Economics
Section -A
MICRO-ECONOMIC
Q.1. The Total Revenue earned by selling 20 units is ₹ 700. Marginal Revenue earned by selling 21st unit is ₹ 70. The value of Total Revenue earned by selling total 21 units will be (Choose the correct alternative)
(a) ₹ 721
(b) ₹ 630
(c) ₹ 770
(d) ₹ 720
Answer:(c) ₹ 770
Q.2. In the given figure X1Y1 and X2Y2 are Production Possibility Curves in two different periods T1 and T2 respectively for Good X and Good Y. A1 and A2 represent actual outputs and P1 and P2 represent potential outputs respectively in the two time periods.
The change in actual output of Goods X and Y over the two periods would be represented by movement from (Fill up the blank)
(a) A2 to P2
(b) A1to P2
(c) P1 to A2
(d) A1 to A2
OR
Q.2. The Marginal Rate of Transformation (MRT) is constant. The Production Possibility Curve, so formed would be ………… to the origin.
(Fill up the blank)
Answer: (d) A1 to A2
OR
Answer: Straight line
Q.3. Under imperfect competition, Average Revenue (AR) remains ………… Marginal Revenue (MR). (Fill up the blank)
OR
Q.3. For a firm to be in equilibrium, Marginal Revenue (MR) and Marginal Cost (MC) must be …………… and beyond that level of output Marginal Cost must be …………. ” (Fill up the blank)
Answer: Greater than
OR
Answer: Equal, rising
Q.4. If the supply curve is a straight line parallel to the vertical axis (Y-axis), supply of the good is called as ……………. (Fill up the blank)
(a) Unitary Elastic Supply
(b) Perfectly Elastic Supply
(c) Perfectly Inelastic Supply
(d) Perfectly Elastic Demand
Answer: (c) Perfectly Inelastic Supply
Q.5. Discuss briefly the concept of normative economics, with suitable example.
Answer: Normative economics focuses on the ideological, opinion-oriented, prescriptive value of judgements and “what should be” statement aimed towards economic development, investment project, and scenarios. Its goal is to summarize people’s desirability (or the lack thereof) to various economic developments, situations, and programs by asking or quoting what should happen or what ought to be. ‘ Normative economics is subjective and value -based, originating from personal perspectives, feelings, or opinions involved in the decision making process. Normative economics statements are rigid and prescriptive in nature. They often sound political or authoritarian, which is why this economic branch is also called “what should be” or “what ought to be” economics.
An example of a normative economic statement is : “The government should provide basic healthcare to all citizens.” As you can deduce from this statement, it is value-based, rooted in personal perspective, and satisfies the requirement of what “should” be.
Q.6. Explain the law of diminishing marginal utility, with the help of a hypothetical schedule.
OR
Q.6. Elaborate the law of demand, with the help of a hypothetical schedule.
Answer: According to the law of diminishing utility, as more and more units of commodity are consumed, the extra utility that we derive from it goes on declining. Total utility will continue to rise till the point of consumption when the marginal utility becomes zero. After this point, MU becomes negative which means now the good begins to harm consumers.
Assumption of Law of Diminishing Marginal Utility
- Utility can be measured in numeric terms.
- The consumption takes place in the stipulated time period (in continuation).
- All the consumers are assumed to be rational.
- Marginal utility of rupee is assumed to be constant.
The schedule indicates that as more and more units of commodity are consumed, the marginal utility derived from the consumption of each additional unit of the commodity tends to fall. With the consumption of successive units the marginal utility becomes zero and consequently become negative. The MU become zero at the consumption of 4th unit and become negative at the consumption of 5th unit.
OR
Answer: The law of demand explains the inverse relationship between price and quantity demanded of a commodity. According to this law, ‘other things remaining constant’ (ceteris paribus), price and quantity demanded of a commodity move in the opposite direction. When the price of the commodity increases, the quantity demanded falls and when the price decreases, the quantity demanded increases, provided factors other than price remain constant. More units of a commodity are purchased at a lower price because of a substitution effect and income effect.
Following are the assumptions of law of demand :
(a) No change in consumer’s income.
(b) No change in the price of related goods.
(c) No change in the consumer’s taste, preferences and fashion.
(d) No expectation of change in the future prices of the goods.
(e) No change in the population.
Demand schedule
| Price of Sugar (₹ per kg) | 20 | 40 | 50 | 70 |
| Quantity | 100 | 75 | 60 | 40 |
The demand schedule shows that the consumer will demand more sugar at a lower price, other things being constant. When the price of sugar is ₹ 20 per kg the quantity demanded will be 100 kg but when price increase to ₹ 40 the demand decreases to 75 kg and 50 Kg so on. This shows that the price and demand are inversely related
Q.7. The market for a good is in equilibrium. How would an increase in an input price affect the equilibrium price and equilibrium quantity, keeping other factors constant ? Explain using a diagram.
Answer: Input price refers to the money paid to the factors of production in return for their productive services. As the input price rises, the cost of production also rises and produc-tion levels falls. This leads to a leftward shift in the supply curve.
This leads to excess demand in the market. It leads to competition among buyers. Due to this, the price starts rising. As the price rises, demand contracts and supply expands. This will continue until there is no more excess demand.
Finally equilibrium prices rises from P1 to P2 and equilibrium quantity falls from Q1 to Q2.
Q.8. (a) The coefficient of price elasticity of demand for Good X is (-) 0-2 . If there is a 5% increase in the price of the good, by what percentage will the quantity demanded for the good fall?
(b) Arrange the following coefficient of price elasticity of demand in ascending order : (-) 3.1, (-) 0.2, (-) 1.1
OR
Q.8. How would the demand for a commodity be affected by a change in “tastes and preferences” of the consumers in favour of the commodity? Explain using a diagram. Answer: (a)
Percentage change in Quantity demanded = -1% Elasticity of demand is unitary elastic and the percentage fall in quantity demanded is 1%.
(b) Ascending order (-) 0.2, (-)1.1, (-)3.1.
OR
Answer: Taste and preference is one of the factors affecting individual demand. If the consumers in the market have started liking a particular commodity, the demand for that commodity will increase. On the other hand, if there is a disliking for a particular commodity or preference for a commodity is falling, demand will decrease.
So change in taste and preference of the commodity in favour of the other commodity, will shift the demand curve towards right from DD to D1 D1.
Q.9. The market for a good is in equilibrium. Explain, using a diagram, how an improvement in technology for producing the goods would affect the equilibrium price and equilibrium quantity, keeping other factors constant.
Answer: Updated technology helps to increase production in less time and cost. Due to this, the expected profit margin of a producer increases and he produces more output.
Hence, the supply of the commodity rises and the supply curve shifts towards the right.
This leads to an excess supply in the market. It increases the competition among the sellers. Due to this, the prices starts falling. As the price falls, demand expands and supply contracts. This continues till there is more excess supply in the market.<br> Finally, equilibrium prices falls from P1 to P2 and equilibrium quantity rises from Q1 to Q2.
Q.10. Explain the meaning of the following features of the Oligopoly Market :
(a) Non-Price Competition
(b) Few Sellers
Answer: (a) Non-price Competition: Oligopoly firm not only competes through price but also on the basis of non-price competition. Product variation and advertisement are the two main forms of non price competition as they fear price war. Normally, the oligopoly firms do not respond to a rise in price by the rivals. However/they have to respond if a rival firm reduces the price of the product.
Implication : This results in price rigidity in the market.
(b) Few Sellers: Under Oligopoly, there are only a few firms, producing a commodity. The product can be homogeneous or differentiated. These firms can influence the price and output by their actions.
Each firm produces significant portion of total output. There exists competition among different firms and each firm try to manipulate both price and volume of production. The number of buyers are large.
Implications: The number of firms is so small that an action by any firm is likely to affect the other firm. So every firm keeps a close watch on the actions of each other.
Q.11. (a) “A firm under perfect competition is a price taker, whereas a firm under monopoly is a price maker”. Defend or refute the given statement with valid reasons.
(b) What is meant by “product differentiation”? Explain with example.
Answer: (a)Thegivenstatmentis true.Equilibrium price in a perfect market is determined by the industry not by an individual firm. The price is determined by the intersection of demand and supply of an industry which is accepted by all the firms, thus, an individual firm is a price taker while industry is a price maker in this case. Price-Determination under Perfect Competition.
On the other hand, in monopoly market, the firm is a price maker as it has full control over the supply of its commodity because :
- There is no competition in the market
- There are barriers in the entry of new firms in a monopoly market.
Therefore, monopolist can influence the market price by varying its supply. It can increase the price by supplying less and reduce the price by supplying more.
(b) Product Differentiation: Under this market products of different firms are not homogeneous but are close substitutes of each other. Products are differentiated from one another in terms of brand name, colour, shape, quality, type, etc. Due to product differentiation, firms here enjoy control over prices and have its own price policy.
For example, there are a number of toothpastes available in the market like Colgate, Closeup, Pepsodent etc.
Implications: Buyers of the products differentiate between the same kind of products produced by different firms. Therefore, they are also ready to pay different prices for the same product produced by different firms. This gives power to the firm to influence the price of the product.
Q.12. Explain the following conditions :
(a) Movement along the same indifference curve.
(b) Shift from a lower to a higher indifference curve.
OR
Q.12. Explain the law of Equi-Marginal Utility.
Answer: (a) Movement along the same indifference curve : All the points along with the same indifference curve represents all those combinations of two commodities which provides the same level of satisfaction to the consumer. Level of satisfaction remains constant whether we move upward or downward along the same indifference curve. In order to increase the consumption of one commodity the consumer has to sacrifice the consumption of the other “and he moves up and down on the same indifference curve.
In the present diagram, combination A (OX + OY) provides the satisfaction equal to combination B (OX1 + OY1).
(b) Shift from lower to a higher indifference curve : Curves nearer to origin represent lower level of satisfaction and curves which are away from origin represent higher level of satisfaction. It means as we move away from origin, level of satisfaction continuously increases.
In the present diagram IC2 represent higher level of satisfaction in comparison to IC1 and in the same way IC3 represent satisfaction more than IC1 and IC2 .
So if there are three indifferent curves in a single diagram then they will represent three different levels of satisfaction.
OR
Answer: Law of Equi-marginal utility states that a consumer allocates his expenditure on various commodities in such a manner that the utility derived from each additional unit of the rupee spent on each of the commodities is equal.
The ratio of the MU to price of X must be equal to the ratio of MU and price of Y.
MUx/Px = MUy/Py…………… = MUn/Pn
This is known as a law of equi-marginal utility. It means the equality of the MU of the last rupee spent on each good. If Mux /Px is greater than My/Py, it means that MU from the last rupee spent on good X is greater than MU of the last rupee spent on good Y. This induces the consumer to transfer the expenditure from Y to X. The consumption of X rises and MUx falls, and MU of Y rises. This act continues till MUx/Px and MUy/Py are equal.
Assumptions of Law of Equi Marginal Utility
1. Utility can be measured in numeric terms.
2. The consumption takes place in the stipulated time period (in continuation).
3. All the consumers are assumed to be rational.
4. Marginal utility of rupee is assumed to be constant.
For e.g.: A consumer consumers 2 commodities X and Y for ₹ 3/unit and ₹ 2/unit respectively. It is assumed that MUR = ₹ 2
Section-B
MACRO-ECONOMICS
Q.13. Primary deficit in a government budget will be zero, when ………….. (Choose the correct alternative).
(a) Revenue deficit is zero
(b) Net interest payments are zero
(c) Fiscal deficit is zero
(d) Fiscal deficit is equal to interest payment.
Answer:
(d) Fiscal deficit is equal to interest payment.
Q.14. In order to encourage investment in the economy, the Central Bank may …………… (Choose the correct alternative).
(a) Reduce Cash Reserve Ratio
(b) Increase Cash Reserve Ratio
(c) Sell Government securities in open market
(d) Increase Bank Rate
Answer: (a) Reduce Cash Reserve ratio.
Q.15. What do you mean by a direct tax?
OR
Q.15. What do you mean by an indirect tax?
Answer: Direct tax refers to a compulsory payment to the government whose impact and incidence falls on the same person. It is progressive in nature. Example-Income tax and Property tax.
OR
Answer: Indirect tax refers to a compulsory payment to the government whose impact and incidence falls on different persons. It is regressive in nature. Example- VAT, custom duty.
Q.16. Define ‘money multiplier’.
Answer: When the primary cash deposits in the banking system leads to multiple expansion in the total deposits, it is called as money multiplier. It is inversely related to legal reserve ratio.
Q.17. Calculate change in final income, if the Marginal Propensity to Consume (MPC) is 0 8 and change in initial investment is ₹ 1,000 crores.
Answer: MPC = 0.8 and change in initial investment = ₹ 1000 crores
Change in income = ₹ 5000 crores.
Q.18. Estimate the change in final income if Marginal Propensity to Consume (MPC) is 0-75 and change in initial investment is ₹ 2,000 crores.
Answer: MPC = 0.75
Change in investment = ₹ 2000
Change in income = ₹ 8000 crore.
Q.19. Classify the following statement as revenue receipts or capital receipts. Give valid reasons in support of your answer.
(a) Financial help from a multinational corporation for victims in a food affected area.
(b) Sale of shares of a Public Sector Undertaking (PSU) to a private company, Y Ltd.
(c) Dividends paid to the Government by the State Bank of India.
(d) Borrowings from International Monetary Fund (IMF).
Answer: (a) Financial help from a multinational company is an aid to the government so it is a revenue receipt as it does not create any liability and reduction in assets.
(b) It is a capital receipt. As sale of shares will reduce the assets of the PSU.
(c) Dividends paid to the government is a revenue receipt as it neither creates any liability nor reduces the assets.
(d) It is a capital receipt. It increases the liability of the government.
Q.20. Discuss briefly the “credit controller” function of Central Bank.
Answer: Central Bank as a credit controller:
It is the most important function of Central Bank. By controlling the credit effectively, Central Bank establishes stability not only in the internal price level but also in the foreign exchange rate and full employment.
This function helps to meet some definite objectives such as price stability, economic growth, exchange rate stability etc. These objectives are achieved by regulating money supply. It includes two types of measures :
(a) Quantitative measures: It includes Bank rate, Repo rate, Open Market Operations (OMO), CRR, SLR etc.
(b) Qualitative measures: It includes moral suasion, margin requirements, direct actions etc.
Q.21. Distinguish between ‘Qualitative and Quantitative tools’ of credit control as may be used by a Central Bank.
Answer:
Q.22. (a) Define “Trade Surplus” and “Trade Deficit”.
(b) Discuss briefly the concept of managed floating system of foreign exchange rate determination.
Answer: (a) Trade surplus refers to the excess of exports of goods over the imports of goods. Trade deficit refers to the excess of import of goods over the export of goods.
(b) Managed floating exchange rate system- It is a system in which the foreign exchange rate is determined by the market forces and central bank influences the exchange rate through intervention in the foreign exchange market. Central bank interferes to restrict the fluctuations in the exchange rate within limits. For this central bank maintains the reserve of foreign exchange to ensure that the exchange rate stays within the targeted value. It is also known as “Dirty floating”.
Q.23. Discuss the adjustment mechanism in the following situations :
(a) Aggregate demand is lesser than Aggregate Supply.
(b) Ex-Ante Investments are greater than Ex- Ante Savings.
Answer: (a) At the income level above the equilibrium, the planned aggregate demand (AD) is less than the aggregate supply (AS). This implies that there is an excess availability of goods and services in an economy. This surplus in goods is added to the inventory stock of goods. The rise in the inventories above a desired level reduces the production which leads to the decrease in income and employment in the economy. This process continues till AD gets equal to AS.
(b) Adjustment Mechanism when planned in-vestment is greater than planned savings :
(i) When planned (ex-ante) saving is greater than planned investment. Suppose firms plan to invest ₹ 20,000 crores but households plan to save ₹ 25,000 crores, it shows consumption expenditure has decreased. Consequently, AD falls short of AS. Due to excess supply there will be stockpiling of unsold goods, i.e., unintended unplanned inventories will accumulate. At this, the producers will cut down employment and produce less. National income will fall and as a result planned saving will start falling until it becomes equal to planned investment. It is at this point equilibrium level of income is determined.
(ii) When planned (ex-ante) saving is less than planned investment. Suppose producers plan to invest ₹ 20,000 crores but households plan to save ₹ 15,000 crores, then AD (or consumption expenditure) is more than AS. Production will have to be increased to meet the excess demand. Consequently national income will increase leading to rise in saving until saving becomes equal to investment. It is here that equilibrium level of income is established because what the savers intend to save becomes equal to what the investors intend to invest. If planned saving and planned investment are equal, then output, income, employment and the price level will be constant.
Q.24. (a) Distinguish between ‘Trade Deficit” and ‘Current Account Deficit’.
(b) Discuss briefly the concept of flexible exchange rate system of foreign exchange rate determination.
Answer: (a)
| Trade Deficit | Current Account Deficit |
| 1. Trade deficit refers to the excess of import of goods over the export of goods. | Current account deficit refers to the excess of current account, Payments over current account receipts. |
| 2. It is a narrower term. | It is broader them. |
| 3. It does not include services and unilateral transfers. | It includes services and unilateral transfers. |
(b) Flexible exchange rate is a system where the value of one currency in terms of another is free to fluctuate and establish the equilibrium level through the forces of demand and supply. It can be better understood with the following merits and demerits of the flexible exchange rate :
(i) Merits :
- No need to maintain reserves of foreign currency.
- Automatic adjustment in balance of payments (BOP) is possible.
- No dependence on external sources.
(ii) Demerits :
- It creates unstable conditions and uncertainty.
- Increased speculation with a destabilizing effect.
- Gives rise to inflation in the economy.