Section
A: Microeconomics
1. The total cost at 5 units of output
is Rs 30. The fixed cost is Rs 5. The average variable cost at 5 units of
output is: (1)
a) Rs
25
b) Rs
6
c) Rs
5
d) Re 1
Ans. 1. c) (1)
2. What policy initiatives can the
government undertake to increase the demand of milk in the country? Mention any
one. (1)
Ans. 2.- Give subsidies to reduce price.
- Undertake health campaigns to promote the positive effects of milk consumption.
(Any 1) (1)
- Undertake health campaigns to promote the positive effects of milk consumption.
(Any 1) (1)
3. Which of the shaded area in the
diagrams below represent total utility? (1)
(a) (b) (c) (d)
Ans. 3.
(c) (1)
4. State the central problems of an
economy. (3)
Ans. 4. If the river Kosi causes widespread floods in
Bihar, it will lead to destruction of resources in Bihar. This will shift the
PPC leftward. (2)
Initial PPC is PP.With floods, the PPC will shift to P1P1
(1)
5.Q. State the central problems of an economy. Ans.5.The central problems of an economy are:
(i) What to produce and in what quantity? (1)
(ii) How to produce? (1)
(iii) For
whom to produce? (1)
6. State whether the following statements are True or
False. Justify your answer. (3)
a) Average product rises only where
marginal product rises.
b)
Total cost rises only when marginal cost rises.
Ans.6.(a)False: Average product rises as long as marginal product is
greater than average product. Here marginal product could be rising or falling. (1½)
(b) False: Total cost rises at a diminishing
rate when marginal cost falls and total cost rises at an increasing rate when
marginal cost increases. (1½)
Q.7.
Explain the effects of a 'price ceiling'. (3)
OR
Explain the effects of a ‘price floor’.
Ans.7. 'Price ceiling' is the maximum price that sellers can legally charge
for a product or a service.
(1)
(1)
Since
this price is below equilibrium price, there is excess demand in the
market. With shortages, sellers tend to hoard the product. It could also lead to
black marketing. (2)
market. With shortages, sellers tend to hoard the product. It could also lead to
black marketing. (2)
OR
‘Price floor’ is the minimum
price fixed by the government at which sellers can legally sell their product. (1)
Since this price is above equilibrium
price, there is excess supply in the market. Since there is surplus, sellers
can attempt to sell their product at a price below the floor price. (2)
Q.8.
Explain the implications of freedom of entry and exit of firms under perfect
competition. (3)
Ans. 8. Freedom of entry and exit of
firms under perfect competition means that there are no costs or barriers a
firm faces to enter or exit the market. The implication of this is that in the
long run each firm earns only normal profit.
Suppose
in the short run, existing firms are earning super normal profits, new firms
enter the industry as they are attracted by profits. This raises the market
supply and reduces the market price. As firms accept the lower market price,
profits reduces. This process continues till profits reduce to normal levels in
the long run.
The
opposite occurs if firms are earning losses as firms leave the industry. This
reduces market supply and raises market price till losses get wiped out and
firms earn only normal profit in the long run. (3)
Q.9.
A good is an 'inferior' good for one and at the same time 'normal 'good for
another consumer. Do you agree? Explain with the help of an example. (4)
Ans.9. Yes, the same good can be inferior for one person and normal
for another.
Whether a good is normal or inferior is determined by the income level of the
consumer. A good which is a normal good for a consumer with a lower income,
may become an inferior good for a consumer with higher income. (2)
Whether a good is normal or inferior is determined by the income level of the
consumer. A good which is a normal good for a consumer with a lower income,
may become an inferior good for a consumer with higher income. (2)
For example, coarse cloth may be a
normal good for a low income consumer, but for a high income consumer it may be
an inferior good as she can afford a better quality cloth.
Thus, when a consumer moves to a higher
income level, she may consider coarse cloth as being below their income status,
and has the ability to buy more expensive fine cloth, thus considering coarse
cloth as being inferior. (2)
Q.
10. Explain why an indifference curve is convex to the origin? (4)
OR
A consumer consumes two goods X and
Y. What will happen if MUx/Px is greater than MUy/Py?
Ans. 10. An indifference curve is
convex to the origin due to diminishing marginal rate of substitution (MRS).
Diminishing MRS means that the number of units of 'Good Y' that a consumer
wants to substitute for one extra unit of 'Good X' goes on decreasing as the
consumption of Good X increases. As consumption of Good X increases, the
willingness to pay for it diminishes (due to the law of diminishing marginal
utility). This payment is in terms of the units of Good Y sacrificed. Thus, MRS
diminishes along an indifference curve, which makes it convex to the origin. (4)
OR
If
MUx/Px is greater than MUy/Py, then it means that the satisfaction a consumer
derives from spending a rupee on Good x is greater than the satisfaction
derived from spending a rupee on Good Y. (1)
The consumer will relocate her
income – substitute Good X for Good Y. (1)
As the consumption of Good X increases
its marginal utility will fall. As the consumption of Good Y decreases, it
marginal utility will increase. This is due to the law of diminishing marginal
utility. (1)
This process will continue till MUx/Px
becomes equal to MUy/Py and the consumer is in equilibrium. (1)
Q.11. Explain the condition of equilibrium of a
firm based on marginal cost and marginal revenue. (6)
Ans.
11. Suppose the firm produces at an
output level where MC
• This
means that the firm’s cost incurred on the last unit is less than the revenue
earned on the unit.
• Firm
earns a profit on the last unit.
• This
incentivizes the firm to produce more output.
Suppose
the firm produces at an output level where MC>MR (2)
• This means that the firm’s cost incurred on
the last unit is more that the revenue earned on it.
• Firm makes a loss on the last unit.
• This incentivizes the firm to produce
less output. (2)
Thus,
a firm earns maximum profit where MC=MR. Should MC=MR occur at more than one
output level, then the firm maximizes profit if MC>MR after the output where
MC=MR. If not, then MC
Thus, profit for a firm is maximized at
an output where: (1)
(a) MC=MR
(b) MC>MR after the output where MC=MR.
5. Q.12. What is meant by change in
supply and change in quantity supplied? (6)
Ans. 12. Change in quantity
supplied means when more is supplied at a higher price (expansion) or when
less is supplied at a lower price (contraction). It leads to an upward or
downward movement along the supply curve.
It
is caused due to a change in the own price of the commodity, other factor affecting
supply are held constant. (3)
Change in supply means more is supplied
at the same price (increase) or less is supplied at the same price (decrease).
It leads to a rightward or leftward shift of the supply
curve.
It is caused due to a change in other
factors affecting supply and not a change in the own price of the commodity. (3)
Q.13. The
following headline appeared in the Hindustan Times on 2 August 2014: (6)
"Crop
damaged in Himachal sent tomato prices roaring in Delhi."
Use
a diagram and economic theory to analyse the statement.
OR
On
19 December 2013, the following news item was printed in the Economic Times:
Households in Southern India prefer
to eat oranges for breakfast as banana plantations in Kerala have been destroyed
and price of apples and grapes have also risen.
Use
a diagram and economic theory to analyse the impact of the rise in price of
apples and grapes on the market of oranges.
13.
(1)
When the tomato crop was damaged in Himachal
the supply of tomatoes (1)
decreases. This means that the supply curve shifts leftward to S'S'.
decreases. This means that the supply curve shifts leftward to S'S'.
At the prevailing market price (OP),
there was an excess demand of AE. In this situation, buyers would have competed
to raise the market price. As market price would have risen, quantity demanded of
tomatoes would have contracted and the quantity supplied would have expanded.
This process would have continued till a new equilibrium price was reached at
OP1, where market demand is equal to market supply. OP1
is higher than the old price of tomatoes. (3)
This explains how prices in Delhi rose
when the tomato crop got damaged in Himachal. (1)
OR
When the price of apples and grapes
rises, consumers will substitute with these fruits with the relatively cheaper
oranges. Thus, demand for oranges will increase and the demand curve shifts
rightwards to D’D’. (1)
At
the prevailing market price (OP), there was an excess demand of AE. In this
situation, buyers would react by competing with each other and raise the market
price. As market price rises, quantity demanded of oranges contracts and the
quantity supplied expands. This process will continued till a new equilibrium
price is reached at OP1, where market demand is equal to market supply.
OP1 is higher than the old price of oranges. (3)
Therefore, the equilibrium price of
oranges increases and the equilibrium quantity also increases when the price of
apples and grapes rises in Southern India. (1)
Q.14. A consumer consumes only two
goods. Explain the conditions that need to be satisfied for the consumer to be
in equilibrium under indifference curve analysis. (6)
Ans.
14. Let a consumer consume Good X and
Good Y. A consumer attains equilibrium when:
1) MRSXY
= 
2) MRSXY must be decreasing due to
the law of diminishing marginal utility. (1)
MRSXY
is the number of units of Good Y a consumer in willing to sacrifice for an
extra unit of Good X.
is the ratio of prices that prevail in the
market and gives the actual units of Good Y that need to be sacrificed to
obtain an extra unit of Good X in the market. (1)
Suppose MRSXY >
• It
means that the consumer is willing to sacrifice more of Good Y than she needs
to give up actually in the market for an extra unit of Good X.
• The
consumer gains and increases consumption of Good X.
• As
consumption of Good X increase, its marginal utility declines.
• Thus,
the willingness to pay for additional units of Good X (in terms of Good Y)
falls.
• Process
continues till MRSXY = (2)
(2)
Suppose MRSXY <
• It
means that the consumer is willing to sacrifice less of Good Y than is actually
required in the market for as extra unit of Good X.
• The
consumer loses and reduces the consumption of Good X.
• As
consumption of Good X decreases, its marginal utility increases.
• Thus,
MRSXY increases.
• The
process continues till MRSXY = (2)
(2)
Section
B: Macroeconomics
Ans.15. a)
Read the following dialogue between two people 1.
Sita
: I want 1kg of potatoes
Rani:
What will you give in exchange?
Sita : I can give you 2 litres of milk in return
for the potatoes.
Rani:
I don't need milk. I want a pair of shoe
Which
of the following problem is being faced by Sita and Rani in their exchange
process?
a)
Lack of double coincidence of
wants
b)
Absence of common units of
value
c)
Lack of store of value
d) Lack of standard of
deferred payment
(1
Q. 16. What is repo rate? (1)
16. Repo
rate or repurchase rate is the rate at which commercial banks borrow money from
the Central Bank for a short period by selling their financial securities to
the Central Bank. (1)
8. Q.17. Which of the following is a
characteristic of a good? (1)
a)
Intangible
b) Can
be stored
c) Production
and consumption must happen
simultaneously
d) Cannot
be transferred
Ans. 1 7. b (1)
Q. 18. The government budget has a revenue deficit.
This gets financed by: (1)
A.
Borrowing
B.
Disinvestment
C.
Tax revenue
D.
Indirect taxes
a) A
and D
b) C
and D
c) A
and B
d) C and D
Ans. 18. c) (1)
Q. 19. Which of the following
statement is not true for fiscal deficit?
(1)
A
fiscal deficit:
a) represents
the borrowing of the government.
b) is
the difference between total expenditure and total receipts of the government
c) is
the difference between total expenditure and total receipts other than
borrowing
d) increases the future liability of the
government
Ans. 19. b)
(1)
Q.20. What is the role of a Central
Bank in the following exchange rate? (3)
a) Fixed
exchange
b) Floating
exchange
c) Managed floating
Ans. 20. The role of the Central Bank in maintaining the foreign exchange
rates under different regimes is:
a) Fixed exchange rate system: A Central Bank
actively uses its foreign currency reserves to maintain the officially
determined exchange rate. (1)
b) Floating exchange rate system: A Central
Bank does not maintain any reserves of foreign currency as the market
automatically adjusts to determine the market driven exchange rate. (1)
c) Managed Floating: A Central Bank enters
the foreign exchange market to buy/sell foreign currency in order to control
fluctuations and volatility in the market. (1)
Q. 21. In an economy the autonomous
investment is 100 and the consumption is C=80+0.4Y. Is the economy in
equilibrium at an income level 400? Justify your answer. (3)
OR
In an economy the autonomous
investment is 60 and the marginal propensity to consume is 0.8. If the
equilibrium level of income is 400, then the autonomous consumption is 30. True
or False? Justify your answer.
Ans. 21. At equilibrium AD
= Y
AD
= C+I = Y (1)
80+0.4Y+100
= Y
0.6Y
= 180
Y
= 
= 300 (1)
= 300 (1)
Since
the given income of 400 is greater than equilibrium level of income, the
economy is not at equilibrium. It is at a situation where aggregate demand is
greater than the aggregate output produced in the economy. (1)
OR
At
equilibrium AD = C +I = Y (1)
I
= 60
C
= C0 + bY = C0 + 0.8Y
If
equilibrium level of income is 400, then C = C0 + 0.8x400 =C0
+320
Thus,
60+C0+320 = 400
C0
= 20 (1)
The
given value of autonomous consumption is incorrect. The correct value is 20. (1)
Q.22. In an economy planned saving
is greater than planned investment. Explain how the economy achieves
equilibrium level of national income. (3)
Ans. 22. Suppose planned saving is higher than planned investment. It
means that households are not consuming as much as the firms had anticipated.
In other words, planned output is greater than planned demand.
As
a result, producers see a rise in their inventory level, beyond the planned
level. To bring back inventory to the planned level, producers cut down
production. This reduces aggregate output. The process continues till aggregate
demand equals the output produced in the economy i.e. planned investment
becomes equal to planned saving.
(3)
Q.23. Only one Product X is produced in the country.
Its output during the year 2012 and 2013 was 100 units and 110 units
respectively. The market price of the
product during the year was Rs 50 and Rs 55 per unit respectively. Calculate
the percentage change in real GDP and nominal GDP in year 2013 using 2012 as
the base year. (4)
Ans. 23.
|
Year
|
Physical
Output (Units)
|
Market
Price Per Unit (Rs.)
|
Real
GDP (Rs) Using base Year Prices
|
Nominal
GDP (Rs.) Using Current Year Price
|
|
|
2012
|
100
|
50
|
5000
|
5000
|
(1)
|
|
2013
|
110
|
55
|
5500
|
6050
|
(1)
|
Percentage
change in:
Real
GDP = 
(1)
(1)
Normal
GDP = 
(1)
(1)
Q.24. What is meant by “balance of
payment” account? Distinguish between the "balance on current
account" and "balance of trade" account. In which account would
remittances from family members from abroad be accounted? (4)
Ans. 24. Balance of payment account records the inflows and outflows of
foreign exchange of a country during a period of time. (1)
'Balance
of Trade' is the difference between exports of goods and imports of goods i.e.
between visible inflows and visible outflows of foreign exchange. 'Balance on
current account' is the difference between the sum of both visible and
invisible (Service, income and transfers) inflows and outflows of foreign
currency. (2)
Remittances
from family members from abroad is accounted for under unilateral transfers of
the current account. (1)
13. Q. 25. State the various components
of the Income Method that are used to calculate national income. (4)
OR
State any four precautions that need
to be kept in mind when using the value added method for calculating national
income.
Ans.
25. The various components that are
used under the income method to calculate national income are:
i) Compensation of employees which includes
- wages and salaries in cash and kind and employers' contribution to social
security benefits. (1)
ii) Operating surplus - which includes rent
and royalties, interest and profit earned by a firm. (1)
iii) Mixed income of self employed which
includes any income that has 2 or more factor income, which cannot be accounted
for separately. (1)
iv) Net factor income from aboard, which in the
difference between factor income from aboard and factor income to abroad. (1)
OR
The precautions that need to be kept
in mind when using the value added method of calculating national income are:
i)
Avoid
double counting of goods and services as these tend to inflate national income
estimates.
ii)
Do
not include the value of second hand goods being sold as their value was
accounted for at the time of first production.
iii)
Include
imputed value of own account production in total output as output has been
produced.
iv)
Include
the imputed value of owner occupied dwellings as houses provide housing
services. (1x4=4)
Q.26. In the
government of India's budget for the year 2013‑14, the Finance Minister
(6) proposed to raise the excise duty on cigarettes. He also proposed to
increase income tax on individual earning more than Rs. one crore per annum.
Identify
and explain the types of taxes proposed by the Finance Minister. Was the objective only to earn revenue for the
government? What possible welfare objectives could
the Government be considering?
Ans. 26. Excise duty - Indirect tax
Indirect
tax is a tax where the payer and the bearer of the tax are different people. (1)
Income
tax - Direct tax
Direct
tax is a tax where the payer and bearer of the tax is the same person. (1)
Besides
the objective of raising more revenue, the proposals also serve some welfare
objectives. Firstly, raising excise duty on cigarettes will make them more
expensive. The price rise is expected to discourage cigarette smoking, which
will positively impact the health of people and raise their welfare.
Secondly,
raising income tax on income above Rs. one core will reduce the gap between the
rich and poor people. In other words, income inequalities will reduce.
Thirdly,
the extra revenue raised from these proposals could be spent on health
education and other welfare enhancing schemes to improve the welfare of the
poor. (4)
Q.27. Draw a straight line
consumption curve. From it derive the saving curve. Explain the process of
derivation on the diagram, show: (6)
a) The
income level at which APC=1
b) The
income level at which APS is negative
Ans.27.
Diagram
(a) gives a straight line consumption curve.
Consumption
(c) + saving (s) = income (Y) (1)
At
zero level of income, there is an autonomous consumption of OC. The corresponding
saving at this income level is (-)OC. The saving curve starts at (-)C. (1)
At
the income level OB, where the 45o reference line intersects the
consumption curve, C=Y. At this income level, saving in equal to zero. Thus, we
get point B on the x-axis of the saving curve. (1)
By
connecting (-)C and B, we get the saving curve.
• At income level OB, APC = 1 as APC = 
and at the income level C= Y. (1)
and at the income level C= Y. (1)
• A level of income at which APS is
negative is any level of income less than OB. APS=
and here saving is negative. (1)
and here saving is negative. (1)
15. Q.28. a) What is meant by Cash reserve ratio? How does it increase the
money supply in the
economy? (3+3)
b) What
is meant by Open market operation? How does it reduce the money supply in the economy?
Ans. 28. Cash reserve ratio is the ratio of bank deposits that
commercial banks must keep as reserves with the Central Bank. (1)
When
CRR falls, commercial banks keep lower reserves with the Central Bank. This
releases funds that were earlier held with the Central Bank for commercial
banks to lend. As lending increases, the money creation in the economy expands
and money supply in the economy increases. (2)
Open
market operations refers to the sale and purchase of government securities by
the Central Bank in the open market. (1)
When
there is a need to reduce the money supply in the economy, the Central Bank
starts selling government securities. Those who buy make payments by cheques to
to the central bank. The money flows from commercial banks to the Central Bank.
This reduces the deposits held by commercial banks. This reduces money supply
as well as the money creation power of the commercial banks. (2)
Q.29. Find
(a) National Income and (b) Gross National Disposable Income. (6)
Rs
Crore
i. Net current transfer from abroad 5
ii. Private final consumption
expenditure 200
iii. Subsidies 20
iv. Net domestic fixed capital formation 40
v. Net factor income to abroad 10
vi. Government final consumption
expenditure 50
vii. Change in stock (-)10
viii.
Net
imports (-)20
ix. Consumption of fixed capital 30
x. Indirect tax 60
xi. Exports 100
OR
Find (a) Private Income and (b)
National Income.
i.
Personal
disposable income 350
ii.
Income
from property and entrepreneurship 50
accruing to the government
administrative departments
iii.
Savings
of non-departmental enterprises 25
iv.
Direct
personal tax 10
v.
Net
factor income from abroad (-)5
vi.
Indirect
taxes 15
vii.
Current
transfers to the rest of the world 20
viii.
Savings
of private corporate sector 25
ix.
Corporation
tax 15
x.
Current
transfers from government 30
Ans. 29. (a) National income using expenditure method:
|
|
|
|
|
(ii)
|
+ (vi) + (iv) + (vii) – (viii) –
(x) + (iii) – (v)
200 + 50 + 40 -10 +20 -60 +20 -10
= Rs 250 crores
|
(1½ ) (1)
( ½ )
|
|
|
|
|
(b) Gross
National disposable income
|
|
National income + (ix) + (x) –
(iii) + (i)
|
|
(1½ )
|
|
|
= 250 + 30 + 60 – 20 + 5
|
|
(1)
|
|
|
= Rs 315 crores
|
|
( ½)
|
|
|
|
|
|
OR
(a)
Private Income
(i) + (iv) + (viii) + (ix) (1½)
= 350 + 10 + 15 + 25 (1)
= Rs 400 crores (½)
(b)
National Income
Private
income + (vii) – (x) + (ii) + (iii) (1½
)
=
400 + 20 - 30 + 25 + 50 (1)
=
Rs 465 crores (½)
...........................................................................................................................................................
