + (70 + 14 -10) - 20 -14 - 60 -10 or, National income, = `670 crore, , 80, 600, , ll, , yK, ita, b, , consumption, , (v), , Economics 2015 (Delhi), , , Time allowed : 3 hours, , yM, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , C, , op, , , , SECTION A, 2. Give equation of Budget Set., [1], Answer : The budget set or the consumption bundles, available to the consumer will be governed by the following, inequality condition :, P1x1 + P2x2 < M, (Budget Constraint), where,, x1 = Quantity of good 1, x2 = Quantity of good 2, , SET II, , Maximum marks : 100, opportunity cost of producing one good (i.e. Good X) in, terms of another (i.e. Good Y) remains the same, that is, 2, (ignoring the minus sign)., Good X (Units) Good Y (units), , Opportunity Cost, , 0, , 8, , -, , 1, , 6, , 2, , 2, , 4, , 2, , 3, , 2, , 2, , 4, , 0, , 2, , The following figure depicts the shape of PPC., , P1 = Price of good 1, , , , P2 = Price of good 2, 5. Giving reason comment on the shape of Production, Possibilities curve based on the following schedule : [3], Good X (units), , Good Y (units), , 0, , 8, , 1, , 6, , 2, , 4, , 3, , 2, , 4, , 0, , Answer : Based on the below schedule, we can say that, PPC is a downward sloping straight line. This is because the, , ** Answer is not given due to change in syllabus., , Thus, the shape of PPC is downward sloping straight line, which can be attributed to the constant opportunity, cost., , • Follow us on Telegram - https://t.me/copymykitab1

Page 75 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2015 (Delhi) | 1085, , among the producers increases and they try to get rid of the, excess stock by selling their output at comparatively lower, price. The price will continue to fall until it reaches OP2,, and the new equilibrium is established at point E2, where the, new demand curve D2D2 intersects the initial market supply, curve S1S1. Hence, a decrease in market demand with supply, remaining constant, results in fall in the equilibrium price as, well as the equilibrium quantity., Decrease in demand ⇒ Excess supply at the existing, price ⇒ Competition among the producers ⇒ Fall in the, price level ⇒ New equilibrium ⇒ Fall in both quantity, demanded as well as price., SECTION B, , P1 = `4, , TE1 = `60, , Q1 = 15, , , , C, , Y, , D1, , S1, , D2, , (Price), , E1, , P1, P2, , E2, , D1, D2, , S1, 0, , 91′ 92 91, (Quantity), , X, , Answer : If market demand decreases, then the market demand, curve shifts parallel leftwards to D2D2. Now, at the initial, price OP1, there exists excess supply equivalent to Oq1 - Oq'1, units of output. Due to the excess supply, the competition, , , , , , op, , yM, , Percentage change in price, Q1 – Q 0, ×100, Q0, Ed = (–), – 20, 15 – 12, ×100, Ed = (–) 12, –20, 25, Ed = (–), –20, Ed = 1.25, \ Ed = 1.25, Thus, the price elasticity of demand is 1.25., 11. Market for a good is in equilibrium. The demand for, the good 'decreases'. Explain the chain of effects of this, change., [6], , , , Percentage change in quantity demanded, , Ed = (–), , , , Now,, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , , , TE0 = `60, , 1200, × 100, 120, or, Real GDP = Rs 1000, 23. An economy is in equilibrium. Find 'autonomous, consumption' from the following :, [4], National income = 1,000, Marginal propensity to consume = 0.8, Investment expenditure = 100, Answer : Given, Y = 1,000, MPC (c) = 0.8, I = 100, Autonomous consumption (C) = ??, We know that at equilibrium,, Y= C+I, i.e., 1,000 = C + cY + I, ⇒, 1,000 = C + 0.8 × 1,000 + 100, ⇒, 1,000 = C + 900, ⇒, 1,000 – 900 = C, so,, C = 100, 29. Calculate 'Gross National Product at Market Price' and, 'Net National Disposable Income'** :, [6], (` crores), (i) Rent, 100, (ii) Net current transfers to rest of the world, 30, (iii) Social security contributions by employers, 47, (iv) Mixed income, 600, (v) Gross domestic capital formation, 140, (vi) Royalty, 20, (vii) Interest, 110, (viii) Compensation of employees, 500, (ix) Net domestic capital formation, 120, (x) Net factor income from abroad, (–)10, (xi) Net indirect tax, 150, (xii) Profit, 200, Real GDP =, , yK, ita, b, , P0 = `5, , Quantity, TE, (Q) =, P, Q0 = 12, , , , Total Expenditure, (TE) = Price (P) ×, Quantity (Q), , Price (P), , 21. If the Nominal GDP is `1,200 and Price Index (with base, = 100) is 120, calculate Real GDP., [3], Nominal GDP, Answer : Real GDP =, × 100, Price Index, substituting the given values in the question, , , , , , , , , 10. A consumer spends `60 on a good priced at `5 per unit., When price falls by 20 percent, the consumer continues, to spend `60 on the good. Calculate price elasticity of, demand by percentage method., [4], Answer : Given :, Initial Total Expenditure (TE0) = `60, Final Total Expenditure (TE1) = `60, Initial Price (P0) = `5, Percentage change in price = – `20, P –P, Percentage change in price = 1 0 × 100, P0, P1 – 5, – 20 =, × 100, 5, –100, = P1 – 5, 100, Pl = 4

Page 76 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1086 | Economics 2015 (Delhi), , , GNPMP = 500 + 100 + 110 + 20 + 200 + 600 – 10 + 150, + 140 – 120, , , , GNPMP = `1690 crore, , ll, , Answer : GNPMP = Compensation of employees + Rent +, Interest + Royalty + Profit + Mixed income + NFIA + Net, indirect taxes + Gross domestic capital formation – Net, domestic capital formation, , Economics 2015 (Delhi), , SET III, Maximum marks : 100, , , , Time allowed : 3 hours, , y, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , y good, (units), , , , SECTION A, 3. Define Budget Set., [1], Answer : A budget set represents those combinations of, consumption bundles that are available to the consumer, given his/her income level and at the existing market prices., In other words, it represents those consumption bundles that, the consumer can purchase using his/her money income (M) ., 5. Explain the feature 'interdependence of firms' in an, oligopoly market., [3], Answer : There exists a very high degree of mutual, interdependence between the firms in an oligopoly market., The price and the quantity decisions of a particular firm are, dependent on the price and the quantity decisions of the rival, (other) firms. Hence, a firm must take into consideration the, probable rival reactions, while formulating its own price and, output decisions., 8. Giving reason comment on the shape of Production, Possibilities curve based on the following schedule : [3], , PPC, , x, , x goods, (units), , , , The following figure depicts the shape of PPC., Thus, the shape of PPC is concave which can be attributed, to the law of increasing opportunity cost., 9. A consumer spends `100 on a good priced at `4 per unit., When price falls by 50 percent, the consumer continues, to spend `100 on the good. Calculate price elasticity of, demand by percentage method., [4], Answer : Given :, , , , yM, , yK, ita, b, , O, , 0, , Final Total Expenditure (TEl) = `100, , 18, , Initial Price (P0) = `4, , 14, , Percentage change in price = –50, , 8, , P –P, Percentage change in price = 1 0 × 100, P0, P1 – 4, – 50 =, × 100, 4, –200, = P1 – 4, 100, P1 = 2, , Good X (units), , Good Y (units), , opportunity cost, , 0, , 20, , -, , 1, , 18, , 2, , 2, , 14, , 4, , 3, , 8, , 6, , 4, , 0, , 8, , , , Answer : Based on the below schedule, we can say that, PPC is concave to origin. This is because as the production, increases, to produce each additional unit of Good X, more, and more units of Good Y are sacrificed. In other words, the, opportunity cost of producing one good in terms of another, increases., , , , 0, , , , 4, , 20, , Price (P), , Total Expenditure, (TE) = Price (P) ×, Quantity (Q), , P0 = `4, , TE0 = `100, , Q0 = 25, , P1 = `2, , TE1 = `100, , Q1 = 50, , Now,, , , 3, , C, , 1, 2, , Initial Total Expenditure (TE0) = `100, , Good Y (units), , op, , Good X (units), , Ed = (–), , Quantity (Q) =, , TE, P, , Percentage change in quantity demanded, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , Percentage change in price

Page 77 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , where,, , Q1 – Q 0, ×100, Q0, Ed = (–), –50, 50 – 25, ×100, 25, Ed = (–), –50, 100, Ed = (–), –50, Ed = 2, , C represents autonomous consumption expenditure, c represents marginal propensity to consumre, So,, , , Y = C + cY + I, Substituting the given values,, , , , 2000 = 400 + c (2000) + 200, 2000 = 600 + 2000 c, , , , , , , , , , , , Economics 2015 (Delhi) | 1087, , \, Ed = 2, Thus, the price elasticity of demand is 2., , or,, , c = 0.7, , Thus, marginal propensity to consume is 0.7., 29. Calculate 'Net Domestic Product at Factor Cost' and, 'Gross National Disposable Income'** :, [6], , 24. An economy is in equilibrium. Find Marginal Propensity, to Consume from the following :, [4], , Answer : NDPFC = Private final consumption expenditure, + Government final consumption expenditure + (Net, domestic capital formation + depreciation) – Net imports –, depreciation – Net indirect taxes, , , , , , , , (ii) Private final consumption expenditure, (iii) New imports, , (iv) Net domestic capital formation, , or, NDPFc = 800 + 200 + 100 + 50 - (-20) -50 -120, or, NDPFC = `1000 crore, , C, , op, , Answer : C = C + cY, , (i) Net current transfers to abroad, , ll, , Investment expenditure = 200, , yM, , National income = 2,000, Autonomous consumption = 400, , (` crores), , yK, ita, b, , , , , , , , SECTION B, 22. If the Real GDP is `300 and Nominal GDP is `330,, calculate Price Index (base = 100)., [3], Answer : We know,, Nominal GDP, Real GDP =, × 100, Price Index of Current year, 330, 300 =, × 100, Price Index, Price Index = `110, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , 15, 800, (–)20, 100

Page 78 :
Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2014 (Outside Delhi), , SET I, , , , Downloaded from CopyMyKitab, , Maximum marks : 100, , , , Time allowed : 3 hours, , In the above figure, AE represents the PPC for capital goods, and consumer goods. Suppose that the initial production point, is B, where 1 unit of capital good and 48 units of consumer, goods are produced. To produce one additional unit of capital, good, 4 units of consumer good must be sacrificed (point C)., Thus, at point C, the opportunity cost of one additional, capital good is 4 units of consumer goods. Further moving to, point D, to produce one more unit of capital good, 9 units of, consumer goods must be sacrificed. That is, the opportunity, cost rises to 9 units of consumer goods. Thus, as we move, down the PPC from point C to point D, the opportunity cost, and MRT increases. This confirms the concave shape of the PPC., , , , , , 8. Explain how technological progress is a determinant of, supply of a good by a firm., [3], OR, , Explain how input prices are a determinant of supply of a, good by a firm., Answer : The level of technology directly affects the supply, of a good. That is, while other things remain the same, there, exists a positive relationship between the state of technology, and the quantity produced. With the appreciation in the, level of production techniques, per unit cost of production, goes down. This encourages the producers to produce, higher quantities of goods, thereby increasing the supply, of the goods., On the contrary, a depreciation in the production technology, raises the per unit cost of production, thereby decreasing the, supply of good., OR, Input prices are related to the supply of a good. If the prices, of inputs increases then the cost of production also increases,, while other things remain the same. Due to the rise in the, cost of productions, it becomes relatively less profitable for a, producer to produce the good. Consequently, lesser quantity, is supplied at the given price. On the other hand, if the input, prices falls, the cost of production also falls, thereby enabling, the producer to supply more quantities of output at the given, price. Thus, the change in the input prices positively affects, the supply of a product., , 9. Why is Average Revenue always equal to price?, [3], Answer : Average Revenue (AR) is defined as the revenue, earned per unit of output sold. AR is the same as the price (P), of the output (Q). Algebraically, it can be expressed as follows :, , , C, , op, , yM, , , , , , 7. When the price of a good falls from 10 to 8 per unit, its, demand rises from 20 units to 24 units. What can you say, about price elasticity of demand of the good through the, ‘expenditure approach’ ?**, [3], , yK, ita, b, , , , , , , , SECTION A, 1. The government has started promoting foreign capital., What is its economic value in the context of Production, Possibilities Frontier ?, [1], Answer: Promotion of foreign capital by the government will, lead to an increment in resources as fresh investment into, the country. It will increase the production in the country, and will lead to a rightward shift in Production Possibility, Frontier (PPF)., 2. Define indifference curve., [1], Answer : A curve that shows different combinations of two, commodities that yield the same level of satisfaction to a, consumer is called an indifference curve., 3. Define marginal product., [1], Answer : Marginal product refers to the change in the total, output brought by employing one additional unit of labour., Algebraically, marginal product = change in total product/, ∆TP, change in labour units MP =, ∆L, 4. What is market supply of a product?, [1], Answer : The total quantity of a commodity supplied by all, the producers at a given price during a given period of time is, called the market supply of a product., 5. What is imperfect oligopoly?, [1], Answer : When the firms produce different products in, an oligopoly market, it is called imperfect oligopoly, e.g.,, automobile industry., 6. Why is Production Possibilities Curve concave? Explain. [3], Answer : The Production Possibility Curve is concave because, marginal rate of transformation, which is the slope of the, curve, increases continuously as each additional unit of one, good is produced by reducing quantity of the other good. It, means to produce more and more units of one good, more, and more units of other good need to be sacrificed. MRT, and opportunity cost increases because no resource is equally, efficient in production of all goods. This can be explained, with the help of the following diagram., , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 79 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Outside Delhi) | 1089, , AR = TR/Q, where TR is total revenue,, , good. i.e., MUx = Px. If MUx > Px that is, when price is lesser, than the Marginal Utility, then the consumer will buy more of, that good. On the other hand, if MUx < Px, that is when price, is more than the Marginal Utility, then the consumer will buy, less of good. This is reflected in the following diagram., , , , TR = P × Q, P×Q, \, AR =, ⇒ AR = P, Q, Thus, AR is always equal to the price of the output., , , , 10. Why is the number of firms small in oligopoly? Explain., [3], Answer : Oligopoly refers to the form of market where very, few big firms (giants) own major control over the whole market, by producing significant portion of the market demand. The, number of firms is small in oligopoly, because there exists a, cut-throat competition among the firms which makes it very, difficult for any new firm to enter the industry. Moreover, as, the existing firms are the only giants in the market, new entry, into the market is associated with high costs, which further, narrows the scope for a new entrant., , C, , op, , yM, , MUx/Px = MUy/Py = MUM, , However, when the price of commodity X rises, the ratio of, marginal utility to price of X (MUx/Px) becomes lower than, that of Y, that is MUx/Px < MUy/Py ., In such a case, the consumer rearranges his consumption, combination such that the equality is again restored. He would, decrease his consumption of commodity X. With the decrease, in the consumption of commodity X, marginal utility of X, rises. As a result, the ratio of marginal utility to price of X rises., The consumer would continue decreasing the consumption of, commodity X till the equality between the ratio of marginal, utility to price in case of X and Y is again reached., OR, In order to decide, how much of a good to buy at a given price,, a consumer compares Marginal Utility (MU) of the good with, its price (P). The consumer will be at equilibrium, when the, Marginal Utility of the good will be equal to the price of the, , 12. Give the meaning of “inferior” good and explain the same, with the help of an example., [4], Answer : Inferior goods refer to those goods that share an, inverse relationship with the income of a consumer. As, income increases the demand for inferior goods fall and viceversa. This is because with an increase in the income, the, consumer tends to shift demand to superior quality goods,, thereby, reducing the demand for inferior goods., , , Given the price of a good, how will a consumer decide as to, how much quantity of that good to buy? Use utility analysis., Answer : In case of two commodities, the consumer’s, equilibrium is attained at that point, where; the utility derived, from each additional unit of the rupee spent on each of the, goods is equal. That is, Marginal Utility of a Rupee spent on, the good X (i.e., MUx/Px) is equal to the Marginal Utility of, a Rupee spent on the good Y (i.e., MUy/Py), which in turn is, equal to the Marginal Utility of Money (MUM). That is,, , For example, coarse cereals can be considered as inferior, goods. A good can be normal or inferior depending on the, level of consumer’s income. For instance, at a very low level, of income, coarse cereals may be a normal good. However, for, higher income level, ceteris paribus, coarse cereals will be an, inferior good because with an increase in income, a consumer, will reduce his/her consumption of inferior cereals and it will, be substituted by superior cereals., 13. Giving reasons, explain the ‘Law of Variable Proportions’., [4], Answer : The Law of Variable Proportions states that if more, and more of variable factor (labour) is combined with the, same quantity of fixed factor (capital), then initially the total, product will increase but gradually after a point, the total, product will become smaller and smaller. MP of variable, factor may initially rise but eventually a situation will come, when MP of variable factor starts declining. It may go to zero, or even negative., , , , , OR, , , , In the figure, the quantity of commodity x is represented on, the x-axis, while, the price and the utility are represented on the, y-axis. OP is the price of the commodity. MUx curve is downward, sloping representing diminishing Marginal Utility of x. The, consumer attains consumer’s equilibrium at point E, where, the, Marginal Utility becomes equal to the price of the commodity., , yK, ita, b, , 11. A consumer consumes only two goods X and Y and is in, equilibrium. Show that when the price of good X rises, the, consumer buys less of good X. Use utility analysis., [4], , • Follow us on Telegram - https://t.me/copymykitab1

Page 80 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1090 | Economics 2014 (Outside Delhi), , Consequently, the MP curve rises and TP curve continues, to rise., IInd Stage : Diminishing Returns to a Factor In this stage,, the TP curve increases but at a decreasing rate and attains, its maximum at point B, where it remains constant. On the, other hand, in the lower panel, the MP curve continues to, fall and cuts AP from its maximum point Z, where MP equal, AP. When TP attains its maximum point, corresponding to, it, MP becomes zero. AP, in this stage initially rises, attains, its maximum point at Z and thereafter, starts falling. This, stage is known as the economic zone as any rational producer, produces in this stage., , O, , Reasons for Decreasing Returns to a Factor, , , 1. Full utilization of fixed factor : In this stage, the fixed, factor is utilized to its maximum level as more and more of, labour inputs are employed., , , 2. Imperfect substitutability between labour and capital :, The variable factors are imperfect substitute for the fixed, factor. Therefore, the firm cannot substitute labour for, capital and as a result diminishing returns takes place., , yK, ita, b, , O, , C, , op, , Ist Stage : Increasing Returns to a Factor During this phase, TP, curve increases at an increasing rate and is also accompanied by, rising MP curve in the lower panel. TP continues to increase at, an increasing rate till point K (inflexion point). Corresponding, to the inflexion point, K, the MP curve attains its maximum, point (U). Throughout this stage, the marginal product of, labour is rising which implies that production (or total product), can be increased by employing more units of labour. The first, stage of production is also known as non-economic zone as a, rational producer will not operate profitably in this stage., Reasons for Increasing Returns to a Factor, , , 1. Underutilisation of the fixed factor : In the first stage, of production, there are not enough labour units to fully, utilize the fixed factor. Therefore, the firm can increase, its output just by combining more and more of labour, inputs with the fixed factor, thereby; the output of the, additional unit of labour (i.e., MP) tends to rise., , , 2. Division of labour : The increase in the labour input, enables the division of labour, which further increases, the efficiency and productivity of the labour., , , 3. Specialisation of labour : Due to the division of labour,, specialization of individual labour unit increases, which, in turn raises the overall efficiency and productivity., , , , 3. Optimum Proportion/Ideal Factor Ratio : The optimum, proportion (or ideal factor ratio) is a fixed ratio in which, the labour and capital inputs are employed. These factors, will be the most efficient if they are employed as per the, optimum proportion. If this proportion is disturbed (by, combining more of labour inputs to the fixed units of, capital), then the efficiency of the factors will fall, thereby, to the diminishing returns to the factor., IIIrd Stage : Negative Returns to a Factor This stage begins, from the point B on the TP curve. Throughout this stage,, TP curve falls and MP curve becomes (crosses the x-axis), negative. Simultaneously, the AP curve continues to fall and, approaches the x-axis (but does not touch it). This stage is, also known as non-economic zone as any rational producer, would not operate in this zone. The addition to the total, output in this stage by the additional labour unit (i.e., marginal product) is negative. This implies that employing, more labour would not contribute anything to the total, product but will add to cost of the production in form of, additional wage., , 14. Explain why is an indifference curve (a) downward sloping, and (b) convex., [6], OR, Explain the concept of ‘Marginal Rate of Substitution’ with, the help of a numerical example. Also explain its behaviour, along an indifference curve., Answer : (a) Indifference curves are downward sloping, from left to right. This reflects the fact that the consumer, cannot simultaneously have more of both the goods. In, other words, an increase in the quantity of one good is, associated with the decrease in the quantity of the other, , , yM, , In the upper panel, TP is the Total Product curve. In the, lower panel, AP represents the Average Product curve and, MP represents the Marginal Product curve. According to the, Law of Variable Proportions, the whole production phase can, be distinguished into three different production stages., , • Follow us on Telegram - https://t.me/copymykitab1

Page 81 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Outside Delhi) | 1091, , good. This is in accordance with the assumption of, monotonic preferences., (b) Indifference curve is convex to the origin because as, we move with the Indifference curve towards the right, the, slope of IC(MRS) decreases. This is because as the consumer, consumes more and more of one good, the marginal utility, of the good falls. On the other hand, the marginal utility of, the good sacrificed will rise. In other words, the consumer is, willing to sacrifice less and less for each additional unit of the, other good consumed. Thus, as we move down the IC, MRS, diminishes. This suggests the convex shape of indifference, curve., OR, Marginal rate of substitution refers to the rate at which a, consumer is willing to substitute one good for each additional, unit of other good., Algebraically, it is represented as follows :, MRS = ∆ x2/∆ x1, , Total, Revenue, ( ), , Total, Cost, ( ), , Marginal Marginal, Revenue, Cost, ( ), ( ), , Profits, (TRTC), , 1, , 6, , 7, , -, , -, , −1, , 2, , 12, , 13, , 6, , 6, , −1, , 3, , 18, , 17, , 6, , 4, , 1, , 4, , 24, , 23, , 6, , 6, , 1, , 5, , 30, , 31, , 6, , 8, , −1, , According to the MR-MC approach, the firm (or producer), will attain its equilibrium in two conditions., 1. MR = MC, 2. MC must be rising after the equilibrium level of output., Thus, by looking at the table, we can say that the firm is in, equilibrium where output equal to 4 units. When output, is 4 units, MR = MC (thus, the first condition is satisfied), and MC increases after the 4th unit of output (therefore, the, second condition is satisfied)., , Good X1 (Units), 5, 2, 1, , Good X2 (Units), 1, 2, 3, , C, , op, , yM, , Now as we can see, a movement from Bundle A to Bundle, B, in order to get one more units of Good X2, the consumer, must sacrifice 3 units of Good X1. This implies that, MRS = −3/1 = −3., As we move down along the Indifference curve to the right,, Marginal Rate of Substitution decreases. This is because as, the consumer consumes more and more of one good, the, marginal utility of that good falls. On the other hand, the, marginal utility of the good sacrificed will rise. In other, words, the consumer is willing to sacrifice less and less for, each additional unit of the other good consumed. Thus, as, we move down the IC, MRS diminishes. This suggests the, convex shape of indifference curve. For instance, in the, example given above, a further movement from bundle B to, bundle C suggests that with one unit of increase in good 2,, the consumer is willing to sacrifice good 1 falls to 1 unit., Thus, MRS falls., , When output is less than 4 units, if the firm produces slightly, lesser level of output than 4 units, then the firm is facing price, that exceeds the MC. This implies that higher profits can be, achieved by increasing the level of output to 4 units. On the, other hand, if the firm produces slightly higher level of output, than 4 units, then the firm is facing price that falls short of, the MC. This implies that higher profits can be achieved by, reducing the output level to 4 units. Thus, only at 4 units of, output, the producer will be in equilibrium and the profit, maximizing output level, where Price (P) = MC and also MC, curve is rising., , 16. Market of a commodity is in equilibrium. Demand for, the commodity ‘decreases’. Explain the chain of effects of, this change till the market again reaches equilibrium. Use, diagram., [6], Answer :, , , Bundles, A, B, C, , Output, (units), , yK, ita, b, , This can be better understood with the help of the following, numerical example., , Answer :, , Y, , , , 15. From the following information about a firm, find the firm’s, equilibrium output in terms of marginal cost and marginal, revenue. Give reasons. Also find profit at this output. [6], Output (units), , Total Revenue ( ), , Total Cost ( ), , 1, 2, 3, 4, 5, , 6, 12, 18, 24, 30, , 7, 13, 17, 23, 31, , X, , A decrease in the demand for the commodity leads to a fall in, the equilibrium price and quantity. Let us understand how it, happens : D1D1 and S1S1 represent the market demand and, , • Follow us on Telegram - https://t.me/copymykitab1

Page 82 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1092 | Economics 2014 (Outside Delhi), , SECTION B, , Explain the significance of the ‘Standard of Deferred, Payment’ function of money.**, 24. Is the following a revenue receipt or a capital receipt in the, context of government budget and why ?, [3], (i) Tax receipts, (ii) Disinvestment, Answer : (i) Tax receipts are revenue receipts as these receipts, neither creates any liability nor it creates any reduction in the, assets of the government., (ii) Disinvestment is treated as capital receipts because it, results in the reduction of government assets., , , , 17. What are the time deposits?, [1], Answer : Time Deposits refer to those deposits that are held, for a fixed (specific) period of time (called maturity period)., , OR, , , , market supply respectively. The initial equilibrium occurs at E1,, where the demand and the supply intersect each other. Due to, the decrease in the demand for the commodity, the demand, curve will shift leftward parallel from D1D1 to D2D2, while, the supply curve will remain unchanged. Hence, there will be a, situation of excess supply, equivalent to (q3 – q1). Consequently,, the price will fall due to excess supply. The price will continue to, fall until it reaches E2 (new equilibrium), where D2D2 intersects, the supply curve S1S1. The equilibrium price falls from P1 to P2, and the equilibrium output falls from q3 to q2., , , , , , 18. Define inflationary gap., [1], Answer : Due to the excess of aggregate demand, there exists, a difference (or gap) between the actual level of aggregate, demand and full employment level of demand. This difference, is termed as inflationary gap., , 25. Distinguish between ‘autonomous’ and ‘accommodating’, Balance of Payments transactions., [3], Answer :, , yK, ita, b, , Fiscal Deficit = Total Budget Expenditure – Revenue Receipts, + Capital Receipts excluding borrowings., , , 21. Define foreign exchange rate., [1], Answer : Foreign exchange rate refers to the rate at which, price of one currency is measured in terms of other currency., , , , 22. What are externalities? Give an example of a positive, externality and its impact on welfare of the people., [3], Answer : An externality is said to occur when the action of, one entity made an impact on other entity. These externalities, can be positive as well as negative. A positive externality occurs, when the action of one person positively affects the other. For, instance, plantation by a person provides fresh air to others., Also, it contributes to the environment along with increasing, the welfare of people. Thus, plantation by a person affects the, life of the people living on the surrounding areas, it enhances, the overall welfare of the society and creates positive externality., 23. Explain the significance of the ‘Unit of Account’ function of, money.**, [3], , 26. Foreign exchange rate in India is on the rise recently. What, impact is it likely to have on exports and how ?, [3], Answer : A rise in the exchange rate say from $1 = 40 to, $1 = 50 implies that domestic country’s export to foreign, countries have become cheaper because now foreigners can, purchase 50 worth of goods for $1, as compared to the, earlier situation where they could purchase only 40 worth, of goods for $1. Thus, this raises the demand for exports., , , C, , op, , , , 20. Define fiscal deficit., [1], Answer : Fiscal deficit refer to the excess of total budget, expenditure over the total revenue receipts excluding, borrowings during a given fiscal year., , Autonomous transactions are, classified ‘above the line items’, in BOP., Such, transactions, are, independent of the BOP, status of a country., , Accommodating Transactions, Accommodating, transactions refer to those international economic transactions, that are undertaken to correct, the disequilibrium in the, autonomous items., Accommodating items are, classified ‘below the line items’, in BOP., Such transactions depend on, the BOP status of a country, as they are compensating, short-term capital transactions, that are undertaken to correct, the disequilibrium in the, autonomous items., , 27. Explain ‘Banker to the Government’ function of the central, bank., [4], , , yM, , , , 19. What is full employment?, [1], Answer : Full employment refers to the situation where the, resources of a country i.e., labour are fully and efficiently, employed. But, it is not a situation of zero unemployment., In other words, full employment can be said to take place, when cyclical unemployment is zero while the structural and, frictional unemployment are minimum., , , , Autonomous Transactions, Autonomous transactions refer, to those international economic, transactions that are undertaken, with the sole motive of earning, profit., , OR, Explain ‘Bankers’ Bank’ function of the central bank., Answer : Central bank acts as a banker and financial advisor to, the government. As a banker to the government, it performs, the following functions., (i) It manages the account of the government., (ii) It accepts receipts from the government and makes, payment on behalf of it., , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 83 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Outside Delhi) | 1093, , C, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ( in Arab), (i) Social security contributions by employees, 90, (ii) Wages and salaries, 800, (iii) Net current transfers to abroad, (−) 30, (iv) Rent and royalty, 300, (v) Net factor income to abroad, 50, (vi) Social security contributions by employers, 100, (vii) Profit, 500, (viii) Interest, 400, (ix) Consumption of fixed capital, 200, (x) Net indirect tax, 250, Answer : NNPFC = Wages and Salaries + Social security, contribution by employers + Rent and Royality + Profit +, Interest – Net factor income to abroad, = 800 + 100 + 300 + 500 + 400 – 50, , , , 29. Tax rates on higher income group have been increased., Which economic value does it reflect? Explain., [4], Answer : Increasing the tax rate on higher income groups, leads to an increase in the tax revenue of the government, without hurting the tax group. The government can inturn, use the revenue thus, generated from this taxation to finance, the welfare activities in the nation. Thus, by increasing the tax, rate on the higher income groups, the government can bridge, the gap between the rich and the poor, thereby moving the, society towards being an egalitarian society. Moreover, the, government can reallocate resources to maintain a balance, between the social objectives of welfare maximization and, economic objective of profit maximization., Thus, we can say that by increasing the tax rate on higher, , ** Answer is not given due to change in syllabus., , = 2050 Arab, , 31. How should the following be treated in estimating national, income of a country? You must give reasons for your answer., [6], , , , , op, , , , yM, , , , , , , , , , 30. Calculate ‘Net National Product at Factor Cost’ and ‘Gross, National Disposable Income**’ from the following :, [6], , yK, ita, b, , 28. Calculate Marginal Propensity to Consume from the, following data about an economy which is in equilibrium : [4], National income, = 2000, Autonomous consumption expenditure, = 200, Investment expenditure, = 100, Answer : Given,, National Income (Y), = 2000, Autonomous consumption expenditure, = 200, Investment expenditure, = 100, As we know in equilibrium,, Y= C+I, Since, C = C + cY, We get, Y = C + cY + I, 2000 = 200 + c (2000) + 100, 1700 = 2000c, ⇒, c = 0.85, Therefore, marginal propensity to consume is 0.85., , income groups, the government satisfies the value of equality, and welfare., , , , (iii) It grants short-term loans and credit to the government., It performs the task of managing the public debt., (iv) The central bank advises the government on all the banking, and financial matters. RBI gives loans to government when, its expenditure exceeds its revenue. This is called deficit, financing through funding from RBI., OR, Central bank is the apex bank of all the commercial banks, and financial institutions in the country. It holds the same, relationship with the commercial banks as a commercial bank, holds with its customer. The central bank accepts deposits, from the commercial banks and holds it as reserves for them., The commercial banks are compulsorily required to hold, a part of their deposits as reserve with the central bank in, accordance with the cash reserve ratio (CRR). In addition to, the CRR requirements, the commercial banks hold reserves, with the central bank for clearing their settlements with other, banks and to fulfill their requirements of inter-bank transfers., , (i) Taking care of aged parents, (ii) Payment of corporate tax, (iii) Expenditure on providing police services by the, government, Answer : (i) Taking care of aged parents : This will not, be included in national income as it does not involve any, production of goods and services. Moreover, these services, that are meant for self-consumption and it is difficult to, estimate the market value of such services., (ii) Payment of corporate tax : Corporate tax is a part, of corporate profit and therefore, it is included in national, income of the country., (iii) Expenditure on providing police services by the, government : It is included in national income of a country, as it forms a part of Government Final Consumption, Expenditure., , 32. When is an economy in equilibrium? Explain with the, help of Saving and Investment functions. Also explain the, changes that take place in an economy when the economy, is not in equilibrium. Use diagram., OR, Outline the steps required to be taken in deriving the, Consumption Curve from the given Saving Curve. Use, diagram., Note: The following question is for the Blind Candidates, only in lieu of Q.No.32., Define investment. Explain national income equilibrium, through Saving and Investment function. Also explain the, , • Follow us on Telegram - https://t.me/copymykitab1

Page 84 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1094 | Economics 2014 (Outside Delhi), , , , changes that takes place in an economy when the economy, is not in equilibrium., [6], OR, What is Consumption Function? How can it be derived, from the Saving Function? Explain., Answer : An economy is in equilibrium when either of the, two conditions are satisfied., 1. Aggregate Demand = Aggregate Supply, 2. Saving = Investment (Saving and Investment Approach), , implies low consumption, which means that the output sold, (due to low consumption) is less than the planned output., Thus, there exists a portion of produced output that remained, unsold, thereby, leading to accumulation of unplanned, inventory. Thus to prevent accumulation of inventories,, savings in the economy will be reduced. This will happen till, savings are again equal to investment and the equilibrium is, restored., OR, Derivation of Consumption Curve from Saving Curve, , According to this approach, the equilibrium is determined at, that point, where the saving and investment are equal to each, other. In other words, the equilibrium is established, where, leakages are equal to the injections., , X, , yK, ita, b, , Y, , op, , yM, , In the diagram, SS represents the saving curve and II represents, the investment curve. The investment curve is a horizontal line, as it represents the autonomous investment. At point E, Savings, = Investment, thus point E represents the equilibrium point,, where the saving curve SS and the investment curve II intersects., Accordingly, OQ is the equilibrium level of income (output)., , , , (i) Corresponding to – C : in the saving function, we have, C in the consumption function. That is, it represents, the autonomous consumption or the consumption at, zero level of income. The autonomous consumption is, financed by drawing down savings., (ii) At point B, saving equals zero. This suggests that whole, of income is spent on consumption. That is, Y = C., This point is also known as the break-even point. This is, shown by point A in the upper panel denoting Y = C., (iii) By joining the points C and A we derive the straight, upward sloping consumption curve., (iv) CC is the required consumptions curve., , , To the right of point E, savings is greater than investment., When S exceeds I i.e., when withdrawal from the income, is greater than injections into the circular flow of income,, implies that total consumption expenditure is less than what, is required to purchase the available supply of goods and, services. In other words, we can understand this as high saving, , In the lower part of the diagram, – C + sY is the saving curve., OS equal to – C represents the saving at zero level of income., Steps for the derivation of consumption curve from the saving, curve are as follows :, , , , C, , To the left of point E, saving is less than investment. When, I exceeds S i.e., when injections into the circular flow of, income is greater than withdrawal from the income, implies, that available supply of goods and services is less than what is, required to meet the current demand for goods and services., In other words, we can understand this as low saving implies, high consumption, which means that the output demand, (due to high consumption) is greater than the planned, output. Thus, there exists a portion of demand that remains, unsatisfied, thereby, leading to an unplanned decline in the, inventory. Thus to prevent inventories from falling, savings in, the economy must be increase. This will happen till savings, are again equal to investment and the equilibrium is restored., , • Follow us on Telegram - https://t.me/copymykitab1

Page 85 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Maximum marks : 100, , , , Time allowed : 3 hours, , SET II, , , , Economics 2014 (Outside Delhi), , Answer : When foreign exchange rate in a country is on the, rise then the demand for foreign currencies will be low. A, rise in the exchange rate i.e., $1 = 40 to $1 = 50 implies, that the goods of abroad become more expensive that is, it, now cost 50 to purchase a commodity worth $1 instead of, 40 earlier. This would result in a reduction in the demand, for the foreign commodities. Thus, there will be fall in, imports., , Note : Except for the following questions, all the remaining, questions have been asked in previous set., SECTION A, , , , , 29. Calculate investment expenditure from the following date, about an economy which is in equilibrium., [4], National Income, , = 1000, , Marginal propensity to save, , = 0.20, , Autonomous consumption expenditure, Answer : Given,, , = 100, , , , , , , , 8. When the price of a good rises from 10 to 12 per unit, its, demand falls from 25 units to 20 units. What can you say, about price elasticity of demand of the good through the, ‘expenditure approach’?**, [3], , , , Autonomous consumption expenditure =, , 100, , MPC (c) = 1 – MPS = 1 – 0.20 =, , 0.8, , , , , , Y= C+I, , Since, C = C + cY, , yM, , We, , Y = C + cY + I, , , , 1000 = 100 + 0.8 (1000) + I, , , , 1000 = 900 + I, ⇒, , I = 100, , Therefore, investment expenditure is 100., , ( in Arab), (i) Net change in stocks, 50, (ii) Government final consumption expenditure, 100, (iii) Net current transfers to abroad, 30, (iv) Gross domestic fixed capital formation, 200, (v) Private final consumption expenditure, 500, (vi) Net imports, 40, (vii) Depreciation, 70, (viii) Net factor income to abroad, (−) 10, (ix) Net indirect tax, 120, (x) Net capital transfers to abroad, 25, Answer : NNPFC = Private final consumption expenditure, + Government final consumption expenditure + Gross, domestic fixed capital formation + Net change in stocks –, Net imports – Depreciation – Net indirect tax – Net factor, income to abroad, , , , , , , , , , , , , 31. Calculate ‘National Income’ and ‘Net National Disposable, Income’** from the following :, [6], , , , , , 18. What is floating exchange rate ?, [1], Answer : When the market forces of demand and supply, determine the conversion rate of currencies, it is called, floating exchange rate., , 0.20, , As we know in equilibrium,, , op, , C, , For example, if price of tea increases, then the demand, for tea will decrease. As a result, consumers will shift their, consumption towards coffee and the demand for coffee will, increase. (Price of tea ↑⇒ Demand for coffee ↑ ). It should, be noted that the demand for a good moves in the same, direction as that of the price of its substitute., , Marginal propensity to save (MPS) =, , , , 13. How does change in price of a substitute good affect the demand, of the given good? Explain with the help of an example., [4], Answer : Substitute goods refer to those goods that can be, consumed in place of each other. In other words, they can, be substituted with each other. For example, tea and coffee,, colgate and pepsodent, cello pens and reynolds pen, etc. In, case of substitute goods, if the price of one good increases,, the consumer shifts his demand to the other (substitute) good, i.e., rise in the price of one good results in a rise in the, demand of the other good and vice-versa., , 1000, , , , , , yK, ita, b, , National Income (Y) =, , , , , , 5. Define marginal revenue., [1], Answer : Marginal revenue refers to an addition to the total, revenue from producing one more unit of output., , , , 3. Give the meaning of ‘inelastic demand’., [1], Answer : When the percentage change in quantity demanded, is less than the percentage change in prices; it is said to be, inelastic demand., , , , 24. When foreign exchange rate in a country is on the rise, what, impact is it likely to have on imports and how?, [3], , ** Answer is not given due to change in syllabus., , , , , , , , 20. Define deflationary gap., [1], Answer : Due to the deficiency in the aggregate demand,, there exists a difference ( or gap) between the actual level of, aggregate demand and full employment level of demand. This, difference is termed as deflationary gap., , , , , , SECTION B, , = 500 + 100 + 200 + 50 – 40 – 70 – 120 – (−10), = 630 Arab, , • Follow us on Telegram - https://t.me/copymykitab1

Page 86 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET III, , , , Economics 2014 (Outside Delhi), Time allowed : 3 hours, , , , Maximum marks : 100, National income, , = 500, , Marginal Propensity to save, , = 0.30, , Investment expenditure, Answer : Given :, , = 100, , , , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , SECTION A, , , 1. Define variable cost., [1], Answer : Variable cost always changes with the change in the, level of output of a good., , Investment expenditure, I = 100, Marginal propensity to consume, MPC = 1 – MPS, ….[AD = AS and AD = CI], , ⇒, , …[Q C = C + I], , , , , , Y = C + b(Y) + I, , 27. Calculate Autonomous Consumption Expenditure from the, following data about an economy which is in equilibrium :, [4], , , , , , 32. Calculate the ‘Net National Product at Market Price’ and, ‘Gross National Disposable Income**’ from the following:, [4,2], ( in Arab), 10, , (ii) Consumption of fixed capital, , 40, , , , , , (i) Closing stock, , 600, , , , (iii) Private final consumption expenditure, (iv) Exports, , 50, , (v) Opening stock, , 20, , , , , , (vi) Government final consumption expenditure, , 100, , (vii) Imports, , 60, , (viii) Net domestic fixed capital formation, , 80, , , , (−) 10, , (x) Net factor income from abroad, Answer : NNPMP, , 30, , , , (ix) Net current transfers to abroad, , , , , , , 23. Explain the effect of appreciation of domestic currency on, exports ?, [3], Answer : When the price of domestic currency rises, it is, called the appreciation of domestic currency. The benefit, of appreciation of domestic currency is that we will require, less currency to buy foreign currency. Because of this foreign, buyer will have to pay high price for the domestic good. It will, decrease in their demand. i.e. reduces exports., , C = 50, , , , , , C, , 19. What is ‘managed floating exchange rate’ ?, [1], Answer : It is a system in which the foreign exchange rate is, determined by market forces. In this system the central bank, stabilizes the value of currency like appreciation or depreciation., , C = 500 – 350 – 100, , , , yM, , op, , 17. What is ‘excess demand’ in macroeconomics ?, [1], Answer : At full employment level of output, the access, of aggregate demand over aggregate supply is called excess, demand in macroeconomics., , , , yK, ita, b, , 500 = C + 0.70 (500) + 100, , , , , , 11. How does change in price of a complementary good affect, the demand of the given good? Explain with the help of an, example., [4], Answer : If we use a pair of goods together to satisfy a, particular want or need then these goods are known as, complementary goods. When one commodity’s price falls, then the other good’s demand rises. e g., car and petrol., , , ⇒, , , , We know that, Y = C + I, , 10. A consumer buys 27 units of a good at a price of ` 10 per, unit. When the price falls to ` 9 per unit, the demand rises to, 30 units. What can you say about price elasticity of demand, of the good through the ‘expenditure approach’** ?, [3], , , , = 1 – 0.30 = 0.70, , , , , , 5. What is meant by monotonic preferences ?, [1], Answer : Some goods offer high level of satisfaction to the, consumer then he prefers more of that good. This is known as, monotonic preferences., , SECTION B, , MPS = 0.30, , , , National income, Y = 500, , = Private final consumption expenditure + Government, final consumption expenditure + Net domestic fixed capital, formation + [Closing stock – Opening stock] + [Exports –, Imports] – Net factor income from abroad, = (iii) + (vi) + (viii) + [(i) – (v)] + [(iv) – (vii)] – (x), = 600 + 100 + 80 + [10 – 20] + [50 – 60] – 30, = 780 – 10 – 10 – 30 = 730 Arab, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 87 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET I, , , , Economics 2014 (Delhi), , Maximum marks : 100, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , Therefore,, , Q = Q2 – Q1, P = P 2 – P1 = ` 1, , , , 1. Unemployment is reduced due to the measures taken by, the government. State its economic value in the context of, production possibilities frontier., [1], Answer : Due to the measures taken by the government to, reduce the unemployment, the point which was earlier below, the production possibility curve (indicating under utilisation, of resources) will shift close to or on the PPC (indicating, better utilisation of resources). Hence, economic value is, reflected in terms of increased output and income., , D, , , , SECTION A, , 7. A consumer buys 18 units of a good at a price of 9 per, unit. The price elasticity of demand for the good is (−)1., How many units the consumer will buy a price of 10 per, unit? Calculate., [3], Answer : Given, Q1 = 18, Q2 = ?, P1 = 9 and P2 = 10, , D, , Time allowed : 3 hours, , [1], , op, , , , 4. Give meaning of ‘returns to a factor’., [1], Answer : Returns to a factor means the change in output when, an additional unit of variable input is employed. The Law of, Variable Proportion can be regarded as ‘Returns to a Factor’., , C, , , , 5. What is perfect oligopoly?, [1], Answer : Perfect oligopoly is a market form in which a, market or industry is dominated by a small number of, sellers (oligopolists) who produce homogenous products. For, example, Cement industry or Chemical industry., , , 6. Explain the central problem ‘for whom to produce’, [3], Answer : The central problem being “for whom to produce”, basically throws light on the distribution mix of the final, goods and services produced. The distribution of the final, goods and services is equivalent to the distribution of, National Income (or National Product) among the factors, of production such as land, labour, capital and entrepreneur., For instance, imagine an economy producing two goods –, normal rice (priced at 15/kg) and graded rice (priced at, 100/kg). If the economy decided to cater to the needs of the, lower section of the society, then it would produce more of, normal rice and less of the graded rice., On the other hand, if the economy decided to cater to the, needs of the higher section of the society, then it would, produce more of the graded rice and less of the normal rice., , Therefore, the consumer will buy 16 units of the good at a, price of 10., , 8. State the relation between marginal revenue and average, revenue., [3], OR, State the relation between total cost and marginal cost. [3], Answer : The relationship between marginal revenue and, average revenue can be divided under two forms of market, – under Perfect Competition market and under Imperfect, Competition market., Under Perfect Competition market, average revenue equals, marginal revenue throughout all output levels. Graphically,, marginal revenue curve is a straight horizontal line parallel to, the x-axis and coincides with the average revenue curve., , , yM, , Answer : In microeconomics, revenue(R) refers to money, receipts of a producer from the sale of his output., , , , , , 3. What is meant by revenue in microeconomics?, , yK, ita, b, , , , 2. Define budget set., [1], Answer : A budget set or opportunity set includes all possible, consumption bundles that someone can afford with the given, the prices of goods and the person’s income level., , y, , Perfect Competition, AR = MR, AR/MR, , O, , x, output, , Under Imperfect Competition market, as output increases, both average revenue and marginal revenue fall. However,, average revenue remains greater than marginal revenue at all, levels of output. Graphically, both average revenue curve and, , • Follow us on Telegram - https://t.me/copymykitab1

Page 88 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1098 | Economics 2014 (Delhi), , the oligopoly market structure indeterminate, thereby making, the firms mutually interdependent in an oligopoly market., 11. A consumer consumes only two goods. Explain consumer’s, equilibrium with the help of utility analysis., [4], OR, A consumer consumes only two goods A and B and is, in equilibrium. Show that when price of good B falls,, demand for B rises. Answer this question with the help of, utility analysis., Answer : The consumer’s equilibrium in this scenario can be, explained by the Law of Equi-Marginal Utility. According, to this, a consumer allocates his expenditure between two, commodities in such a manner that the utility derived, from each additional unit of the rupee spent on each of the, commodities is equal to the marginal utility of money. This is, algebraically described as follows :, MUx / Px = MUy / Py = MUn / Pn = MUM, where,, MUM represents the marginal utility of money, MUx represents the marginal utility of good x, MUy represents the marginal utility of good y, Let us suppose that MUM is 10 and the price of both the, goods i.e., Px and Py is same at 5. MUx and MUy for different, units of goods consumed is tabulated below., , , marginal revenue curve are downward sloping but the AR, curve remains above the marginal revenue curve., , yM, , yK, ita, b, , MR may even go to zero or negative but AR curve continues, to be positive., OR, In economics and finance marginal cost is the change in, the total cost that arises when the quantity produced has an, increment by unit. Marginal Cost is derived from Total Cost, by using the following formula :, MCn = TCn – TCn–1, where,, MCn represents Marginal Cost of producing ‘n’ units of, output, TCn represents Total Cost of producing ‘n’ units of output, TCn−1 represents Total Cost of producing ‘n−1’ units, While, Total Cost refers to the total cost of production that is, incurred by a firm in the short run to carry out the production of, goods and services. It is the aggregate of expenditure incurred on, fixed factors as well as variable factors. Total cost can be derived, by summing up marginal cost at all the levels of output., , MU y, MU x, =, = MUM, Px, Py, , C, , op, , , , 9. What is the behaviour of average fixed cost as output is, increased ? Why is it so?, [3], Answer : Average Fixed Cost can be described as the fixed, cost per unit of output produced. It is described by dividing, the entire Fixed Cost by quantity of output produced. That is,, AFC = TFC / Q, where, TFC represents Total Fixed Cost, Q represents units of output produced, Average fixed cost continues to fall with an increase in the, level of output but, it nerver reaches to zero because average, fixed cost is a rectangular hyperbola. That is, it can never be, zero. This happens because AFC is defined as the ratio of TFC, to output. We know that TFC remains constant throughout, all the output levels and as output increases, with TFC being, constant, AFC decreases. When output level is close to zero,, AFC is infinitely large and by contrast when output level is, very large, AFC tends to be zero but never becomes zero., AFC can never be zero because it is a rectangular hyperbola, and it never intersects the x-axis and thereby it can never be, equal to zero., , Units, MUx, MUy, 1, 57, 62, 2, 55, 58, 3, 50, 53, 4, 47, 51, 5, 42, 50, 6, 35, 45, 7, 30, 40, From the schedule, we can conclude that the consumer, attains equilibrium when he consumes 3 units of good x and, 5 units of good y. At this consumption bundle, the consumer’s, equilibrium is Featured by :, , , , 10. Why are the firms said to be interdependent in an oligopoly, market? Explain., [3], Answer : Firms are said to be interdependent in an oligopoly, market because the firms under such a market structure, experience a high degree of mutual interdependence. It is, because the price and the output decisions of the firms are, interdependent on each other. The price and output policy of, a firm affects the policies and profit of another firm. This is, because when one firm lowers (or rises) its prices, the rival firms, may or may not follow suit. This makes the demand curve under, , i.e., , 50, 50, =, = 10, 5, 5, , , , , , , , , , , , Consumer's, Equilibrium, , OR, In this situation, the consumer’s equilibrium is attained at, that point, where Q the utility derived from each additional, unit of the rupee spent on each of the goods is equal., That is, Marginal Utility of a Rupee spent on the good A, (i.e., MUA /PA) is equal to the Marginal Utility of a Rupee, spent on the good B (i.e., MUB / PB), which in turn is, equal to the Marginal Utility of Money (MUM). That is,, MUA / PA = MUB / PB = MUM, If price of the good B falls, then the value of the fraction, (i.e., MUB / PB) increases., Mathematically, this implies : MUB / PB > MUA / PA = MUM, In such a situation, the demand for good B rises and consumer, would increase his consumption of good B. He will continue, to increase the consumption of good B until the equality, between the marginal utilities of each of the goods become, equal to the marginal utility of money. At this situation, the, equilibrium is restored. That is, MUA/P A = MUB / PB = MUM, , • Follow us on Telegram - https://t.me/copymykitab1

Page 89 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Delhi) | 1099, , Behaviour of MP, Stage’s Name, , MP, , Range, , I, , Increasing Returns, to a factor, Diminishing Returns to a factor, Negative Returns, to a factor, , MP increases, till point U, MP falls and, touches x-axis, MP becomes, negative, , From 0 to, point U, From U onwards, Beyond x-axis, , op, , C, , III, , , , 14. Explain the conditions of consumer’s equilibrium with the, help of the indifference curve analysis., [6], OR, Explain the three properties of the indifference curves., Answer : As per the Indifference Curve Approach, a, consumer attains equilibrium at the point where the budget, line is tangent to the indifference curve and the IC is convex, to the origin at the point of tangency. This optimum point is, characterized by the following equality :, It is, Absolute value of the slope of the IC = Absolute value of, the slope of the budget line., Y, , yM, , Stages, , II, , The main reason behind this behaviour of MP is Law of, Diminishing Marginal Product. According to the Law, of Diminishing Marginal Product, if the employment of, variable factor is kept on increasing along with the constant, level of the fixed factor, then finally a point will be reached, where after, the marginal product of the variable factor will, start falling and after this point the marginal product of any, additional variable factor can be zero and even be negative., , yK, ita, b, , , , , , 12. What happens to the demand of a good when consumer’s, income changes? Explain., [4], Answer : The demand for goods is affected by change in the, income of the buyer. The effect of change in income on the, demand depends on the Quality of the good., Demand for normal goods makes a positive relationship with, buyer’s income. As income increases, the demand for normal, goods also increases and vice-versa., Demand for inferior goods (such as coarse cereals) shares a, negative relationship with consumer’s income. As the income, increases, the demand for inferior goods falls and vice-versa., Giffen goods are those goods which are highly inferior., Similar to the inferior goods, demand for Giffen goods also, shares a negative relationship with the income., 13. State the behaviour of marginal product in the law of, variable proportions. Explain the cause of this behaviour., [4], Answer : Law of variable proportions, As per the law of variable proportion, if more and more, units of variable factor (labour) are combined with the, same quantity of fixed factor (capital) then initially the total, product will increase. But gradually, after a point, the total, product will fall., , O, , X, , In the above figure, point E depicts consumer’s equilibrium., At this point, the budget line is tangent to the indifference, curve IC2. The optimum bundle is denoted by (x*1, x*2). This, point is the optimum or the best possible consumption, bundle, where the consumer is maximizing his satisfaction., All other points lying on the budget line (such as point B and, point C) are inferior to (x*1, x*2) as they lie on a lower IC (i.e.,, IC1). Thus, the consumer will rearrange his consumption, and will attempt to reach the equilibrium point, where the, marginal rate of substitution is equal to the price ratio., Let’s suppose that instead of point E, the consumer is at point, B. At this point, MRS is greater than the price ratio. In this, case, the consumer would tend to move towards point E by, giving-up some amount of good 2 in order to consume more, units of good 1. The consumer will continue to give-up the, consumption of good 2. Until, he reaches the point E, where,, MRS becomes equal to the price ratio., On the other hand, for all other points C, MRS is lesser than, the price ratio In this case, the consumer would tend to move, towards point E by giving up some amount of good 1 to, consume more units of good 2., , • Follow us on Telegram - https://t.me/copymykitab1

Page 90 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1100 | Economics 2014 (Delhi), , Thus, we can conclude that if the consumer is consuming any, bundle other than the optimum one, then he would rearrange, his consumption bundle in such a manner that the equality, between the MRS and the price ratio is established and he, attains that state of equilibrium., , In the above figure, IC is the Indifference Curve., , OR, There are three properties of Indifference Curve because, increase relation between good x Y., , MRS at B < MRS at A, so MRS has fallen., , At point B,, , MRSxy = BE / BC, , , , BE / EC < AD / DB, , 15. From the following information about a firm, find the firms, equilibrium output in terms of marginal cost and marginal, revenue. Give reasons. Also find profit at this output. [6], Output (units), 1, 2, 3, 4, 5, Answer :, Output, (units), , Y, , yM, , 1, 2, 3, 4, 5, , op, , X, , At point A :, , Slope of Indifference Curve (MRS) = ∆ Y / ∆ X, , C, , i.e., MRS shows the rate at which the consumer is willing to, sacrifice good Y for an additional unit of good X., 3. Shape of Indifference Curve : As we move down along, the Indifference curve to the right, the slope of IC (MRS), decreases. This is because as the consumer consumes more, and more of one good, the marginal utility of the good falls., On the other hand, the marginal utility of the good which, is sacrificed rises. In other words, the consumer is willing to, sacrifice less and less for each additional unit of the other good, consumed. Thus, as we move down the IC, MRS diminishes., This suggests the convex shape of indifference curve., Convex to origin because, of diminishing MRS, , Total, Cost, ( ), 8, 15, 21, 28, 36, , Marginal, Revenue, ( ), 7, 7, 7, 7, , Total Cost ( ), 8, 15, 21, 28, 36, Marginal, Cost ( ), 7, 6, 7, 8, , Profits, (TRTC), −1, −1, 0, 0, −1, , According to the MR-MC approach, the firm (or producer), attains its equilibrium, where the following two necessary and, sufficient conditions are fulfilled., 1. MR = MC, 2. MC must be rising after the equilibrium level of output., Thus, by looking at the table given above, we can say that the, firm is in equilibrium at output equal to 4 units. When output, is 4 units, MR = MC (thus, the first condition is satisfied), and MC increases after the 4th unit of output (therefore, the, second condition is satisfied)., At output less than 4 units, if the firm produces slightly lesser, level of output than 4 units, then the firm is facing price that, exceeds the MC. This implies that higher profits can be achieved, by increasing the level of output to 4 units. On the other hand,, if the firm produces slightly higher level of output than 4 units,, then the firm’s MC exceeds its MR, thereby making profits, negative. This implies that higher profits can be achieved by, reducing the output level to 4 units. Thus, 4 unit of output is, the producer’s equilibrium and 4 units of output is the profit, maximizing output level, where Price = MC and also MC is, rising., 16. Market of a commodity is in equilibrium. Demand for, the commodity “increases”. Explain the chain of effects of, this change till the market again reaches equilibrium. Use, diagram., [6], , , , , Total, Revenue, ( ), 7, 14, 21, 28, 35, , Total Revenue ( ), 7, 14, 21, 28, 35, , yK, ita, b, , , , 2. Slope of IC : The Slope of an IC is given by the Marginal, Rate of Substitution (MRS). Marginal rate of substitution, refers to the rate at which a consumer is willing to substitute, one good for each additional unit of the other good., , MRSxy = AD / AB, , , , , , 1. Indifference curves are downward slopping to the right :, Downward slope of the indifference curve to the right implies, that a consumer cannot simultaneously have more of both the, goods. An increase in the quantity of one good is associated, with the decrease in the quantity of the other good. This is in, accordance with the assumption of monotonic preferences., , At point A,, , • Follow us on Telegram - https://t.me/copymykitab1

Page 91 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Delhi) | 1101, , Answer :, , 22. Define externalities. Give an example of negative externality., What is its impact on welfare?, [1], Answer : An externality is said to occur when the actions of one, entity bears an impact on other entities. These externalities can, be positive as well as negative. A positive externality is when the, action of one person positively affects the others. For instance, plantation by a person provides fresh air to the neighbours. Also,, it contributes to the environment and at the same time, increases, the welfare of the neighbours. Thus, plantation by a person, affects the life of the people living in the surrounding areas., , , Y, Price, (`), , X, , 23. Explain the significance of ‘store of value’ function of, money.**, [3], , Let us understand how it happens : D1D1 and S1S1 represent, the market demand and market supply respectively. The initial, equilibrium occurs at E1, where the demand and the supply, intersect each other. Due to the increase in the demand for the, commodity, the demand curve will shift rightward parallely from, D1D1 to D2D2, while the supply curve will remain unchanged., Hence, there will be a situation of excess demand, equivalent, to (q3 – q1). Consequently, the price will rise due to excess, demand. The price will continue to rise until it reaches E2 (new, equilibrium), where D2D2 intersects the supply curve S1S1. The, equilibrium price increases from P1 to P2 and the equilibrium, output increases from q1 to q2., , OR, , , , An increase in the demand for the commodity leads to an, increase in the equilibrium price and quantity., , Explain the significance or ‘medium of exchange’ function, of money.**, , C, , op, , , , 17. What are demand deposits?, [1], Answer : Funds held in an account from which deposited, funds can be withdrawn at any time without any advance, notice to the depository institution are demand deposits., The depositor can withdraw the required amount from the, account through cheques., , , 18. What is involuntary unemployment?, [1], Answer : Involuntary unemployment is a situation when a, person who is able and is willing to work does not get work, at the going wage rate., , , 19. Define marginal propensity to consume., [1], Answer : Marginal Propensity to Consume is the ratio of, change in the consumption expenditure and change in the, disposable income. Algebraically, MPC = ∆ C / ∆ Y, , , 20. Define government budget., [1], Answer : A government budget is a government document, presenting the government’s proposed revenues and spending, for a financial year. It also presents the government’s report, on the financial performance during the previous fiscal year., , , 21. Give meaning of balance of trade., [1], Answer : Balance of trade shows the balance of exports and, imports of all the physical or visible goods of a country during, a given year., , , , (ii) Expenditure on purchasing computers., Answer : (i) Expenditure on collection of taxes is a revenue, expenditure. This type of expenditure includes the government, expenditure which does not cause any reduction in government, liabilities and also does not create assets for the government., (ii) Expenditure on purchasing computers is a capital, expenditure. This expenditure includes that government, expenditure, which creates assets for the government., , 25. Explain the meaning of balance of payments deficit., [3], Answer : The deficit in the BOP is governed by the balance of, autonomous transactions in the BOP. Autonomous items refer, to those international economic transactions that are undertaken, with the sole motive of earning profit. The BOP would show a, deficit if the autonomous receipts are lesser than the autonomous, payments. As autonomous receipts implies a receipt of foreign, exchange and autonomous payments implies a payment of, foreign exchange, so, it can be said that BOP would show a deficit, if the foreign exchange receipts are less than foreign exchange, payments. In other words, the BOP deficit would be reflected in, a depletion of foreign exchange reserves of the country., , , SECTION B, , (i) Expenditure on collection of taxes., , 26. Recently Government of India has doubled the import, duty on gold. What impact is it likely to have on foreign, exchange rate and how?, [3], Answer : With a rise in the import duty of gold, the import, of gold will fall. This reduces the demand for foreign currency., With the supply of foreign currency remaining same, the foreign, exchange rate would fall. This implies appreciation of rupees., This can be explained with the help of the following diagram :, , , yM, , yK, ita, b, , 24. Is the following revenue expenditure or capital expenditure, in the context of government budget? Give reasons., [3], , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 92 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1102 | Economics 2014 (Delhi), , , , , , , 29. Government raises its expenditure on producing public, goods. Which economic value does it reflect? Explain. [4], Answer: The economic value that is reflected in the rise in the, production of public goods in the “social welfare”. The major, objective of the budgetary policy of the government is to, enhance the welfare of the society at large. For this, it performs, the allocative function. The allocative function is concerned with, allocating the resources between the private and public sectors., As the public goods cannot be provided by the private sectors, through market mechanism, hence the need for providing such, goods is to be fulfilled by the government. In addition to this,, private goods cannot be afforded by all, that is, only those who, can pay for these goods can avail the benefits of such goods. But,, as the public goods are required by all and are essential from, welfare point of view, thus, government provides these goods., , , , , , , , , , , , , , , , , (i) Net current transfers to abroad, (−) 15, (ii) Private final consumption expenditure, 600, (iii) Subsidies, 20, (iv) Government final consumption expenditure, 100, (v) Indirect tax, 120, (vi) Net imports, 20, (vii) Consumption of fixed capital, 35, (viii) Net change in stocks, (−) 10, (ix) Net factor income to abroad, 5, (x) Net domestic capital formation, 110, Answer : National Income = Private Final Consumption, Expenditure + Government Final Consumption Expenditure, – Net Imports + (Net Domestic Capital Formation +, Depreciation) – Depreciation – (Indirect Taxes – Subsidies) –, Net Factor Income to Abroad or,, National Income (NNPFC) = 600 + 100 + (−20) + (110 + 35), – 35 – (120 – 20) – 5 = 685 Arab., , , , , , , 31. Giving reason explain how should the following be treated, in estimating gross domestic product at market price? [6], (i) Fees to a mechanic paid by a firm., , ** Answer is not given due to change in syllabus., , , , , , OR, Lender of last resort function of Central Bank implies that, the Central Bank is under the obligation to provide funds, against securities to the commercial bank as and when needed, by them. When a commercial bank faces financial crisis and, fails to obtain funds from other sources, then central bank, provides them the financial assistance in the form of credit., This role of the central bank saves the commercial banks from, being bankrupt. Thus, the central bank plays the role of a, guarantor for the commercial banks and maintains a sound, and healthy banking system in the economy., , 30. Calculate national income and gross (national disposable, income)** from the following :, [6], ( Arab), , , C, , op, , yM, , , , 27. Define money supply and explain its components., [4], OR, Explain the ‘lender of last resort’ function of central bank., Answer : Supply of money refers to the total stock of money, (in the form of currency notes and coins) held by the people, of an economy at a particular point of time. The following are, the components of money :, (i) Curency component : It includes currency notes and coins, which are issued by the Monetary Authority of a country,, collectively called the Currency Component of the money, supply. In India, RBI issues the currency notes of various, denominations (such as 2, 5, 100, 500, 2000) and, the Government of India issues currency coins and notes of, denomination less than and equal to 1., (ii) Deposit component : The savings or the current account, deposits held by the public in various commercial banks of a, country. Apart from the currency notes and coins, the stock, of money also includes the Saving Deposits and the Current, Account Deposits held by the public in various commercial, banks., , , , yK, ita, b, , In the diagram, DD and SS are the initial demand curve and, supply curve for foreign currency respectively. E is the initial, equilibrium point, with OR as the equilibrium exchange rate., A fall in the demand for foreign currencies (due to fall in, imports) shifts the demand curve from DD to D'D'. With, the shift in demand curve, new equilibrium is established at, point E', where the exchange rate falls from OR to OR1.A fall, in the exchange rate implies currency appreciation., , , , , , , , , , ∴, , , , , , , , 28. Calculate investment expenditure from the following data, about an economy which is in equilibrium :, [4], National income = 1000, Marginal propensity to save = 0.25, Autonomous consumption expenditure = 200., Answer : We know,, Y=C+I, C = c + cY, Y = c + cY + I, Where c = autonomus consumption (200), c = marginal propensity to consume, (1–MPS = 1 – 0.25 = 0.75), Y = national tricome = ` 1000, I = Investment expenditure by putting the value, 1000 = 200 + 0.75 × 1000 + I, I = 1000 – (200 + 750), = 1000 – 950, I = ` 50, , • Follow us on Telegram - https://t.me/copymykitab1

Page 93 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Delhi) | 1103, , OR, In the diagram, is the consumption curve. The 45º line is the, aggregate supply curve. At point A, consumption = income, i.e., (Y = C) represents the autonomous consumption i.e.,, consumption at zero level of income. Steps for derivation of, supply curve from consumption curve as follows:, (i) Corresponding to in the consumption function we have –, in the saving function. That is, there are negative savings equal, to autonomous consumption at Y = 0. This is represented by, S on the negative axis in the lower panel., (ii) At point A (Y = C). This implies that all the income is, spent on consumption expenditure. Thus savings equal to, zero. This is shown as S = 0 in lower panel. This point is also, known as the Break-even point., (iii) Beyond the break-even point, by connecting points S, and B we derive the straight upward sloping saving curve., (iv) SS is the required saving curve., , C, , op, , yM, , Answer : Aggregate Demand and Aggregate Supply approach, (AD and AS approach). Under this approach, the equilibrium, level of income is determined at the point where Aggregate, Demand (AD) is equal to Aggregate Supply (AS)., Y, , thereby increases employment level and income. Finally, the, income will rise sufficiently to equate the AD with AS, thus, the equilibrium is restored back., On the other hand, in case, AS > AD, then it implies a situation,, where the total supply of goods and services is more than the, total demand for the goods and services. This implies a situation, of deficit demand. Due to the deficit demand, the producers, experience pilling-up of stock of unsold goods, i.e., inventory, accumulation. This would force the producers to cut-back, the production, thereby results in the reduced employment, of factors of production. This leads to fall in the income and, output. Finally, the income and output will fall sufficiently to, equate the AD with AS, thus the equilibrium is restored back., , yK, ita, b, , , , (ii) Interest paid by an individual on a car loan taken from, a bank., (iii) Expenditure on purchasing a car for use by a firm., Answer: (i) Fees paid to a mechanic by a firm will be included, while estimating the gross domestic product at market price. This, is because the fees in being paid in return for the services offered, by the mechanic. Thus, as GDPMP includes the market value of all, the goods and services produced in a country, it will be included., (ii) Interest paid by an individual on a car loan taken from, a bank will be included while estimating the gross domestic, product at market price. This is because it is an income for the, bank. Thus, it will be a part of GDPMP., (iii) Expenditure on purchasing a car for use by a firm will, be included while estimating the gross domestic product at, market price. This is because the car is being purchased by the, firm for its usage and not for other purposes., 32. Explain national income equilibrium through aggregate, demand and aggregate supply. Use diagram. Also explain, the changes that take place in an economy when the, economy is not in equilibrium., [6], OR, Outline the steps required to be taken in deriving saving, curve from the given consumption curve. Use diagram., , X, , In this diagram, consumption curve is depicted by C and the, investment curve is depicted by the horizontal straight line, parallel to the output/income axis. Summing-up the investment, curve and consumption curve, we get the Aggregate Demand, curve represented by AD = C + I. The Aggregate Supply curve is, represented by the 45º line. Throughout this line, the planned, expenditure is equal to the planned output. The point E is, the equilibrium point, where the planned level of expenditure, (AD) is equal to the planned level of output (AS). Accordingly,, the equilibrium level of output (income) is OQ., In case, if AD > AS, then it implies a situation, where the total, demand for goods and services is more than the total supply, of the goods and services. This implies a situation of excess, demand. Due to the excess demand, the producers draw, down their inventory and increases production. The increase, in production requires hiring more factors of production,, , • Follow us on Telegram - https://t.me/copymykitab1, , X, , X

Page 94 :
Downloaded from CopyMyKitab, , SET II, , , , Economics 2014 (Delhi), , Visit our Site - https://copymykitab1.blogspot.in/, , Time allowed : 3 hours, , , , Maximum marks : 100, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , yK, ita, b, , P = −1, D, , We know, Q = Q2 – Q1 = 18 – 16 = 2, , ∆Q P, ×, Q ∆P, 2, P, −1 = ×, 16 ( −1), (−P ), −1 =, 8, P =8, , op, , yM, , , , Ed =, , SECTION B, 18. What is ‘current account deficit’ in the balance of, payments?, [1], Answer : When export of visible items, invisible items and, unilateral transfers are less and import of these items are, more, it leads to current account deficit., OR, When foreign exchange receipts in current account fall,, as compared to foreign exchange payments, it is known as, current account deficit., , C, , Therefore, price before change is 8, , , 13. Explain the change in demand of a good on account of, change in prices of related goods., [4], Answer : Quantity demanded of a good depends on the, price of other goods (i.e., related goods). Any two goods are, considered to be related to each other, when the demand for, one good changes in response to the change in the price of the, other good. The related goods can be classified into following, two categories., 1. Substitute Goods, Substitute goods refer to those goods that can be consumed in, place of each other. In other words, they can be substituted for, each other. For example, tea and coffee, colgate and pepsodent,, cello pens and reynolds pen, etc. In case of substitute goods, if, the price of one good increases, the consumer shifts his demand, to the other (substitute) good i.e., rise in the price of one good, result in a rise in the demand of the other good and vice-versa., For example, if price of tea increases, then the demand, for tea will decrease. As a result, consumers will shift their, consumption towards coffee and the demand for coffee will, increase. (Price of Tea ↑⇒ Demand for Coffee ↑ ). It should, be noted that the demand for a good moves in the same, , 24. Visits of foreign countries for sightseeing etc., by the people, of India is on the rise. What will be its likely impact on, foreign exchange rate and how?, [3], Answer : With the increase in the foreign visit by the people, India, the demand for foreign currency increases. With the, supply of foreign currency remaining same, the foreign, exchange rises, implying a depreciation of rupees. This can be, explained diagrammatically as follows., , • Follow us on Telegram - https://t.me/copymykitab1, , , , D, , , , , , , , SECTION A, 3. Define budget line., [1], Answer : A Budget line is a line which shows different, combination of two goods which a consumer can attain at his, given income and market price of the goods., 5. What is meant by cost in economics?, [1], Answer : Cost refers to the expenditure incurred by a producer, on factor and non-factor inputs for a given amount of output, of a commodity., 8. Price elasticity of demand of a good is (−)1. When its price, per unit falls by one rupee, its demand rises from 16 to 18, units. Calculate the price before change., [3], Answer : Given,, Q1 = 16, Q2 = 18, , direction as that of the price of its substitute. If PT increases, ⇒ DT decreases ⇒ DC increases ⇒ Tea and coffee are, substitute goods., 2. Complementary Goods, Complementary goods refer to those goods that are consumed, together. The joint consumption of these goods satisfies wants, of the consumer. For example: Tea and sugar, ink pen and, ink, printer and paper, etc. In case of complementary goods,, if the price of one good increases then a consumer reduces his, demand for the complementary good as well, i.e., a rise in the, price of one good results in a fall in demand of the other good, and vice-versa., For example, sugar and tea are complementary goods. Since,, sugar and tea is consumed together, so a rise in price of tea, reduces the demand of sugar and vice-versa. It should be noted, that demand for a good moves in the opposite direction of the, price of its complementary goods. (Price of tea ↑⇒ demand, for sugar ↓ ) If PTea increases ↑⇒ DTea decreases ⇒↓, DSugar decreases ↑⇒ Tea and Sugar are complementary, goods.

Page 95 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2014 (Delhi) | 1105, , propensity to consumer, c = 1 – marginal propensity to, consume (mps) so, c = 1 – 0.20 = 0.80. Thus, putting the, values in the equation, Y = C + cY + I or, 1200 = C + 0.80 ×, 1200 + 100 or, C = 1200 – 1060 = 140. Thus, autonomous, consumption expenditure is 140., , , , 31. Calculate ‘net national product’ at factor cost and ‘private, income**’ from the following :, [6], , ( Arab), , , , (i) National debt interest, 60, (ii) Wages and salaries, 600, (iii) Net current transfers to abroad, 20, (iv) Rent, 200, (v) Transfer payments by government, 70, (vi) Interest, 300, (vii) Net domestic product at factor cost accruing to, government, 400, (viii) Social security contribution by employers, 100, (ix) Net factor income paid to abroad, 50, (x) Profits, 300, Answer : NNPFC = Wages and salaries + Employers, contribution to social security + Rent + Interest + Profit –, Net Factor Income to Abroad or, NNPFC = 600 + 100 + 200, + 300 + 300 – 50 = 1,450 Arab., , , , , , , 29. Calculate autonomous consumption expenditure, from the following data about an economy which is in, equilibrium., [4], , , , , , In the diagram, DD and SS are the initial demand curve and, supply curve for foreign currency respectively. E is the initial, equilibrium point, with OR as the equilibrium exchange rate., An increase in the demand for foreign currencies shifts the, demand curve from DD to D'D' With the shift in demand, curve, new equilibrium is established at point E' where the, exchange rate rises from OR to OR1 and the demand and, supply of foreign currencies rises from OQ to OQ1. A rise in, the exchange rate implies currency depreciation., , , , National income = 1200, , , , Marginal propensity to save = 0.20, , , , Investment expenditure = 100, Answer :, , , , We, , yK, ita, b, , , , Y=C+I, , , , where,, , SET III, , , , Maximum marks : 100, , op, , Time allowed : 3 hours, , , , Economics 2014 (Delhi), , yM, , I is investment expenditure which is given as 100. Y is, income which is given as 1200 and, C = C + cY here,, C is autonomous consumption expenditure is marginal, , C, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , , 1. Define marginal revenue., [1], Answer : Marginal Revenue (MR) is an addition to the Total, Revenue (TR) from selling an additional unit of output., , , 5. Define indifference map., [1], Answer : It is a set of indifference curves, drawn in graph, called IDmap corresponding to different satisfaction levels, of a consumer. A higher indifference curve represents higher, level of satisfaction., , , , Therefore, the consumer will buy 33 units of the good at a, price of 9., 11. What is market demand for a good? Name the factors, determining market demand., [4], Answer : Market demand for a good is the sum total of, demands of all the consumers in a market at a particular, price. Factors determining market demand are :, 1. Market Price of Good, Other things remaining constant, as the market price of a, good rises (or falls), the quantity demanded of the good falls, (or rises)., 2. Market Price of Other Goods, Quantity demanded of a good also depends on the market, , , , 10. A consumer buys 30 units of a good at a price of 10 per, unit. Price elasticity of demand for the good is (−1). How, many units the consumer will buy at a price of 9 per unit?, Calculate., [3], Answer : Given, Q1 = 30, Q2 = ?, P1 = 10, P2 = 9 and Ed = −1, D, , D, , Therefore, Q = Q2 – Q1 and P = P2 – P1 = (−1), , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 96 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1106 | Economics 2014 (Delhi), , respectively. The initial equilibrium occurs at E1, where, the demand and the supply intersect each other. Due to, the decrease in the supply of the commodity, the supply, curve will shift leftward parallel from S1S1 to S2S2, while, the demand curve will remain unchanged. Hence, at the, original price (P1), there will be a situation of excess demand,, equivalent to (q3 – q1). Consequently, the price will rise due, to excess demand. The price will continue to rise until it, reaches, E2 (new equilibrium), where D1D1 intersects the, supply curve S2S2. The equilibrium price rises from P1 to P2, and the equilibrium output falls from q1 to q2., SECTION B, , , 17. Define aggregate supply?, [1], Answer : Aggregate supply refers to the value of all final, goods and services produced by all the production unit in an, economy in a particular period of time., , , 19. What is ‘devaluation’?, [1], Answer : A deliberate downward adjustment in the value of, a country’s currency, relative to another country’s currency by, the government, is called devaluation of domestic currency., , , , 23. How does giving incentives for exports influence foreign, exchange rate? Explain., [3], Answer : The incentives for exports boosts exports for the, country. As a result of increase in exports the supply of, foreign currency in the country increases. With demand, remaining the same, this results in a fall in the exchange, rate implying currency appreciation. This can be explained, diagrammatically as follows,, Y, , op, , yM, , yK, ita, b, , price of other goods (i.e., related goods). The related goods, can be classified into following two categories., (i) Substitute Goods, In case of substitute goods, rise in the price of one good results, in a rise in the demand of the other good and vice-versa., (ii) Complementary Goods, In case of complementary goods, a rise in the price of one good, results in a fall in demand of the other good and vice-versa., 3. Income of the consumer, Change in the income of the consumer also affects the market, demand for goods. The effect of change in income on the, market demand depends on the type of the good., The market demand for normal goods shares a positive, relationship with consumer’s income. The market demand, for inferior goods (such as coarse cereals) shares a negative, relationship with consumer’s income., The market demand for giffen goods also shares a negative, relationship with the income., 4. Consumer’s tastes and preferences, Other things being equal, if all the consumers prefer a, commodity over other, then the market demand for that, commodity increases and vice-versa., 5. Population size – Number of consumers in the market, The market demand for a commodity is also affected by the, population size. Other things being equal, an increase in the, population size increases the market demand of a commodity, and a decrease in population decreases the market demand of, a commodity., 6. Distribution of Income, If distribution of income in a society is fair and equal, then, demand for a commodity is more compared to a situation, with unequal distribution of income., , D, , Price, (`), , S, , C, , R, , E1, , R1, , 15. Market for a product is in equilibrium. Supply of the product, “decreases.” Explain the chain of effects of this change till the, market again reaches equilibrium. Use diagram., [6], Answer :, , , D, S, , Y, , O, , Price, (`), , Q3, , Q2 Q1, , X, , Output (Units), , S1, Q1 Q2, Output (Units), , X, , With the rise in exports the supply of foreign currency, increases. In the diagram DD and SS are the initial demand, curve and supply curve for foreign currency respectively. E, is the initial equilibrium point, with OR as the equilibrium, exchange rate. Rise in the supply of foreign currency would, shift the supply curve from SS to S'S'. With the shift in supply, curve, the new equilibrium is established at point E', where, the exchange rate falls from OR to OR1 and the demand and, supply of foreign currency rises to OQ2. This represents a case, of currency appreciation., 27. Calculate marginal propensity to consume from the, following data about an economy which is in equilibrium :, [4], , , Decrease in the supply of the commodity leads to an increase, in the equilibrium price and a fall in the equilibrium, quantity. Let us understand how it happens: D1D1 and, S1S1 represents the market demand and market supply, , S1, , E, , • Follow us on Telegram - https://t.me/copymykitab1

Page 97 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , , , or,, , 1500 = 300 + c 1500 + 300, , 1500 – 600, = 0.6., 1500, Thus, marginal propensity to cinsume is 0.6., 32. Calculate net domestic product at factor cost and (net, national disposable income**) from the following :, c=, , , , , , , , , , , , , , , , , , , , , , C, , op, , yM, , yK, ita, b, , , , or,, , ( Arab), (i) Net current transfers to abroad, 5, (ii) Government final consumption expenditure, 100, (iii) Net indirect tax, 80, (iv) Private final consumption expenditure, 300, (v) Consumption of fixed capital, 20, (vi) Gross domestic fixed capital formation, 50, (vii) Net imports, (−) 10, (viii) Closing stock, 25, (ix) Opening stock, 25, (x) Net factor income to abroad, 10, [6], Answer : National Domestic Income at Factor Cost, = Private Final Consumption Expenditure + Government Final, Consumption Expenditure – Net Imports + (Gross Domestic, Fixed Capital Formation + Closing stock – Opening stock), – Depreciation – Net Indirect Taxes or, National Income, (NDPFC) = 300 + 100 – (−10) + (50 + 25 -25) – 20 – 80 =, 360 Arab., , , National Income = 1500, Autonomous consumption expenditure = 300, Investment expenditure = 300, Answer : We know that in equilibrium,, Y=C+I, where,, I is investment expenditure, given as 300, Y is national income, given as 1500 and, C = C + cY, here, C is autonomous consumption expenditure, given as 300,, c is marginal propensity to consume. Thus, putting the values in, the equation, we have Y = C + cY + I., , , , Economics 2014 (Delhi) | 1107, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 98 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET I, , , , Economics 2013 (Outside Delhi), Time allowed : 3 hours, , , , Maximum marks : 100, , 2. What does a rightward shift of demand curve indicate? [1], Answer : The rightward shift of demand curve indicates the, increase in demand for a good due to change in the factors, other than the price of the good. These factors can be increase, in the income of a consumer, increase in the total number of, consumers, increase in the price of substitute goods, etc., , 7. A firm supplies 10 units of a good at a price of 5 per unit., Price elasticity of supply is 1.25. What quantity will the, firm supply at a price of 7 per unit?, [3], Answer : As given in the question,, , , , , , 3. Under which market form is a firm a price taker?, [1], Answer : Under perfect competition, a firm is a price taker., , Qs = 10, P = 5 and Es = 1.25, At new price of 7 per unit, P=7–5=2, We know,, Es =, , ∆Q P, ×, ∆P Q, , yK, ita, b, , , , 4. When is the demand for a good said to be perfectly inelastic?, [1], Answer : When demand remains constant at all prices, the, demand for a good is said to be perfectly inelastic. eg., Salt., , , , reduces the demand for sugar and vice-versa. It should be, noted that demand for a good moves in the opposite direction, of the price of its complementary goods. (Price of tea ⇒, demand for sugar ↓), , , , SECTION A, 1. Define marginal revenue., [1], Answer : Marginal Revenue (MR) is an addition to the Total, Revenue (TR) from selling an additional unit of output., , yM, , C, , op, , , , 6. How is the demand for a good affected by a rise in the prices, of other goods? Explain., [3], Answer : Price of other goods and demand for the given, good : Any two goods are considered to be related to each, other, when the demand for one good changes in response to, the change in the price of the other good. The related goods, can be classified into following two categories., , 1. Substitute goods : Substitute goods refer to those goods, that can be consumed in place of each other. In other words,, they can be substituted for each other. For example, tea and, coffee, Colgate and Pepsodent, Cello pens and Reynolds pen,, etc., For example, if price of tea increases, then the demand, for tea will decrease. As a result, consumers will shift their, consumption towards coffee and the demand for coffee will, increase. (Price of Tea ⇒Demand for Coffee ). It should, be noted that the demand for a good moves in the same, direction as that of the price of its substitute., 2. Complementary goods : Complementary goods refer, to those goods that are consumed together. The joint, consumption of these goods satisfies wants of the consumer., For example: Tea and sugar, ink pen and ink, printer and, paper, etc., For example, sugar and tea are complementary goods. Since,, sugar and tea are consumed together, so a rise in price of tea, , 2, , 10, , or, Q = 1.25 × 4 = 5, , Thus, the new quantity that the firm would supply at a price, of 7 per unit is 15 (5 + 10)., , 8. Explain the meaning of diminishing marginal rate of, substitution with the help of a numerical example., [3], Answer : Marginal Rate of Substitution (MRS) refers to the, rate at which a consumer is willing to substitute one good for, each additional unit of other good. Algebraically,, , , , , 5. Give one reason for an “increase” in supply of a commodity., [1], Answer : ‘A fall in the price of inputs’ can be one of the, reasons for an increase in the supply of a commodity., , or, 1.25 = ∆Q × 5, , MRS =, , ∆Y, ∆X, , It shows how many units of good Y the consumer is willing to, sacrifice to gain one additional unit of good X., The following schedule explains the concept of MRS, Consumption, Combinations, P, Q, R, S, , Units of, good, X, , Units of, good, Y, , MRSxy, , 2, 3, 4, 5, , 10, 5, 2, 1, , 5, 3, 1, , As the consumer moves from consumption combination P to, consumption combination Q, consumption of good X increases, from 2 units to 3 units while, the consumption of good Y falls, from 10 units to 5 units. That is to gain one additional unit of, good X, the consumer sacrifices 5 units of good Y. Thus, the, MRS is 5., , • Follow us on Telegram - https://t.me/copymykitab1

Page 99 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Outside Delhi) | 1109, , 9. From the following table, find out the level of output at, which the producer will be in equilibrium. Give reasons for, your answer., [3], , , Y, , X, , Marginal Revenue (in ), 8, 8, 8, 8, 8, , Marginal Cost, (in ), 10, 8, 7, 8, 9, , OR, The demand curve under monopolistic competition is more, elastic than under monopoly. The reason behind this can be, attributed to the fact that the nature of the goods available in, both the markets is different. That is, under monopolistic market,, there is a wide range of close substitutes available for the goods, whereas, in monopoly market, the monopolist is the single seller, and there are no close substitutes available for its product. Due to, this, the demand curve under monopoly is less responsive to the, changes in prices of the good. In contrast to this, in monopolistic, market, due to the availability of a wide range of substitutes, there, is a higher responsiveness of demand to the changes in prices., Hence, we can infer that the demand curve under monopolistic, competition is more elastic than under monopoly., , We know that the producer attains equilibrium when the, following two conditions are accomplished., (i) MR = MC, (ii) MC is rising, , yM, , As we can see in the given schedule, the first condition is, being met in two cases., That is at point A and B, MR = MC = 8., , C, , op, , However, the second condition is being met only at point, B. That is, in contrast to A where MC is falling from 8 to, 7, the MC is rising from 8 to 9 point B. Thus, the producer, equilibrium will be at point B or at 4 units output level., , Y, , , , 10. Why can a firm not earn abnormal profits under perfect, competition in the long run? Explain., [3], , 11. Equilibrium price of an essential medicine is too high., Explain what possible steps can be taken to bring down the, equilibrium price but only through the market forces. Also, explain the series of changes that will occur in the market., [4], Answer : If the equilibrium price of an essential medicine, is too high then the price can be reduced by increasing the, supply of the commodity. This can be explained with the help, of the following diagram., , , 1, 2=A, 3, 4=B, 5, , Marginal Cost, ( ), 10, 8, 7, 8, 9, , yK, ita, b, , Output, , Marginal Revenue, ( ), 8, 8, 8, 8, 8, , , , Output, (units), 1, 2, 3, 4, 5, Answer:, , OR, Why is the demand curve of a firm under monopolistic, competition more elastic than under monopoly? Explain, Answer : Under perfect competition, no firm can earn abnormal, profits in the long run. This is because if any firm in the long, run earns abnormal profits (that is price > minimum of average, cost curve), then new firms are attracted into the market. Due, to the new entrants, the production of output increases, which, then increases the supply of the output. This puts pressure on the, price and price continues to fall, until it reaches the minimum, of average cost curve. At the minimum of average cost curve, all, the abnormal profits are wiped-out and no firm earns abnormal, profit. Thus, in long run, under perfect competition, no firm can, earn abnormal profits, rather earns only normal profit., , X, , In the above diagram, we can see that the demand and supply, forces intersect each other at point E. This is the initial market, equilibrium with equilibrium price at P and equilibrium, quantity at Q., Now let us suppose that there is an increase in the supply of the, commodity. This increase will shift the supply curve towards, right from SS to S1S1. Holding the demand constant, at the, , • Follow us on Telegram - https://t.me/copymykitab1

Page 100 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1110 | Economics 2013 (Outside Delhi), , initial price OP, we can observe that there will be an excess, supply. This excess supply will increase competition among, the producers and consequently they would be willing to sell, their output at a lower price. The price now, will continue, to fall until it reaches OP1, where the new supply curve, intersects the initial demand curve. This new equilibrium will, be established at E1 with the new equilibrium price at OP1., Thus, we can observe that the equilibrium price has fallen, from OP to OP1., , Y, , Y, , , , , , 12. Explain the meaning of opportunity cost with the help of, production possibility schedule., [4], OR, With the help of suitable example explain the problem of, ‘for whom to produce’., [4], Answer : The cost of enjoying more of one good in terms of, sacrificing the benefit of another good is called opportunity, cost of the additional unit of the good., Let us consider the example of the economy producing two, goods – consumer goods and capital goods assuming the, level of resources and technology remain same. The following, schedule depicts the different possible combinations of the, consumer goods and the capital goods that the economy, can produce with its resource endowment and the available, technology. This schedule is called production possibility, schedule. Production Possibility schedule refers to the table, showing different production possibilities of two goods with, the given resources & technology., , For instance, imagine an economy producing two goods –, normal rice (priced at 15/kg) and graded rice (priced at, 100/kg). If the economy decides to cater the needs of the, lower section of the society, then it would produce more of, normal rice and less of the graded rice. In such a case, the, PPC curve will be as depicted in figure (ii)., On the other hand, if the economy decided to cater the needs, of the higher section of the society, then it would produce, more of the graded rice and less of the normal rice. In such a, case, the PPC curve will be as depicted in figure (i)., , X, , OR, This economic problem basically focuses on the distribution, of final goods and services produced. The distribution of the, final goods and services is equivalent to the distribution of, National Income (or National Product) among the factors of, production such as land, labour, capital and entrepreneur., , , , Ed, Thus, price elasticity of demand is 1.2, , , 14. Explain three properties of indifference curves., , [6], , OR, Explain the conditions of consumer’s equilibrium under, indifference curve approach., [6], Answer : There are three properties of Indifference Curve., , , C, , op, , Production, Consumer, Capital Goods, Possibilities, Goods (units), (units), A, 50, 0, B, 48, 1, C, 44, 2, D, 35, 3, E, 0, 4, From the schedule, we can see that point A shows, if all the, resources are utilized in the production of the consumer goods,, then 50 units of consumer goods can be produced with zero, units of capital goods. On the other hand, point E shows that, if all the resources are utilized in the production of the capital, goods, then 4 units of capital goods can be produced with, zero units of consumer goods. Also, consider the movement, from point B to point C. It implies that the economy is, diverting resources from the production of consumer goods, to the production of capital goods. In order to produce one, additional unit of capital goods, the economy needs to sacrifice, four units of consumer goods. Thus, the opportunity cost of, producing one additional unit of capital goods is four units of, consumer goods., , 13. A 5 per cent fall in the price of a good raises its demand, from 300 units to 318 units. Calculate its price elasticity of, demand., [4], Answer : Given, the initial quantity Q1 = 300, New quantity Q2 = 318, So, Q = 318 – 300 = 18, ∆P, Now, percentage fall in price =, × 100 = (–)5%, P, We know,, D, , yM, , yK, ita, b, , X, , 1. Indifference curves are downward sloping to the right :, Downward slope of the indifference curve to the right implies that, a consumer cannot simultaneously have more of both the goods., An increase in the quantity of one good is associated with the, decrease in the quantity of the other good. This is the accordance, with the assumption of monotonic preferences., 2. Slope of IC : The Slope of an IC is given by the Marginal, Rate of substitution (MRS). Marginal rate of substitution refers to, the rate at which a consumer is willing to substitute one good for, each additional unit of the other good., , • Follow us on Telegram - https://t.me/copymykitab1

Page 101 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Outside Delhi) | 1111, , Y, , Y, , 2, , X, , At point A : Slope of Indifference Curve (MRS) = Y / X, i.e., MRS shows the rate at which the consumer is willing to, sacrifice good Y for an additional unit of good X., , In the above figure, point E depicts consumer’s equilibrium., At this point, the budget line is tangent to the Indifference, curve IC2. The optimum bundle is denoted by (x1* x2*)., This point is the optimum or the best possible consumption, bundle, where the consumer is maximizing his satisfaction., All other points lying on the budget line (such as point B and, point C) are inferior to (x1* x2*) as they lie on a lower IC (i.e.,, IC1). Thus, the consumer will rearrange his consumption, and will attempt to reach the equilibrium point, where the, marginal rate of substitution is equal to the price ratio., , yK, ita, b, , 3. Shape of Indifference Curve : As we move down along the, Indifference curve to the right, the slope of IC (MRS) decreases., This is because as the consumer consumes more and more of one, good, the marginal utility of the good falls. On the other hand,, the marginal utility of the good which is sacrificed rises. In other, words, the consumer is willing to sacrifice less and less for each, additional unit of the other good consumed. Thus, as we move, down the IC, MRS diminishes. This suggests the convex shape of, indifference curve., , X, , op, , yM, , Y, , C, , X, , In the above figure, IC is the Indifference Curve., At point A, MRSxy = AD / DB, , Let’s suppose that instead of point E, the consumer is at, point B. At this point, MRS is greater than the price ratio., , , P ,  i.e. MRS > 1  . In this case, the consumer would tend to, , P2 , , move towards point E by giving-up some amount of good, , 2 in order to consume more units of good 1. The consumer, will continue to give-up the consumption of good 2, until,, he reaches the point E, where, MRS becomes equal to the, price ratio., On the other hand, for all other points such as point C, MRS, , , P , is lesser than the price ratio.  i.e. MRS < 1  In this case,, , , BE / EC < AD / DB, MRS at B < MRS at A, so MRS has fallen., OR, As per the Indifference Curve Approach, a consumer attains, equilibrium at the point where the budget line is tangent to, the indifference curve and the IC is convex to the origin at the, point of tangency. This optimum point is characterized by the, following equality :, P, –dy, = MRS = 1, P2, dx, It is, absolute value of the slope of the IC = Absolute value of, the slope of the budget line., , the consumer would tend to move towards point E by giving, up some amount of good 1 to consume more units of good 2., Thus, we can conclude that if the consumer is consuming any, bundle other than the optimum one, then he would rearrange, his consumption bundle in such a manner that the equality, between the MRS and the price ratio is established and he, attains the state of equilibrium., 15. If equilibrium price of a good is greater than its market, price, explain all the changes that will take place in the, market. Use diagram., [6], Answer : When equilibrium price of a good is more than, its market price, then there will be competition among the, buyers. This is because when the equilibrium price of a, good is above the market price then it implies that there is a, situation of excess demand., , , At point B, MRSxy = BE / EC, , P2 , , This is explained with the help of the following diagram :, , • Follow us on Telegram - https://t.me/copymykitab1

Page 102 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1112 | Economics 2013 (Outside Delhi), , (ii) False, with increase in the level of output, the average, fixed cost continues to fall but it never reaches zero because, average fixed cost is a rectangular hyperbola. That is, it can, never be zero. This can be explained with the help of the, following diagram., , From the above figure, we can analyse that the market demand, curve DD and the market supply curve SS intersects each, other at the point ‘E’, which is known as equilibrium. The, corresponding price and quantity are regarded as equilibrium, price and equilibrium quantity, OPe and Oqe., As we can see that the average fixed cost being a rectangular, hyperbola tends to be zero, but however, it can never be zero., (iii) True, under diminishing returns to a factor, total product, continues to increase till marginal product reaches zero. This, can be explained with the help of the following diagram., , yK, ita, b, , In other words, if the market price Ps is below the equilibrium, price then at this price the market demand is more than the, market supply. This implies a situation of excess demand., Thus, due to this the competition will exist among the buyers., , , , 16. Giving reasons, state whether the following statements are, true or false :, [6], (i) Average product will increase only when marginal, product increases., , yM, , (ii) With increase in level of output, average fixed cost goes, on falling till it reaches zero., , C, , op, , (iii) Under diminishing returns to a factor, total product, continues to increase till marginal product reaches, zero., Answer : (i) False, the average product does not only rise, when the marginal product increases. But, there also exist a, region where average product continues to rise corresponding, to the falling marginal product. This can be explained with, the help of the following diagram., Y, , X, , As we can see in the region AB, the average product continues, to rise even when the marginal product is falling. The reason, behind this can be attributed to the fact that the marginal, component always change (rise/fall) at a faster rate in contrast, to the average component., , As we can see from the above figure, the total product, continues to increase till the marginal product reaches zero., This is because from the point I till the point B as more and, more labour inputs are combined with the constant level of, fixed factor, it leads to the fuller utilization of the fixed factor., Consequently, the marginal product of the additional labour, units falls, whereas, TP continues to rise. The moment, where,, , • Follow us on Telegram - https://t.me/copymykitab1

Page 103 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Outside Delhi) | 1113, , the MP of the last labour unit becomes exactly equal to zero,, then the TP reaches its maximum point., SECTION B, [1], , 25. Explain the effect of depreciation of domestic currency on, exports., [3], Answer : With the depreciation of the domestic currency, the, demand for the exports (by the native country) rises. This, is because depreciation of domestic currency results in the, fall in the price of the domestic currency in terms of foreign, currency. This makes the exports cheaper and dearer and, thereby their foreign demand increases., , , , , 17. Give two examples of intermediate goods., Answer : Fuel and steel or goods for resale., , Govt. should levy more direct taxes because these are paid, by rich people. Schemes for providing health services and, education to poor people should be encouraged., , , , 18. State the components of supply of money., [1], Answer : The components of supply of money are the, currency component and the deposit component., , , , 19. What one step can be taken through market to reduce the, consumption of a product harmful for health?, [1], Answer : By imposing high tax on the product by the, government, the consumption of a product, which is harmful, for health will be reduced. Ex–wines, alcohol etc., , }, , Depreciation of, Indian Rupee, , In the above case, Indian Rupee has depreciated in terms of US, from 45 to 50. Consequent to this fall in the Indian Rupee,, the demand for Indian exports will rise, as it is more cheaper, for the Americans to buys the same goods at lower price of, 50. Thus, as they can buy more goods using the same 1$ (as, before), so this would raise the demand for Indian exports., , yK, ita, b, , , , 20. How can Reserve Bank of India help in bringing down the, foreign exchange rate which is very high?, [1], Answer : The Reserve Bank of India can devalue Indian rupee, for bringing down the high rate of foreign exchange, RBI can, sell foreign exchange from its reserves to bring down its value., , Original Exchange Rate : 1$ = ` 45, New Exchange Rate, : 1$ = ` 50, , , , 22. Explain the ‘medium of exchange’ function of money.** [3], , Y, , yM, , OR, Explain the ‘lender of last resort’ function of central bank.**, , 26. How is exchange rate determined in the foreign exchange, market? Explain., [3], Answer : In the foreign exchange market, the equilibrium exchange, rate is determined by the intersection of the demand curve for, foreign currency and the supply curve of the foreign currency., , , , , 21. What is revenue deficit., [1], Answer : Excess of total revenue expenditure over the total, receipts, of budget is called Revenue Deficit., , , , 23. Distinguish between revenue receipts and capital receipts., Give an example of each., [3], Answer :, , op, , Basis of, DifferCapital Receipts, ence, Definition Capital receipts refer, to those receipts of the, government, which, causes a reduction in, the government assets, and also creates a liability for the government., , Revenue Receipts, , C, , Revenue receipts refer to those receipts, of the government, which neither creates, any liability nor creates any reduction in, the assets of the government., Reduce government as- No effect on governsets and create liabilities ment assets and lifor government., abilities., Recovery of loans., Tax receipts., , Impact, , Example, , , , 24. How can budgetary policy be used to reduce inequalities, of income?, [3], Answer : Budgetary policy can be used by government, for reducing inequalities of income. To achieve its target,, government should formulate suitably its fiscal policy., Through, its fiscal policy government should put tax on rich, people and spend that revenue for the benefit of poor people., , ** Answer is not given due to change in syllabus., , X, , In the above diagram, DD is the demand curve for foreign, currency and SS is the supply curve of foreign currency. The, point E is the point of intersection, where the demand curve, and the supply curve intersect. Thus, the point E represents the, equilibrium exchange rate. OR is the equilibrium exchange rate, and OQ is the quantity demanded and supplied of the foreign, currencies., If exchange rate rises to OR1, then the supply of foreign currency, exceeds the demand for foreign. This will then force the exchange, rate to fall back to OR due to the excess supply. On the contrary,, if the exchange rate falls to OR2, then there exists excess demand., Consequently, the rate of exchange rises from OR2 to OR., Thus, in the foreign exchange market, the exchange rate is, determined by the intersection of the demand and supply of, , • Follow us on Telegram - https://t.me/copymykitab1

Page 104 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1114 | Economics 2013 (Outside Delhi), , [4], , , , 27. Calculate ‘Sales’ from the following data :, , , ( in lakhs), 200, , (ii) Opening stock, , 100, , (iii) Closing stock, , 600, , , , , , , , (i) Subsidies, , 3,000, , , , (iv) Intermediate consumption, , 700, , (vi) Profit, , 750, , , , , , (v) Consumption of fixed capital, , , , (vii) Net value added at factor cost, 2,000, Answer : GDPMP = NDPFC – Subsidies + Depreciation, = 2000 – 200 + 700, = ` 2,500 lakhs, , OR, Stock, Flow, 1. Stocks are related to a 1. Flows are related to a, point of time., period of time., 2. Stock is not time 2. Flow is time dimensional., dimensional., 3. These are affected by flows, 3. These are affected by, such as more saving leads, stocks, such as, more, to more stock of capital., stock of capital leads to, more volume of output., 4. Some flows are related to 4. Some stocks are related to, stock, i.e., money supply, flows, i.e., flow of water, and change in money, and quantity of water in, supply., a tank., 5. Examples: Wealth, stock 5. Examples: Raw material,, of capital, etc., fuel, etc., , yK, ita, b, , Now,, , production of goods and services implies a change in the, employment and income levels, thereby, indicating a change, in the living standards of the people in an economy., , , , GDPMP = Sales + (Closing Stock – Opening Stock) –, Intermediate Consumption, , , or, Sales = GDPMP – (Closing Stock – Opening Stock) +, Intermediate Consumption, = 2,500 – (600 – 100) + 3000, = ` 5,000 lakhs, , C, , op, , , , yM, , 28. Distinguish between “real” gross domestic product and, “nominal” gross domestic product. Which of these is a, better index of welfare of the people and why?, [4], OR, Distinguish between stocks and flows. Give two examples, of each., Answer: The difference are as follows:, Real GDP, Nominal GDP, 1. Real GDP refers to the 1. Nominal GDP refers to the, total market value of, total market value of the, the output at the base, output at the current year, year prices., prices., 2. The value of Real GDP 2. The value of Nominal, can change only when, GDP can change only with, the volume / quantity, change in the prices overof output changes, time., overtime., 3. It can be treated as an 3. It cannot be treated as a, index of economic, index of economic growth, growth i.e. higher, i.e. higher Nominal GDP, real., does not implies higher, economic growth, in fact, it, may indicates inflation., , Real GDP is a better index of economic welfare. This is, because a change in the Real GDP reflects a change in the, quantity of goods and services produced. The change in the, , 29. Explain the credit creation role of commercial banks with, the help of a numerical example., [4], Answer : The process of money creation by the commercial, banks starts as soon as people deposit money in their respective, bank accounts. After receiving the deposits, as per the central, bank guidelines, the commercial banks maintain a portion of, total deposits in form of cash reserves. The remaining portion, left after maintaining cash reserves of the total deposits is then, lend by the commercial bank to the general public in form of, credit, loans and advances. Now assuming that all transactions, in the economy are routed through the commercial banks,, then the money borrowed by the borrowers again comes back, to the banks in form of deposits. The commercial banks again, keep a portion of the deposits as reserves and lend the rest., The deposit of money by the people in the banks and the, subsequent lending of loans by the commercial banks is a, recurring process. It is due to this continuous process that the, commercial banks are able to create credit money a multiple, times of the initial deposits., , , the foreign exchange. In case of any mismatches between the, demand and the supply, then such mismatchs are corrected, automatically by the invisible hands of the market i.e.,, demand and supply., , The process of creation of money is explained with the help, of the following numerical example., Rounds, Initial, Ist Round, IInd Round, nth Round, Total, , Deposits, Received, 10,000, 8,000, 6,400, 50,000, , Loans Extended, 8,000, 6,400, 5,120, 40,000, , Cash Reserves, 2,000, 1,600, 1,280, 10,000, , Suppose, initially the public deposited 10,000 with the, banks. Assuming the Legal Reserve Ratio to be 20%, the, , • Follow us on Telegram - https://t.me/copymykitab1

Page 105 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Outside Delhi) | 1115, , banks keep 2,000 as minimum cash reserves and lend the, balance amount of 8,000 ( 10,000 – 2,000) in form of, loans and advances to the general public., Now, if all the transactions taking place in the economy are, routed only through banks then, the money borrowed by, the borrowers is again routed back to the banks in form of, deposits. Hence, in the second round there is an increment in, the deposits with the banks by ` 8,000 and the total deposits, with the banks now rises to ` 18,000 (that is, ` 10,000, + ` 8,000). Now, out of the new deposits of ` 8,000, the, banks will keep 20% as reserves (that is, ` 1,600) and lend, the remaining amount (that is ` 6,400). Again, this money, will come back to the bank and in the third round, the total, deposits rises to ` 24,400 (i.e., 18,000 ` 6,400)., The same process continues and with each round the, total deposits with the banks increases. However; in every, subsequent round the cash reserves diminishes. The process, comes to an end when the total cash reserves (aggregate of, cash reserves from the subsequent rounds) become equal to, the initial deposits of ` 10,000 that were initially held by the, banks. As per the above schedule, with the initial deposits, of ` 10,000, the commercial banks have created money of, ` 50,000., , (i) Open market operations as an instrument to correct, deficit demand : Open Market Operations refer to the, buying and selling of securities either to the general public or, to the commercial banks in an open market. To curtail deficit, demand, the central bank purchases securities in the open, market. With purchase of securities, the central bank pumps, in additional money into the economy. With the additional, money the level of Aggregate Demand in the economy, increases. Thus, the deficit demand is corrected., , yK, ita, b, ,   , , (ii) Bank rate as an instrument to correct deficit demand :, Bank rate refers to the rate at which the central bank provides, loans to the commercial banks. To curtail deficit demand, the, central bank lowers the bank rate. This implies that cost of, borrowing for the commercial banks from the central bank, reduces. The commercial banks in turn reduce the lending rate, (the rate at which they provide loans) for their customers. This, reduction in the lending rate raises the borrowings capacity, of the public, thereby, encourages the demand for loans and, credit. Consequently, the level of Aggregate Demand in the, economy increases and deficit demand is corrected., , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ∴, , , 31. Explain the meaning of under-employed equilibrium., Explain two measures by which full employment, equilibrium can be reached., [6], Answer : A situation where the equilibrium level of income is, established before the full employment level, is called underemployment equilibrium. At this level, aggregate demand, is less than aggregate supply. So, for attaining the level of, full employment, we have to increase the level of aggregate, demand. There are two methods which can be used to increase, the level of aggregate demand. These are as follows :, , OR, Calculate “Gross National Disposable Income” from the, following data** :, ( in crores), (i) Net domestic product as factor cost, 3,000, (ii) Indirect taxes, 300, (iii) Net current transfer from rest of the world, 250, (iv) Current transfers from the government, 100, (v) Net factor income to abroad, 150, (vi) Consumption of fixed capital, 200, (vii) Subsidies, 100, , , C, , 32. Calculate ‘Gross National Product at Market Price’ from, the following data** :, [6], ( in crores), (i) Compensation of employees, 2,000, (ii) Interest, 500, (iii) Rent, 700, (iv) Profits, 800, (v) Employer’s contribution to social security schemes 200, (vi) Dividends, 300, (vii) Consumption of fixed capital, 100, (viii) Net indirect taxes, 250, (ix) Net exports, 70, (x) Net factor income to abroad, 150, (xi) Mixed income of self employed, 1,500, , , , , , , , , , , , , , , , op, , yM, , , , , , , , , , 30. From the data given below about an economy. Calculate, (a) investment expenditure and (b) consumption expenditure, [6], (i) Equilibrium level of income, 5000, (ii) Autonomous consumption, 500, (iii) Marginal propensity to consume, 0.4, Answer : Income Y = 5,000; Autonomous Consumption,, a = 500; MPC, C = 0.4, Income = Y = ` 5000, autonomous consumption = c ` 500, MPC = c = 0.40, Now, Y = c+I, C = c + cY, c = 500 + 0.40 × 5000, c = 500 + 2000, c = 2500, Y = C+I, 5000 = 2500 + I, I = 2500, I = ` 2500, c = ` 2500, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 106 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET II, , , , Economics 2013 (Outside Delhi), Time allowed : 3 hours, , , , Maximum marks : 100, , SECTION A, , , 5. Give one reason for “decrease” in supply of a commodity., [1], Answer : Increase in the price of inputs., , , , 7. The price elasticity of supply of a commodity is 2.0. A firm, supplies 200 units of it at a price of 8 per unit. At what, price will it supply 250 units?, [3], Answer : Given, Es = 2, P = 8, Q = 200 units, Q1 = 250, units, Q = Q1 – Q = 250 – 200 = 50 units, Let the change in price, P = x, , yK, ita, b, , We knot that,, or, or 2x = 2 ⇒ x = 1 or P = 1, New price, P1 = P +, , P=8+1= 9, , yM, , , , 13. When the price of a commodity falls by 20 per cent, its, demand rises from 400 units to 500 units. Calculate its, price elasticity of demand., [4], Answer :, % change in Quantity Demanded, % change in price, Q –Q, % change in Quantity Demanded = 2, × 100, Q1, 500 – 400, =, × 100, 400, = 25%, , , C, , , , op, , Ed =, , central bank controls the volume of credit by increasing or, decreasing the quantity of money in the economy through, sale and purchase of securities in the money market. The, functioning of this method is like this : When central bank, of the country wants to increase the volume of credit, it starts, purchasing securities from the market. These securities are, generally bought at a higher price than the market price. As, such, banks start selling them, as a result of which their cash, reserves increase, i.e., their liquid assets increase. As a result, of this, banks now can create more credit. On the contrary,, when central bank wants to control the volume of credit, it, starts selling securities in the market which are bought by, the commercial banks. With the result, their cash reserves, are reduced and this adversely affects their power of creating, credit. In short, “for expanding the volume of credit central, bank purchases securities and for reducing the volume of, credit, it sells securities in the open market. In this way,, according to this method, the volume of credit is controlled, and regulated by controlling and regulating the cash reserves, and credit creating power of commercial banks., 31. Distinguish between inflationary gap and deflationary gap., State two measures by which these can be corrected., [6], Answer : Deflationary gap : It prevails when aggregate, demand is less than aggregate supply at the full employment, level of output. In other words, deflationary gap represents, the situation of unemployment attributable to the fact that, at full employment level of output in the diagram RF is, deflationary gap., , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , Ed = 25 = 1.25, –20, , , , SECTION B, 23. Distinguish between revenue expenditure and capital, expenditure in government Budget. Give an example of, each., [3], Answer : Capital expenditure : An expenditure which, results in the creation of assets or reduction in liabilities is, treated as Capital expenditure, such as expenditure incurred, on construction of buildings, roads, bridges, etc., Revenue expenditure : An expenditure which does not, result in creation of assets or reduction in liabilities, is called, revenue expenditure such as payments of salaries, pensions,, etc., , , , 29. How does central bank control credit creation by, commercial banks through open market operations?, Explain., [4], Answer : Open market operations means the sale and, purchase of all kinds of bills and securities by the “central, bank in the open market.” In narrow terms, this method, signifies sale and purchase of government securities by central, bank in the open market. In short, according to this method, , Inflationary gap – This is the situation where economy, operates at a level which is greater than full employment., In other words, the gap between aggregate demand and, aggregate supply is known as inflationary gap. In the diagram, RN is inflationary gap. Volume of credit should be supervised, and controlled for correcting the situation of deflationary, and inflationary gap., Two methods can be adopted for controlling these two gaps :, , • Follow us on Telegram - https://t.me/copymykitab1

Page 107 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2013 (Outside Delhi) | 1117, , Because of this the level of aggregate demand and their credit, paying capacity will be reduced., (ii) Bank Rate : Bank rate should be reduced. This will, decline the rate of interest. This is for controlling deflationary, gap. In the case of inflationary gap bank should increase their, rate, so that rate of interest will go up and the demand for, credit will decline. This will affect aggregate demand., , , , 32. In an economy C = 200 + 0.75Y is the consumption, function where C is consumption expenditure and Y, is national income. Investment expenditure is 4,000., Calculate equilibrium level of income and consumption, expenditure., [6], Answer : Consumption function, C = 200 + 0.75Y,, Investment, I = 4,000, Now Y = C + I or Y = 200 + 0.75Y + 4,000, , , , , , ta, b, , Y – 0.75Y = 4,200 or 0.25Y = 4,200 ⇒ Y = 4,200 ×, Income, Y = 16,800, Consumption expenditure, C = 200 + 0.75Y, = 200 + 0.75 (16,800), = 200 + 12,600 = 12,800, , yK, i, , (i) Open market operations : If the central bank of the, country will buy the securities from commercial banks, this, will increase the capacity of credit paying of these banks. This, way the deflationary situation can be corrected. If the central, bank of the country sells the securities in the open market, then the situation of inflationary gap will be controlled., , SET III, , , , Economics 2013 (Outside Delhi), , op, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , C, , , , SECTION A, 5. Give the meaning of market supply., [1], Answer : Market supply is the combined supply of everyone’s, ability to sell goods in the market., , , , 7. A 15 per cent rise in the price of a commodity raises its, supply from 300 units to 345 units. Calculate its price, elasticity of supply., [3], Answer :, , EEs =, , Percentage change in quantity supplied, Percentage change in price, , , , 345 − 300, 45, ×100, ×100, 15, 300, =, = 300, = =1, 15, 15, 15, \ Es = 1, 8. Explain the conditions of consumer’s equilibrium under, utility analysis., [3], Answer : Conditions for consumer’s equilibrium are :, (i) Budget line should be tangent to indifference curve, i.e.,, MRS xy =, , Px, Py, , (Slope of IC) = Slope of Budget Line, , Maximum marks : 100, , (ii) Indifference curve should be convex to the point of, origin, i.e., MRS is diminishing., At equilibrium, marginal rate of substitution should be equal to, the ratio of prices of the two goods :, MRSxy > Px/Py. It means that to obtain one extra unit of, X the consumer is willing to sacrifice more than he has to, sacrifice actually. In the process, the consumer gains. As he, goes on obtaining more and more units of X, marginal utility, of X goes on declining. Therefore, the consumer is willing to, sacrifice less and less of Y each time he obtains one extra unit, of X. As a result, MRSxy falls and ultimately becomes equal to, Px/Py at some combination of X and Y. At this combination, the consumer is in equilibrium., MRSxy < Px/Py. If the consumer attempts to obtain more, units of X beyond the equilibrium level, MRSxy will become, less than Px/Py and he will start losing. So he will not try to, obtain more of X., 13. Price elasticity of demand of a good is −0.75. Calculate the, percentage fall in its price that will result in 15 per cent rise, in its demand., [4], Answer : Elasticity of demand, Percentage change in quantity demanded, =, Percentage change in price, 15, or −0.75 =, …[Let x be the percentage change in price], x, , , , , yM, , Time allowed : 3 hours, , • Follow us on Telegram - https://t.me/copymykitab1

Page 108 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1118 | Economics 2013 (Outside Delhi), , = 200 + 0.5 (3,400), = 200 + 1,700 = 1,900, 32. Explain all the changes that will take place in an economy, when aggregate demand is not equal to aggregate supply., [6], Answer : The equilibrium level may takes place before the, stage of full employment and also it may take place after the, stage of full employment., , , x = –20, , , , or −0.75x = 15, Price will fall by 20%, , , , SECTION B, , , , 23. State three sources each of revenue receipts and capital, receipts in government budget., [3], Answer : Sources of revenue receipts : (i) Direct tax,, (ii) Indirect tax and (iii) Commercial revenue., , Y, , Deflationary Gap, , Sources of capital receipts : (i) Recovery of loan,, (ii) Borrowings and (iii) Funds raised through disinvestment., , ADF, AD, B, , , , 29. Explain any two methods of credit control used by central, bank., [4], Answer : Bank Rate : Bank rate is the rate which is fixed by, the Central Bank. Credit is controlled by the central bank by, making variations in the bank rate. This is the rate of interest, which is charged from commercial bank for giving them loans., , A, , AS, , O, , op, , yM, , Open market operations : In the open market operation,, some activities going on such as buying and selling the, government securities in open market. When the central, bank is purchasing securities from the market it means it, wants to increase the volume of credit. Banks starts selling, securities for increasing their cash reserves i.e., their liquid, assets increase. On the other hand, when central bank starts, selling securities in the market it means it wants to control the, volume credit, which are bought by the commercial banks. In, the result their cash reserves are reduced and this effects their, power of creating credit., , C, , 30. From the following data about an economy, calculate, (a) equilibrium level of national income and (b) total, consumption expenditure at equilibrium level of national, income., (i) C = 200 + 0.5Y is the consumption function where C is, consumption expenditure and Y is national income., , Inflationary Gap, A, , B, , AS, AD, ADF, , AD, , O, , Z Y, Income, , X, , In the deficient demand, the equilibrium level takes place, before the full employment level. This is the case of involuntary, unemployment. This signifies that deficiency of aggregate, demand does not lead to the full use of given resources at the, full employment level. Therefore, for reaching the stage of full, employment where all the given resources are fully utilized,, AD is required to be incorrected., In the diagram (i) OZ is the full employment level and OY is, the actual output level, where AD equals to AS., , , , (ii) Investment expenditure is 1,500., [6], Answer : Given, consumption function, C = 200 + 0.5Y,, Investment, I = 1,500, , Y, , X, , Y Z, Income, , yK, ita, b, , When the value of credit is to be increased, the bank rate, reduces and vice-versa., , AD, , We know that, Y = C + I, Y = 200 + 0.5Y + 1,500 or Y = 1,700 + 0.5Y, 10, or 0.5Y = 1,700, or Y = 1,700 × = 3, 400, 5, (a) Equilibrium level of National Income, Y = 3,400, (b) Total Consumption Expenditure, C = 200 + 0.5Y, , In the case of excess demand, the equilibrium takes place, after the stage of full employment. The level of equilibrium is, higher and cannot be met by full use of resources and output, does not increase, only price increases in this case., The necessary methods should be used for reducing the level of, aggregate demand, for achieving the level of full employment., In the diagram (ii) OZ is the full employment level and OY, is the actual level of employments at equilibrium, where AD, is equal to AS., , • Follow us on Telegram - https://t.me/copymykitab1

Page 109 :
Downloaded from CopyMyKitab, , Maximum marks : 100, , , , Time allowed : 3 hours, , SET I, , , , Economics 2013 (Delhi), , Visit our Site - https://copymykitab1.blogspot.in/, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , , , , , , , 1. Give two examples of fixed costs., [1], Answer : Insurance premiums, and loan payments., 2. Define marginal cost., [1], Answer : Marginal cost may be defined as the change in total, cost that takes place by producing an additional unit., 3. When is the demand for a good said to be inelastic?, [1], Answer : The demand for a good is inelastic when the, percentage change in the demand of a product is less than the, percentage change in the price of the good., 4. Give the meaning of market demand., [1], Answer : Market demand is the sum total demand of all the, buyers of a good at a point of time at a given price., 5. Under which market form a firm’s marginal revenue is, always equal to price., [1], Answer : Under perfect competition marginal revenue is, always equal to price., 6. Explain the difference between an inferior good and a, normal good., [3], Answer : Normal Good, 1. A normal good is one whose demand increases with an, increase in the money income of the consumer., 2. Normal goods have positive income effect, e.g. if a, consumer buys more of milk for his family as his income, rises, then milk will be called a normal good as shown in, Diagram 1., , , , 7. Explain the law of diminishing marginal utility with the, help of a total utility schedule., [3], , , , OR, , , , yK, ita, b, , C, , op, , yM, , , , , , , , , Explain the condition of consumer’s equilibrium with the, help of utility analysis., [3], Answer : Law of Diminishing Marginal Utility states, that as a consumer consumes more and more units of, a commodity at succession, then the Marginal Utility, derived from the consumption of each additional unit of, the commodity falls., Units of, Commodity, , Total Utility, (TU), , 1, 2, 3, 4, 5, 6, , 80, 160, 220, 270, 310, 340, , Marginal Utility (MU), MU = Tn - TUn−1, (80−0) = 80, (160−80) = 80, (220−160) = 60, (270−220) = 50, (310−270) = 40, (340−310) = 30, , From the above schedule, it can be observed that for two unit, of consumption, marginal utility is 80. For the third unit, the, marginal utility falls to 60. For the fourth unit, the marginal, utility further falls to 50 and so on. Thus, as more and more, units of a commodity are consumed, the marginal utility, derived from the consumption of each additional unit falls., , Inferior Good, , , 1. An inferior good is one whose demand falls with a rise in, income of the consumer because he can now afford to buy, a normal (superior) good., , , 2. Inferior goods have negative income effect; e.g. if a, consumer reduces the consumption of toned milk when, his income rises, then toned milk is an inferior good for, that consumer, as shown in Diagram2., , OR, Consumer’s equilibrium will be attained at a point, where marginal utility of a commodity is equal to its, price. However, MU is expressed in terms of utils and, price is expressed in money form. Therefore, equality of, MU in utils and price cannot be the basis of consumer’s, equilibrium. Hence, marginal utility also needs to be, expressed in money form., Marginal utility in money form can be obtained by dividing, it (MU) by marginal utility of one rupee. Marginal utility, , • Follow us on Telegram - https://t.me/copymykitab1

Page 110 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1120 | Economics 2013 (Delhi), , , , , , 8. When the price of a good rises from 20 per unit to 30, per unit, the revenue of the firm producing this good rises, from 100 to 300. Calculate the price elasticity of supply., [3], Answer : Price, P = 20,, TR = 100, , 1, , D, , , , P = P1 – P = 30 – 20 = 10, or Q = Q1 – Q = 10 – 5 = 5 units, D, , Buyers like firms have to accept the price which is fixed by, the supply and demand of the whole industry. Buyers can buy, any quantity of product at this price. Similarly sellers are also, very large in number having very small share in the market., Sellers cannot influrence the market price and can sell any, quantity on the prevailing price. That is why firms are called, price-takers in perfectly competitive industry., 11. either Question is not complete or Answer is extra., [4], Answer : Unemployment in economy leads to underutilization of, resources which compels an economy to remain on less efficient, PPC. Hence the AD should be raised to increase employment., So the government should start some schemes through which, can be generated. As a result the point of actual operation will, move to or move nearer to the situation where there is a no, unemployment. We can see in the diagram, P is the point of, operation due to unemployment. The point of operation will, move on to the right side of Production Possibility curve when, the new employment schemes will be introduced. The point of, operation shifts from point P to point M or T or any other point, on the production possibility curve AB., , yK, ita, b, , TR = 300, , , , Price, P1 = 30,, , Answer : There are very large number of buyers in perfect, competition. No individual buyer can influence the market, price because of its large number. Every buyer buys only a, fraction from the total sale of the product., , , , of 1 is the extra utility when an additional rupee is spent, on other available goods in general. Suppose that for an, additional rupee we get two units of some other commodity,, then marginal utility of rupee is 2 (utils). Knowing marginal, utility (MU) of a commodity and marginal utility of a rupee,, we can find out marginal utility of a commodity in money, terms in the following way :, , yM, , 9. Complete the following table :, , Units of Labour Average Product, Marginal, (Units), Product (Units), 8, , 2, , 10, , …, , 3, , …, , 10, , 9, , …, , …, , 4, , 7, , …, , C, , 4, 5, 6, , A, , …, , Efficient PPC, , op, , 1, , Y, , M, P, , T, , Guns, , , , [3], , Answer :, , B, O, , Average, Product, (Units), , Marginal, Product, (Units), , Total Product (Units), , 1, , 8, , 8, , 8, , 2, , 10, , 12, , 20, , 3, , 10, , 10, , 30, , 4, , 9, , 6, , 36, , 5, , 8, , 4, , 40, , 6, , 7, , 2, , 42, , X, , 12. Explain the conditions of producer’s equilibrium with the, help of a numerical example., [4], Answer : Producer’s equilibrium refers to a combination, of price and quantity of output which yields the producer, the maximum profit. For achieving this combination two, conditions need to be fulfilled., , , Units of, Labour, , Bread, , (ii) At the point where, the difference between TC and TR is, maximum, MR and MC should also be equal. Any departure, from this position will not ensure maximum profit., , , , 10. Explain “large number of buyers and sellers” feature of a, perfectly competitive market., [3], , (i) The difference between total cost and total revenue must, be the maximum., , • Follow us on Telegram - https://t.me/copymykitab1

Page 111 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Delhi) | 1121, , In the Table, the difference between TR and TC is maximum, at 3 units as well as at 4 units but the point of equilibrium, is 4 units because at this point MC = MR. & MC must rise., These two conditions can be explained with the help of a, table given below :, Equilibrium of a Producer, TC, ( ), , MC, ( ), , MR Profit, ( ) (TR –, TC), 10, 1, 10, 10, 10, 10, 0, 10, 2, 20, 18, 8, 10, 2, MC=MR, 10, 3, 30, 24, 6, 10, 6, MC<MR, 10, 4, 40, 34, 10, 10, 6, Equilibrium, 10, 5, 50, 46, 12, 10, 4, MC>MR, 13. The price elasticity of demand for a good is −0.4. If its price, increase by 5 per cent, by what percentage will its demand, fall? Calculate., [4], Answer :, Percentage change in quantity demanded, Ep =, Percentage change in price, Percentage change in quantity demanded, –0.4 =, 5, −2 = Percentage change in quantity demanded, Quantity decreases by 2% or Demand falls by 2%, , As more and more units of variable input are employed, the, proportion between the fixed and variable factors keeps on, changing. The output passes through three phases., These three phases are identified with respect to the marginal, product., Phase I : TP increaes at an increasing rate. In The first phase, of production the marginal product rises and reaches its, highest point. This is the phase of Increasing Returns to a, factor and during this phase, total product increases at an, increasing rate., Phase II : TP increases at a diminishing rate. In this phase,, Marginal Product is declining, but is positive. In this phase, total product increases but at a diminishing rate. This phase, ends when Marginal Product is zero and Total Product is at, its maximum level. A producer always operates in this stage., , yK, ita, b, , TR, ( ), , Phase III : TP is falling. In phase of production, Marginal, Product is and negative. Here total product starts falling., , yM, , , , Price Output, ( ) (Units), , and other factors input are variables. The quantity of output, can be increased by increasing the use of variable input., , , , 14. Giving reasons, state whether the following statements are, true or false :, [6], , op, , , , (i) A monopolist can sell any quantity he likes at a price., , C, , , , (ii) When equilibrium price of a good is less than its market, price, there will be competition among the sellers., Answer : (i) The statement is false. The price is fixed at a, point where marginal cost is equal to marginal revenue. If a, monopolist fixes a price less or more than the price fixed at, equilibrium point, the quantity will be more or less than the, equilibrium quantity but not the quantity that a monopolist, would like to sell., (ii) The statement is true. In this situation, market price is higher, than the equilibrium price. As a result of which supply will be more, than demand. As such there will be competition among the sellers., In other words, sellers would like to sell their entire quantity to, meet the demand which (supply) is much more than the demand., , , , 15. Explain the Law of Variable Proportions with the help of, total product and marginal product curves., [6], Answer : The law of variable proportions explains the, relationship between inputs and outputs in the short run. In, the short run, some factors of production (inputs) are fixed, , • Follow us on Telegram - https://t.me/copymykitab1

Page 112 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1122 | Economics 2013 (Delhi), , According to indifference curve analysis, consumer’s, equilibrium is established at a point where budget line is, tangent to the highest attainable indifference curve. At this,  ∆y , point the slope of indifference curve i.e. MRS   is equal,  ∆x , Price of x, to the slope of Budget line, i.e.,, Price of y, , Units of, Labour, Total, Marginal, Phase of, (Variable Product, Product, Production, input), 1, 3, 3, Phase I, 2, 7, 4, 3, 12, 5, 4, 16, 4, Phase II, 5, 18, 2, 6, 18, 0, 7, 17, –1, Phase III, 8, 16, –2, These phases are shown graphically in Diagram., The reasons for the Operation of the Law are :, , }, }, , At point of consumer equilibrium (E),, ∆y, P, P, MRS = x or, = x, ∆x, Py, Py, Conditions for consumer’s equilibrium are :, (i) Budget line should be tangent to the indifference curve,, P, i.e., MRSxy = x i.e., Slope of Indifference curve,, Py, Ic = Slope of Budget line., , , }, , , , (ii) MRS is diminishing or Indifference curve is convex to, the point of origin., , yK, ita, b, , , , 1. Optimum combination of factors : The phase of increasing, marginal product is due to optimum combination of, factors that is required for any given technology, therefore, fixed factors get better utilized., , , 2. However, when more and more units of variable factors are, employed to a fixed factor, the fixed factor cannot absorb it, and there is overcrowding of variable factors due to which, the marginal product falls and becomes negative. This is, the phase of diminishing marginal product., , op, , Explain the relationship between, , yM, , , , 16. Explain consumer’s equilibrium with the help of Indifference, Curve Analysis., [6], OR, (i) Prices of other goods and demand for the given good., , C, , (ii) Income of the buyers and demand for a good., 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 that he possibly, can get., , OR, , (i) Price of other goods and demand for the given good., Demand for a commodity may be affected by the prices of, other goods. The other goods may be substitute goods and, complementary goods., Prices of substitute goods. Those goods which can be used, at the place of another are known as substitute goods like tea, and coffee. If the price of tea increases then the demand of, coffee will increases because now it is cheaper in comparison, to tea on the other side, if the price of tea falls, the demand of, tea will increases, because now it is cheaper than coffee., Price of complementary goods. Those goods which we, cannot use without one another are known as complementary, goods. Such as car and petrol if the price of car rises then the, demand for petrol falls down. The reverse will happen when, the price of car falls., (ii) Income of the buyers and demand for a good. Income, of the buyers affect the demand of goods. Generally, we can, see when the income of buyer increases the demand increases, and vice versa. The effect of increase in income is not uniform, on the demand of all goods. When income increases, the, demand of normal goods increases and that for inferior goods, decreases. The reverse of it happens when income falls., SECTION B, , , 17. How can increase in foreign direct investment affect the, price of foreign exchange?, [1], Answer : Increase in foreign direct investment will increase, the supply of foreign exchange and therefore it will reduce the, price of foreign exchange., • Follow us on Telegram - https://t.me/copymykitab1

Page 113 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2013 (Delhi) | 1123, , required by the government to affect the levels of aggregate, demand. These measures are called stabilization measures., These are for avoiding unemployment and inflation., , 19. Give one example of “externality” which reduces welfare of, the people., [1], Answer : Air pollution from motor vehicles is an example of, a negative externality. The cost of the air pollution for the rest, of the society is not compensated by the producers or by the, users of motor vehicles., , 24. Explain the effect of appreciation of domestic currency on, imports., [3], Answer : If the external value of domestic currency is, increased in the foreign exchange market then it is known as, appreciation of the domestic currency., The imports will increase as they become cheaper because of, the appreciation of domestic currency., , [1], , op, , OR, , C, , Answer : Revenue deficit is equal to the excess of total, revenue expenditure over the total revenue receipts. On, the other hand, fiscal deficit is equal to the excess of total, expenditure over the sum of revenue and capital receipts, excluding borrowings. Thus, it is clear from the above, statement, revenue deficit relates to total revenue receipts and, total revenue expenditure, whereas, fiscal deficit relates to the, difference in total expenditure (revenue and capital) and total, receipts (revenue and capital) excluding borrowings., Revenue Deficit = Total Revenue Expenditure – Total, Revenue Receipts, Fiscal Deficit = Total Budget Expenditure (−) (Revenue, Receipts + Capital Receipts excluding borrowings), , , 23. Explain any one objective of Government Budget., [3], Answer : To maintain economic stability is an important, objective of government budget. Some economic fluctuations, like boom and depression affects the economy of a country., Because of these changes country faces some benefits and, harms. In this situation, appropriate policy measures will be, , , , , , , , (i) Net value added at factor cost, (ii) Depreciation, (iii) Change in stock, (iv) Intermediate cost, (v) Exports, (vi) Indirect taxes, Answer : Sales, = Net value added at factor cost + Depreciation + Intermediate, cost + Indirect taxes – Changes in stock, = (i) + (ii) + (iv) + (vi) – (iii), 560 + 60 + 1000 + 60 – (−30) = 1710 lakhs, , , , , , , Capital expenditure : This expenditure spent by a business or, a firm on acquiring or maintaining fixed assets. e.g. buildings,, land etc., , [4], ( in lakhs), 560, 60, (−) 30, 1000, 200, 60, , 27. Giving reasons categorise the following into stock and flow :, [4], (i) Capital, (ii) Saving, (iii) Gross domestic product, (iv) Wealth, OR, , , yM, , Distinguish between revenue deficit and fiscal deficit., Answer : Revenue expenditure : This expenditure relates to, the day to day running of the business which does not result, in the creation of assets or reduction of liability e.g. salaries, and wages., , 26. Calculate “Sales” from the following data:, , , , , yK, ita, b, , 22. Distinguish between revenue expenditure and capital, expenditure in Government budget. Give an example of, each., [3], OR, , , , , , 21. What is a Government Budget?, [1], Answer : Budget is prepared during the period of financial, year. It is a statement which is made by government for, showing the estimated receipts and expenditure., , 25. Distinguish between balance of trade and balance on, current account., [3], Answer : Balance of trade is confined to the difference, between Export of Goods and Imports of Goods. On the other, hand, the Balance of current account of a country includes, payments and receipts relating to visible trade (export and, import of goods), invisibles (services) and unilateral transfers., Thus, Balance of trade is a restricted term in comparison to, Current account balance., , , , , 20. Give two examples of indirect taxes., Answer : Custom tax and Entertainment tax., , , , , , , , 18. What are demand deposits?, [1], Answer : Demand deposits are those deposits which a, depositor can withdraw at any given time by writing a cheque., , Explain the circular flow of income., Answer : (i) Capital is a stock. This is so because capital is, measured at a point of time., (ii) Saving is a flow. This is so because it relates to a period, of time., (iii) Gross domestic product is a flow because it relates to a, time period which is generally one fiscal year., (iv) Wealth is a stock because it is measured at a point time., , • Follow us on Telegram - https://t.me/copymykitab1

Page 114 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1124 | Economics 2013 (Delhi), , 30. Complete the following table :, , [6], , , , OR, Answer : The flow of production, income generation and, expenditure involving different sectors of the economy in the, form of wages, rent and dividends, is known as circular flow of, income (see diagram). Production gives rise to income (factor, incomes), which in turn gives rise to demand for good and, services. This demand leads to expenditure by households on, goods and services produced. In this way income generated, by production units reaches back to production units and, makes the circular flow complete., , Income (`), , Marginal, Average, propensity propensity, to save, to save, …, …, 0.4, …, …, 0, …, 0.20, 0.8, 0.35, , Consumption, expenditure (`), , 0, 100, 200, …, …, Answer :, , 80, 140, …, 240, 260, , yK, ita, b, , In- Consump- Saving Marginal, Average, come tion expenpropensity, propensity, to, (`), to save, save, (`), diture (`), 0, 80, −80, 100, 140, −40 40/100=0.4 −40/100=−0.4, 200, 200, 0, 40/100=0.4, 0, 300, 240, 60, 60/100=0.6 60/300=0.20, 400, 260, 140 80/100=0.8 140/400=0.35, , , [6], , , , (` in crores), (i) Private final consumption expenditure, 900, (ii) Profit, 100, (iii) Government final consumption expenditure, 400, (iv) Net indirect taxes, 100, (v) Gross domestic capital formation, 250, (vi) Change in stock, 50, (vii) Net factor income from abroad, (−) 40, (viii) Consumption of fixed capita, 20, (ix) Net imports, 30, OR, Calculate net national disposable income from the following, data** :, , , , , , , yM, , , , , , , , op, , , , , , , , , , , , , , , , (` in crores), (i) Gross domestic product at market price, 2000, (ii) Net current transfers to rest of the world, (−)200, (iii) Net Indirect taxes, 150, (iv) Net factor income to abroad, 60, (v) National debt interest, 70, (vi) Consumption of fixed capital, 200, (vii) Current transfers from Government, 150, Answer : National Income, , , , , C, , , , 28. Explain Banker to the Government function of the central, bank., [4], Answer : The central bank works as a commercial bank for the, government. Central bank provides all services and facilities, to the government like ordinary banks provide services to, public. Central bank manages all government departments, undertaking and the funds of government. It provides loans, to government when expenditure exceeds the revenue. This, is called deficit financing through borrowing from RBI. It, manages public debt also. It also accepts the payment of taxes, from the public on behalf of the government and makes, payment for the cheques issued by government., 29. C = 100 + 0.4 Y is the Consumption Function of an economy, where C is Consumption Expenditure and Y is National, Income. Investment expenditure is 1100. Calculate, [6], (i) Equilibrium level of National Income., (ii) Consumption expenditure at equilibrium level of, National Income., Answer : Given, Y = National Income, Consumption, Function, C = 100 + 0.4Y, Investment Expenditure, I = 1,100, (i) Now, Y = C + I, \ Y = 100 + 0.4Y + 1,100 or y – 0.4y = 1200, or 0.6 Y = 1,200, 10, \ Equilibrium level of National Income, Y = 1,200 ×, 6, = 2,000, (ii) Now, C = 100 + 0.4Y or C = 100 + 0.4(2,000), Consumption, C = 100 + 800 = 900, , , , , , , , 31. Calculate National Income from the following data :, , = Private final consumption expenditure + Government final, consumption expenditure + Gross domestic capital formation, + Net factor income from abroad – Consumption of fixed, capital – Net imports – Net indirect taxes, = (i) + (iii) + (v) + (vii) – (viii) – (ix) – (iv), = 900 + 400 + 250 + (−40) – 20 – 30 – 100 = ` 1,360 Crores, , • Follow us on Telegram - https://t.me/copymykitab1

Page 115 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET II, , , , Economics 2013 (Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , , , 2. A monopolist is a price maker : Since, a monopolist firm, is the single firm in the market, therefore, it enjoys full control, over the price and output decisions. The monopolist has the, total freedom to fix the price level, which maximizes his profit., Therefore, it can be said that a monopoly firm is a price-maker., , D, , , , 12. The demand for good rises by 20 percent as a result of all in, its price. Its price elasticity of demand (−) 0.8. Calculate the, percentage fall in price., [4], , yK, ita, , , , , , SECTION A, 1. Give two examples of variable costs., [1], Answer : (i) Wages of labourers who work on daily wage rate, (ii) Cost of raw material., 8. A firm’s revenue rises from ` 400 to ` 500 when the price, of its product rises from ` 20 per unit to ` 25 per unit., Calculate the price elasticity of supply., [3], Answer :, Initial Total Revenue (TR1) = `400, Final Total Revenue (TR2) = `500, Initial Price (P1) = `20, Initial Price (P2) = `25, ⇒ Change in Price ( P) = ` (25−20) = `5, , 10. Explain any two features of monopoly market., [3], Answer : The following are the two features of a monopoly, market., 1. Restricted entry of new firms : The entry into the, monopolist market is restricted. In other words, no new firm, can enter the monopoly market. There may be various legal, barriers such as, patent rights, cartel laws, exclusive rights, etc.,, to restrict the entry of the new firms., , b, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , OR, , TR2 500, Final Quantity Supplied (Q2) =, =, = 20 units, P2, 25, ⇒ Change in Price ( Q) = ` (20−20) = ` 0, , (ii) Nature of the good, Answer :, Percentage Change in Quantity Demanded, Ed =, Percentage Change in Price, , op, , ( ∆Q ), ×100 0 ×100, Q, Es =, = 20, =0, ( ∆P ), 5, ×100, ×100, P, 20, Hence, elasticity of supply is zero., , yM, , How is price elasticity of demand affected by :, , D, , TR 400, = 20 units, Initial Quantity Supplied (Q2) = 1 =, P1, 20, , , , Output (Units), 1, 2, 3, 4, 5, 6, Answer :, , C, , 9. Complete the following table., , Average Cost ( ) Marginal Cost ( ), 12, …….., 10, …….., ……, 10, 10.5, ….., 11, ….., ….., 17, [3], , Output, (Units), , Average Cost, (TC × Q) `, , 1, 2, 3, 4, 5, 6, , 12, 10, 10, 10.5, 11, 12, , Marginal, Cost (TCn TCn−1) `, 12, 8, 10, 12, 13, 17, , Total Cost, (TC) `, 12, 20, 30, 42, 55, 72, , (i) Number of substitutes of available for the good., , or 0.8 =, , 20, Percentage Change in Price, , or, Percentage Change in Price =, , 20, = 25%, 0.8, , Thus, the percentage fall in the price 25., OR, (i) Number of Substitutes Available for the Good : The, demand for a good that has more number of substitutes, available will be relatively more elastic and ed > 1. This is, because a slight increase in the price will push the consumers, to shift their demand away from the good to its substitutes., On the other hand, with a slight fall in price the consumers, would shift their demand from the substitutes towards, the good. Thus, the goods having a large number of close, substitutes will have elastic demand. On the contrary, if a, good has no close substitutes, then it will have an inelastic, demand., (ii) Nature of the good : The price elasticity of demand, depends on the nature of a good. The goods and services, can be broadly divided into three categories – Necessities,, Luxuries, Jointly-demanded goods. The three types of goods, have different values of elasticity as discussed below., , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 116 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1126 | Economics 2013 (Delhi), , (a) Necessity goods : These goods are those goods which a, , 30. In an economy, S = −100 + 0.6Y is the saving function,, , consumer demands for sustaining his life. A consumer cannot, , where S is saving and Y is National Income. If investment, , reduce the consumption of these goods. The demand for such, , expenditure is 1100. Calculate :, , goods does not change much in response to the changes in, , (i) Equilibrium level of National Income, , their prices. Even when the price rises the consumer cannot, demand (ed < 1)., , (ii) Consumption expenditure of equilibrium level of, National Income., [6], Answer : Saving function, S = –100 + 0.6 Y, , (b)Luxury goods : Luxuries are the good which are not, , Investment, I = 1,100 Y = National Income, , , , reduce their demand. Hence, such goods have an inelastic, , essential, rather, are consumed for leisure or comfort purposes., For example, air conditioner, branded garments, etc. The, demand for such goods is highly responsive to changes in, , (i) We know that S = I, , Given S = −100 + 0.6Y, , ⇒ I = −100 + 0.6 Y, , ⇒ 1,100 = −100 + 0.6Y, , and vice-versa. Thus, such goods have high price elasticity., , 10, = 2,000, 6, \ Equilibrium level of National Income, Y = 2,000, , (c)Jointly-demanded goods : Jointly-demanded goods, , (ii) Y = C + I, , are those goods that are demanded together. The joint, , 2,000 = C + I, , consumption of such goods collectively satisfies wants. For, , \ Consumption expenditure at equilibrium level = 900, , 1,200 = 0.6 Y, , ⇒ C = 2,000 – 1,100 = 900, , yK, ita, b, , example, sugar and tea. A rise in the price of one good does, , not reduce its demand if the demand for its complement, , | Y = 1,200 ×, , , , ↑⇒, , their prices. A rise in the price, reduces the demand for them, , 32. Complete the following table :, , good has not reduced. For example, a rise in the price of, , Income, , sugar will not reduce its demand if the demand for tea has, not decreased. Hence, such goods have an inelastic demand, , Savings, , Average, Propensity, to consume, , Marginal, Propensity, to Consume, , 0, , −40, , ….., , ….., , 50, , −20, , ….., , ….., , 100, , 0, , ….., , 0.6, , ‘money creator’ in the economy. They have the capacity to, , 150, , 30, , 0.8, , ….., , generate credit through demand deposits. These demand, , 200, , 50, , ….., , ….., , SECTION B, , yM, , (ed < 1)., , , , 28. How do commercial banks create deposits? Explain., , [4], , op, , Answer : Commercial banks play the important role of, , The process of money creation can be explained by taking, an example of a bank XYZ. A depositor deposit `10,000 in, his savings account, which will become the demand deposit, , [6], , , , C, , deposits make credit more than the initial deposits., , Answer :, Income Savings, , of the bank. Based on the assumption that not all customers, will turn up at the same day to withdraw their deposits, banks, maintains a minimum cash reserve of 10% of the demand, deposits, i.e.,, , 1000. It lends the remaining amount of, , 9000 in the form of credit to other customers. This further, creates deposits for the bank XYZ. With the cash reserve of, 1000, the credit creation is worth 10,000. So, the credit, multiplier is given by :, Credit multiplier = 1/CRR = 1/10% = 10, The money supply in the economy will increase by the, , Consumption, , Average, Marginal, Propensity Propensity, to consume to Consume, , 0, , −40, , 40, , -, , -, , 50, , −20, , 70, , 70/50 = 1.4, , 30/50 = 0.6, , 100, , 0, , 100, , 100/100 = 1, , 30/50 = 0.6, , 150, , 30, , 120, , 120/150 =, 0.8, , 20/50 = 0.4, , 200, , 50, , 150, , 150/200 =, 0.75, , 30/50 = 0.6, , amount (times) of credit multiplier., , • Follow us on Telegram - https://t.me/copymykitab1

Page 117 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET III, , , , Economics 2013 (Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , SECTION A, , , [1], , Example of Variable Cost – Labour Cost (Wages and salaries), , , , 8. The price elasticity of supply of a good is 0.8. Its price, rises by 50 percent. Calculate the percentage increase in its, supply., [3], Answer : es = 0.8, , average cost (LAC) in the long run. Due to the free entry of, the new firms in the industry, the quantity produce increases,, which results in the rise of the supply of the output and, finally, this pushes the equilibrium price down. Thus, the, , b, , Similarly, on the other hand, the existing firms leave the, , yK, , industry whenever the price falls short of the minimum, , 16, , ….., , 2, , 20, , 3, , ….., , 4, , 18, , ….., , 5, , ….., , 8, , 6, , 14, , ….., , op, , 1, , C, , yM, , of short run average cost curve (SAC) in the short run or, , Marginal Product, (Units), , , , such circumstances, the existing firms each losses and, consequently wishes to quit. Now, as there are no restrictions, , the price start rising and reaches the point at LAC where a, firm earns only normal profit., Thus, it is due to freedom of the entry and exit to firms that, [3], , Total Product, TP = AP × L or,, TPn = TPn−1 +, MPn, 16 ( 1 × 16), 40 (2 × 20), 60 (40 + 20), 72 ( 4 × 18), 80 (72 + 8), 84 (6 × 14), , average cost (LAC) in the long run. This is because under, , This leads to the fall in the supply of the commodity. Hence,, , 20, , Answer :, , whenever price falls short of the minimum of long run, , imposed on the exit of the firms, so firm quits the industry., , ….., , 24 (40 – 16), 20, 12 (72 – 60), 8, 4 (84 – 80), , run and whenever price exceeds the minimum of long run, , to enter the industry., , Average Product, (Units), , MPn = TPn, – TPn−1, , the minimum of short run average cost (SAC) in short, , normal profit. At this point, no new firm has any incentive, , Units of, Labour, , Marginal, Product, (Units), , firms are attracted into the industry whenever price exceeds, , the minimum of average cost curve, where, all the firms earns, , D, , D, , 9. Complete the following table :, , entrants and existing firms to quit the industry. The new, , ita, , D, , Q, or, 0.8 =, 50, or, Q = 40%, Percentage Change in Quantity Supplied is 40%., , 16, 20, 20 (60 – 3), 18, 16 (80 - 5), 14, , Answer : Freedom of entry and exit to firms in a monopolistic, , equilibrium price continues to fall, until it become equals to, , Q=?, Percentage Change in Quantity Supplied, es =, Percentage Change in Pr ice, , 1, 2, 3, 4, 5, 6, , [3], , price remains equal to the minimum of average cost implying, the normal profit only., 12. Give the meaning of producer’s equilibrium. A produces, that quantity of his product at which marginal cost and, marginal revenue are equal. Is he earning maximum profits?, Give reasons for your answer., [4], Answer : At a point where, MC = MR, the producer’s, equilibrium is established. Yes, the producer earns maximum, profit on this point. Because any deviation from this position, will either reduce the profit of a firm or increase the losses., , , D, , P = 50%, , Average, Product, TP, AP =, L, , features of monopolistic competition., , industry implies that there exists no restriction for the new, , 1. Give an example each of fixed cost and variable cost., Answer : Example of Fixed Cost – Cost of Machinery, , Units of, Labour, , 10. Explain “freedom of entry and exit to firms in industry”, , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , MC refers to the additional cost that takes place by producing, an additional unit of output. MR refers to the additional, revenue that takes place by selling an additional unit., , • Follow us on Telegram - https://t.me/copymykitab1

Page 118 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1128 | Economics 2013 (Delhi), , 31. C = 50 + 0.5Y is the consumption function where C is, consumption expenditure and Y is National Income and, investment expenditure is 2,000 in an economy., Calculate Equilibrium level of (National Income) Consumption expenditure of equilibrium level of national, income., [6], , , When marginal cost is less than MR available from the sale, of a product, the firm will go on increasing its output. When, MC and MR are equal, the firm reaches on its equilibrium., After that point if a firm increases its output, MC will be, greater than MR resulting in decline in profit. This diagram, is related to the perfect competition, where the equilibrium, output is OQ, where MR = MC., , Answer:, Y = National Income, Consumption Function, C = 50 + 0.5Y, Investment, I = 2,000, (i) Y = C + I or Y = 50 + 0.5Y + 2,000, , 10, = 4,100, 5, ∴ Equilibrium level of National Income = 4,100, , or 0.5Y = 50 + 2,000 = 2,050 or Y = 2,050 ×, , C = 50 + 0.5 (4,100), , , , Cost of, Revenue, , (ii) Given, C = 50 + 0.5Y, , yK, ita, b, , , , C = 50 + 2,050 = 2,100, , ∴ Consumption expenditure at equilibrium level = 2,100, , 32. Complete the following table :, Savings, ( ), , Income, ( ), , Marginal, Propensity to, consume, , 100, , 50, , 150, , ….., , ( in lakhs), , 175, , 75, , ….., , ….., , 700, , 250, , 100, , ….., , ….., , 80, , 325, , 125, , ….., , ….., , yM, , SECTION B, , Consumption, expenditure ( ), , op, , , , Intermediate costs, , , , Consumption of fixed capital, , , Change in stock, , , C, , Subsidy, , , , Net value added at factor cost, , , Exports, , (−)50, 60, 1300, 50, , , , [4], Answer :, , NVAFC = ` 1,300, , GDPMP = NVAFC – Subsidies + Consumption of fixed capital, = 1,300 – 60 + 80 = ` 1,320, Also, we know that :, GDPMP = Sales + Change in stock – Intermediate Cost, Sales = GDPMP – Change in stock + Intermediate Cost, = 1,320 – (−50) + 700, , [6], , , , , , 27. Calculate “sales” from the following data :, , Answer :, Consumption, expenditure, ( ), , Savings, ( ), , Income, ( ), , 100, , 50, , 150, , ….., , 175, , 75, , 250, , 75/100 = 0.75, , 250, , 100, , 350, , 75/100 = 0.75, , 325, , 125, , 450, , 75/100 = 0.75, , i.e. Sales = ` 2,070 Lakhs., , • Follow us on Telegram - https://t.me/copymykitab1, , Marginal, Propensity to, consume

Page 119 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET I, , , , Economics 2012 (Outside Delhi), , Maximum marks : 100, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , Answer :, (`), , , , 1. Define microeconomics., [1], Answer : Micro Economics is the branch of Economics, in, which we study the behaviour of individual. Economic units, like a firm, a consumer, an industry etc., , 8. Draw Total Variable Cost, Total Cost, and Total Fixed Cost, curves in a single diagram., [3], , , Time allowed : 3 hours, , , , 2. Give one reason for a shift in demand curve., [1], Answer : A demand curve shifts when there is a change in a, factors other than own price of the product., , yK, ita, b, , , , 3. What is the behaviour of Total Variable Cost, as output, increases?, [1], Answer : When output increases total variable cost also, increases initilly at a decreasing rate. After a point it increases, at increasing rate., , , , C, , 6. Define Production Possibilitiy Curve. Explain why it is, downward sloping from left to right., [3], Answer : A production possibility curve is a hypothetical, representation. Which represents the amount of two different, goods that can be produced with the full use of given resources, in an economy under technological conditions., PP curve slopes downward from left to right because of the fact, that in a combination if we produce more of one good with, limited resources, the less we produce of the another good., , Explicit cost : When producer is hiring labour for his business, than the cost of hiring the labour involves expenditure given, by the producer. Therefore the wages paid to the labour will, be explicit cost., 10. Explain the implications of large number of buyers in a, perfectly competitive market., [3], , , , 7. A consumer consumes only two goods X and Y and is in, equilibrium Price of X falls. Explain the reaction of the, consumer through the Utility Analysis., [3], Answer : The basic condition fulfilling the condition of, consumer’s equilibrium when two commodities according to, utility analysis is :, MU y, MU x, =, Px, Py, If the price of X falls, per rupee marginal utility of X will, increase and becomes more than that of Y. The consumer will, transfer expenditure from Y to X, and will buy more of X., , 9. A producer starts a business by investing his own savings, and hiring the labour. Identify implicit and explicit costs, from this information. Explain., [3], Answer : Implicit cost : The producer is using his own savings, in his business which elsewhere would have earned interest., Therefore the value of the interest on the savings invested is, implicit cost., , , op, , , , 5. What is a price-maker firm?, [1], Answer : A price maker firm is one which participates in, fixing the price of the product., , In the short period the total cost is the sum of total variable, cost (TVC) and total fixed cost (TFC). Total variable cost, initially increases with the increase in output at a decreasing, rate and after that it increases at an increasing rate. Therefore, total cost initially increases at a decreasing rate and after that, increases at an increasing rate., , , , yM, , , , 4. What is the behaviour of Marginal Revenue in a market in, which a firm can sell any quantity of the output it produces, at a given price?, [1], Answer : In the given situation marginal revenue in the, market will always remain the same. This situation known as, perfect competition., , OR, Explain why there are only a few firms in an oligopoly, market., Answer : The implication of large number of buyers in a, perfectly competitive market is that no individual buyer, can affect the market demand for a commodity. In a perfect, competition market, the number of buyers is so large and, each individual buyer purchases only a small portion of the, , • Follow us on Telegram - https://t.me/copymykitab1

Page 120 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1130 | Economics 2012 (Outside Delhi), , total output. As a result, no single buyer can influence the, prevailing market price. He can only decide the quantities of, the commodity to purchase and cannot influence the existing, price., , , , OR, , 12. A consumer buys 10 units of a commodity at a price of 10, per unit. He incurs an expenditure of 200 on buying 20, units. Calculate price elasticity of demand by the percentage, method. Comment upon the shape of demand curve based, on this information., [4], Answer :, , Under oligopoly there are only a few large firms, each produces, a significant portion of the market output. There are some, barriers, such as patents, large capital requirement, control, over raw material, etc. which prevent new firms from entering, into industry. Small firms, in general, do not survive because, of the threat of competition, though they are independent to, exist., , P = 10,, , P1 = 10,, , ∆ P = 10 – 10 = 0,, , Q = 10,, , Total Expenditure ( ), 100, 200, Q1 = 20, , ∆ Q = 20 – 10 = 10, , , , 11. Define an indifference map. Why does an indifference curve, show more utility towards right ? Explain., [4], Answer : Indifference map is a family of collection of, indifference curves that depicts the different levels of, satisfaction and preferences of a consumer. Each indifference, curve in an indifference map depicts a particular level of, satisfaction., , Quantity (units), 10, 20, , Price ( ), 10, 10, , yK, ita, b, , Since the price remains the same the shape of demand curve, will be perfectly elastic. Demand Curve will be parallel to, x-axis., , , , OR, , Explain how changes in price of inputs influence the supply, of a product., Answer : The law of variable proportions shows how the, product will be affected if one factor is variable and other, is fixed. The law explains if the units of a variable factor are, increased the total product will also increase. This law can be, divided into three stages. The behaviour of MP curve will be, as shown in the diagram., III, Stage, , II, Stage, , Y, , C, , op, , yM, , Higher IC denotes higher level of satisfaction and lower IC, denotes lower level of satisfaction., , 13. What does the Law of Variable Proportions show? State the, behaviour of marginal product according to this law. [4], , TP, I, Stage, Out put, B, , The above figure depicts an Indifference Map comprising of, six indifference curves (from IC1 to IC6). As the consumer, moves farther away from IC1 to higher indifference curves the, level of satisfaction derived by the consumer increases. IC6, depicts the highest level of satisfaction. On the other hand,, IC1 depicts the lowest level of satisfaction., An indifference curve is downward sloping from left to right., It implies that a consumer cannot simultaneously have more, of both the goods. An increase in the quantity of one good is, associated with the decrease in the quantity of the other good., This is in accordance with the assumption of monotonic, preferences., , C, , O, , Quantity of variable factor, , X, MP, , (i) In the first stage, the firm starts from the point of origin, to the point where MP curve is maximum. According to, diagram this stage is from point of origin to point B. In this, stage MP curve rises and reaches the maximum., (ii) In the second stage, MP curve ranges from point B (where, it is maximum) to point C (where it is zero) i.e., MP decreases, but is positive., (iii) The third stage goes from point C and goes below X-axis., In this phase, MP decreases and gets negative. Therefore a, firm always operates in the second stage., , • Follow us on Telegram - https://t.me/copymykitab1

Page 121 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Outside Delhi) | 1131, , OR, The increase in the cost of input or factors of production leads, to an increase in the cost of production, which affects the, supply of a commodity., Example : When the prices of factors increases, the cost, of production also increases. In the result, the supply of, commodity will be less at a given price., Similarly, when the cost of inputs and the factors of production, fall the cost falls. The cost of the product will not be changed., In this case producer will get profit. This induces producers, to supply more., , Change in supply. In case of change in supply, supply, supplied increases or decreases due to factors other than, price. These factors may be price of other commodities, state, of technology, cost of production etc. In short, in the case of, change in supply, the supply is either more or less at the same, price., , yK, ita, b, , , , 14. Explain the difference between (i) Inferior goods and, normal goods and (ii) Cardinal utility and ordinal utility., Give example in each case., [4], Answer : (i) Inferior goods are those goods whose demand, falls with the increment in income of consumers. This is, because when income rises the consumers want superior, goods than before. Those goods which are affected negatively, are called inferior goods., Normal goods are those goods whose demand increases with, the increment in income and vice-versa., In short, when income increases the demand of normal goods, increases and the demand of inferior goods decreases., , yM, , (ii) Cardinal Utility means the utility derived from units can, be measured in numerical terms. Such as utility from first, unit consumed is 8, from the another unit consumed is 6 etc., Unit analysis approach explains consumer’s behaviour which, is based on cardinal approach., , In the case of change in supply, a shift takes place in the, supply curve towards right when there is an increase in, supply and towards left when there is a decrease in supply., As shown in the Diagram (ii), when supply curve shifts to, S1S1 supply falls from OQ to OQ1. On the other hand,, when there is a shift in supply curve from SS to S2S2 supply, increases from OQ to OQ2. In both the cases price remains, the same, i.e., OP., , C, , op, , Ordinal Utility approach explains the consumer’s behaviour, in the case of preferences of the combination of two, commodities instead of adopting cardinal utility approach., Indifference curve approach is basically based on ordinal, approach because the fact that indifference curves express the, level of satisfaction of the consumers which may be more or, less. It can not be measured in numerical terms., , , , 15. Explain the difference between “change in quantity, supplied” and “change in supply”. Use diagram., [6], Answer : Change in quantity supplied means the changes, in supply which are caused by the changes in the price of, the good, other things remaining constant. In this case, when, price increases quantity supplied also increases and when price, falls quantity supplied also falls. In this case, a movement, along the supply curve takes place upwards or downwards as, the case may be. As shown below in the diagram, when price, increases from OP to OP2, there is a movement on supply, curve from point E to point F. On the other hand, when, price falls from OP to OP1, there is a movement downward, on the supply curve from point E to point G. When price, increases, Quantity supplied also increases and when price, falls, quantity supplied also falls. This is clear looking at the, diagram (i)., , (ii), Change in supply, , , , 16. Market for a good is in equilibrium. There is simultaneous, “decrease” both in demand and supply but there is no, change in market price. Explain with the help of a schedule, how it is possible., [6], OR, Market for a good is in equilibrium. Explain the chain, of reactions in the market if the price is (i) higher than, equilibrium price and (ii) lower than equilibrium price., , • Follow us on Telegram - https://t.me/copymykitab1

Page 122 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1132 | Economics 2012 (Outside Delhi), , Answer : When the Quantity Supplied and Quantity, demanded are equal then the market price is in equilibrium., According to the demand supply schedule given below, the, equilibrium price is 7 where the quantity of demand and, supply both are 16 units in other situation there is simultaneous, decrement in both supply and demand but there is no change, in market price. Therefore according to the new condition, D1 and S1 is drawn. There is no change in market price,, new demand and supply are equal at 12 units. Therefore the, equilibrium quantity is 16 in the original condition. In the, new situation equilibrium quantity is different but the price is, the same i.e., 7. This has been possible because there is equal, decrease both in demand and supply in the new situation. It, is because of that the equilibrium quantity has fallen from 16, to 12 units., Supply, S1, 4, 6, 12, 16, 20, 24, , op, , yM, , OR, (i) When market price is higher than the equilibrium, price. There is excess supply of goods and producers are not, in a situation to sell all they want to sell at the given price., This leads to competition among producers which leads to, lowering of price which in turn raises the demand and the, supply reduces., , C, , As shown in the diagram, equilibrium price is OP where, equilibrium quantity is OQ. Say, if market price is fixed at, OP1 then there will be disequilibrium between demand and, supply. Demand will be OQ1 and supply OQ2, thus there, will be excess of supply equal to Q1Q2. For bringing equality, between demand and supply, market price should be reduced, from OP1 to OP, so that there is no excess supply., , SECTION B, , 17. Define flow variable., [1], Answer : Flow variable refers to those variables that are, measured over a period of time. These variables have an, element of time attached to them. For example, interest, earned on bank deposits for 1 year, i.e., from October 01,, 2009 to October 30, 2010 is a flow variable., 18. Define consumption goods., [1], Answer : Consumption goods are those goods which are, ready for the consumption in satisfaction of human needs and, wants and are not used in the production of another goods., , , S, 9, 12, 16, 20, 24, 28, , , , D1, 20, 16, 12, 8, 4, 0, , 19. What are time deposits?, [1], Answer : Those bank deposits which cannot be withdrawn, before the expiry time which has already decided. These are, bank deposits, such as fixed deposits., , , Demand, D, 24, 29, 16, 12, 8, 4, , yK, ita, b, , Price, ( ), 5, 6, 7, 8, 9, 10, , There is excess demand and consumers are not able to buy all, they want to buy at the given price. This leads to competition, between consumers which leads to a rise in price. Rise in price, reduces demand while raises supply. As shown in the diagram,, equilibrium price is OP and quantity demanded OQ. If OP1, is fixed as market price (lower than the equilibrium price),, there will be excess demand equal to Q1Q2. Therefore for, bringing about an equality between demand and supply,, market price needs to be increased from OP1 to OP, so that, there is no excess demand., , , , 20. Define a ‘direct tax’., [1], Answer : Direct tax is a tax whose liability cannot be shifted, to any other person. Example- Income tax., , , 21. What is a fixed exchange rate?, [1], Answer : Fixed exchange rate is fixed by the Government/, Central Bank., [3], , , , 22. Find Net Value Added at Market Price :, (i) Depreciation ( ), , 700, , (ii) Output sold (units), , 900, , (iii) Price per unit of output ( ), (ii) When market price is lower than the equilibrium price., , (iv) Closing stock ( ), , • Follow us on Telegram - https://t.me/copymykitab1, , 40, 1,000

Page 123 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Outside Delhi) | 1133, , 800, , (vi) Sales tax ( ), , Autonomous consumption (a) = ` 1,000, Marginal propensity to consume (b) = 0.80, \ Consumption, (C) = a + bY = 1,000 + 0.8 (5,000), = 1,000 + 4,000 = ` 5,000, , 3,000, , (vii) Intermediate cost ( ), 20,000, Answer : Net Value Added at Market Price, = (Units of output sold × Price per unit of output) + Closing, stock – Opening stock – Intermediate cost – Depreciation, = (ii) × (iii) + (iv) – (v) – (vii) – (i), = (900 × 40) + 1,000 – 800 – 20,000 – 700, = 36,000 + 1,000] – 21,500 = 15,500, , , , 23. Explain the ‘standard of deferred payment’ function of, money.**, [3], , OR, Ensuring economic stability is one of the important objectives, of a government budget. Government aims at insulating the, economy from major economic fluctuations (such as inflation,, unemployment, etc.) and the business cycles such as boom,, recession, depression and recovery. It aims at achieving higher, economic growth rate while combating such situations., Through the budget policy, government aims at maintaining, price and employment stability. This aim of economic growth, with stability ensures a smooth and efficient functioning of, an economy., , op, \S=Y–C, , (i) Purchase of furniture by a firm., , C, , (i) Y = C + S, , 27. Should the following be treated as final expenditure or, intermediate expenditure? Give reasons for your answer. [4], , , yM, , yK, ita, b, , , , 24. Outline the steps taken in deriving Consumption Curve, from the Saving Curve. Use diagram,, [3], Answer : Before deriving consumption curve from saving, curve we should know the following :, , 26. Distinguish between revenue receipts and capital receipts in, a government budget. Give example in each case., [3], OR, Explain the role of government budget in bringing economic, stability., Answer : Revenue receipts are those which do not either, create a liability or lead to a reduction in assets, such as tax, revenue., Capital receipts are those funds which government raises, either by incurring liability or by disposing of assets, such as, recovery of loans, loans raised etc., , , (v) Opening stock ( ), , (ii) C = Autonomous consumption + That part of income, which is consumed, as such., When C is positive, saving is negative and when C = Y, S = 0, , (ii) Expenditure on maintenance by a firm is an intermediate, expenditure because it occurs again and again and is not of, permanent nature., 28. Explain the ‘lender of last resort’ function of the central, bank., [4], OR, Explain ‘government’s banker’ function of the central bank., Answer : When commercial banks exhaust all resources to, supplement their funds at the time of liquidity crisis, the, Central bank acts as the lender of the last resort for them., When Commercial banks cannot meet obligations of their, depositors, the Central bank comes to their help. The Central, Bank advances credit against eligible securities subject to, certain terms and conditions. This saves the Commercial banks, from a possible breakdown. This is an important function of, the Central banks in the banking system of a country., , , (iii) On the basis of this information, we can draw, consumption curve and saving curve as shown in the diagram., , (ii) Expenditure on maintenance by a firm., Answer : (i) Purchase of furniture by a firm is a final, expenditure because firm does not invest on the furniture, daily. So it is a kind of investment., , In the diagram, SS is saving curve. At OS level of income, C = Y, therefore S is zero. Beyond that SS becomes positive., When SS is positive consumption is less than income and the, part of consumption curve is MC., , , 25. Find Consumption Expenditure from the following :, National Income = ` 5,000, Autonomous Consumption = ` 1,000, Marginal propensity to consume = 0.80, Answer : National Income, Y = ` 5,000, , ** Answer is not given due to change in syllabus., , [3], , • Follow us on Telegram - https://t.me/copymykitab1

Page 124 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1134 | Economics 2012 (Outside Delhi), , , , yM, , , , , , 30. Find out (i) Gross National Product at Market Price and, (ii) Net Current Transfers to Abroad:, [4], , =, , (−) 65 crore, , 31. Explain the concept of ‘inflationary gap’. Also explain the, role of ‘legal reserves’ in reducing it., , [6], , OR, Explain the concept of ‘deflationary gap’. Also explain the, , , role of ‘margin requirements’ in reducing it., , [6], , Answer : Inflationary Gap : The situation of inflationary gap, arises when equilibrium is established after the stage of full, employment. The excess of aggregate demand over aggregate, supply at the full employment level is inflationary gap. For, bringing equality between AD and AS as the full employment, level AD has to be reduced because AS cannot be increased, since all the resources are fully employed., (i) Legal reserves. Legal reserves refer to a minimum, percentage of deposits commercial banks have to keep as cash, either with themselves or with the central bank. The central, bank has the power to change it. When there is inflationary, gap the central bank can raise the minimum limit of these, reserves so that less funds are available to the bank for lending., This will reduce Aggregate Demand., , 1,000, , (ii) Bank rate. Bank rate is the rate of interest which central, , 100, , bank charges from commercial banks for giving them loans. If, , 1,500, , bank rate is increased, the rate of interest for general public also, , 20, , goes up and this reduces the demand for credit by the public, , C, , (iii) Net national disposable income, (iv) Closing stock, , = 1,535 – 100 – 1,500, , ( crores), , op, , (i) Private final consumption expenditure, (ii) Depreciation, , = GNPMP – (ii) – (iii), , yK, ita, b, , , , , , , , 29. Explain the concept of ‘fiscal deficit’ in a government, budget. What does it indicate?, [4], Answer : Fiscal deficit refers to the excess of total Expenditure, over total receipts during the given fiscal year including, borrowings., • If fiscal deficit is increasing then the amount of debt, repayment is also increasing. The total borrowing of the, government are increasing., • If government requires borrowing then it may borrow from, Reserve Bank of India. When RBI prints new currency to, meet the deficit requirements it increases the money supply, in the economy and creates inflationary pressure., • The debt and financial burden of interest payments on, the revenue expenditure causes a reduction on the capital, expenditure for growth and development of the economy., , = GNPMP – Depreciation – Net national disposable income, , , , OR, The Central bank works as a Commercial bank for the, government. Central bank provides all services and facilities, to the government like ordinary banks provides services to, public. Central Bank manages funds of all government, departmental undertakings and the funds of government., It also provides loans when government needs. It manages, Public debt also. It also accepts the payment of taxes from the, public on the behalf of the government and makes payment, for the cheques issued by government. Deficit financing, through borrowing from RBI., , (v) Government final consumption expenditure, , 300, , (vi) Net indirect tax, , 50, , (vii) Opening stock, , 20, , (viii) Net domestic fixed capital formation, , 110, , (ix) Net exports, , for investment and consumption. Therefore, for controlling, the situation of inflationary gap, bank rate is increased. This, ultimately will lead to the decline in the demand for credit., Decline in the volume of credit as a component of money, supply will have controlling pressure on inflationary forces., , 15, , (x) Net factor income to abroad, Answer : (i) GNPMP, , (−) 10, , = Private final consumption expenditure + Government, final consumption expenditure + (Net domestic fixed capital, formation + Closing stock – Opening stock + Depreciation), + Net exports – Net factor income to abroad., = (i) + (v) + [(viii) + (iv) – (vii) + (ii)] + (ix) – (x), = 1,000 + 300 + (110 + 20 – 20 + 100) + 15 – (−10), = 1,300 + 210 + 15 + 10 = 1,535 crore, (ii) Net Current Transfers to Abroad, , OR, The situation of deflationary gap arises when equilibrium is, established before the stage of full employment of output. In, this case, at the full employment level, aggregate demand is, less than aggregate supply. In the diagram, DEF is deflationary, gap. For removing deflationary gap, the level of aggregate, demand needs to be increased., Margin requirements. Commercial banks never advance, loans to its customers equal to the full value of collateral, or securities. They always keep a margin with them, such, as keeping a margin of 20% and advancing loans equal to, , • Follow us on Telegram - https://t.me/copymykitab1

Page 125 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Outside Delhi) | 1135, , 80% of value of security. The rate of margin is determined, by the Central bank. In the situation of deflationary gap, this, margin will be reduced so that more credit may be advanced, against the security., , total reserves of foreign currency is the stock of foreign, currencies that a country holds at a given time., Exchange rate : The rate for exchanging domestic currency, (say ) into another currency (say US$) is known as exchange, rate. The rate of exchange represents the value of home, currency., For Example if US$ 1 is equal to 60.86 Indian rupees then, exchange rate between American dollar and Indian rupee is, $1 = 60.86., There is an inverse relationship between foreign exchange rate, and demand for foreign exchange. Higher is the exchange, rate, and lower is the demand for foreign exchange and viceversa., , , , yK, ita, b, , 32. Give the meaning of ‘foreign exchange’ and ‘foreign, exchange rate’. Giving reason, explain the relation between, foreign exchange rate and demand for foreign exchange.[6], Answer : Foreign exchange : It means foreign currency. It, also means the stock of foreign currency of a country. The, , The inverse relation between the two can be explained by, an example if price of US dollar in India falls down from, 60.86 to 55 it means now Indian people will pay 55 for, US $1 instead of 60.86. This means American goods have, become cheaper for Indians. When exchange rate decreases,, the demand of foreign currency decreases and vice-versa., , , , Economics 2012 (Outside Delhi), , , yM, , Time allowed : 3 hours, , SET II, Maximum marks : 100, , 11. Define a budget line. When can it shift to the right?, [4], Answer : A budget line graphically shows the many, combinations of two goods which a consumer can buy,, given his entire income and the prices of the two goods. A, SECTION A, budget line, as shown in the diagram is a straight line having, 6. Explain the central problem of ‘how to produce’., [3], a negative slope., Answer : A number of methods are available to a producer, There will be a shift in the budget line towards right when :, for producing a good. First a producer decides how he should, (1) Income of the consumer increases, prices of both the, combined all factors in producing a commodity. A producer, goods given, as shown in Diagram (i)., will use that combination or technique of production where, , , C, , , , op, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous set., , the cost is minimum. This is the central problem of how to, produce in an economy., 9. A farmer takes a farm on rent and carries on farming with, the help of family members. Identify explicit and implicit, , , costs from this information. Explain., , [3], , Answer : (i) In the given example, the farmer carries on, farming with the help of family members. If these members, had worked elsewhere they would have earned wages., Therefore, the imputed expenditure incurred on the wages of, family members is implicit cost., , (i), (2) Price of either of the two commodities or of both of, commodities fall, as shown in Diagram (ii)., , , (ii) The farmer takes the farm on rent. Therefore, the, expenditure incurred on rent (input) is explicit cost., , • Follow us on Telegram - https://t.me/copymykitab1

Page 126 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1136 | Economics 2012 (Outside Delhi), , , , Answer : Given : Autonomous Consumption (a) = 100, MPC (b) = 0.60, Investment (I) = 200, \ Income (Y) = a + bY + I, = 100 + 0.6Y + 200, ⇒ (Y – 0.6) = 100 + 200 = 300, ⇒ Y (0.4) = 300, , ⇒ Y = 300 × 10, 4, ∴ Y = 750, , (ii), , Price ( ) Q (Units), Total Expenditure ( ), 8, 14, 112, 7, 14, 98, P = 8, P1 = 7, Q = 14, Q1 = 14, , 30. Find out (a) National Income and (b) Net National, disposable Income * * :, [4, 2], ( crore), (i) Net imports, (−) 10, , 15,000, , , , , , 3,000, , , , 60, , (v) Change in stocks, , (−) 50, , , (vi) Government final consumption expenditure, , 200, , (vii) Net factor income to abroad, , 20, , (viii) Net current transfers to abroad, , 30, , (ix) Net indirect tax, , 70, , (x) Factor income from abroad, , 10, , Answer : (a) National Income, , = (Units of output sold × Price per unit of output) + Change, in stock – Intermediate costs + Subsidy, = [(i) × (ii)] + (iv) – (v) – (vi), = (2,000 × 20) + (−500) – 15,000 + 3,000, = 40,000 + 3,000 – 15,500 = 27,500, , , , , , , (v) Intermediate costs ( ), , (iv) Consumption of fixed capital, , , , , , , , (−) 500, , , , (iv) Change in stock ( ), , 25. Find National Income from the following :, Autonomous Consumption = 100, Marginal propensity to consume = 0.60, Investment = 200, , 600, , , , 2,000, 2,000, , (vi) Subsidy ( ), Answer : Gross Value Added at Factor Cost, , (iii) Private final consumption expenditure, , , , [3], 20, , (iii) Depreciation ( ), , 100, , , , , , C, , , (ii) Price per unit of output ( ), , (ii) Net domestic fixed capital formation, , , , SECTION B, , 22. Find Gross Value Added at Factor Cost :, , , , yM, , op, , Therefore, the shape of demand curve will be perfectly, inelastic., , (i) Unit of output sold, , , , (ii) It should not be included because it is an intermediate, cost., , , , ∆Q P, 0 8, × = × =0, ∆P Q −1 14, , 27. Giving reason, explain how should the following be treated, while estimating national income :, [4], (i) Expenditure on free services provided by government., (ii) Payment of interest by a government firm., Answer : (i) It should be included because it is a government, final consumption expenditure., , , , ∆ P = 7 – 8 = −1, ∆ Q = 14 – 14 = 0, Ed =, , Therefore National Income is 750., , yK, ita, b, , , , 12. A consumer buys 14 units of a good at a price of 8 per unit., At price 7 per unit he spends 98 on the good. Calculate, price elasticity of demand by the percentage method., Comment upon the shape of demand curve based on this, information., [4], Answer :, , [3], , = Private final consumption expenditure + Government, final consumption expenditure + [Net domestic fixed capital, formation + Change in stocks] – Net imports – Net factor, income to abroad – Net indirect tax, = (iii) + (vi) + [(ii) + (v)] – (i) – (vii) – (ix), = 600 + 200 + [100 + (−50)] – (−10) – 20 – 70, = 800 + 100 – 50 + 10 – 90 = 910 – 140 = 770 crores, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 127 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , SET III, , , , Economics 2012 (Outside Delhi), Time allowed : 3 hours, , , , Maximum marks : 100, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , Opportunity Cost from B to C =, , Opportunity Cost from B to C =, , Amount of Consumer Goods Sacrificed, , =, , Amount of Consumer Goods Sacrificed, Amount of Capital Goods Gained, , (44 − 48), = −4, (2 − 1), , Consumer Goods, , , , , , 6. What is Opportunity Cost? Explain with the help of an example., Amount of Capital Goods Gained, [3], 9. A producer borrows money and starts a business. He himself, Answer : The cost of enjoying more of one good in terms, looks after the business. Identify implicit and explicit costs, of sacrificing the benefit of another good is termed as, from this information. Explain., [3], opportunity cost of the additional unit of the good., Answer : (i) In the given example, the producer is borrowing, money to start his business, So the expenses incurred (interest), on money borrowed is explicit cost., , ita, , b, , (ii) The producer looks after the business himself, therefore, the imputed cost of the efforts of the businessman is implicit, cost because of he had worked somewhere else, he would, have earned some money., , Consumer Goods, (units), 50, 48, 44, 35, 0, , C, , Production, Possibilities, A, B, C, D, E, , op, , Production Possibility Curve, , Capital Goods, (units), 0, 1, 2, 3, 4, , In the above figure, as we move downwards along the PPC, from left to right (i.e. from A to E), we observe that in order, to produce more units of capital goods, the economy must, sacrifice some amount of consumer goods. In other words, it, reflects the opportunity cost of producing one good in terms, of another good. For example, a movement from point B to, point C implies that the economy is diverting resources from, the production of consumer goods to the production of goods., In order to produce one additional unit of capital good,, the economy is sacrificing four units (i.e. 48 – 44 units) of, consumer goods. Thus, the opportunity cost of producing one, additional unit of capital goods is 4 units of consumer goods., , P1X + P2Y ≤ M, This means money spent on good X and good Y should not, exceed income. If there is any change in the budget set it takes, place due to change in money variables fulfilling the basic, condition stated above., 12. A consumer buys 8 units of a good at a price of 7 per unit., When price rises to 8 per unit he buys 7 units. Calculate, price elasticity of demand through the expenditure, approach. Comment upon the shape of demand curve, based on this information.**, [4], Answer :, , , Capital Goods, , yM, , yK, , , , 11. What is budget set? Explain what can lead to change in, budget set., [4], Answer : Budget set is the set of all consumption bundles, of two goods that a consumer can afford at the same prices, of goods which is given. It also shows the income level of, consumers. The budget set changes because of changes in the, price of the goods and changes in the income of consumer., Using M as income, P1 as price of good X. P2 as price of, good Y. A consumer can buy any bundle which he can get by, spending M on good X and good Y in the following manner:, , Q (Units), Price ( ), Total Expenditure ( ), 7, 8, 56, 8, 7, 56, According to expenditure method, since the total expenditure, does not change, the elasticity of demand will be equal to −1., In this case, the demand curve will be a rectangular hyperbola., , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , =, , (44, (2

Page 128 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1138 | Economics 2012 (Outside Delhi), , Answer : (i) Expenditure on education of children by a family, is a final consumption expenditure of households because it, is a payment for the services rendered by the school. It will, be included., , SECTION B, [3], , , , 22. Find out Net Value Added at Factor Cost :, (i) Price per unit of output ( ), 25, (ii) Output sold (units), 1,000, (iii) Excise duty ( ), 5,000, (iv) Depreciation ( ), 1,000, (v) Change in stocks ( ), (−) 500, (vi) Intermediate costs ( ), 7,000, Answer : NVA at Factor Cost, , (ii) Payment of electricity by a school is intermediate cost, of the school and therefore is used for finding out value, added and not directly included in the estimation of national, income., , = 25,000 – 13,500 = 11,500, [3], , , , 25. Find Investment from the following :, National Income = 600, , Y = a + bY + I, , (iii) Rent, , 300, , (iv) Dividend, , 100, , 600 = 150 + (0.7 × 600) + I, , or, , 600 = 150 + 420 + I, , Royalty, , 40, , ita, , op, , C, , , , 27. How should the following be treated while estimating, National Income? Give reasons., [4], , 50, 400, , (ix) Depreciation, , 70, , (x) Net factor income from abroad, (xi) Net indirect tax, Answer : (a) NNPMP, , (−) 10, 60, , = Compensation of employees + Rent + Royalty +, Undistributed profits + Dividend + Corporation tax + Net, factor income earned from abroad + Interest + Net indirect tax, = (ii) + [(iii) + (v)] + [(i) + (iv) + (vii)] + (x) + (viii) + (xi), = 800 + (300 + 40) + (20 + 100 + 50) + (−10) + 400 + 60, , (i) Expenditure on education of children by a family., , = 800 + 340 + 170 – 10 + 460, , (ii) Payment of electricity bill by a school., , = 1,760 crores, , SET I, , , , Economics 2012 (Delhi), , Maximum marks : 100, , , , 2. What is market demand?, [1], Answer : Market demand for a good is the sum total of, demands of all the consumers in a market at a particular price, during a given period of time., , , Time allowed : 3 hours, , (−) 30, , (viii) Interest, , yM, , or, , 800, , yK, , MPC (b) = 0.70, , I = 30, , Compensation of employees, , (vii) Corporation tax, , Autonomous Consumption (a) = 150, , or, , (ii), , 20, , (vi) Net current transfers to abroad, , Marginal propensity to consume = 0.70, Answer : Given, National Income (Y) = 600, , 600 – 570 = I, , Undistributed profits, , (v), , Autonomous Consumption = 150, , or, , (i), , b, , = (25 × 1,000) + (−500) – 7,000 – 1,000 – 5,000, , \, , ( crore), , , , = [(i) + (ii)] + (v) – (vi) – (iv) – (iii), , , , = [Price per unit of output × Output sold (units)] + Change, in stocks – Intermediate costs – Depreciation - Excise duty, , 30. Find out (a) Net National Product at Market Price and (b), (Gross National Disposable Income**) form the following :, [6], , , , SECTION A, 1. Give meaning of an Economy., [1], Answer : It is a system in which goods and services are, produced, sold and bought in a country or region through, which people get their living., , ** Answer is not given due to change in syllabus., , 3. What is the behaviour of average fixed cost as output, increases?, [1], Answer : Average Fixed Cost refers to the fixed cost per unit, of output produced. It is derived by dividing the Total Fixed, Cost by quantity of output produced. That is,, TFC, AFC =, Q, , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , As output increases, the average fixed cost (AFC) falls., , • Follow us on Telegram - https://t.me/copymykitab1

Page 129 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Delhi) | 1139, , , , 5. What is a price taker firm?, [1], Answer : A price taker firm is the firm which does not have any, control over the existing market price and cannot influence, it. A firm in a perfectly competitive market is regarded as a, price taker firm., , , , 7. Given price of a goods, how does a consumer decide as to, how much of the good to buy?, [3], Answer : In order to decide, how much of a good to buy, at a given price, a consumer compares Marginal Utility, (MU) of the good with its price (P). The consumer will be at, equilibrium, when the Marginal Utility of the good will be, equal to the price of the good., i.e., MUx = Px, , , , Implicit cost (Imputed cost) refers to cost of the factor that, a producer neither hires nor purchases. Such costs are not, actually paid by the producers yet are included in the cost, of production. It is a difference between the economic profit, and accounting profit. On the other hand, explicit costs are, those costs that are borne directly by a firm and are paid to, the factors of production. Another way of distinguishing the, two is that while explicit costs are referred to as out-of-pocket, expenses, on the other hand, implicit costs do not result in, any cash outlay from the business. Thus, in the case given, the, rent for the shop is to be paid by the firm, so it is considered as, explicit cost, while, the costs of owner’s service are considered, as implicit costs, as no cash is expended for hiring such services., , yK, ita, b, , If MUx > Px that is, when price is lesser than the Marginal, Utility, then the consumer will buy more of that good., , 9. An individual is both the owner and the manager of a shop, taken on rent. Identify implicit cost and explicit cost from, this information. Explain., [3], Answer : In this case the implicit cost consists of imputed, value of the owner’s (manager’s) services and the explicit cost, consists of the rent paid for the shop., , C, , op, , yM, , On the other hand, if MUx < Px, that is, when price is more, than the Marginal Utility, then the consumer will buy less of, that good. This is reflected in the following diagram., , , , 8. Draw Average Variable Cost, Average Total Cost and, Marginal Cost curves in a single diagram., [3], Answer :, , 10. Explain the implication of large number of sellers in a, perfectly competitive market., [3], , , , , 4. What is the behaviour of average revenue in a market in, which a firm can sell more only by lowering the price? [1], Answer : AR curve slopes downward in a market in which, firm can sell more only by lowering price., , OR, Explain why firms are mutually interdependent in an, oligopoly market., Answer : There exist a large number of buyers and sellers in, a perfectly competitive market. The number of sellers is so, large that no individual firm owns the control over the market, price of a commodity. Due to the large number of sellers in the, market, there exists a perfect and free competition. A firm acts, as a price taker while the price is determined by the ‘invisible, hands of market’, i.e., by ‘demand for’ and ‘supply of’ goods., Thus, we can conclude that under perfectly competitive market,, an individual firm is a price taker and not a price maker., OR, Oligopoly market structure consists of only a few firms., The firms under such a market structure experience a high, degree of mutual interdependence. This is because the price, and the output decisions of the firms are interdependent on, each other. The price and output policy of a firm affects the, policies and profit of another firm. This is because when one, firm lowers (rises) its prices, the rival firms may or may not, follow suit. This makes the demand curve under the oligopoly, market structure indeterminate, thereby makes the firms, mutually interdependent in an oligopoly market., , , , 11. Define an indifference curve. Explain why an indifference, curve is downward sloping from left to right., [4], Answer : Indifference curve is a curve that depicts various, combinations of two goods that provides a consumer with, the same level of satisfaction., , • Follow us on Telegram - https://t.me/copymykitab1

Page 130 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1140 | Economics 2012 (Delhi), , 13. What does the Law of variable Proportions show? State the, behaviour of total product according to this law., [4], , , Y, , OR, Explain how changes in prices of other products influence, the supply of a given product., , X, , In the above figure, IC is the Indifference Curve. Each bundle, on the IC shows those combinations of two goods that yield, the consumer the same level of satisfaction., , Total Expenditure (TE), 84, 72, , op, , Price (P), 7, 6, , yM, , , , 12. When price of good is 7 per unit a consumer buys 12 units., When price falls to 6 per unit he spends 72 on the good., Calculate price elasticity of demand by using the percentage, method. Comment on the likely shape of demand curve, based on this measure of elasticity., [4], Answer :, Quantity (Q), 12, 12, , Behaviour of TP, Stages, , Stage’s Name, , yK, ita, b, , An indifference curve is downward sloping from left to right. It, implies that a consumer cannot simultaneously have more of both, the goods. An increase in the quantity of one good is associated, with the decrease in the quantity of the other good. This is in, accordance with the assumption of monotonic preferences., , Answer : According to this law, if more and more units of, variable factor (labour) are combined with the same quantity, of fixed factor (capital) then, initially the total product will, increase. However, after a certain point of time, total product, will start declining., Assumptions of Law of Variable Proportions, (i) Technology level remains constant, (ii) The units of variable factors are homogeneous, (iii) One of the inputs must be fixed, (vi) No change in the input prices – wages and interests., , II, , III, , Increasing, Returns to a, factor, Diminishing, Returns to a, factor, Negative, Returns to a, factor, , Range, , TP increases at, an increasing, rate till K, Increases at a, decreasing rate, and attains, maximum, TP starts to fall, , From 0 to, point K, From K to, point B, , From B, onwards, , Y, , C, , We know, Price × Quantity = Total Expenditure, or, 6 × Quantity = 72, or, Quantity = 12, Percentage change in quantity, Now, ed =, Percentage change in price, Percentage change in quantity, ∆Q, 12 − 12, =, × 100 =, × 100 = 0, Q, 12, , I, , TP, , X, , Percentage change in price, , ∆P, 6−7, =, ×100 =, ×100 = 14.28, P, 7, , Y, , Substituting the values in the formula of price elasticity of, demand,, so, ed =, , 0, =0, 14.28, , Thus, the demand is perfectly inelastic., As the demand is perfectly inelastic, so the demand curve is a, vertical straight line parallel to the price-axis., , • Follow us on Telegram - https://t.me/copymykitab1, , X

Page 131 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Delhi) | 1141, Y, Fig...(i), , K, , X, , (i) Condition 1 : MR = MC, If price is greater than the MC the firm can increase profit, by increasing the production.In figure (i) At output OQ1,, price is KQ1 and the marginal cost is LQ1, such that KQ1 >, LQ1. Therefore, OQ1 is not the profit maximizing output., This is due to the fact that the firm can increase its profit by, increasing the production of output to OQ2., , yK, ita, b, , OR, The supply of a given good depends on the price of other, goods. In other words, the supply of the good depends, on the price of its substitute goods and on the price of its, complementary goods. The supply of a given good shares, positive (negative) relationship with the price of its substitute, goods (complementary goods)., In case of substitute goods : If the price of the substitute, goods falls, then the consumer will shift their preference, towards that good. As a result, the demand of the good, reduces. Consequently, it is not profitable to supply this, good, thereby the supply of the good reduces. For example,, tea and coffee are substitute goods. If, the price of tea falls,, then the supply of coffee will fall., In Case of complementary goods : If the price of the, complementary goods falls, then the consumer will shift, their preference towards the given good. This will lead to, increase in the demand of the given good. As a result, it, becomes profitable to supply more of the good. Thereby, the, supply of the good increases. For example, petrol and car are, complementary goods. If, the price of petrol falls, then the, supply of cars will increase., , On the other hand, if price is less than MC the firm can, increase profit by lowering the production. At output OQ3,, price is HQ3 and the marginal cost is GQ3, such that HQ3 <, GQ3. Therefore, OQ3 is not the profit maximizing output., This is because the firm can increase its profit by reducing its, output level to OQ2., (ii) Condition 2 : MC curve should be rising at the point of, intersection with MR, Y, , Fig...(ii), , C, , op, , yM, , , , 14. Explain how do the following influence demand for a good:, (i) Rise in income of the consumer., (ii) Fall in prices of the related goods., [6], Answer :, (i) Rise in the income of the consumer : In case of normal, goods, a rise in the income of the consumer will increase the, demand for the good. This increases leads to the outward, parallel shift of the demand curve. However, in case of inferior, goods, a rise in the income of the consumer will decrease, the demand for the good. This decrease leads to the inward, parallel shift of the demand curve., (ii) Fall in prices of the related goods : Let us suppose that, there are two goods X and Y that are perfect substitutes of, each other. A fall in the price of say Good X will lead to fall, in the demand for the Good Y and vice-versa. On the other, hand, if X and Y are complementary goods, then a fall in the, price of Good X will increase the demand for Good Y and, vice-versa., , X, , , , 15. Explain the conditions of a producer’s equilibrium in, terms of marginal cost and marginal revenue. Use diagram., [6], Answer : According to MR-MC approach, the producer attains, equilibrium where the following two conditions are satisfied, (i) Necessary condition of First Order Condition (FOC), MR = MC, or,, , d (TR ) d (TC ), =, dx, dx, , , , (ii) Sufficient condition or Second Order Condition (SOC), MC curve is rising and cuts MR curve from below :, That is, Slope of MC > 0, , d ( MC ), ∴, >0, dx, , The conditions are explained below diagrammatically., , In the diagram, the MC curve cuts the price line (or MR), at two different points i.e., at ‘Z’ and ‘E’. The first order, condition of profit maximization, i.e. Price (or MR = MC) is, fulfilled at both these points., At Point Z : MC is falling and is negatively sloped. Any slight, increase in the output would imply that the price exceeds MC., This implies that the firm can increase profit by increasing the, production., At Point E : MR is equal to MC and also MC is rising. Any, deviation from this point results in a lowering of profit for, the firm., , • Follow us on Telegram - https://t.me/copymykitab1

Page 132 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1142 | Economics 2012 (Delhi), , Thus, both the first order condition (MR = MC) and the, second order condition (MC curve should be rising at the, point of intersection with MR) are satisfied at point E. Hence,, point E is the equilibrium point., , Y, , , , 16. Market for a good is in equilibrium. There is simultaneous, “increase” both in demand and supply of the good. Explain, its effect on market price., [6], OR, Market for a good is in equilibrium. There is simultaneous, “decrease” both in demand and supply of the good., Explain its effect on market price., Answer : The simultaneous increase in demand and supply, affects the equilibrium price and output depending on, the magnitude of the change in demand and supply. The, simultaneous increase in the demand and supply can be, bifurcated into the following three conditions., , Y, , (iii) When Demand Increases but Lesser than the Increase, in Supply, Let the initial equilibrium be at point E1, with the equilibrium, price oP1 and the equilibrium output oq1. Now, suppose, that the demand increase to D2D2 and supply increases to, S2S2. However, the increase in supply is more than that of, the increase in demand. The new demand curve D2D2 and, the new supply curve S2S2 intersect at point E2, with lower, equilibrium price oP2. Thus, when the increase in demand, is less than the increase in supply, the equilibrium price, falls., , yK, ita, b, , (i) When Demand and Supply Increase in the Same, Proportion, , X, , Y, , yM, , X, , op, , According to the diagram, E1 is the initial equilibrium with, equilibrium price P1 and equilibrium output q1., , C, , Now let us suppose, the demand increases to D2D2 and the, supply increases to S2S2 by the same proportion to that of, demand. The new demand curve and the new supply curve, intersect at point E2, which is the new equilibrium point., At the new equilibrium point, new equilibrium output is, o q2, while the equilibrium price remains the same at o P1., Thus, an increase in the demand and the supply by same, proportion leaves the equilibrium price unchanged., (ii) When Demand Increases More than Increase in Supply, The initial demand curve and the initial supply curve intersect, each other at point E1, with initial equilibrium price oP1 and, initial equilibrium output o q1., , X, , OR, The simultaneous decrease in demand and supply affects the, equilibrium price and output depending on the magnitude, of the change in demand and supply. The simultaneous, decrease in the demand and supply can be bifurcated into the, following three conditions., (i) When Demand and Supply Decreases in the Same, Proportion, Y, , Now let us suppose that, demand increases and thereby demand, curve shifts to D2D2. Simultaneously, the supply also rises and, the supply curve shift to S2S2. However, the increase in the, supply is less than the increase in the demand. The new supply, curve and the new demand curve intersect each other at point, E2, with higher equilibrium price o P2 and higher equilibrium, output oq2. Thus, when the demand increases more than the, increase in supply, the equilibrium price rises., , • Follow us on Telegram - https://t.me/copymykitab1, , X

Page 133 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Delhi) | 1143, , Let S1S1 and D1D1 be the initial supply curve and the initial, demand curve respectively. The initial equilibrium is at point, E1, with equilibrium price at oP1 and equilibrium output oq1., Suppose that both demand and supply decrease by the same, proportion. Consequently, the demand curve shifts to D2D2, and the supply curve shifts to S2S2. The new equilibrium, is at point E2 with lower equilibrium output oq2 but the, same equilibrium price oP2. Thus, When both demand and, supply decrease in the same proportion, the equilibrium price, remains the same, but the equilibrium quantity falls., (ii) When Demand Decreases More than the Decrease in, Supply, , Let the initial equilibrium be at point E1, determined by, the intersection of the initial demand curve D1D1 and the, initial supply curve S1S1. The equilibrium price is oP1 and the, equilibrium output is oq1., Now suppose that, the demand decreases but lesser than the, decrease in the supply. The demand curve shifts to D2D2, while the supply curve shifts to S2S2. The new equilibrium, determined by the intersection of D2D2 and S2S2 is at, point E2, where the equilibrium price increases to o P2 and, the equilibrium quantity falls to oq2. Thus, when decrease, in demand is lesser then the decrease in supply then the, equilibrium price rises and equilibrium output falls to oq2., , Y, , SECTION B, , , 17. Define stock variable., [1], Answer : A variable whose value is measured at a point of time, is called stock variable., , C, , (iii) When Decrease in Demand is Lesser then Decrease, in Supply., Y, , 21. Give meanisng of managed floating exchange rate., [1], Answer : A system where the government fix the exchange, rate through central bank, it is called managed floating, exchange rate., , , op, , Now let us suppose that, demand decrease to D2D2 and supply, decreases by lesser proportion to S2S2. Consequently, the new, equilibrium is established at point E2. At the new equilibrium,, the equilibrium price falls to oP2 and equilibrium output, falls to oq2. Thus, when decrease in demand is more than the, decrease in supply, the equilibrium price falls accompanied by, the fall in equilibrium output., , 20. Define a Tax., [1], Answer : Taxes are the compulsory payments made by the, households and the producing sectors to the government. Taxes, as of two types namely, direct taxes (such as income tax) and, indirect taxes (such as, sales tax)., , 22. Calculate Gross Value Added at Factor Cost :, , , , yM, , Let D1D1 and S1S1 be the initial demand curve and the initial, supply curve, respectively. The initial equilibrium is at point, E1 with equilibrium price P1 and equilibrium output q1., , , , 19. What are demand deposits?, [1], Answer : Demand deposits are those deposits which can be, withdrawn immeditely by issuing cheques., , , X, , yK, ita, b, , , , 18. Define capital goods., [1], Answer : Capital goods are those goods which are used in, producing other goods., , [3], , (i), , Units of output sold (units), , 1,000, , (ii), , Price per unit of output ( ), , 30, , (iii), , Depreciation ( ), , (iv), , Intermediate cost ( ), , (v), , Closing stock ( ), , 3,000, , (vi), , Opening stock ( ), , 2,000, , (vii), , Excise ( ), , 2,500, , (viii), , Sales tax ( ), , 3,500, , 1,000, 12,000, , Answer : Gross Value Added at Factor cost (GVAFC) = Total, Value of Sales + Change in Stock – Intermediate Consume, X, , ⇒ GVAFC (or GDPFC) = (1000 × 30)+(3000−2000)−12000−, (3500+2500), or, GVAFC =, , 13,000, , • Follow us on Telegram - https://t.me/copymykitab1

Page 134 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1144 | Economics 2012 (Delhi), , , , 24. Outline the steps taken in deriving saving curve from the, consumption curve. Use diagram., [3], In the diagram C + bY is the consumption curve., The 45º line is the aggregate supply curve., At point E, consumption = income i.e. (Y = C), C represents the autonomous consumption i.e., consumption, at zero level of income. Steps for derivation of supply curve, from consumption curve as follows :, (i) Corresponding to C in the consumption function we, have - C in the saving function. That is, there are negative, savings equal to autonomous consumption at Y = 0. This is, represented by S on the negative axis in the lower panel., (ii) At point E (Y = C). This implies that all the income is, spent on consumption expenditure. Thus, savings equal to, zero. This is shown as S = 0 in lower panel. This point is also, known as the Break-even point., , Answer : C = ` 100, MPC (b) = 0.80, I = ` 50, At Equilibrium,, Y=C+I, , or, Y = C + bY + I Y = C + bY + I, substituting the values,, Y = 100 + 0.8Y + 50, or, 0.2 Y = 150, or, Y = ` 750, ∴ National Income = ` 750, 26. Distinguish between Revenue Expenditure and Capital, Expenditure in a government budget. Give examples. [4], OR, Explain the role of Government budget in allocation of, resources., , , , , 23. Explain the significance of the ‘Store of Value’ function of, money.**, [3], , Answer :, Revenue, Expenditure, Creation, It does not create, of Assets, assets for the government., Reduction These expenditures, of Liabil- do not result in the, ity, reduction of liability., Example, (a) Interest payments, (b) Expenditure on, defence, , yK, ita, b, , Basis, , op, , yM, , Y, , C, , X, , , , , , , , 25. Find national income from the following :, Autonomous consumption, , , , (a) Purchase of shares, (b) Expenditure on, land, building, etc., (c) Grants by the central, government to the state, government, , [3], ` 100, 0.80, ` 50, , In a mixed economy, private enterprises generally have, a tendency to allocate resources to only those areas of, production which are economically feasible and profitable., They are not guided by the service or welfare motive; in, fact they are guided by the price signals. In such a situation,, the government through its budgetary policy reallocates, resources to maintain a balance between the social objectives, of welfare maximization and the economic objective of profit, maximization. For example, the government levies taxes on, socially harmful goods such as tobacco and provides subsidies, for the socially desirable goods such as good grains. Thus, the, government through its budgetary policy allocates resources, in such a manner as to maintain a balance between the profit, motive and the social welfare., 27. Giving reason explain how should the following be treated, in estimating national income :, [6], (i) Expenditure on fertilizers by a farmer., (ii) Purchase a tractor by a farmer., , • Follow us on Telegram - https://t.me/copymykitab1, , , , (iv) SS is the required saving curve., , ** Answer is not given due to change in syllabus., , These expenditure cause, a reduction of the liability of the government., , OR, , (iii) Beyond the break-even point, by connecting points S, and Y we derive the straight upward sloping saving curve., , Marginal propensity to consume, Investment, , Capital, Expenditure, It results in the creation, of assets.

Page 135 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Delhi) | 1145, , Answer : (i) Expenditure on fertilizers by a farmer should, not be included in the estimation of National Income. This, is because it is an intermediate consumption that a farmer, purchases in order to enhance the crop productivity, so that, he can sell more output., (ii) Purchase of tractor by a farmer should be included in the, estimation of National Income. This is because it is a part of, Gross Domestic Capital Formation., , (i) Factor income from abroadt, (ii) Private Final Consumption Expenditure, (iii) Consumption of fixed capital, (iv) Government Final Consumption, Expenditure, (v) Net current transfers to abroad, (vi) Net domestic fixed capital formation, (vii) Net factor income to abroad, (viii) Net imports, (ix) Net indirect tax, (x) Change in stocks, , OR, , C, , op, , yM, , Central bank is the apex bank of all the commercial banks, and financial institutions in the country. It holds the same, relationship with the commercial banks as commercial, banks holds with its customer. The central bank accepts, deposits from the commercial banks and holds it as reserves, for them. The commercial banks are compulsorily required, to hold a part of their deposits as reserves with the central, bank in accordance with the cash reserve ratio (CRR). In, addition to the CRR requirements, the commercial banks, hold reserves with the central bank for clearing their, settlements with other banks and fulfill their requirements, to inter-bank transfers., , , , 29. Explain ‘revenue deficit’ in a Government budget? What, does it indicate?, [6], Answer : Revenue deficit is equal to the excess of total revenue, expenditure over the total revenue receipts. In short :, , , , Revenue deficit = Total revenue expenditure – Total revenue, receipts, Revenue deficit indicates the extra amount of current, expenditure which cannot be met by revenue receipts., This shows the extent of borrowings which are required to, meet this deficit. Revenue expenditure increases without a, corresponding increase in the revenue receipts, revenue deficit, increases and this calls for additional borrowing. This means, liability of the government deficit increases and this calls for, additional borrowing. This means liability of the government, increases., , 50, 200, (−)5, 110, 10, (−) 20, 70, (−) 10, , 31. Explain the concept of ‘excess demand’ in macroeconomics., Also explain the role of open market operations in correcting, it., [6], OR, Explain the concept of ‘deficient demand’ in, macroeconomics. Also explain the role of bank Rate in, correction it., Answer : Concept of “Excess Demand”: When the, equilibrium level of income is determined after the level of, full employment, it is the situation of excess demand. At the, level of full employment, aggregate demand is more than, aggregate supply. It leads to the high prices and it creates, inflationary gap or excess demand., Role of Open Market Operations to Correct Excess Demand :, Open Market Operations refer to the buying and selling of, securities either to the public or to the commercial banks in, an open market. To curtail excess demand the central bank, sells securities in the open market. By selling the securities in, the open market the central bank withdraws excess money, from the economy. This result in a lower Aggregate Demand, in the economy and excess demand is controlled., OR, Concept of “Deficient Demand” : When the equilibrium, level of income is determined before the level of full, employment, it is the situation of deficient demand. In this, , , (ii) Statutory Liquidity Ratio (SLR): It is a ratio of deposits, which banks have to keep with themselves in the form gold, or securities., , 600, , Answer : (a) National Income, = Private final consumption expenditure + Government, consumption expenditure + [Net domestic fixed capital, formation + Change in stock] – Net imports – Net indirect, tax – Net factor income to abroad, = (ii) + (iv) + [(vi) + (x)] – (viii) – (ix) – (vii), = 600 + 200 + [110 + (−10)] - (−20) – 70 – 10, = 600 + 200 + 100 + 20 – 70 – 10, = 920 – 80 = 840 crore, , yK, ita, b, , (i) Cash Reserve Ratio (CRR): It is a part of deposits which, is kept with central bank as reserve in cash by the commercial, banks., , ( crores), 15, , [6], , , , , , 28. Explain the components of Legal Reverse Ratio., [6], OR, Explain ‘bankers’ bank, function of Central bank., Answer : A certain minimum fraction of deposits which is, legally compulsory for the commercial banks to keep in the, form of liquid assets, is known as legal reserve ratio. There are, two components of this ratio, those are as follows :, , 30. Find out (a) National income and (b) Net National, Disposable Income** :, , ** Answer is not given due to change in syllabus., , • Follow us on Telegram - https://t.me/copymykitab1

Page 136 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1146 | Economics 2012 (Delhi), , Role of Bank Rate to Correct Deficient Demand : Bank rate, refers to the rate at which the central bank provides loans to the, commercial banks. Thus to curtail deficit demand, the central, bank lowers the bank rate. This implies that cost of borrowing, for the commercial banks from the central bank reduces. The, commercial banks in turn reduce the lending rate (the rate at, which they provide loans) for their customers. This reduction, in the lending rate raises the borrowing capacity of the, public, thereby, encourages the demand for loans and credit., Consequently, the level of Aggregate Demand in the economy, increases and deficit demand is corrected., , , , Autonomous transactions, are also called ‘above the, line items’ in BOP., Such transactions are independent of the BOP status, of a country., , Accommodating Transactions, Accommodating, transactions refer to those international economic transactions, that are undertaken to correct the disequilibrium in the, autonomous items., Accommodating items are, also called ‘below the line, items’ in BOP, Such transactions depend on, the BOP status of a country, as they are compensating, short-term capital transactions that are undertaken to, correct the disequilibrium in, the autonomous items., , When autonomous foreign exchange payments are more than, autonomous foreign exchange receipts, this excess is called, deficit in balance of payments., , SET II, , yM, , , , Economics 2012 (Delhi), , Autonomous Transactions, Autonomous transactions, refer to those international, economic transactions that, are undertaken with the sole, motive of earning profit., , yK, ita, , 32. Explain the distinction between autonomous and, accommodating transactions in balance of payments. Also, explain the concept of balance of payments ‘deficit’ in this, context., [6], , Answer :, , b, , situation aggregate demand is less than aggregate supply., It leads to the less production, rising unemployment level., All the resources will not be full employed at this level. This, condition creates deflationary gap or deficient demand., , , , Time allowed : 3 hours, , Maximum marks : 100, , SECTION A, , , , C, , 6. What is ‘Marginal Rate of Transformation’? Explain with, the help of an example., [3], Answer : Marginal Rate of Transformation (MRT) refers to, the amount of good Y that must be sacrificed in order to gain, an additional unit of X, with full and efficient utilization of, available resources. It is also known as marginal opportunity, cost. MRT indicates the slope of PPC., , PPC =, , Consumer Goods, , op, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , ∆Y Amount of Good Y sacrificed, =, ∆X, Amount of Good X gained, Production Possibility Curve, , Production, Possibilities, A, B, C, D, E, , Consumer Goods, (units), 50, 48, 44, 35, 0, , Capital Goods, (units), 0, 1, 2, 3, 4, , Capital Goods, , In the above figure, AE represents the PPC for good X and, good Y. Suppose, the initial production point in B, where, 1 unit of good X and 48 units of good Y are produced. To, produce one additional unit of good X, 4 units of good Y, must be sacrificed (point C). Thus, at point C, the MRT is 4, units of good Y., ∆Y 44 − 48, MRTat point C =, =, = −4, ∆X, 2 −1, Similarly, at point D, the MRT is 9 units of good Y., , • Follow us on Telegram - https://t.me/copymykitab1

Page 137 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2012 (Delhi) | 1147, , SECTION B, 22. Calculate Net Value Added at Factor Cost :, S.No., (i), (ii), (iii), (iv), (v), (vi), (vii), , , , 9. A producer borrows money and opens a shop. The shop, premises is owned by him. Identify the implicit and explicit, costs from this information. Explain., [4], Answer : In this case the implicit cost will consist of, (i) Imputed rent of the shop and, (ii) Imputed value of his own services, , Amount (in ), Consumption of fixed capital ( ) 600, 400, Import duty ( ), Output sold (units), 2,000, 10, Price per unit of output ( ), (−) 50, Net change in stock ( ), 10,000, Intermediate cost ( ), 500, Subsidy ( ), , Answer : NVAFC = Sales + Change in Stock – Intermediate, Cost – Consumption of Fixed Capital – Net Indirect Taxes, Sales = Quantity × Price, = 2,000 × 10 = 20,000, Net Indirect taxes = Taxes – subsidy, = Import duty – subsidy, = 400 – 500 = (−100), ∴ NVAFC = 20,000 + (−50) – 10,000 – 600 (−100), = 20,000 – 50 – 10,000 – 600 + 100, = 9,450 crore, Items, , , , 12. A consumer buys 10 units of a good at a price of 9 per, unit. At price of 10 per unit he buys 9 units. What is, price elasticity of demand. Use expenditure approach., Comment on the likely shape of demand curve on the, basis of this measure of elasticity.**, [6], , ** Answer is not given due to change in syllabus., , National Income, , 500, , Autonomous Consumption, , 100, , Marginal propensity to Consume, , 0.75, , Answer : At equilibrium, Y=C+I, or, Y = C + bY + I where, b = MPC, 500=100 + (0.75 × 500) + I, 500 – 100 – 375 = I, Investment = 25, , , , 27. Giving reason explain how should the following be treated, in estimating national income :, (i) Payment of bonus by a firm, (ii) Payment of interest on a loan taken by an employee, from the employer., [6], Answer : (i) Payment of bonus by a firm :, Payment of bonus by a firm should be included in the, national income because it is a part of the compensation of, employees (while estimating National Income by Income, Method)., (ii) Payment of interest on loan taken by employee from, the employer :, Payment of interest on loan taken by employee from the, employer should be included in the national income because, it is a part of operating surplus (while estimating National, Income by Income Method)., , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , The IC is convex to the origin because of the diminishing, MRS. As the consumer consumes more and more of, one good, the marginal utility of the good falls. On the, other hand, the marginal utility of the good which is, sacrificed rises. In other words, the consumer is willing to, sacrifice less and less for each additional unit of the other, good consumed. Thus, as we move down the IC, MRS, diminishes. This suggests the convex shape of indifference, curve., , Amount (`), , ∴ , , op, , C, ∆x2, =, ∆x1, , [4], , , , 25. Find ‘Investment’ from the following :, , yM, , , , 11. Define Marginal Rate of Substitution. Explain why is an, indifference curve convex?, [4], Answer : The Marginal Rate of Substitution (MRS) is defined, as the amount of good that a consumer is ready to forego or, substitute for an additional unit of good 1. In other words,, it represents the cost of good 1 that the consumer is ready to, pay in terms of the other good. The MRS between two goods, is given by the absolute value of the ratio of change in the, consumption of good 2 to the change in the consumption of, good 1. That is,, MRS1,2, , Items, , yK, ita, b, , The explicit cost will consist of interest payment made on, the borrowed money. Implicit cost (Imputed cost) refers to, cost of the factor that a firm neither hires nor purchases. It is, not actually paid by the producers but is included in the cost, of production. It is estimated as the difference between the, economic profit and accounting profit. On the other hand,, explicit costs are those costs that are borne directly by the firm, and paid to the factors of production., , [3], , , , ∆Y 35 − 44, =, = −9, ∆X, 3−2, Thus, as we move down the PPC, MRT (or the opportunity, cost) increases. This increasing MRT indicates the concave, shape of PPC., MRTat point D =

Page 138 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1148 | Economics 2012 (Delhi), , 60, 400, [6], , , , , , , , (x) Undistributed profits, (xi) Interest, , Answer : (a) Net National Product at Market Price, = Wages and salaries + social security contributions by, employers + Rent + Interest + Corporation tax + Dividend +, Undistributed profits + Net indirect tax – Net factor income, to abroad, = (ii) + (iv) + (vi) + (xi) + (viii) + (ix) + (x) + (v) – (iii), = 1,000 + 100 + 300 + 400 + 50 + 200 + 60 + 80 – (−20), = 2,210 crore, , , , , , , , , , , , , , , , , , , , , , 30. Find out (a) Net National Product at Market Price and (b), Gross National Disposable Income**., ( in crore), (i) Net current transfers from abroad, (−) 10, (ii) Wages and Salaries, 1,000, (iii) Net factor income to abroad, (−) 20, (iv) Social security contributions by employers, 100, (v) Net Indirect Tax, 80, (vi) Rent, 300, (vii) Consumption of fixed capital, 120, (viii) Corporation Tax, 50, (ix) Dividend, 200, , Maximum marks : 100, , , , those costs that are borne directly by a firm and are paid to, the factors of production. Another way of distinguishing the, two is that while explicit costs are referred to as out-of-pocket, expenses, on the other hand, implicit costs do not result in, any cash outlay from the business. Thus, in the case given,, the salary is to be paid to the manager, so it is considered as, explicit cost, while, the costs of investing (interest) producer’s, saving is considered as implicit costs, as no cash is expended, for borrowings these funds (savings)., , yK, ita, b, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , C, , op, , yM, , , , 6. State reasons why does an economic problem arise?, [3], Answer : The following are the main causes due to which, every economy faces economic problem., (i) Unlimited human wants : Human wants, never-ends and they keep on arising. The unlimited human, wants require unlimited resources to get fulfilled. But no, matter how well an economy is endowed with resources, it, will fall short to fulfill every wants., (ii) Limited availability of resources : Every economy has, unlimited wants but its endowment of resources remains, scarce to fulfill these unlimited wants., (iii) Alternative uses : The scarce available resources have, alternative uses. This implies resources can be allocated to the, production of different goods and services. The allocation of, resources to one use involves a cost in terms of sacrifice of the, other possible uses. Therefore, every economy has to decide, the allocation of its resources in the best possible manner by, analyzing the opportunity cost., , 11. Define an indifference map. Explain why an indifference, curve to the right shows higher utility level., [4], Answer : Indifference map is a family or collection of, indifference curves that depicts the different levels of satisfaction, and preferences of a consumer. Each indifference curve in an, indifference map depicts a particular level of satisfaction., , , Time allowed : 3 hours, , SET III, , , , Economics 2012 (Delhi), , Higher IC denotes higher level of satisfaction and lower IC, denotes lower level of satisfaction., Y, Good 2, (units), Highest level of, satisfaction, , , , 9. A producer invests his own savings in starting a business, and employs a manager to look after it. Identify implicit, and explicit costs from his information. Explain., [4], Answer : In this implicit cost consists of imputed value of, the interest on the saving and the explicit cost consists of the, salary paid to the manager., Implicit cost (Imputed cost) refers to cost of the factor that, a producer neither hires nor purchases. Such costs are not, actually paid by the producers yet are included in the cost, of production. It is a difference between the economic profit, and accounting profit. On the other hand, explicit costs are, , Lowest level of, satisfaction, , IC6, IC1, , 0, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1, , IC2, , IC3, , IC4, , IC5, Good 1, (units), , X

Page 139 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2012 (Delhi) | 1149, , SECTION B, 22. Find Net Value Added at Market Price, , Percentage change in quantity, Percentage change in price, , op, y, , Percentage change in quantity, ∆Q, 24 − 20, =, × 100 =, ×100 = 20%, Q, 20, , ∆P, 5−5, ×100 =, ×100 = 0, P, 20, Substituting the values in the formula of price elasticity of, demand,, , 20, =∞, 0, , (vi), , Depreciation ( ), , 1,000, , (vii), , Intermediate Cost ( ), , 8,000, , , , 25. Find consumption expenditure from the following :, Amount, , b, , Items, Autonomous consumption, , [4], , ita, , 100, 0.70, , Marginal propensity to consume, National Income, , 1,000, , Answer : Given :, C = 100, MPC (b) = 0.70, Y = 1,000, To Calculate : Consumption Expenditure, Consumption Expenditure (C) = C + bY = 100 + 0.70 ×, 1,000 = 800, , 27. Comparing reason explain how should the following be, treated in estimating National Income :, (i) Interest paid by banks on deposits by individuals., (ii) National debt interest., [6], Answer : (i) Interest is a factor payment by a producer, so,, interest paid by banks on deposits by individuals is included, in the estimation of National Income., (ii) National debt interest is a transfer payment and this loan, is taken for consumption purposes. So, it is not included in, the estimation of National Income., , , ed =, , C, , Percentage change in price =, , Amount, 800, 20, 1,600, 400, (−) 500, , Answer : Net Value Added at Market Prices (NDPMP) =, Total Value of Sales + Change in Stock – Intermediate, Consumption – Depreciation, NDPMP = (800 × 20) + (−500) – 8000 – 1000, or, NDPMP = 6,500, , M, , Now, ed =, , Items, Output sold (units), Price per unit of output ( ), Excise ( ), Import duty ( ), Net change in stocks ( ), , yK, , Price (P), Quantity (Q) Total Expenditure (TE), 5, 20, 100, 5, 24, 120, We know,, Price × Quantity = Total Expenditure, or, Price × 24 = 120, or, Price = 5, , [3], , , , S. No., (i), (ii), (iii), (iv), (v), , , , The above figure depicts an Indifference Map comprising of, six indifference curves (from IC1 to IC6). As the consumer, moves farther away from IC1 to higher indifference curves the, level of satisfaction derived by the consumer increases. IC6, depicts the highest level of satisfaction. On the other hand,, IC1 depicts the lowest level of satisfaction., An indifference curve is downward sloping from left to right., It implies that a consumer cannot simultaneously have more, of both the goods. An increase in the quantity of one good is, associated with the decrease in the quantity of the other good., This is in accordance with the assumption of monotonic, preferences & their is an inverse relation between good 1 & 2., 12. A consumer buys 20 units of a good at a price of 5 per unit., He incurs an expenditure of 20 when he buys 24 units., Calculate price elasticity of demand using the percentage, method. Comment upon the likely shape of demand curve, based on this information., [6], Answer :, , Thus, the demand is perfectly elastic., As the demand is perfectly elastic, so the demand curve is a, horizontal straight line parallel to the quantity-axis., , 30. Find out (a) Gross National Product at Market Price and, (b) Net Current Transfers from abroad :, ( crore), (i) Net Indirect Tax, 35, (ii) Private final consumption expenditure, 500, (iii) Net national disposable income, 750, (iv) Closing stock, 10, (v) Government final consumption expenditure, 150, (vi) Net domestic fixed capital formation, 100, (vii) Net factor income to abroad, (−) 15, , , , , , , , , Y, , Hence, the likely shape of demand curve is Parallel to the, X-axis, i.e., perfectly elastic., , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , , , , , X

Page 140 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1150 | Economics 2012 (Delhi), , 20, , = (ii) + (v) + [(vi) + (iv) – (ix) + (x)] – (viii) – (vii), , (ix) Opening stock, , 10, , = 500 + 150 + (100 + 10 – 10 + 50) – 20 – (−15), , (x) Consumption of fixed capital, , 50, [6], , = 650 + 150 – 20 + 15, , , , , , , , , , (viii) Net imports, , Answer : (a) GNPMP, , (b) Net Current Transfer from abroad, = Net national disposable income – (GNPMP – Consumption, of fixed capital), = 750 – 795 + 50, = 800 – 795 = ` 5 crore, , C, , op, , yM, , yK, ita, b, , = Private final consumption expenditure + Government final, consumption expenditure + (net domestic capital formation, + Closing stock – Opening stock + Consumption of fixed, capital – Net imports – Net factor income to abroad, , = 815 – 20 = ` 795 crore, , • Follow us on Telegram - https://t.me/copymykitab1

Page 141 :
Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2011 (Outside Delhi), , SET I, , , , Downloaded from CopyMyKitab, , Maximum marks : 100, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , SECTION A, 1. What is a planned economy?, [1], Answer : An economic system in which economic decisions, are made by the state or government rather than by the, interaction between consumers and business. Unlike a market, economy in which production decisions are made by private, citizens and business owners, a centrally planned economy, seeks to control what is produced and how resources are, distributed and used., , yK, ita, b, , , , 2. When a firm is called price maker?, [1], Answer : A firm is said to be a price maker when it has the, total freedom to fix the price level at which it maximizes his, profit., , Answer : The number of people of working age without a job, is usually expressed as an unemployment rate, a percentage, of the workforce. Due to the presence of unemployment,, the PPC of an economy would be affected adversely. This, is because PPC depicts the amount of two goods that an, economy can produce employing all its resources. Due to, unemployment the economy will not operate on its full, potential, and economy will operate on less efficient PPC., In the figure below, AB represents the PPC of an economy, which is associated with the full employment of the, resources. However, due to the presence of unemployment,, the economy is operating at point U which is below the, PPC. The point U depicts that the economy is operating, below its full potential or efficiency level., , , , 4. What is ‘decrease’ in supply?, [1], Answer : When a negative change in any of the determinants, of suppy, except the price of the commodity, leads to the, reduction in the supply of the commodity, it is called deoreare, in suppy. Decrease in suppy is depicted by leftward shift in, the supply curve., , 7. When price of a good is 13 per unit, the consumer buys, 11 units of that good. When price rises to 15 per unit,, the consumer continues to buy 11 units. Calculate price, elasticity of demand., [3], Answer : Given,, P, 13, 15, , , , 5. Define Production Function., [1], Answer : The technical and technological relationship, between inputs and output is known as production function., In other words, the physical relationship between inputs and, outputs under given technology is called production function., Algebraically, a production function can be represented as :, Qx = f (L, K), Where,, L represents units of labour used (input one), K represents units of capital used (input two), Qx represents units of output x produced (output), , X, , , , C, , op, , yM, , , , 3. Define a budget line., [1], Answer : A graphical depiction of the various combinations of, two selected products that a consumer can afford at specified, prices for the products given their particular income level. When, a typical business is analyzing a two product budget line, the, amounts of the first product are plotted on the horizontal X axis, and the amounts of the second product are plotted on the vertical, Y axis. Algebraically, a budget line is represented as follows., P1x1 + P2x2 = M, Where,, P1x1 represents the amount spent on good 1, P2x2 represents the amount spent on good 2, M represents the income of the consumer, , Y, , ∆ P = (15 – 13) = 2 and,, ∆ Q = (11 – 11) = 0, Now,, Ed =, Substituting the values, , ∆Q, P, ×, ∆P, Q, , 0 13, ×, =0, 2 11, Hence, demand is Perfectly Inelastic., Ed =, , , , 8. Distinguish between explicit cost and implicit cost and give, examples., [3], , , , 6. How is production possibility curve affected by, unemployment in the economy? Explain., [3], , Q, 11, 11, , • Follow us on Telegram - https://t.me/copymykitab1

Page 142 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1152 | Economics 2011 (Outside Delhi), , Explicit Costs, , Implicit Costs, , These refer to the, expenditure, incurred, or payments made by a, firm to various factors of, production and also nonfactors of production., , Record in, These costs are recorded, books of, in the books of account., account, Other name These costs are also, called as ‘out of the, pocket expenses’., Cash outlay In case of explicit cost, from busithere is an cash outlay, ness, from the business., , These costs are not, recorded in the books, of account., These costs are also, called imputed costs., , In case of implicit, cost there is no cash, outlay from the, business., For example, payments For example,, in the form of wages for rent of his own land, labour, rent for building interest on his own, capital, and salary for, his own service as, manager etc., , 10. Explain the implications of the feature ‘large number of, buyers’ in a perfectly competitive market., [4], OR, Explain the implications of the feature ‘homogeneous, products’ in a perfectly competitive market., Answer : The implication of large number of buyers in a, perfectly competitive market is that no individual buyer, can affect the market price for a commodity. In a perfect, competetive market the number of buyers is so large and, each individual buyer purchases only a small portion of the, total output. As a result, no single buyer can influence the, prevailing market price. He can only decide the quantities of the, commodity to purchase and cannot influence the existing price., OR, The implication of the existence of homogeneous products, in a perfectly competitive market is that there exists uniform, price in the market. The output of all the sellers in the market, are similar and identical to each other in terms of quantity,, quality, colour, size, features, etc. This indicates that the buyers, are indifferent between the products of the different firms., In such a situation, if any single firm attempts to change a, price that is slightly higher than the market price, then all its, consumers will shift their price towards the products of other, firms and the firm that raised the price will lose its consumers., Thus, the existence of homogeneous products enforces the, uniformity of price charged by different firms., , yK, ita, b, , Example, , These refers to the, opportunity cost, of the firm’s own, resources., , yM, , C, , op, , , , 9. Draw in a single diagram the average revenue and marginal, revenue curves of a firm which can sell any quantity of the, good at a given price. Explain., [4], Answer : It is under perfect competition, where a firm can sell, any quantity of a good at a given price. The average revenue, and marginal revenue curve for a perfectly competitive firm, are drawn as follows :, , 11. A consumer consumes only two goods X and Y. At a, consumption level of these two goods, he finds that the, ratio of marginal utility to price in case of X is higher than, in case of Y. Explain the reaction of the consumer., [4], Answer : A consumer consuming only two commodities X, and Y attains equilibrium at the level where,, , , Basis of, Difference, Meaning, , to the output-axis. This represents that the price and MR, remain constant at all levels of output., , , , Answer :, , Marginal Utility of a Rupee spent on commodity X = Marginal, Utility of a Rupee spent on commodity Y = Marginal Utility, of Money., or,, , MU x MU y, =, = MU m, Px, Py, , However, when the ratio of marginal utility to price of X, , , Under perfect competitions, the AR curve and the MR curve, coincide with each other. The AR curve is also known as the, price line or the demand curve. Thus, it can be said that the, demand, AR and the MR curves all are equal to each other., They are drawn as a horizontal straight line, which is parallel, ,  MU, , MU yx  MU y , , , >, >, higher than that of Y, that that, is, is,if, if  that is,if, Pyx  then,, Py the,  Px, , consumer rearranges his consumption combination such, that the equality is again restored. He would increase, his consumption of commodity X. With the increase in, the consumption of commodity X, marginal utility of, X fails. As a result, the ratio of marginal utility to price, of X falls. The consumer would continue increasing the, consumption of commodity X till the equality between, , • Follow us on Telegram - https://t.me/copymykitab1, , x

Page 143 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Outside Delhi) | 1153, , , , 12. Explain how rise in income of a consumer affects the, demand of a good. Give examples., [6], Answer : The effect of increase in income of a consumer on, the demand of a good depends on the type of the good., Normal Goods : The demand for normal goods share a positive, relationship with a consumer’s income. That is, as income of, the consumer increases, the demand for normal goods also, increases. For example, shirt is a normal good. As the income, of the consumer increases, the demand for shirts increases., Y, , consumer, the demand for the inferior good (or Giffen good), falls and the demand curve shifts parallel inwards to D"D"., The consumer purchases lesser units of the good (OQ2) at the, same price OP1.£, 13. Define marginal cost. Explain its relation with average cost., [6], OR, Define variable cost. Explain the behaviour of total variable, cost as output increases., Answer : Marginal cost is defined as the additional cost to the, Total Cost, which is incurred for producing one additional, unit of output. Algebraically,, MCn = TCn - TCn−1, , , the ratio of marginal utility to price in case of X and Y is, again reached. That is, in other words, when he reaches, point E, where the equilibrium is restored by the equality, between the marginal Utilities of each commodities., , Average Cost is defined as per unit cost of producing output., It is derived by dividing total cost by quantity of output, produced. That is,, , AC =, , TC, Q, , yK, ita, b, , With the increase in output, both AC and MC fall. However,, MC falls faster than AC and the MC curve remains below the, AC curve. MC reaches its minimum point faster than AC and, starts rising. When MC starts rising AC is still falling. MC, curve cuts the AC curve at its minimum. When AC starts, rising, it rises at a slower rate and AC curve remains below, MC curve., Relationship between AC and MC is explained with the help, of the following diagram., , yM, , X, , C, , op, , In the figure, initially at the price OP1, consumer is, consuming OQ1 units of good. With an increase in the, income of the consumer, the demand for the good increases, and the demand curve shifts parallel outwards to D'D'. The, consumer purchases more units of the good (OQ2) at the, same price OP1., Inferior Goods and Giffen Goods : The demand for, the inferior goods and the giffen goods share a negative, relationship with a consumer’s income. That is, as the income, increases, the demand for these goods falls., Y, , Relationship between AC and MC :, When AC is falling, MC falls at a faster rate; and MC remains, below AC curve., When AC is rising, MC rises at a faster rate; and MC remains, above AC curve., When AC is at its minimum point, MC is equal to AC., MC curve cuts AC curve at its minimum point., OR, , X, , Variable costs refer to the costs which are incurred by a firm, on the variable inputs for production., In the figure, initially at the price OP1, consumer is consuming, OQ1 units of good. With an increase in the income of the, , The variable costs are positive function of output i.e., as, output increases, variable costs also increases and vice-versa., , • Follow us on Telegram - https://t.me/copymykitab1

Page 144 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1154 | Economics 2011 (Outside Delhi), , That is, as more and more units of variable factor (such as, labour) are employed to produce higher units of output, the, variable costs rises. Initially, with the increase in output, total, variable cost increasing at a diminishing rate. With further, increase in output, the total variable cost starts increasing at, an increasing rate., Y, , (i) Condition 1 : MR = MC, If price is greater than MC, then a firm can increase profit by, increasing the production. At output OQ1, price is KQ1 and, the marginal cost is LQ1, such that KQ1 > LQ1. Therefore,, OQ1 is not the profit maximizing output. This is due to the, fact that the firm can increase its profit by increasing the, production of output to OQ2., On the other hand, if price is less than MC the firm can, increase profit by lowering the production. At output OQ3, is not the profit maximizing output. This is because the firm, can increase its profit by reducing its output level to OQ2., (ii) Condition 2 : MC curve should be rising at the point of, intersection with MR, Y, , X, , yK, ita, b, , ∴, , C, , op, , yM, , , , In the figure above, output is shown on X-axis and total, variable cost (TVC) on the Y-axis. With the increase in, output, total variable cost increases at a diminishing rate till, point Z. Beyond point Z, with further increase in output, the, total variable cost increase with increasing rate., 14. What is producer’s equilibrium? Explain the conditions, of producer’s equilibrium through the ‘marginal cost and, marginal revenue’ approach. Use diagram., [6], Answer : According to MR-MC approach, a producer/firm, attains equilibrium where the following two conditions are, satisfied., (i) Necessary Condition or First Order Condition (FOC), MR = MC, d( TR ) d( TC ), or,, =, dx, dx, (ii) Sufficient Condition or Second Order Condition (SOC), MC curve is rising and cuts MR curve from below, That is, Slope of MC > 0, d (MC), >0, dx, The conditions are explained below diagrammatically,, Y, , X, , 1, , In the diagram, the MC curves cuts the price line (or MR), at two different points i.e., at ‘Z’ and ‘E’. The first order, condition of profit maximization, i.e., Price (or MR = MC) is, fulfilled at both these points., At point Z :, MC is falling and is negatively sloped. Any slight increase, in the output would imply that the price exceeds MC. This, implies that the firm can increase profit by increasing the, production., At point E :, MR is equal to MC and also MC is rising. Any deviation from, this point results in a lowering of profit for the firm., Thus, both the first order condition (MR = MC) and the, second order condition (MC curve should be rising at the, point of intersection with MR) are satisfied at point E. Hence,, point E is the equilibrium point., , 15. Explain the conditions of consumer’s equilibrium with the, help of the Indifference Curve Analysis., [6], Answer : According to this approach, a consumer attains, equilibrium at the point where the budget line is tangent to, the indifference curve. This optimum point is characterized, by the following inequality., , , K, , -dy, X, , dx, , • Follow us on Telegram - https://t.me/copymykitab1, , | MRS |, , P1, P2

Page 145 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Outside Delhi) | 1155, , That is, Absolute value of the slope of the IC = Absolute value, of the slope of the budget line, Y, , X, , In the above figure, the initial demand curve is D1D1 and the, initial supply curve is S1S1. The initial equilibrium is at point, E1, where the equilibrium price is OP2 and the equilibrium, output is Oq1., Now, with the increase in market supply (say, due to a fall in, the input prices), the supply curve parallel rightwards to S2S2, from S1S1. Holding demand unchanged, at the initial price, OP2, there exist excess supply equivalent to (Oq1' – Oq'1), units of output. This excess supply will increase competition, among the producers and consequently they would be willing, to sell their output at a lower price. The price will continue, to fall until it reaches OP1, where, the new supply curve S2S2, intersects the initial demand D1D1. The new equilibrium is, established at point E2, where the equilibrium output is Oq2, and the equilibrium price is OP1., At the new equilibrium E2,, Equilibrium output has increased from Oq1 to Oq2, , yK, ita, b, , In the figure given above, point E depicts consumer, equilibrium. At this point, the budget line is tangent to the, indifference curve. The optimum bundle is denoted by (x1*, x2*)., This point is the optimum or the best possible point., All other points lying on the budget line (such as point B and, point C) are inferior to (x1*, x2*) as they lie on a lower IC., Thus, the consumer can rearrange his consumption and again, reach equilibrium where the marginal rate of substitution is, equal to the price ratio., At points such as B, MRS is greater than the price ratio, , Increase in Supply, , P, (i.e., MRS > 1 ). In this case, the consumer would give, P2, , yM, , up some amount of good 2 to increase the consumption of, good 1 such that the equality between price ratio and MRS, is again reached., On the other hand, at point such as C, MRS is less than price, , P2, , op, , ratio (i.e., MRS < P1 ). In this case the consumer would, , , , C, , give up some amount of good 1 to increase the consumption, of good 2 so that MRS again equals price ratio., 16. Market for a good is in equilibrium. There is ‘increase’, in supply of the good. Explain the chain of effects of this, change. Use diagram., [6], OR, Distinguish between ‘non-collusive’ ad ‘collusive’ oligopoly., Explain the following features of oligopoly :, (i) Few firms, (ii) Non-price competition, Answer : Market equilibrium is a state or a position where, market demand equals market supply. Now, if the market, supply increases, then it results in a change in the equilibrium., Y, , Equilibrium price has fallen from OP2 to OP1, Hence, an increase in supply with demand remaining, constant, results in rise in the equilibrium quantity and a fall, in equilibrium price., OR, Collusive Oligopoly, Under this form of oligopoly, firms might decide to, collude together and not to, compete with each other., Under collusive oligopoly,, the firms would behave as, a single monopoly with an, aim of maximizing their, collective profits rather, than their individual profits., , Non-collusive Oligopoly, In this form of oligopoly, firms, do not collude and instead, compete with each other., Under non-collusive oligopoly, each firm aims at maximizing its own profits and decides, how much quantity to produce assuming that the other, firms would not change their, quantity supplied., , Few Large Firms : There exists few but large and dominating, firms. These firms account for majority of market supply,, thereby control the market price and quantity of the output., Non-Price Competition : In an oligopoly market structure,, all the firms take their price and output decisions keeping in, mind the decision taken by their competitors. In this process, of making their price and output decisions, firms also indulge, in some strategic behavior in order to compete with their, competitors. To survive in the cut-throat competition, firms, incur heavy selling costs such as, advertisement expenditures, to convince and attract the consumers to buy the products., SECTION B, , , 17. What are stock variables?, [1], Answer : A stock variable is measured at one specific time,, and represents a quantity existing at that point in time (say,, , X, , • Follow us on Telegram - https://t.me/copymykitab1

Page 146 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1156 | Economics 2011 (Outside Delhi), , March 31, 2017) , which may have accumulated in the past., A flow variable is measured over an interval of time. Therefore, a flow would be measured per unit of time (say a year). Flow, is roughly analogous to rate or speed in this sense., , Answer : Given :, MPC = 0.75, ∆ I = 75, To calculate : ∆ Y, We know,, , , , 18. Define ‘Depreciation’., [1], Answer : Depreciation means decline in the value of fixed, capital goods, e.g., wear and tear of machines during, production process., , 1, 1, 1, =, =, =4, 1 − MPC 1 − 0.75 0.25, , Now,, , , , 19. Define ‘Statutory Liquidity Ratio’., [1], Answer : Statutory liquidity ratio (SLR) refers to the amount, that the commercial banks require to maintain in the form of, gold or govt. approved securities before providing credit to, the customers. Here by approved securities we mean, bond, and shares of different companies. Statutory Liquidity Ratio, is determined and maintained by the Reserve Bank of India, in order to control the expansion of bank credit., , Multiplier, k =, , , , , , D, , , , or,, Y = 300 crore, Thus with an increase in the investment expenditure by 75, crores, National Income increased by 300 crore., 25. Explain the distinction between voluntary and involuntary, unemployment., [3], Answer:, , C, , op, , , , 22. Which transactions determine the balance of trade? When, is balance of trade in surplus?, [3], Answer: The transaction of the visible items of home country, with rest of the world determine the balance of trade. This, can be stated in different words as the balance of exports, and balance of imports of all the physical goods of a country, determines the balance of trade. The balance of trade is in, surplus when export of visible items exceeds import of visible, items., , , , 23. Explain how ‘non-monetary exchanges’ are a limitation in, taking gross domestic product as an index of welfare. [3], Answer : A non-monetary exchange occurs when an, entity receives goods or services from an external entity in, exchange. This is because GDP does not take into account, those transactions that cannot be expressed in the monetary, terms. Often, in the less developed countries, there exists a, large number of non-monetary exchanges, particularly in the, rural areas and household sector. For example, farm labour, paid in terms of food grains. Such transactions as cannot be, expressed in the monetary terms remain uncaptured by GDP., Consequently, the value of GDP remains underestimated., In this sense, GDP cannot be considered as an index of, economic welfare., , , , 24. In an economy the marginal propensity to consume is 0.75, investment expenditure in the economy increases by 75, crore. Calculate the total increase in national income. [3], , Voluntary Unemployment, , If refers to a situation where, a person who is able to work, remains unemployed due to, his/her own willingness., In this situation, the person remains unemployed, despite the jobs being available in the market., , Involuntary, Unemployment, It refers to a situation where, a person who is willing and, is able to work does not get, work at the existing wage, rate., In this situation, the person, remains unemployed due to, non-availability of the job in, the market., , 26. When price of a foreign currency falls, the demand for that, foreign currency rises. Explain why., [3], , , yM, , , , 21. What is foreign exchange?, [1], Answer : In finance, an exchange rate (also known as a, foreign-exchange rate, forex rate, FX rate or Agio) between, two currencies is the rate at which one currency will be, exchanged for another. It is also regarded as the value of one, country’s currency in terms of another currency., , , , yK, ita, b, , , , 20. Define Money., [1], Answer : An officially-issued legal tender generally consisting, of currency and coin. Money is the circulating medium of, exchange as defined by a government., , ∆Y, ∆I, Substituting the value,, ∆Y, 4=, 75, k=, , OR, When price of a foreign currency falls, the supply of that, foreign currency also falls. Explain? Why?, Answer: When the price of foreign currency falls then it, implies that foreign goods have become cheaper for the, domestic residents of a country. As a result, the demand for, the foreign goods by the domestic residents rises, which rises, the demand for foreign currency as well., For example, suppose the rupee-dollar exchange rate (price of, dollars in terms of rupees) falls from say, from $1 = 50 to $1, = 48. This implies that in order to purchase one dollar worth, of goods domestic residents now have to pay 48 instead of, 50. As a result, demand for the foreign goods increases and, the demand for dollars also rises., OR, When the price of foreign currency falls, then this implies, that the domestic goods have become expensive for the, foreign residents. This is because they can now buy less goods, , • Follow us on Telegram - https://t.me/copymykitab1

Page 147 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Outside Delhi) | 1157, , , , , , (b) Fiscal Deficit – Revenue Expenditure – Revenue Receipts, + Capital Expenditure – Capital Receipts Net of Borrowings, = Revenue Expenditure – Tax Revenue – Non-tax Revenue, – (Capital Receipts – Borrowings), = (v) – (i) – (iii) [(ii) – (iv)], = 80 – 47 – 10 – (34 – 32), = 112 – 91 = ` 21 Arab., (c) Primary deficit = Fiscal Deficit – Interest Payments, = 21 – 20, = ` 1 Arab., , , , 29. Giving reasons, explain the treatment assigned to the, following while estimating National Income :, (i) Family members working free on the farm owned by the, family., (ii) Payment of interest on borrowings by general, government., [4], Answer : (i) It would be not be included in National Income, because production for self consumption is not included is, the estimation of National Income., (ii) It would not be included because it is a non-factor, payment and it doesn’t relate to flow of goods and services., , yK, ita, b, , C, , op, , yM, , OR, Ensuring economic stability is one of the important objectives, of a government budget. Government aims at insulating, the economy from major economic fluctuations (such as, inflation, unemployment, etc.) and the business cycles, such as boom, recession, depression and recovery. It aims, at achieving higher economic growth rate while combating, such situations. Through the budget policy, government aims, at maintaining price and employment stability. This state of, economic growth with stability ensures a smooth and efficient, functioning of an economy., 28. From the following data about a government budget find, (a) revenue deficit, (b) fiscal deficit and (c) primary deficit, S. No., (i), (ii), (iii), (iv), (v), (vi), , Items, Tax revenue, Capital receipts, Non-tax revenue, Borrowings, Revenue expenditure, Interest payments, , ( Arab), 47, 34, 10, 32, 80, 20, , Answer : (a) Revenue Deficit = Revenue Expenditure –, Revenue Receipts, Where, Revenue Receipts = Tax Revenue + Non Tax Revenue, = (v) – (i) – (iii), = 80 – 47 – 10 = ` 23 Arab., , 30. Explain the role of the following in correcting the, inflationary gap in an economy :, [6], (i) Legal reserves, (ii) Bank rate, , , , , and services with the same worth of the foreign currency. As, a result, the foreign demand for the domestic products falls., This leads to a fall in the exports of the native country. With, fall in the exports, the native country receives less foreign, currency, thereby, reduces the supply of foreign currency, in the economy. For example, suppose the rupee-dollar, exchange rate (price of dollars in terms of rupees) falls from, say, from $1 = ` 70 to $1 = ` 68. This implies that the foreign, residents can now buy only ` 68 worth of goods with one, dollar. Thus, the demand for domestic goods falls and the, supply of dollars also falls., 27. Explain the ‘redistribution of income’ objective of a, government budget., [4], OR, Explain the ‘economy stability objective of a government, budget., Answer : Redistribution of income and wealth or, redistribution of wealth is the transfer of income, wealth, or property from some individuals to others. Government, through its budgetary policy attempts to promote fair and right, distribution of income in an economy. This is done through, taxation and expenditure policy. Through its taxation policy,, government levies taxes on the higher income groups in the, economy and transfers the purchasing power (so extracted), to the poor sections of the society through its expenditure, policy (subsides, transfer payments, etc.). Thus, with the help, of the taxation and expenditure policy, government aims at, redistribution of income such that a fair and just distribution, of income is achieved in the society., , OR, , Explain the role of the following in correcting the, deflationary gap in an economy:, (i) Open market operations (ii) Margin requirements, Answer : The situation of inflationary gap rises when, equilibrium is established after the stage of full employment., The excess of aggregate demand over aggregate supply at, the full employment level is inflationary gap. For bringing, equality between AD and AS at the full employment level AD, has to be reduced because AS cannot be increased since all the, resources are fully employed., (i) Legal reserves : Legal reserves refers to a minimum, percentage of deposits commercial banks have to keep as cash, either with themselves or with the central bank. The central, bank has the power to change it. When there is inflationary, gap the central bank can raise the minimum limit of these, reserves so that less funds are available to the banks for, lending. This will reduce Aggregate Demand., (ii) Bank rate : Bank rate is the rate of interest which central, bank charges from commercial banks for giving them loans., If banks rate is increased, the rate of interest for general, public also goes up and this reduces the demand for credit, by the public for investment and consumption. Therefore,, for controlling the situation of inflationary gap, bank rate, is increased. This ultimately will lead to the decline in the, demand for credit. Decline in the volume of credit as a, component of money supply will have controlling pressure, on inflationary forces., , • Follow us on Telegram - https://t.me/copymykitab1, , OR

Page 148 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1158 | Economics 2011 (Outside Delhi), , The situation of deflationary gap arises when equilibrium is, , monopoly of note issue. This ensures about uniformity in, note circulation. At the same time, it gives the central bank, power to influence money supply because currency with, public is a part of money supply., , established before the stage of full employment. In this case,, the full employment level, aggregate demand is less than, aggregate supply. In Diagram, DF is the deflationary gap., , (ii) Banker’s bank : Central bank is the bank of banks. This, signifies that it has the same relationship with commercial, banks in the country which commercial banks have with their, customers. It keeps their required cash in reserve, provides, them financial securities, gives them advice and discounts, their bills and securities held by them. It also gives them loan, in times of emergency., , For removing deflationary gap, the level of aggregate demand, needs to be increased to match the aggregate supply., (i) Open market operations : This means the sale and, purchase of securities by the central bank which are bought, and sold by the commercial banks to correct deflationary, gap. Credit as a component of money supply needs to be, increased. For achieving this central bank buys securities, , 32. Calculate (a) ‘Net Domestic Product at Factor Cost’ and (ii), ‘Private Income**’ from the following :, [6], , , from commercial banks in lieu of which cash flow or liquidity, , , , position of commercial banks improves and their lending, , ( crores), (i) Domestic product accruing to government, 300, (ii) Wages and salaries, 1,000, (iii) Net current transfers to abroad, (−) 20, (iv) Rent, 100, (v) Interest paid by the production units, 130, (vi) National debt interest, 30, (vii) Corporation tax, 50, (viii) Current transfers by government, 40, (ix) Contribution to social security schemes by employees, 200, , , capacity is raised. People can borrow more. This will raise AD., , ADFE, , X, , YF, , C, , op, , (ii) Margin requirements : Commercial banks never advance, loans to its customers equal to the full value of collateral or, securities. They always keep a margin with them, such as, keeping a margin of 20% and advancing loans equal to 80%, of the value of security., , In dealing with deflationary gap, this margin is reduced so that, more credit may be made available against the security. This, increases borrowing capacity of borrowers and thus will raise AD., , , 31. Explain the following functions of the central bank :, , , (i) Bank of issue, (ii) Banker’s bank, [6], Answer : (i) Bank of issue : Bank of issue refers to the legal, right to issue currency. The central bank enjoys complete, , (x), , , , , , Dividends, , 100, , (xi) Undistributed profits, (xii) Net factor income to abroad, , , Income, , Y, , yM, , O, , , , AD, , , , F, , , , , , AD, E, , , , , , AS, , D, , , , Deflationary Gap, , yK, ita, b, , Y, , 20, 0, , Answer : (a) NDPFC = wages & salary + contribution to, social seunit of scheme + Rent + Interest + corporation tax +, Dividend + Undistributed profit., = Wages and salaries + Rent + Interest paid by production, units + Corporation tax + Contribution to social security, schemes by employers + Dividends + Undistributed profits, = (ii) + (iv) + (v) + (vii) + (ix) + (x) + (xi), = 1,000 + 100 + 130 + 50 + 200 + 100 + 20, = 1,600 crores, , ** Answer is not given due to change in syllabus., • Follow us on Telegram - https://t.me/copymykitab1

Page 149 :
Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2011 (Outside Delhi), , Maximum marks : 100, , , , Time allowed : 3 hours, , SET II, , , , Downloaded from CopyMyKitab, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , :, P, , Q, , 12, , 24, , 14, , 20, , (or MRS) decreases. This is because as the consumer consumes, more and more of one good, the marginal utility of that good, falls. On the other hand, the marginal utility of the (other), good which is sacrificed rises. In other words, the consumer is, willing to sacrifice lesser and lesser for each additional unit of, the other good consumed. Thus, as we move down the IC, MRS, diminishes. This suggests the convex shape of indifference curve., Y, , Now,, Ed =, , ∆Q P, ×, ∆P Q, , Substituting the values,, −4 12, ×, = −1, 2 24, Hence, demand is unitary elastic., , b, , Ed =, , ita, At point A,, , op, yM, , yK, , , , 15. Explain any three properties of Indifference Curves., [6], Answer : Indifference Curve (IC) is a curve that depicts, various combinations of two goods that provides a consumer, with the same level of satisfaction. The following are the three, major properties of an IC., (i) Indifference curve is downward sloping to the right :, Downward slope of an IC to the right implies that a consumer, cannot simultaneously have more of both the goods. An, increase in the consumption of one good is possible only with, the reduced consumption of another good., , MRS xy =, , At point B,, , Y, , X, , At point A :, , ∆Y, Slope of IC (MRS ) =, ∆X, i.e., MRS shows the rate at which the consumer is willing to, sacrifice good Y for an additional unit of good X., (iii) Shape of indifference curve : An IC is convex to the origin., As we move down along th e IC to the right, the slope of IC, , ** Answer is not given due to change in syllabus., , AD, DB, , BE, EC, BE AD, <, EC DB, , MRS xy =, , MRS at B < MRS at A, so MRS has fallen., , SECTION B, 22. List the transactions of Current Account of the Balance of, Payments Account., [3], Answer : The following are the three main transactions of the, Current Account of BOP., (i) Export and Import of Goods : The transaction related to, the export and import of goods are recorded in the Current, Account of BOP. This record of exports and imports is also, termed as ‘Balance of Visible Trade’. The export of goods is, recorded as positive items whereas, the import of goods are, recorded as negative items in the Current Account of BOP., (ii) Export and import of services : The second component, of the Current Account is the export and import of services., The record of export and import of services is also termed the, ‘Balance of Invisible Trade’. Similar to the export of goods,, export of services is recorded as positive items in the Current, Account of BOP. Some of the major services that are included, in the Current Account are shipping services, insurance and, banking services, income from investment (i.e., income, from profits and dividends), foreign travel, miscellaneous, , , C, , (ii) Slope of IC : The slope of an IC is given by the Marginal, Rate of Substitution (MRS). It refers to the rate at which a, consumer is willing to substitute one good for each additional, unit of another good., , X, , • Follow us on Telegram - https://t.me/copymykitab1

Page 150 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1160 | Economics 2011 (Outside Delhi), , 32. Calculate (a) ‘Net National Product at Market Price’ (b), ‘Private Income**’ from the following :, [6], S. No., , Items, , ( in Crore), , (i), , Net current transfers to abroad, , 30, , (ii), , Mixed income, , 600, , (iii), , Subsidies, , 20, , (iv), , Operating surplus, , 200, , (v), , National debt interest, , 70, , (vi), , Net factor income to abroad, , 10, , (vii), , Compensation of employees, , 1400, , (viii), , Indirect tax, , 100, , yK, ita, b, , D, , , , 24. In an economy the marginal properity to save is 0.4., National income in the economy increases by `200 crore, as a result of change in investment. Calculate the change in, investement., [3], Answer : Given, Marginal propensity to save (MPS) = 0.4, Increase in national income ( Y) = `200 Crore, We know that,, Multiplier (K) = 1 = 1 = 2.5, MPS 0.4, , (ii) Pension paid after retirement should be included in the, estimation of national income. This is because it is a part of, compensation of employees., , , , transactions such as royalties, consultancy services, telephone, services, etc., (iii) Unilateral transfer : Unilateral transfers refer to the onesided transfer such as gifts, donations, grants from foreign, governments, etc. A country makes such transfers to the rest, of the world as well as receives transfers from the rest of the, world. The receipts of unilateral transfers are recorded as, positive items in the Current Account, whereas, the payments, of unilateral transfers are recorded as negative items in the, Current Account of BOP., , D, , D, , D, , D, , We also know that, K = Y or I = Y = 200 = 80, 2.5, I, K, Change in investment = ` 80 crore., , Economics 2011 (Outside Delhi), , Domestic product accruing to, government, , 350, , (x), , Current transfers by government, , 50, , Answer : NNPMP = Compensation of Employees + Operating, Surplus + Mixed Income + (Indirect Tax – Subsides) – Net, Factor Income to Abroad, = 1400 + 200 + 600 + (100 – 20) – 10, = 2,270 crore, , SET III, , , , C, , op, , yM, , , , 29. Giving reasons and explain the treatment assigned to the, following while estimating national income :, [4], (i) Social security contributions by employees., (ii) Pension paid after retirement., Answer : (i) Social security contributions by employees, should be included in the estimation of national income as it, is part of compensation of an employee., , (ix), , Maximum marks : 100, , , , Time allowed : 3 hours, , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., SECTION A, , , 1. Define macroeconomics., [1], Answer : Macroeconomics is that branch of economics,, which deals with the economic activities performed by all the, sectors facing economic problems and different situations for, a country (economy) as a whole., 7. From the following data calculate price elasticity of demand, , , , Price ( ), 9, 9, , Demand (units), 100, 150, , Answer : Given,, Initial Price, P = 9, Initial Quantity demanded, Q = 100, Final Price, P1 = 9, Final Quantity demanded, Q1 = 150, ∆ P = (P1 – P) = (9 – 9) = 0 and,, ∆ Q = (Q1 – Q) = (150 – 100) = 50, Now,, , Ed =, , ∆Q P, ×, ∆P Q, , Substituting the values,, 50 9, Ed = ×, =∞, 0 100, [3], , Hence, demand is Perfectly Elastic., , • Follow us on Telegram - https://t.me/copymykitab1

Page 151 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , Economics 2011 (Outside Delhi) | 1161, , (ii) Budget line is a line that represents the different, combinations of two goods that are affordable and are, available to a consumer given his/her level of income and the, market prices of the goods if the consumer spends his entire, income on the two goods., , , , 11. Explain the law of diminishing marginal utility with the, help of a total utility schedule., [4], Answer: Law of Diminishing Marginal Utility states, that as a consumer consumes more and more units of, a commodity at succession, then the Marginal Utility, derived from the consumption of each additional unit of, the commodity falls., , P1x1 + P2x2 = M, , Marginal Utility (MU), MU = TUn - TUn – 1, (80−0) = 80, , 2, , 160, , (160−80) = 80, , 3, , 220, , (220−160) = 60, , 4, , 270, , (270−220) = 50, , 5, , 310, , (310−270) = 40, , 6, , 340, , (340−310) = 30, , SECTION B, 22. Distinguish between balance of trade and balance on, current account of balance of payments., [3], Answer :, Basis of, Difference, Meaning, , Balance of Trade, , It records visible, transactions only., , yK, , From the above schedule, it can be observed that for two, units of consumption, marginal utility is 80. For the third, unit, the marginal utility falls to 60. For the fourth unit,, the marginal utility further falls to 50 and so on. Thus,, as more and more units of a commodity are consumed,, the marginal utility derived from the consumption of each, additional unit falls., , 5x1 + 4x2 = 100, , , , 80, , b, , 1, , For example, consider a consumer who has income (M) of, ` 100. He wants to purchase two goods, good 1 and good 2., Good 1 costs (P1) ` 5 per unit, while good 2 costs (P2) ` 4, per unit. In this case, the budget line is of the form,, , ita, , Units of Com- Total Utility, modity, (TU), , The equation of the budget line is represented as follows :, , Components, , ∆Y, ∆X, , It shows how many units of good Y the consumer is willing to, sacrifice to gain one additional unit of good X., , 24. As a result of increase in mvestment by ` 60 crore, national, income rises by ` 240 crore. Calculate marginal propensity, to consume., [3], Answer : I = 60, Y = 240, To Calculate : MPC, We know,, Multiplier, K = Y = 240 = 4, 60, I, Also we know,, 1, K=, 1 – MPC, 1, Or ,, 4=, 1 – MPC, Or, 4 (1 – MPC) = 1, , 5, 3, 1, , As the consumer moves from consumption combination P, to consumption combination Q, consumption of good X, increases from 2 units to 3 units while, the consumption, of good Y falls from 10 units to 5 units. That is to gain one, additional unit of good X, the consumer sacrifices 5 units, of good Y. Thus, the MRS is 5. Similarly, as the consumer, moves from point R to point S, he is willing to sacrifice, only one unit of good Y for one additional unit of good X., Thus, MRS is 1., , Or, MPC = 0.75, 29. Giving reasons, explain the treatment assigned to the, following while estimating National Income., [4], , , MRSxy, , D, , Units of, good Y, 10, 5, 2, 1, , D, , Units of, good X, 2, 3, 4, 5, , , , Consumption, combination, P, Q, R, S, , D, , D, , The following schedule explains the concepts of MRS :, , It, records, the, transactions relating, to goods, services as, well as unilateral, transactions., , , , C, , MRS =, , It is the balance, of exports and, imports of all, physical goods of, the country., It records the, transactions relating to physical, goods only., , Nature of, transactions, , op, , , , yM, , 15. Explain the concepts of (i) marginal rate of substitution, and (ii) budget line equation with the help of numerical, examples., [6], Answer: (i) Marginal Rate of Substitution (MRS) refers to, the rate at which a consumer is willing to substitute one good, for each additional unit of the other good. Algebraically,, , Balance on, Current Account, It records visible, as well as invisible, and, unilateral, transactions., It is the balance, of visible trade, invisible trade and, unilateral transfers., , (i) Expenditure on maintenance of a building., (ii) Expenditure on adding a floor to the building., , • Follow us on Telegram - https://t.me/copymykitab1

Page 152 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1162 | Economics 2011 (Delhi), , (vii) Consumption of fixed capital, , 100, , (viii) Personal taxes, , 200, , , , , , , , 500, , 1,200, , , , (ix) Compensation of employees, , 250, [6], , , , (x) Net indirect tax, Answer : (a) GNPMP, , = Compensation of employees + Mixed Income + Operating, surplus + consumption of fixed capital + Net indirect tax –, Net factor income to abroad, = (ix) + (vi) + (iii) + (vii) + (x) – (i), = 1,200 + 500 + 300 + 100 + 250 – 10, = 2,350- 10 = 2,340 crores, , , , , , , , , , , , , , 32. Calculate (a) ‘Gross National Product at market place’ and, (b) ‘Personal Disposable Income’ from the following** :, ( crore), (i) Net factor income to abroad, 10, (ii) Private income, 1,700, (iii) Operating surplus, 300, (iv) Corporation tax, 150, (v) Undistributed Profits, 30, , (vi) Mixed income, , , , Answer : (i) Expenditure on maintenance of a building will, not be included in the National Income because it is not, adding anything in capital formation., (ii) Expenditure on adding a floor to the building will be, included in the National Income because it is a part of, domestic capital formation., , yK, ita, b, , , , Time allowed : 3 hours, , SET I, , , , Economics 2011 (Delhi), , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , 4., , 5., , X, , yM, , C, , op, , , , , , , , 6., , , , 3., , , , 2., , Answer : Production Possibility Curve (PPC) is concave to the, origin because of the increasing marginal opportunity cost., As we move down along the PPC, to produce each additional, unit of one good, more and more units of other good needs, to be sacrificed. That is, as we move down along the PPC, the, marginal opportunity cost increases. This is called as the law, of increasing opportunity cost., In the above figure, AE represents the PPC for capital goods, and consumer goods. Suppose the initial production point, is B, where 1 unit of capital good and 48 units of consumer, goods are produced. To produce one additional unit of capital, good, 4 units of consumer good must be sacrificed (point C)., Thus, at point C the opportunity cost of one additional capital, good is 4 units of consumer goods. On the other hand, at, point D, the opportunity cost of producing one additional, unit of capital good is 9 units of consumer goods. Thus, as we, move down the PPC form point C to point D, the marginal, opportunity cost increases. This confirms the concave shape, of PPC., , , , 1., , SECTION A, What is a market economy?, [1], Answer : Market economy is a form of economy where the, capitalist or the private entrepreneurs have the major control, over all the economic activities. They organize and undertake, production with the sole motive of profit making., When is a firm called ‘price-taker’?, [1], Answer : A firm is said to be a price taker when it has no, control over the existing market price and accepts the price as, determined by the ‘invisible hands of market’, i.e., by demand, for and supply of the commodities., Define budget set., [1], Answer : A budget set represents those combinations of, consumption bundles that are available to the consumer, given his/her income level and at the existing market prices., In other words, it represents those consumption bundles that, the consumer can purchase using his/her money income (M)., It is represented by the following inequality condition:, P1x1 + P2x2 ≤ M, What is meant by ‘increase’ in supply ?, [1], Answer : When the supply of a good increases due to a, favourable change in the factors other than the price of the, good (such as a rise in the price of substitute good, appreciation, of technology level, etc), then it is called increase in supply., Define supply., [1], Answer : Supply refers to different quantities of a commodity, that are offered for sale at different prices in the market., Why is a production possibilities curve concave? Explain., [3], , Maximum marks : 100, , ** Answer is not given due to change in syllabus., , 7. 8 units of a good are demanded at a price of 7 per unit., Price elasticity of demand is (−)1. How many units will be, , • Follow us on Telegram - https://t.me/copymykitab1

Page 153 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1163, , , , 10. Explain the implication of ‘freedom of entry and exit to the, firms’ under perfect competition., [3], Answer : The basic implication of the feature of freedom of, entry and exit of the firms under perfect competition is that, all firms in the market earn normal profit in the long run., Each individual firm is able to operate at the point where the, minimum of long run average cost curve (LAC) is tangent to, the price line. This implies that the firm neither earns super, normal profits nor suffers losses., If, the firms are earning super normal profits that is, the price, is greater than the minimum of LAC then, it attracts new, firms in the market. Consequently, the total output in the, industry increases and the price falls. Price continues to fall, till it becomes equal to the minimum of the LAC curve and, the super-normal profits are wiped out. As against this, if the, firms are suffering losses (that is, the price is less than the, minimum of LAC) then, it leads some of the firms to exit the, market. Consequently, the total output in the industry falls, and the price rises. Price continues to rise till it becomes equal, to the minimum of the LAC curve and the losses are wiped, out. Thus, freedom of entry and exit of firms under perfect, competition implies that all firms earn only normal profits in, the long run., , X, , A monopoly firm faces a downward sloping demand curve, (AR curve) because it has no control over the quantity of the, output that he can sell in the market. Although, it is a price, maker, it depends on the buyers what quantity of output they, want to purchase at the price fixed by the monopolist. If the, monopolist fixes a higher price, then lesser quantity of the, output will be demanded and lesser quantity will be sold in, the market. On the other hand, if he fixes a lower price, then, higher quantity of the good will be sold. This implies the, , OR, Explain the implication of ‘perfect knowledge about, market’ under perfect competition., Answer : The implication of perfect knowledge about market, under perfect competition is that no seller can either sell their, products at higher prices or at lower prices than the market, price. Perfect knowledge implies that both buyers as well as, the sellers are fully aware of the conditions prevailing in the, market. That is, the buyers are fully aware of the prevailing, market price of the product at different places and the sellers, are also aware of at what prices are the buyers willing to buy, the product. Thus, if any individual firm is charging higher, (or lower) price for the homogeneous product, then the, buyers will shift their purchase to the seller (or shift their, purchase from other seller to the firm selling at lower price)., Hence, no firm can either sell their products at a price that is, higher or lower than the market price., 11. “A consumer consumes only two goods X and Y”. State and, explain the conditions of consumer’s equilibrium with the, help of utility analysis., [4], Answer : In case of two commodities, the consumer’s, equilibrium is attained in accordance with the Law of EquiMarginal Utility. It states that a consumer allocates his, expenditure on two goods in such a manner that the utility, , • Follow us on Telegram - https://t.me/copymykitab1, , , , yM, , , , op, , C, , Y, , negative relationship between the monopolist’s price and the, quantity demand by the buyers. This negative relationship is, depicted by the falling AR curve and MR curve. Also, MR, curve is more elastic than the AR curve and lies below the AR, curve., , yK, ita, b, , , , , , demanded if the price rises to 8 per unit? Use expenditure, approach of price elasticity of demand to answer this, question.**, [3], 8. Giving examples, explain the meaning of cost in economics., [3], Answer : Cost in economics includes the following two, components., (i) Expenditures incurred or payments made by a firm, to various factors of production and non-factors of, production : In the process of production a firm hires various, factor such as land, labour, capital and entrepreneur. In return, of the services provided by the factor of production, the firm, makes payments to them. Labour is given wages, rent is paid, for the land; interest is paid for the capital and profit for the, entrepreneur. Such payments made are a cost for the firm., Besides, a firm also uses various non-factors of production, such as raw material. Payments made to such non-factors are, also included in the cost of the firm., (ii) Opportunity cost : Cost in economics also includes the, opportunity cost. When the resources are allocated towards, the production of one good, the production of some other, good needs to be sacrificed. It is the cost of producing one, good in terms of sacrificing the production of another good is, known as the opportunity cost. Such opportunity cost is also, included as a cost in economics., 9. Draw average revenue and marginal revenue curves in a, single diagram of a firm which can sell more units of a good, only by lowering price of that good. Explain., [3], Answer : The firm that can sell more units of a good only, by lowering the price of that good is a monopoly firm. A, monopoly firm faces a downward sloping AR and MR curves., AR curve is also the demand curve for the monopoly firm., The AR curve and the MR curve for a monopoly firm are, depicted below.

Page 154 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1164 | Economics 2011 (Delhi), , derived from each additional unit of the rupee spent on each, of the commodities is equal. That is,, , demand to the other (substitute) good i.e., rise in the price of, one good results in a rise in the demand of the other good and, vice-versa. For example, tea and coffee are substitute goods., If, the price of tea rises (falls), the demand for coffee rises, (falls)., (ii) Complementary goods : These are the goods that are, consumed together. It is the joint consumption of these goods, that satisfies wants of the consumer. In case of complementary, goods, if the price of one good increase then a consumer, reduces his demand for the complementary good as well., That is, a rise in the price of one good results in a fall in the, demand of the other good and vice-versa. For example, sugar, and tea are complimentary goods. If, the price of tea increases, (decreases), the demand for sugar decreases (increases)., , , , 13. Define ‘Market-supply’. What is the effect on the supply of, a good when government imposes a tax on the production, of that good? Explain., [4], OR, What is a supply schedule? What is the effect on the, supply of a good when government gives a subsidy on the, production of that good? Explain., Answer : Market supply refers to the total of quantities, supplied by all the firms in the market at different price levels., When the government imposes a tax on the production of, a good then this implies that the cost of production also, rises. Consequently, the firm will supply same quantity at, the higher price. The diagrammatic presentation of the effect, on the supply of a good when government imposes a tax on, production of the good is as follows :, , yK, ita, b, , Marginal Utility of a Rupee spent on commodity x = Marginal, Utility of a Rupee spent on commodity y = Marginal Utility, of Money i.e.,, MU x MU y, =, = MU m, or,, Px, Py, , C, , op, , yM, , In the diagram, OO1 represents the total income of a, consumer. MUx and MUy represents the Marginal Utility, curves of commodity X and commodity Y, respectively., Equilibrium is established at point E, where, MUx and MUy, intersect each other and with MUm ., At this point, OM amount of income is spent on commodity, X and the remaining amount of income MO1 is spent on, commodity Y., Suppose, instead of point M, the consumer is at point S,, where he spends OS amount of income on commodity X, and SO1 amount of income on commodity Y. At point S,, however;, MU x MU y, >, Px, Py, , Thus, the consumer would increase his consumption of, commodity X till the equality is achieved. That is, in other, words, the consumer increases his consumption of good X till, he reaches point E where,, MU x MU y, =, Px, Py, , , , 12. Explain how the demand for a good is affected by the prices, of its related goods. Give examples., [4], Answer : Demand for a good depends on the price of other, goods (i.e., related goods). Any two goods are considered, to be related to each other, when the demand for one good, changes in response to the change in the price of the other, good. The related goods can be classified into following two, categories., (i) Substitute goods : These are the goods that can be, consumed in place of each other. In other words, they can, be substituted for each other. In case of substitute goods, if, the price of one good increases, then the consumer shifts his, , Y, S1, , S, , P+K, P, Price, S1, O, , S, , Quantity, , Q, , X, , In the diagramme, SS is the original supply curve and the firm, is ready to sell OQ quantity of the good at OP price. Now if, the government imposes a unit tax of ` ‘K’ per unit of output,, then this will raise the cost of production as the firm needs to, pay an extra amount of ` ‘K’ each unit of the output supplied., Consequently, the cost curve will shift leftward (upwards) to, S1 S1 from SS. The magnitude of the shift in the cost curve is, equal to ` ‘K’. This leftward shift in the supply curve shows, that the firm now intends to charge higher price, i.e., OP+K, instead of OP to supply OQ quantity of commodity due to, imposition of tax., , • Follow us on Telegram - https://t.me/copymykitab1

Page 155 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1165, , OR, Supply schedule is a tabular presentation representing different, quantities of a commodity offered for sale corresponding to, the different prices at which these quantities are offered for, sale. The following table represents a supply schedule., Price `, , Quantity (in units), , 1, , 5, , 2, , 10, , 3, , 15, , 4, , 20, , 5, , 25, , X, , At point A, , The diagrammatic presentation of the effect on the supply, given a subsidy on the production of that good is as follows :, Y, , S, , P–V, Price, , O, , S1, Quantity, , X, , Q, , Slope of Indifference curve (MRS) =, , ∆Y, ∆X, , That is, MRS shows the rate at which the consumer is willing, to sacrifice good Y for an additional unit of good X., (iii) Shape of Indifference Curve : An indifference curve is, convex to the origin. As we move down along the indifference, curve to the right, the slope of IC (MRS) decreases. This is, because as the consumer consumes more and more of one, good, the marginal utility of the good falls. On the other, hand, the marginal utility of the good which is sacrificed rises., In other words, the consumer is willing to sacrifice less and less, for each additional unit of the other good consumed. Thus,, as we move down the IC, MRS diminishes. This suggests the, convex shape of indifference curve., At point A,, , yK, ita, b, , S1, , P, , S, , Y, , AD, DB, , MRS xy =, , BE, EC, , BE AD, <, EC DB, Y, , , , 15. Explain the three properties of indifference curves., [6], Answer : Indifference curve is a curve that depicts various, combinations of two goods that provides a consumer with the, same level of satisfaction., , MRS xy =, At point B,, , C, , op, , yM, , In the diagramme, SS is the supply curve and the firm is, ready to sell OQ quantity of the good at OP price. Now if, the government provides subsidy of ` ‘V’ per unit of output,, then this reduces the cost of production. This results in the, rightward shift of the supply curve from SS to S1S1. Hence, the firm can supply the same quantity of commodity at lower, price, i.c., earlier the firm was supplying OQ quantity of, good at OP price. After the provision of subsidy, the firm will, supply the same quantity at OP–V price. The magnitude of, the shift in the cost curves is equal to ` V., , Properties of Indifference Curve, , X, , Therefore, MRS at B < MRS at A, so MRS has fallen., 16. Market for a good is in equilibrium. There is an ‘increase’, in demand for this good. Explain the chain of effects of this, change. Use diagram., [6], , • Follow us on Telegram - https://t.me/copymykitab1, , , , (i) Indifference curves are downward sloping to the right :, Downward slope of the indifference curve to the right implies, that a consumer cannot simultaneously have more of both the, goods. An increase in the quantity of one good is associated, with the decrease in the quantity of the other good. This is in, accordance with the assumption of monotonic preferences., (ii) Slope of IC : The Slope of an IC is given by the Marginal, Rate of Substitution (MRS). Marginal rate of substitution, refers to the rate at which consumer is willing to substitute, one good for each additional unit of the other good.

Page 156 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1166 | Economics 2011 (Delhi), , element of time attached to them. For example, interest, earned on bank deposits for 1 year, i.e., from October 01,, 2009 to October 30, 2010 is a flow variable., 19. Define cash variable ratio., [1], Answer : Cash Reserve Ratio (CRR) refers to the minimum, proportion of the total deposits which the commercial banks, are required to keep with the central bank in the form of, reserves., , , Answer: Market equilibrium is a state or a position, where market demand equals market supply. Now, if the, market demand increases, then it results in a change in the, equilibrium., Y, , , , 20. Define money supply., [1], Answer : Money supply refers to the total stock of money (in, the form of currency notes and coins) held by the people of, an economy at a particular point of time., X, , 21. Define foreign exchange rate., [1], Answer : Foreign exchange rate is the rate at which the, currency of one country is traded for currency of another, country. In other words, it refers to the cost of one currency, in terms of another currency., , , ′, , For example, a rupee-dollar exchange rate of 50 ($1 = 50), implies that it costs 50 to purchase $1., , yK, ita, b, , Suppose D1D1 and S1S1 are the initial market demand curve, and the initial market supply curve, respectively. The initial, equilibrium is established at point E1, where the market, demand curve and the market supply curve intersects each, other. Accordingly, the equilibrium price is OP1 and the, equilibrium quantity demanded is Oq1., , C, , At the new equilibrium E2, , op, , yM, , Equilibrium output has increased from Oq1 to, Equilibrium price has increased from OP1 to, , 2, 2, , Hence, an increase in demand with supply remaining, constant, results in rise in the equilibrium price as well as the, equilibrium quantity., , 22. State the components of capital account of balance of, payments., [3], Answer : Capital Account of Balance of payment (BOP) refers, to the account of BOP, which records all the transactions that, cause a change in the status of assets and liabilities of the, government or any of the residents of a country., , , Now, if there is an increase in the market demand, the market, demand curve shifts parallely rightwards to D2D2 from, D1D1, while the market supply curve remains unchanged, at S1S1. This implies that at the initial price OP1, there exist, excess demand equivalent to (Oq'1 – Oq1) units. This excess, demand will increase competition among the buyers and they, will now be ready to pay a higher price to acquire more units, of the good. This will further raise the market price. The price, will continue to rise till it reaches OP2. The new equilibrium, is established at point E2, where the new demand curve D2D2, intersects the supply curve S1S1., , The following are the components of capital account of BOP., (i) Foreign direct investment (FDI) and Portfolio, Investment : Foreign Direct Investment refers to the, investment in the assets of a foreign country that allows, control over the asset. On the contrary, Portfolio Investment, refers to the investment in the assets of a foreign country, without any control over that asset. Both FDI and portfolio, are non-debt creating capital transactions. They cause an, inflow of foreign exchange into the country. Thus, they are, recorded as positive items in the Capital Account of BOP., , 17. What is nominal gross domestic product?, [1], Answer : Nominal Gross Domestic Product refers to the, market value of all the final goods and services produced, within the domestic territory during an accounting year as, estimated with reference to current year prices., , (iii) Banking Capital Transactions : Banking capital, transactions refer to the transactions of external financial, assets and liabilities of the commercial banks and cooperative, banks that operate as authorized dealers in the foreign, exchange market., , 18. Define flow variable., [1], Answer : Flow variable refers to those variables that are, measured over a period of time. These variables have an, , 23. Explain how ‘distribution of gross domestic product’ is a, limitation in taking gross domestic product as an index of, welfare., [3], , , SECTION B, , (ii) Loans and borrowings : A country takes loans and, borrowings from the foreign countries and from the, international monetary institutions. Loans and borrowings, are debt-increasing capital transactions. They result in inflow, of foreign exchange into the country. Hence, they are recorded, as positive items in the Capital Account of BOP., , , , , , Increase in Demand ⇒ Excess Demand at the Existing, Price ⇒ Competition Among the Buyers ⇒ Rise in the, Price Level ⇒ New Equilibrium ⇒ Rise in both Quantity, Demanded as well as price., , • Follow us on Telegram - https://t.me/copymykitab1

Page 157 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1167, , k=, , 1, 1 − MPC, , Suppose, the value of MPC is 0.5 then,, 1, k=, =2, 1 − 0.5, Now, if the value of MPC rises to 0.8 then,, 1, k=, =5, 1 − 0.8, Thus, as the value of MPC rises from 0.5 to 0.8, the value, of investment multiplier rises from 2 to 5. This confirms, the direct positive relation between MPC and investment, multiplier., 26. When price of a foreign currency rises, its demand falls., Explain why., [3], , , , 24. Given that national income is 80 crore and consumption, expenditure 64 crore, find out average propensity of, save. When income rise to 100 crore and consumption, expenditure to 78 crore, what will be the average propensity, to consume and the marginal propensity to consume? [3], Answer : Given :, National Income, Y = 80, Consumption Expenditure, C = 64, We know,, S C −Y, APS = =, Y, Y, , Algebraically, the relationship is expressed as follows,, , , , Answer : GDP refers to the market value of all the final goods, and services produced within the domestic territory during an, accounting year. GDP as an index of welfare depends on the, distribution of income in the economy. It is possible that even, with the rise in the real GDP, the welfare of the people might, not increase. This is because an increase in the GDP may be a, result of the increase in the income of only a few individuals, while, the majority of people remain deprived of the benefits, of the rise in the GDP. In such a situation, a rise in the GDP, does not enhance the economic welfare. In other words, a, rise in national income may lead to false interpretation of the, social welfare. Thus, it can be said that distribution of GDP is, a limitation as a measure of economic welfare., , Also,, , MPC =, , yK, ita, b, , op, C, , 78, = 0.78, 100, , When price of a foreign currency rises, its supply also rises., Explain why., Answer : When the price of foreign currency rises then it, implies that foreign goods have become expensive for the, domestic residents of the country. This results in a fall in, the demand for foreign goods by the domestic residents., Consequently, the demand for foreign currency falls., , ∆C 78 − 64 14, =, =, = 0.70, ∆Y 100 − 80 20, , , 25. Explain the relationship between investment multiplier and, marginal propensity to consume., [3], Answer : Investment multiplier (k) implies that any change in, the investment leads to a corresponding change in the income, and output by multiple times. That is, in other words, the, change in the income and output is more than (or multiple, times of ) the change in investment., ∆Y, Investment Multiplier, k =, ∆I, Investment Multiplier shares a direct positive relationship, with marginal propensity to consume. That is, higher the value, of MPC, higher will be the value of investment multiplier and, vice-versa., , For example, suppose the rupee-dollar exchange rate (price of, dollars in terms of rupees) rises from say, from $1 = ` 68 to $1, = ` 70. This implies that in order to purchase one dollar worth, of foreign goods, the domestic residents now have to pay, ` 70 instead of ` 68. Thereby, the demand for foreign goods, decreases. Consequently, the demand for dollars decreases., OR, When the price of foreign currency rises, this implies that, the domestic goods have become cheaper for the foreign, residents. This is because they can now buy more goods and, services with same worth of foreign currency. As a result, the, foreign demand for domestic products rises. This leads to, an increase in the exports of domestic country. As a result,, the domestic country receives more foreign currency and its, supply rises., For example, suppose the rupee-dollar exchange rate (price, of dollars in terms of rupees) rises from say, from $1 = ` 68, to $1 = ` 70. This implies that the foreign residents can now, buy ` 70 worth of goods with the same one dollar. Thus, the, demand for domestic goods increases. As a result, the supply, of dollars increases., , 27. Explain the ‘allocation of resources’ objective of Government, budget., [4], OR, Explain the ‘redistribution of income’ objective of, Government budget., , , APC =, , yM, , Substituting the values,, 80 − 64, APS =, = 0.2, 80, Now given,, Y = 100, C = 78, We know,, C, APC =, Y, , OR, , • Follow us on Telegram - https://t.me/copymykitab1

Page 158 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, , 1168 | Economics 2011 (Delhi), , (ii) Chalks, dusters, etc, are intermediate product as they are, used is the process of teaching service in a school., 30. Explain the role of the following in correcting ‘deficit, demand’ in an economy :, [6], (i) Open market operations., (ii) Bank rate., OR, Explain the role of the following in correcting ‘excess, demand’ in an economy:, (i) Bank rate., (ii) Open market operations., Answer :, (i) Open market operations as an instrument to correct, deficit demand : Open Market Operations refer to the, buying and selling of securities either to the general public or, to the commercial banks in an open market. To correct deficit, demand, the central bank purchases securities in the open, market. With purchase of securities, the central bank pumps, in additional money into the economy. With the additional, money, the level of Aggregate Demand in the economy, increases. Thus, the deficit demand is corrected., (ii) Bank rate as an instrument to correct deficit demand :, Bank rate refers to the rate at which the central bank provides, loan to the commercial banks. To curtail deficit demand, the, central bank lowers the bank rate. This implies that cost of, borrowing for the commercial banks from the central bank, reduces. The commercial banks in turn reduce the lending, rate (the rate at which they provide loans) for their customers., This reduction in the lending rate raises the borrowing capacity, of the public, thereby, encourage the demand for loans and, credit. Consequently, the level of Aggregate Demand in the, economy increases and deficit demand is corrected., , yK, ita, b, , OR, Redistribution of income is one of the important objectives of, government budget. The government through its budgetary, policy attempts to promote fair and right distribution, of income in an economy. This is done through taxation, and expenditure policy. Through its taxation policy, the, government taxes the higher income groups in the economy., Purchasing power extracted from the higher income groups, in the form of taxes is then transferred to the poor sections, of the society through the expenditure policy (subsidies,, transfer payments, etc.). Thus, with the help of taxation and, expenditure policy in the budget, the government aims at, redistribution of income such that a fair and just distribution, of income is achieved in the society., , Answer : (i) Furniture purchased by the school is a final, product as it is used by the school for final consumption, purposes and does not undergo any further processing., , , , Answer : Allocation of resources is one of the important, objectives of government budget. In a mixed economy, the, private producers aim towards profit maximization, while,, the government aims towards welfare maximization. The, private sector always tend to divert resources towards areas, of high profit, while, ignoring areas of social welfare. In such, a situation, the government through its budgetary policy, reallocates resources to maintain a balance between the social, objectives of welfare maximization and economic objective of, profit maximization. For example, government levies taxes on, socially harmful goods such as tobacco and provides subsidies, for the socially desirable goods such as food grains., , ( ) Arab, , 95, , C, , op, , S., Items, No., (i), Capital receipts net of borrowings, (ii) Revenue expenditure, (iii) Interest payments, (iv) Revenue receipts, (v) Capital expenditure, , yM, , , , 28. From the following data about a Government budget, find, out (a) Revenue deficit, (b) Fiscal deficit and (c) Primary, deficit :, [4], , 100, 10, 80, 110, , Answer : (a) Revenue Deficit = Revenue Expenditure –, Revenue Receipts, = 100 – 80 = 20 Arab, (b) Fiscal Deficit = Revenue Expenditure + Capital, Expenditure – Revenue Receipts – Capital Receipts net of, Borrowings, = 100 + 110 – 80 – 95, = 35 Arab, (c) Primary Deficit = Fiscal Deficit – Interest Payments, = 35 – 10, = 25 Arab, , Bank rate is the rate at which the central bank provides loan to, the commercial banks. To control excess demand, the central, bank increases the bank rate. A rise in the bank rate increases, the cost of borrowing for the commercial banks from the, central bank. The commercial banks in turn raise the lending, rate (the rate at which they provide loans) for their customers., This hike in the lending rate reduces the borrowing capacity, of the public, thereby, discourages the demand for loans and, credit. Consequently, the level of Aggregate Demand in the, economy falls and excess demand is curtailed,, (ii) Open market operations as an instrument to correct, excess demand, , , , 29. Giving reasons classify the following into intermediate, products and final products :, [4], , OR, (i) Bank rate as an instrument to correct excess demand, , (i) Furniture purchased by a school., (ii) Chalks, dusters, etc, purchased by a school., , Open market operations refer to the buying and selling of, securities either to the public or to the commercial banks in, , • Follow us on Telegram - https://t.me/copymykitab1

Page 159 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1169, , , , 31. Explain the process of money creation by the commercial, banks with the help of a numerical example., [6], Answer : Process of Creation of Money, , Deposits, Received, , Initial, , 10,000, , Ist Round, , 8,000, , IInd Round, -, , Loans Extended, , C, , Rounds, , op, , yM, , yK, ita, b, , The process of money creation by the commercial banks starts, as soon as people deposit money in their respective bank, accounts. After receiving the deposits, as per the central bank, guidelines, the commercial banks maintain a portion of total, deposits in form of cash reserves. The remaining portion left, after maintaining cash reserves of the total deposits is then, lend by the commercial bank to the general public in form of, credit, loans and advances. Now assuming that all transactions, in the economy are routed through the commercial banks,, then the money borrowed by the borrowers again comes back, to the banks in form of deposits. The commercial banks again, keep a portion of the deposits as reserves and lend the rest., The deposit of money by the people in the banks and the, subsequent lending of loans by the commercial banks is a, recurring process. It is due to this continuous process that the, commercial banks are able to create credit money a multiple, times of the initial deposits., The process of creation of money is explained with the help of, the following numerical example., , the borrowers is again routed back to the banks in form of, deposits. Hence, in the second round there is an increment in, the deposits with the banks by ` 8,000 and the total deposits, with the banks now rises to ` 18,000 (that is, ` 10,000, + ` 8,000). Now, out of the new deposits of ` 8,000, the, banks will keep 20% as reserves (that is, ` 1,600) and lend, the remaining amount (that is ` 6,400). Again, this money, will come back to the bank and in the third round, the total, deposits rises to ` 24,400 (i.e., 18,000 ` 6,400)., The same process continues and with each round the, total deposits with the banks increases. However , in every, subsequent round the cash reserves diminishes. The process, comes to an end when the total cash reserves (aggregate of, cash reserves from the subsequent rounds) become equal to, the initial deposits of ` 10,000 that were initially held by the, banks. As per the above schedule, with the initial deposits, of ` 10,000, the commercial banks have created money of, ` 50,000.,   , , an open market. To curtail excess demand the central bank, sells securities in the open market. By selling the securities in, the open market, the central bank withdraws excess money, from the economy. This results in a lower Aggregate Demand, in the economy and excess demand is controlled., , Cash Reserves, , 32. Calculate National Income and Gross National Disposable, Income from the following :**, S., No., , Items, , (, crore), , (i), , Net current transfers to the rest of the, world, , (−) 5, , (ii), , Private final consumption expenditure, , 500, , (iii), , Consumption of fixed capital, , (iv), , Net factor income to abroad, , (v), , Government final consumption expenditure, , 200, , 20, (−) 10, , 8,000, , 2,000, , 6,400, , 1,600, , (vi), , Net indirect tax, , 100, , 6,400, , 5,120, , 1,280, , (vii), , Net domestic fixed capital formation, , 120, , -, , -, , -, , (viii) Net imports, , n Round, , -, , -, , -, , (ix), , Total, , 50,000, , 40,000, , 10,000, , th, , Suppose, initially the public deposited 10,000 with the, banks. Assuming the Legal Reserve Ratio to be 20%, the, banks keep 2,000 as minimum cash reserves and lend the, balance amount of 8,000 ( 10,000 – 2,000) in form of, loans and advances to the general public., Now, if all the transactions taking place in the economy are, routed only through banks then, the money borrowed by, , Change in stocks, , 30, (−) 20, [6], , Answer : National tricome by expenditure Method, GDPmp = P + G + I + (X – M), = 500 + 200 + (120 – 20 + 20) + (– 30), = 790 crores, NNPFC = GDPmp + NFIA – Dep – NUT, = ` 680 crores., , • Follow us on Telegram - https://t.me/copymykitab1

Page 160 :
Downloaded from CopyMyKitab, , SET II, , , , Economics 2011 (Delhi), , Visit our Site - https://copymykitab1.blogspot.in/, , Maximum marks : 100, , , , Time allowed : 3 hours, , , , SECTION A, 1. What is positive economics?, [1], Answer : The study of economics based on objective analysis., Most economics today focuses on positive economic. For, example, the statement ‘rate of inflation at present is 4%’ is a, positive economic statement., , Consumption Combinations, , Units of, good X, , Units of, good Y, , MRSXY, , P, , 2, , 10, , -, , Q, , 3, , 5, , 5, , R, , 4, , 2, , 3, , S, , 5, , 1, , 1, , op, , yM, , yK, ita, b, , , , , , 7. A consumer buys 10 units of a good at a price of 6 per, unit. Price elasticity of demand is (−)1. At what price will, buy 12 units? Use expenditure approach of price elasticity, of demand to answer this question.**, [3], 11. Explain the conditions determining how many units of a, good the consumer will buy at a given price., [4], Answer : Given the price of a good a consumer decides how, many units of the good to buy based on the marginal utility, derived from the good and the marginal utility of money for, him., A consumer purchases those many units of good where the, marginal utility of a rupee spent on the good becomes equal, to the marginal utility of money., That is where,, Marginal Utility of a Rupee spent on the commodity =, Marginal Utility of Money, Marginal Utility of rupee spent on the commodity refers to, the utility derived from each additional unit of the rupee, spent on the purchase of the good. Algebraically,, , 15. Explain the concept of Marginal Rate of Substitution, (MRS) by giving an example. What happens to MRS when, consumer moves downwards along the indifference curve?, Give reasons for your answer., [6], Answer : Marginal Rate of Substitution (MRS) refers to the, rate at which a consumer is willing to substitute one good, for each additional unit of the other good. Algebraically,, ∆Y, MRS =, ∆X, It shows how many units of good Y the consumer is willing to, sacrifice to gain one additional unit of good X., The following schedule explains the concept of MRS, , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , Marginal Utility of Rupee = MU x, , C, , Px, , Marginal Utility of money refers to the valuation of a unit of, a rupee for a consumer. It is assumed to constant., Thus, the consumer purchases those many units of the good, where,, MU x, = MU m, Px, , As the consumer moves from consumption combination P, to consumption combination Q, consumption of good X, increases from 2 units to 3 units while, the consumption of, good Y falls from 10 units to 5 units. That is to gain one, additional unit of good X, the consumer sacrifices 5 units of, good the consumer sacrifices 5 units of good Y. Thus, the, MRS is 5., The Indifference Curve depicting the above consumption, combination is drawn as follows., Y, , However, if the marginal utility of the rupee spent on the, commodity is greater than the marginal utility of money,, , , , MU x, > MU m  then, the consumer would continue,  that is,if, Px, , , , to consume more and more units of the good until the, equality is again reached., On the other hand, if the marginal utility of the rupee, spent on the good is less than the marginal utility of money,, , , MU x, < MU m  then, the consumer would reduce,  that is,if, P, x, , , , the consumption of the good until marginal utility becomes, equal to the price paid by him., • Follow us on Telegram - https://t.me/copymykitab1, , X

Page 161 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1171, , As we move down along the Indifference curve to the right,, the Marginal Rate of Substitution falls. This is because as, the consumer consumes more and more of one good, the, marginal utility of the good falls. On the other hand, the, marginal utility of the good which is sacrificed rises. In other, words, as we move down along the Indifference Curve, the, consumer is willing to sacrifice less and less for each additional, unit of the other good consumed. Initially, at point Q the, consumer has 2 units of good X and 10 units of good Y. As, the consumer moves from point P to point Q, he is willing, to sacrifice 5 units of good Y for one additional unit of good, X. As compared to this, at point R the consumer has 4 units, of good X and only 2 units of good Y. Now, as the consumer, has 4 units of good X and only 2 units of good Y. Now, as the, consumer moves from R to S, he is willing to sacrifice only one, unit of good Y for one additional unit of good X. Thus, as the, consumer moves down along the IC, he has more of good X, and to consume one additional unit of good X he is willing to, sacrifice lesser and lesser units of good Y., , APC =, Substituting the values,, , APC =, Now given,, Y = 60, S = 9 We know, , APC =, , C Y −S, =, Y, Y, 50 − 5, = 0.90, 50, , C Y − S 60 − 9, =, =, = 0.85, Y, Y, 60, , Now,, , ∆S, ∆Y, 9−5, 4, or,, MPS =, = = 0.40, 60 − 50 10, 29. Giving reasons classify the following into intermediate, products and final products;, (i) Computers installed in an office., (ii) Mobile sets purchased by a mobile dealer., [4], Answer : (i) Computers installed in an office is a final product, as they are used by the office for final consumption purposes, and does not undergo any further processing., (ii) Mobile sets purchased by a mobile dealer are intermediate, products as they are purchased by the dealer for resale in the, market., 32. Find the gross National Product at market price and (Net, National Disposable Income**) from the following : [6], MPS =, , C, , (iii), (iv), (v), (vi), (vii), (viii), (ix), , Items, Opening stock, Private final consumption expenditure, Net current transfers to abroad, Closing stock, Net factor income to abroad, Government final consumption expenditure, Consumption of fixed capital, Net imports, Net domestic fixed capital formation, , ( Arab), 50, 1000, 5, 40, (−) 10, 300, 30, 20, 150, , , , , , Answer : GNPMP = P + G + I + (X – M), = 1000 + 300 + (150 + 30 + 40 – 50) +, (– 20), = 1300 + 170 – 20, = 1450, GNPmp = GDPmp + NFIA, = 1450 – (–10), = 1460, , , , , ** Answer is not given due to change in syllabus., , , , , , S., No., (i), (ii), , op, , yM, , , , yK, ita, b, , SECTION B, 22. State the components of capital account of balance of, payments., [3], Answer : Capital Account of Balance of payment (BOP) refers, to that account of BOP, which records all the transactions, that cause a change in the status of assets and liabilities of the, government or any of the residents of a country., The following are the components of capital account of BOP., (i) Foreign Direct Investment (FDI) and Portfolio, Investment : Foreign Direct Investment refers to the, investment in the assets of a foreign country that follows, control over the asset. On the contrary, Portfolio Investment, refers to the investment in the assets of a foreign country, without any control over that asset. Both FDI and portfolio, are non-debt creating capital transactions. They cause an, inflow of foreign exchange into the country. Thus, they are, recorded as positive items in the capital account of BOP., (ii) Loans and Borrowings : A country takes loans and, borrowings from the foreign countries and from the, international monetary transactions. Loans and borrowings, are debt-increasing capital transactions. They result in inflow, of foreign exchange into the country. Hence, they are recorded, as positive items in the Capital Account of BOP., (iii) Banking Capital Transactions : Banking capital, transactions refer to the transactions of external financial, assets and liabilities of the commercial banks and cooperative, banks that operate as authorized dealers in the foreign, exchange market., 24. If National Income is 50 crore and Saving 5 crore, find, out average propensity to consume. When income rises to, 60 crore and saving to 9 crore, what will be the average, propensity to consume and the marginal propensity to, save?, [3], Answer : Given :, National Income, Y = 50, , Saving, S = 5, We know,, , • Follow us on Telegram - https://t.me/copymykitab1

Page 162 :
Downloaded from CopyMyKitab, , Maximum marks : 100, , , , Note : Except for the following questions, all the remaining, questions have been asked in previous sets., , , , SECTION A, 1. What is normative economics?, [1], Answer : A perspective on economics that incorporates, subjectivity within its analyses. It is the study or presentation, of “what ought to be?” rather than what actually is. Normative, economics deals heavily in value judgments and theoretical, scenario. For example, the statement ‘what should an ideal, rate of inflation be?’ is a normative economic statement., , (ii) Capital account : Capital account of BOP is that account, which records all the transactions that cause a change in the, status of assets and liabilities of the government or any of the, residents of a country., 24. If national income is 90 crore and consumption expenditure, 81 crore, find out average propensity to save. When income, rises to 100 crore and consumption expenditure to 88, crore, what will be the marginal propensity to consume and, marginal propensity to save., [3], Answer : Given :, National Income, Y = 90, Consumption Expenditure, C = 81, We know,, S Y −C, APS = =, Y, Y, , Substituting the values,, 90 − 81, APS =, = 0.1, 90, Now given,, Y = 100, C = 88, We know,, ∆C, MPC =, ∆Y, or, MPC =, Now,, , 88 − 81, 7, = = 0.7, 100 − 90 10, , MPS = 1 – MPC, or, MPS = 1 – 0.7, or, MPS = 0.3, 29. Giving reasons identify whether the following are final, expenditure or intermediate expenditure :, [4], , , C, , op, , yM, , , , yK, ita, b, , , , 7. When a price of a good changes to 11 per unit, the, consumer’s demand falls from 11 units to 7 units. The price, elasticity of demand is (−) 1. What was the price before, change? Use expenditure approach of price elasticity of, demand to answer this question.**, [3], 15. What are monotonic preferences? Explain why is an, indifference curve (i) Downward sloping from left to right, and (ii) Convex., [6], Answer : Monotonic preferences refer to those consumer, preferences where the consumer prefers those consumption, bundles which have at least more of one good and no less of, the other good than other consumption bundles., Suppose, there are two consumption bundles, bundle A (7, 5), and bundle B(3, 5). In this case, consumer preferences would, be called monotonic if he prefers bundle A over bundle B., This is because bundle A has more units of good 2 (i.e. 7 unit, are compared to only 3 units in bundle B) and less of good 1., (i) An indifference curve is downward sloping from left to, right because a consumer cannot simultaneously have more, of both the goods. An increase in the quantity of one good is, associated with the decrease in the quantity of the other good., This is in accordance with the assumption of monotonic, preferences., (ii) An indifference curve is convex to the origin because, of diminishing MRS. As the consumer consumes more and, more of one good, the marginal utility of the good falls. On, the other hand, the marginal utility of the good which is, sacrificed rises. In other words, as the consumer consumes, more of one good he is willing to sacrifice less and less of, other good for each additional unit of the good. Thus, as, we move down the IC, MRS diminishes. This confirms the, convex shape of the indifference curve., , of goods and services as well as the record of unilateral, transfers., , , , Time allowed : 3 hours, , SET III, , , , Economics 2011 (Delhi), , Visit our Site - https://copymykitab1.blogspot.in/, , (i) Expenditure on maintenance of an office building., (ii) Expenditure on improvement of a machine in a factory., Answer : (i) Expenditure on maintenance of an office building, is a final expenditure as it is used for final consumption, purposes., (ii) Expenditure on improvement of a machine in a factory is, also a final expenditure as it increases the capital formation., 32. Calculate Net National Product at market Price and Gross, National Disposable Income :, [6], , • Follow us on Telegram - https://t.me/copymykitab1, , , , , , SECTION B, 22. What does balance of payments account show? Name the, two parts of the balance of payments account., [3], Answer : Balance of payment account shows the record of, economic transactions of a country with the rest of the world., In other words, it reflects the inflow of foreign exchange into, the country and the outflow of foreign exchange from the, country., The two parts of the BOP account are as follows :, (i) Current account : The Current account of BOP is that, account which maintains the records of imports and exports

Page 163 :
Downloaded from CopyMyKitab, , Visit our Site - https://copymykitab1.blogspot.in/, Economics 2011 (Delhi) | 1173, , S., No., (i), (ii), (iii), (iv), (v), (vi), , (, Arab), 40, (−) 10, 20, 100, 800, 5, , Items, , Consumption of fixed capital, Change in stocks, Net imports, Gross domestic fixed capital formation, Private final consumption expenditure, Net current transfer to rest of the, world, (vii) Government final consumption expenditure, , Answer : Expenditure Imports, GDPmp = P + G + I + (X – M), = 800 + 250 + (100 – 10) – 20, = 1050 + 90 – 20, = 1140 – 20, = 1120 Arab, NNPmp = GDPmp – Dep + NFIA, = 1120 – 40 – 40, , 250, 40, 130, , = 1040 Arab, , C, , op, , yM, , yK, ita, b, , (viii) Net factor income to abroad, (ix) Net indirect tax, , = 1120 – 80, , • Follow us on Telegram - https://t.me/copymykitab1