1. Studymate Solutions to CBSE Board Examination 2012-2013
Series : SKS/1 Code No. 58/1/1
Candidates must write the Code on
Roll No. the title page of the answer-book.
 Code number given on the right hand side of the question paper should be written on the title page of
the answer-book by the candidate.
 Please write down the Serial Number of the questions before attempting it.
 15 minutes time has been allotted to read this question paper. The question paper will be distributed at
10.15 a.m. From 10.15 a.m. to 10.30 a.m., the student will read the question paper only and will not
write any answer on the answer script during this period.
ECONOMICS
[Time allowed : 3 hours] [Maximum marks : 100]
General Instructions:
1. All questions are compulsory.
2. Marks for questions are indicated against each.
3. Questions numbered 1 to 5 and 17-21 are very short-answer questions carrying 1 mark each. They are
required to be answered in one sentence each.
4. Questions numbered 6 to 10 and 22-26 are short-answer questions carrying 3 marks each. Answer to
them should not normally exceed 60 words each.
5. Questions numbered 11 to 13 and 27-29 are also short-answer questions carrying 4 marks each. Answer
to them should not normally exceed 70 words each.
6. Questions numbered 14 to 16 and 30-32 are long-answer questions carrying 6 marks each. Answer to
them should not normally exceed 100 words each.
7. Answer should be brief and to the point and the above word limit be adhered to as far as possible.
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2. STUDYmate
SECTION-A
1. Give two examples of fixed costs.
Ans. Rent and Interest.
2. Define marginal cost.
Ans. Marginal cost refers to the addition to the total cost when one more unit of output is produced.
3. When is the demand for a good said to be inelastic?
Ans. When a change in the price of a commodity brings about a LESS THAN PROPORTIONATE
CHANGE in the quantity demanded for it, then the demand is said to be relatively inelastic
demand. The change in quantity demanded is less than the change in price.
4. Give the meaning of market demand.
Ans. Market demand is the total demand of all the buyers in the market which they are ready to
buy at different possible prices of the commodity at a point of time.
5. Under which market form a firm’s marginal revenue is always equal to price?
Ans. Marginal Revenue is always equal to price under perfect competition.
6. Explain the difference between an inferior good and a normal good.
Ans. Normal Goods Inferior Goods
An increase in the money income of a An increase in the income generally leads
consumer increases the demand for the to fall in demand for an inferior good
normal good and a fall in the income because a household can now afford to
reduces the demand for it. buy normal (superior) good.
Income effect is positive in case of normal Income effect is negative in case of inferior
goods. goods.
There is a direct relation between income There is an inverse relation between
and demand for normal goods. income and demand for inferior goods.
‘Full Cream Milk’ is a normal good if its ‘Toned Milk’ is an inferior goods if its
demand increases with an increase in demand decreases with an increase in
income. income.
7. Explain the law of diminishing marginal utility with the help of a total utility schedule.
OR
Explain the conditions of consumer’s equilibrium with the help of utility analysis.
Ans. The law states, “As more and more units of a commodity are consumed, marginal utility
derived from additional units goes on falling” or “As the consumer consumes more and more
units of a good, the addition to total utility obtained goes on decreasing.”
Bars of chocaltes (N) TU (Utils) MU ( TU/ N)
0 0 –
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 –2
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3. STUDYmate
In the schedule, as a consumer buys units from 1 to 4, additional utility is MU declines from
8 to 2.
OR
Ans. There are two equilibrium conditions as per this approach:
MUx
(a) MUx = price, i.e.,  Px
MUm
If MUx (money) > Px, consumer keeps on consuming more units. When he consumes
more unit, the additional utility derived from consuming x keeps on falling. He keeps
on consuming till MUx (money) = Px.
If MUx (money) < Px, he will decrease the consumption of x. When he decreases the
consumption of x, the marginal utility of x will increase. He will keep on decreasing
consumption of x till MUx(money) = Px.
(b) Total gain falls as more is purchased after equilibrium.
The consumer continues to purchase so long as gain is increasing or at least constant.
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.
Ans. P TR Quantity Supplied = TR/P
20 100 5
30 300 10
P = 10
Q = 5
Q P
ep = 
Q P
5 20
= 
5 10
=2
9. Complete the following table:
Units of Labour Average Product (Units) Mar ginal Product (Units)
1 8 _________
2 10 _________
3 _________ 10
4 9 _________
5 _________ 4
6 7 _________
Ans. Units of Average Product Marginal Product
TP
Labour (Units) (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
Formulae used,
TP = AP × Units of Labour
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4. STUDYmate
TP = MP
MP = TPn – TPn–1
MP
AP =
Units of labour
10. Explain ‘large number of buyers and sellers’ feature of a perfectly competitive market.
Ans. A Large Number of Buyers and Sellers: There are so many buyers and sellers that no individual
buyer or seller can influence the price of the commodity in the market. Any change in the
output supplied by a single firm will not affect the total output of the industry. To an individual
producer the price of the commodity is given. He can sell whatever output he produces at the
given price, i.e., an individual seller is a price-taker. Similarly, no individual buyer can
influence the price of the commodity by his decision to vary the amount that he would like to
buy, i.e., price of the commodity is given to the buyer. He is a price-taker having no bargaining
power in the market.
Market Firm
D S
P AR = MR = P
P
Price
Price
S D
O X Output O Output
Implication: The perfectly competitive firm is then a ‘price-taker’ and can sell any amount
of the commodity at the established price. Thus, AR is a straight line parallel to x-axis.
11. Production in an economy is below its potential due to unemployment. Government starts
employment generation schemes. Explain its effect using production possibilities curve.
Ans. When the economy is below its potential due to unemployment the economy operates inside
the PPC.
Good 1
A
B
C
u
D
Good 2
E
When the government starts employment generation schemes it enables the economy utilise
its existing resources in the optimum manner.
The resources who were sitting idle now get job and the economy function at its maximum
capacity and moves from inside the PPC to points on the PPC.
Thus, economy moves from point u in the PPC to any point on PPC as shown in the diagram.
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5. STUDYmate
12. Explain the conditions of producer’s equilibrium with the help of a numerical example.
Ans. Two conditions of producer’s equilibrium are
(a) MC = MR;
(b) MC curve cuts the MR curve from below.
MR is the addition to total revenue from the sale of one more unit of output and MC is the
addition to total cost for increasing the production by one unit.
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.
Condition 1: MC = MR. This can be explained with the help of illustration and diagram.
Output (Units) Marginal Revevenue (In `) Marginal Cost (In `)
1 10 10
2 10 5
3 10 2
4 10 5
5 10 7
6 10 10
7 10 13
8 10 15
Two other situations may exist
(a) MR > MC. At output level less than OQ, MR > MC, this implies that the firm is earning
profit on the last unit of output. The marginal profit provides an incentive to the firm to
increase production and move towards OQ units of output. Therefore when MR > MC,
the firm increases output to maximise its profit.
(b) MR < MC. At output level more than OQ, MR < MC. This implies that the 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.
Y
Revenue and Cost
MC
R K
(in Rs.)
P AR = MR
Producer’s
equilibrium
O X
Q1 Q
Output (in units)
In the diagram, AR = MR = P. The marginal cost (MC) curve is U-shaped. Now, the condition of
MR = MC is satisfied at two points; R and K. However, profits are maximised at point K,
corresponding to OQ level of output.
Condition 2; MC cuts MR curve from below. MC = MR at two points R and K in the diagram
but profits are maximised at point K, corresponding to OQ level of output.
B et een O Q 1 and OQ levels of output, MR exceeds MC, therefore firm will not stop at point R
w
but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at
point K.
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6. STUDYmate
13. The price elasticity of demand for a good is –0.4. If its price increases by 5 per cent, by what
percentage will its demand fall? Calculate.
OR
Explain any two factors that affect the price elasticity of demand. Give suitable examples.
Ans. ep = –0.4
% change in quantity
ep = % change in price
% change in quantity
0.4 =
5%
2% = % change in quantity
Hence, demand will fall by 2%.
OR
Ans. The two factors that affect the price elasticity of demand are:
(a) Nature of the Commodity.
i. Necessities: These commodities are essential for satisfying the basic needs of
individuals. Examples of necessities includes vegetables, salt, medicines, sugar, pulses,
grains, etc. The demand for these products is relatively insensitive to price changes, as
these are needed for day-to-day living. Hence, as price changes, demand for such
commodities changes but by a smaller extent. Thus, the elasticity of these products is
relatively inelastic.
ii. Luxuries: These commodities are typically not required for survival. Examples of luxury
goods include ice creams, watches, branded clothing, cosmetics, tinned and other
processed food, etc. If prices of such commodities rise then individuals can wait to
purchase them or substitute them for more basic commodities. Thus, demand for such
product changes by a large extent with a price change. Luxury goods are relatively
elastic products.
(b) Availability of substitute goods
i. If there are a large number of close substitutes available for a product, then it is easy for
consumers to replace the good when its price increases. Here, demand reduces by a
large extent. Similarly, when the price of the products reduces, individuals consuming
substitute products start buying this product. Here, demand rises by a large extent.
Hence, larger the number of substitutes available for a commodity, the more elastic
is its demand.
Now if the price of Amul Chocolate were to increase, then demand shifts from Amul
chocolate to other brands, as consumer have the option of doing so. Demand for Amul
chocolate decreases by a large extent. Hence demand is relatively elastic.
ii. Fewer the substitutes available for a product, the more inelastic is its demand.
Products such as cooking gas do not have close substitutes available. Here even if price
increases, demand reduces (usage of electric ranges may increase or people start
conserving cooking gas) but the reduction in demand is relatively small, as consumers
do not have many options of switching to alternative products.
14. Giving reasons, state whether the following statements are true or false:
(i) A monopolist can sell any quantity he likes at a price.
(ii) When equilibrium price of a good is less than its market price, there will be competition
among the sellers.
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7. STUDYmate
Ans. (i) A monopolist can sell any quantity he likes at a price
False, a monopolist can sell more quantity only by lowering the price of a commodity.
The demand curve is a constraint faced by a monopoly firm.
Since consumer demand more only at a lower price, therefore monopolist will have to
lower down the price to sell more output. AR is, therefore, downward sloping.
(ii) False, when equilibrium price of a good is less than its market price, there will be
competition among the buyers
– At a price lower than market price, there will be excess demand, i.e., demand will
be more than supply
– Due to excess demand, buyers will compete with each other and price begins to
rise.
– When price rises, demand contracts and supply expands, till excess demand
becomes zero.
15. Explain the Law of Variable Proportions with the help of total product and marginal product
curves.
Ans. The law states, ‘if more and more units of a variable factor are employed with fixed factors,
total product (TP) increases at an increasing rate in the beginning, then increases at a
diminishing rate and finally starts falling.
Three phases of production
Land No. of TP AP MP
(Acre) labourers (quintal) (quintal) (quintal)
1 0 0 0 –
1 1 2 2 2
 Phase I
1 2 6 3 4
1 3 12 4 
6
1 4 16 4 4
1 5 18 3.6 2 Phase II

1 6 18 3 0

1 7 16 2.2 –2
Phase III
1 8 15 1.8 –1

Phase I : Stage of increasing returns
TPP increases at an increasing rate. In the following figure, TP increases up to OQ1 level of
output at an increasing rate. Accordingly TP curve is increasing from point O to M.
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8. STUDYmate
Y
N
M
TP
TP
O X
Q1 Q2 Unit of variable
factor
Phase I Phase II
MP
R
X
O Q1 Q2
MP
Unit of variable factor
MP keeps rising between O to Q1 level of output and reaches its maximum (here point R)
where this stage ends. This is reflected by MP curve from point O to R. Increasing returns
occur due to better utilisation of abundant fixed factor and devision of labour and specialisation
of variable factors.
Phase II : Stage of Diminishing returns
TP increases at a diminishing rate till it reaches its maximum point (here N). This is reflected
by TP curve from point M to point N which lies between Q1 and Q2 level of output. The point
(here M) where TP changes from increasing at increasing rate to increasing at decreasing
rate is called the point of inflexion.
MP is falling but remains positive. This phase covers from point R where MP is maximum to
point Q2 where MP = 0. During phase II since MP is diminishing, it is called the phase of
diminishing returns to a factor. Out of three phases of production, this phase is crucial because
a firm would always try to operate in phase II. Diminishing returns occur due to scarcity of
fixed factor and overabundance of variable factor.
Phase III : Stage of negative returns
TP starts declining. As a result TP curve starts sloping downward. So phase III is called the
phase of negative returns.
16. Explain consumer’s equilibrium with the help of Indifference Curve Analysis.
OR
Explain the relationship between:
(i) Prices of other goods and demand for the given good.
(ii) Income of the buyers and demand for a good.
Ans. Account to indifference curve approach consumers equilibrium is determined if the following
two conditions are satisfied.
(i) MRSxy = MRE = Px / Py (ii) MRSxy is declining.
MRSxy is the rate at which the consumer is willing to sacrifice Y to obtain one more unit of X.
MRE is the rate at which market requires a consumer to sacrifice units of Y to buy one more
unit of X which is equal to ratio of prices of x and y good. MRE = Px/Py.
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9. STUDYmate
If MRSxy > MRE it implies that the consumer is willing to sacrifice more unit of Y than what
market requires. This induces the consumer to buy more of x. When he buys more of x, utility
derived from X falls and he is willing to sacrifice less of Y. Thus MRSxy starts declining. He
continues to consume more of X, till MRSxy = MRE = Px/Py.
If MRSxy < MRE, it implies consumer is willing to sacrifice less units of Y than what the
market requires. He decreases the consumption of X. Due to this MRSxy began to rise, he
continues to decrease the consumption of X till MRSxy = MRE.
Thus we can say that
“A consumer is in equilibrium at a point
where budget line is tangent to indifference curve”.
Y
A
F
Good Y
y1 E
IC3
IC2
G
IC1
O X
x1 B
Good X
Slope of indifference curve = Slope of budget line i.e. MRSxy = Px/Py.
In the diagram, equilibrium is at point E, where the budget line touches the highest attainable
indifference curve IC2 within consumer’s budget.
Bundles on the indifference curve IC3 are not affordable within budget.
Bundles on the indifference curve IC1 (i.e., points F and G) are lying on a lower indifference
curve i.e. will have lower utility levels as compared to the tangency point E. Therefore, the
consumer will choose only the tangency point on the budget line.
Therefore, E is a point of consumer’s equilibrium where he maximizes his satisfaction. Point
E is also called the “Optimum Consumption Point” where he consumes OX1 of X and OY1 of Y.
OR
Ans. (i) Prices of other goods and demand for the given good.
(a) The effect of change in price of substitude good. Two goods are substitutes if
one can be used in place of the other. They compete with each other for demand in
the market. For example, Tea and Coffee. Suppose the price of coffee falls. Since
the relative price (i.e., the proportional price) of coffee is now lower the consumer
is likely to consume more coffee in place of tea. The demand for tea is likely to fall.
Leftward shift in demand curve (A to C)
C A B owing to fall in the price of the
Price
P substitute commodity.
Rightward shift in demand curve (A to B)
owing to rise in the price of the
D1 D2 D3 substitute commodity.
0
Quantity Demanded
As such, with the fall in price of a substitute (coffee) the demand for the given good
(tea) falls. Again, with the rise in price of a substitute the demad for a given good
rises. So, there is a positive relation between the price of a substitute and the
demand for the given good.
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10. STUDYmate
(b) Effect of change in price of a complementary good. Two goods are complementary
to each other when they are used jointly. They are also called joint goods. For
example, tea and milk are complementary goods.
Suppose the price of milk rises. Rise in the price of milk reduces demand for milk.
Since, milk is used with tea the demand for tea is also likely to fall. So a rise in
the price of a complementary good (milk) leads to fall in demand for the given good
(tea). Again, fall in price of a complementary good is likely to lead to rise in demand
for the given good. Thus, there is an inverse relation between the price of a
complementary good and demand for the given good.
Leftward shift in demand curve (A to C)
C A B owing to rise in the price of the
Price
P complementary commodity.
Rightward shift in demand curve (A to B)
owing to fall in the price of the
D1 D2 D3 complementary commodity.
0
Quantity Demanded
(ii) Income of the buyers and demand for a good.
(a) Normal good. A good whose demand by a consumer rises with the rise in the
income of that consumer is called a normal good. For example, if a consumer buys
more of toned milk for his family as his income rises, then toned milk with be
called a normal good. Demand for a normal goods falls with the fall in income.
Leftward shift in demand curve (A to C)
C A B owing to fall in the income of the
Price
P consumer.
Rightward shift in demand curve (A to B)
owing to rise in the income of the
D1 D2 D3 consumer.
0
Quantity Demanded
(b) Inferior good. A good whose demand by a consumer falls with the rise in income
of that consumer is called an inferior good. For example, if a consumer reduces
the consumption of toned milk when his income rises, then toned milk is an
inferior good for that consumer. Remember, toned milk is not always an inferior
good. At lower income levels it may be a normal good. Like this, no good is either
always normal or always inferior. It is the income level of the individual consumer
that makes a good normal or inferior for him. Demand for an inferior good rises
with the fall in income.
Leftward shift in demand curve (A to C)
C A B owing to rise in the income of the
Price
P consumer.
Rightward shift in demand curve (A to B)
owing to fall in the income of the
D1 D2 D3 consumer.
0
Quantity Demanded
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11. STUDYmate
SECTION-B
17. How can increase in foreign direct investment affect the price of foreign exchange?
Ans. An increase in foreign direct investment will result in more supply of foreign exchange
therefore due to excess supply price of foreign exchange will fall i.e. exchange rate falls.
18. What are demand deposits?
Ans. Demand deposits are those deposits which are payable on demand i.e. the depositor has the
right to go to the bank and withdraw his entire balance in the account. A demand deposit is
treated as equal to currency held, and included in money supply.
19. Give one example of “extrenality” which reduces welfare of the people.
Ans. When the activities of one result in harm to others with no payment made for the harm done,
such activities are called negative externalities. GDP does not take into account negative
externalities. For example, factories produce goods but at the same time create pollution of
water and air. Producing goods increases welfare but creating pollution reduces welfare.
20. Give two examples of indirect taxes.
Ans. It refers to those taxes which are imposed by the government on the production and sale of
goods and services. Sales tax, excise duty, custom duty, etc. are some examples of indirect
taxes.
21. What is a Government Budget?
Ans. Government budget is an annual statement, showing item-wise estimates of receipts and
expenditures during a fiscal year. A budget shows the financial accounts of the previous years,
the budget and revised estimates of the current year and the budget estimates for next year.
22. Explain the problem of double coincidence of wants faced under barter system. How has money
solved it?
Ans. (i) Double coincidence of wants means the simultaneous fulfillment of mutual wants by
buyers and sellers.
(ii) In the Barter system, a lot of time and energy gets wasted in finding/locating the
individuals who both wants the good/service that you want to sell and is willing to
exchange it for the good that you want.
Money as a medium of exchange
(i) With the introduction of money, the goods produced can be exchanged for money and
with the money, any commodity can be purchased at any time.
(ii) The problem of double coincidence of wants gets automatically eliminated and the trading
cost which is present in the Barter system wouldn’t be present here. We can buy the
commodity from anywhere at any point of time, wherever we get the best bargain.
(iii) Therefore, Money is called a bearer of options / of generalized purchasing power, because
money provides us with a choice.
23. Distinguish between revenue expenditure and capital expenditure in Government budget.
Give an example of each.
OR
Distinguish between revenue deficit and fiscal deficit.
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12. STUDYmate
Ans. Revenue Expenditure Capital Expenditure
Revenue expenditure neither creates any Capital expenditure either creates an
asset nor reduces any liability asset or reduces a liability.
Revenue expenditure is incurred on the Capital expenditure is incurred for
normal functioning of government acquisition of assets, granting of loans
departments and on the provisions for and advances and repayment of
various services borrowings.
Revenue expenditure is recurring in However, capital expenditure is non-
nature i.e. an expenditure is made by recurring in nature.
the government on its day-to-day
activities.
OR
Ans.
Revenue Deficit Fiscal Deficit
1. It refers to the excess of total revenue 1. Its defined as excess of total
expenditure of the government over expenditure over total receipts
its total revenue receipts. excluding borrowing during a fiscal
Revenue deficit = Revenue year.
expenditures – Revenue receipts Fiscal deficit = Total budget
expenditure – Total budget receipts
excluding borrowings
2. Revenue Deficit implies that the 2. Fiscal deficit shows the borrowing
government is overspending to meet requirements of the government to
its current expenses. meet its revenue and capital
expenditure.
3. Revenue deficit can be made up by 3. Fiscal deficit can be meet through
capital receipts. monetary expansion and borrowing.
24. Explain any one objective of Government Budget.
Ans. Objectives of Government Budget
1. Reallocation of Resources-
(a) The government aims to reallocate resources according to economic and social priorities
through its budgetary policy.
(b) Government encourages the production of certain commodities by giving subsidies or
tax reliefs. For e.g. government encourages the use of’ khadi products’ by providing
subsidies.
(c) Government can discourage the production of harmful goods like liquor or cigarettes,
by imposing heavy excise duties or taxes.
25. Explain the effect of appreciation of domestic currency on imports.
Ans. Demand curve of foreign exchange is downward stoping i.e. less of foreign exchange is demanded
as exchange rate rises and more is demanded when exchange rate falls.
When exchange rate falls there is appreciation of domestic currency. Foreign exchange becomes
cheaper. Less of domestic currency has to be paid for purchasing foreign currency.
There is fall in rupee cost of foreign goods therefore imports become cheaper, their demand
increases as a result demand for foreign exchange increases.
Foreign assets also become cheaper for the domestic country therefore foreign investment
increase resulting in increase in demand of foreign exchange.
Therefore when foreign exchange rate falls, there is increase in demand for import and
investment. As a result more foreign exchange is demanded to pay for them.
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13. STUDYmate
26. Distinguish between balance of trade and balance on current account.
Ans. Balance of Trade Balance on Current Account
Balance of trade includes only visible Balance on current account is the
items. It is the difference between difference between sum of credit items
exports and imports of a country. and sum of debit items on current a/ct.
BOT does not record any transactions of Balance of current account includes
invisible items and transfers. balance of visible items balance of
invisible items and Balance of unilateral
transfer.
Balance of trade is a narrower concept Balance on current account includes the
and it is only a part of the balance of balance of trade.
payments account.
Deficit in balance of trade can be made Deficit in current a/ct can be made up by
up by surplus in other transactions of capital transactions in BOP a/ct.
current a/ct.
27. Calculate “sales” from the following data:
(` in Lakhs)
(i) Net value added at factor cost 560
(ii) Depreciation 60
(iii) Change in stock (–) 30
(iv) Intermediate cost 1000
(v) Exports 200
(vi) Indirect taxes 60
Ans. GVAMP = Value of output – Intermediate consumption
NVAFC + Depreciation + Net Indirect Taxes = Sales + Change in stock – Intermediate
consumption
560 + 60 + 60 = Sales + (–30) – 1000
680 + 30 + 1000 = Sales
 Sales = 1710 lakhs
Hence, Sales = 1710 lakhs
28. Giving reasons categorise the following into stock and flow:
(i) Capital
(ii) Saving
(iii) Gross domestic product
(iv) Wealth
OR
Explain the circular flow of income.
Ans. (i) Capital - It is a man made means of production. It is a stock because it is measured at
a given point of time.
(ii) Saving - Saving is the surplus of production over consumption. It is a flow as it is measured
during a period of time.
(iii) Gross domestic product - It is a flow as it is the market value of final goods and services
produced with in the domestic territory during a period of time.
(iv) Wealth - It is a stock as it is measured at a particular point of time.
OR
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14. STUDYmate
Ans. Circular flow of income refers to the cycle of generation of income in the production process, its
distribution among the factor of production and finally, its circulation from households to the
production units in the form of consumption expenditure on goods and services produced by these
units.
Phases of Circular Flow of Income
There are 3 different phases (generation, distribution and disposition) in circular flow of income,
as shown in the given diagram:
Production Phase
(Generation of Income)
Income Phase
(Distribution of Income)
Expenditure Phase
(Disposition of Income)
Different Phases of
Circular Flow of Income
(i) Generation Phase : In this phase, firms produce goods and services with the help of
factor services.
(ii) Distribution Phase : This phase involves the flow of factor income (rent, wages, interest
and profit) from firms to the households.
(iii) Disposition Phase : In this phase, the income received by factors of production, is spent
on the goods and services produced by firms.
Income is first generated in production units, then distributed to households, and finally
spent on goods and services produced by these units to make the circular flow complete its
course.
29. Explain “Banker to the Government” function of the Central Bank.
Ans. “Banker to the Government”
A central bank conducts the banking accounts of government departments. It accepts
their deposits and undertakes inter-bank transfers. It also gives loans to the government.
Agent : A central bank also provides various services as agent of the government. It manages
public debt. It undertakes payment of interest on this debt and all sorts of other services
relating to public debt.
Advisor : Central bank gives advice to the government regarding money market, capital market,
government loans, and on economic policy matters.
Central bank carries out monetary policy, while government carries out fiscal policy. Both
the policies are intimately connected. The main objective of both is to serve the public interest.
30. 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
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of national income.
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15. STUDYmate
Ans. C = 100 + 0.4 Y
S = –100 + 0.6 Y
I = 1100
At Equilibrium level of Income
S=I
–100 + 0.6 Y = 1100
0.6 Y = 1200
Y = 2000
Consumption at equilibrium level of income
C = 100 + 0.4 Y
Y = 2000
C = 100 + 0.4 (2000)
= 900
31. Complete the following table.
Income Consumption Marginal Average
(`) expenditure propensity to propensity to
(`) save save
0 80
100 140 0.4 ……
200 …… …… 0
300 240 …… 0.20
400 260 0.8 0.35
Ans. Income Consumption Marginal Average propensity
S
(`) expenditure (`) propensity to save to save
0 80 –80 – –
100 140 –40 0.4 –0.4
200 200 0 0.4 0
300 240 60 0.6 0.20
400 260 140 0.8 0.35
Formulae:
S S
MPS = APS =
Y Y
32. Calculate National Income from the following data:
(` 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 capital 20
(ix) Net imports 30
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16. STUDYmate
OR
Calculate net national disposable income from the following data:
(` 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
Ans. GDPmp = PFCE 900
+ GFCE 400
+ GDCF 250
+ Net Export – 30 (Net Imports are given, therefore Net exports = –30.)
1520 crores
NNPFC = GDPmp – Depreciation – NIT + Net factor income from abroad
= 1520 – 20 – 100 + (– 40)
= ` 1360 crores
OR
Ans. NNDI = NNPmp + Net current transfers from rest of the world
NNPmp = GDPmp consumption of fixed capital + NFIA
= 2000 – 200 + (–60)
= 1740 crores
NNDI = NNPMP + Net current transfers from rest of the world
= 1740 + 200
= 1940 crores
×·×·×·×·×
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17. STUDYmate
Studymate Solutions to CBSE Board Examination 2012-2013
Series : SKS/1 Code No. 58/1/2
UNCOMMON QUESTIONS ONLY
SECTION-A
1. Give two examples of variable costs.
Ans. Raw materials and Electricity Bills.
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.
Ans. P ( `) TR (`) Q = TR/P
20 400 20
25 500 20
q P
eS = p  Q
0 20
= 
5 20
=0
Hence, the price elasticity of supply is perfectly inelastic.
9. Complete the following table:
Output (Units) Average Cost (`) Marginal Cost ( `)
1 12 _________
2 10 _________
3 _________ 10
4 10.5 _________
5 11 _________
6 _________ 17
Ans. Output (Units) Average Cost (`) Marginal Cost ( `) TC
1 12 – 12
2 10 8 20
3 10 10 30
4 10.5 12 42
5 11 13 55
6 12 17 72
10. Explain any two features of monopoly market.
Ans. Single Producer
(a) There is a single firm producing the commodity in the market. Since there is single
firm, the difference between firm and industry vanishes.
(b) It may be due to some legal restrictions in the form of patent, copyright, state monopoly
or due to some natural conditions prevailing in the market.
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18. STUDYmate
(c) Since there is a single seller, he can influence the price of the market by influencing
the supply of a commodity.
(d) Thus, the implication of this assumptionis that the firm is a price maker.
No Close Substitutes
(a) The monopoly firm has no fear of competition from new or existing products. For example,
there is no close substitutes of electricity services provided by BSES.
(b) Monopolist can practice price discrimation, i.e., he can change different prices for his
product from different sets of consumers.
12. The demand for good rises by 20 per cent as a result of fall in its price. Its price elasticity of
demand is (–)0.8. Calculate the percentage fall in price.
OR
How is price elasticity of demand affected by:
(i) Number of substitutes available for the good.
(ii) Nature of the good.
% change in quantity
Ans. ed = % change in price
20%
0.8 = % change in price
20
 % change in price = = 25%
0.8
Hence, percentage fall in price = 25%
OR
Ans. (i) Availability of substitutes.
(a) If there are a large number of close substitutes available for a product, then it is
easy for consumers to replace the good when its price increases. Here, demand
reduces by a large extent. Hence, larger the number of substitutes available for
a commodity, the more elastic is its demand.
(b) Fewer the substitutes available for a product, the more inelastic is its demand.
Products such as cooking gas do not have close substitutes available. Here even if
price increases, demand reduces (usage of electric ranges may increase or people
start conserving cooking gas) but the reduction in demand is relatively small, as
consumers do not have many options of switching to alternative products.
(ii) Nature of the good.
(a) Necessities: These commodities are essential for satisfying the basic needs of
individuals. Examples of necessities includes vegetables, salt, medicines, sugar,
pulses, grains, etc. The demand for these products is relatively insensitive to
price changes, as these are needed for day-to-day living. Hence, as price changes,
demand for such commodities changes but by a smaller extent. Thus, the elasticity
of these products is relatively inelastic.
(b) Luxuries: These commodities are typically not required for survival. They satisfy
the ‘higher wants’ of individuals. Examples of luxury goods include ice creams,
watches, branded clothing, cosmetics, tinned and other processed food, etc. The
demand for these products is relatively sensitive to price changes, as individuals
can easily do without them. If prices of such commodities were to rise then
individuals can wait to purchase them or substitute them for more basic
commodities. Thus, demand for such product changes by a large extent with a
price change. Luxury goods are relatively elastic products.
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19. STUDYmate
SECTION-B
28. How do commercial banks create deposits? Explain.
Ans. Mone creation or deposit creation or credit creation by the bank is determine by the amount
of the initial fresh deposits and the Legal Reserve Ratio (LRR), the minimum ratio of deposit
legally required to be kept as cash by banks. It is assumed that all the money that goes out of
bank is redeposisted in to the banks.
It is determined by the legal Reserve Ratio (LRR) (or (reserve Deposit Ratio). The value is:
1
Deposit multiplier  .
LRR
Suppose new deposits of ` 1,000 are made in banks. Let the LRR be 20 per cent. It means that
banks keep only ` 200 as cash reserve and lend the remaining amount of ` 800. Lending
means that banks create deposits of ` 800 in the names of borrowers. This is the first round
creation and equals 80 per cent of the initial deposit. Suppose, borrowers withdraw the entire
amount of loan and spend the same on the goods and services needed for investment and
consumption. It means that the sellers of these goods and services receive ` 800 of revenue
and deposit the same in their respective bank accounts. The banks get new deposits. They
keep 20 percent of these deposits, i.e. ` 160, as cash and lend the remaining ` 640. This is the
second round increase. It is 80 per cent of the previous round increase. In the same manner
as above, the third round creation of deposits will be 80 per cent of ` 640, i.e. ` 512 and soon in
each of the further round will be 80 per cent of previous round. In each round, the increase
becomes smaller and smaller and ultimately, it becomes virtually zero. The sum total of all
deposits will ultimately be ` 5000, i.e. five times the initial deposit. The working of the deposit
creation process is summed up in the following table.
Deposits Loans Cash reserves
Initial 1,000 800 200
I Round 800 640 160
II Round 640 512 128
· · · ·
· · · ·
· · · ·
· · · ·
· · · ·
5000 4000 1000
In the above example LRR = 20 % i.e. 0.2, then
Deposit multiplier  1  5
0.2
Initial deposit of ` 1000 can create credit of 5000 `.
30. In an economy, S = –100 + 0.6 Y is the saving function, where S is Saving and Y is National
Income. If investment expenditure is 1100, calculate:
(i) Equilibrium level of National Income.
(ii) Consumption expenditure at equilibrium level of National Income.
Ans. S = –100 + 0.6Y
I = 1100
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20. STUDYmate
(i) At equilibrium level of National Income
S=I
–100 + 0.6 Y = 1100
 0.6 Y = 1100 + 100
1200
 Y=
0.6
 Y = 2000
(ii) Saving at equilibrium level of National Income
= –100 + 0.6 × 2000
= –100 + 1200
= 1100
 C = Y – S = 2000 – 1100 = 900
32. Complete the following table:
Average Propensity Marginal Propensity
Income (` ) Savings ( `)
to Consume to Consume
0 –40
50 –20 ______ ______
100 0 ______ 0.6
150 30 0.8 ______
200 50 ______ ______
Ans. Average Propensity Marginal Propensity
Income ( `) Savings (`) Consumption
to Consume to Consume
0 –40 40 0 –
50 –20 70 1.4 0.6
100 0 100 1 0.6
150 30 120 0.8 0.4
200 50 150 0.75 0.6
×·×·×·×·×
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21. STUDYmate
Studymate Solutions to CBSE Board Examination 2012-2013
Series : SKS/1 Code No. 58/1/3
UNCOMMON QUESTIONS ONLY
SECTION-A
1. Give an example each of fixed cost and variable cost.
Ans. Fixed Cost: Rent
Variable Cost: Wages to the casual labour
8. The price elasticity of supply of a good is 0.8. Its price rises by 50 per cent. Calculate the
percentage increase in its supply.
Ans. ep = 0.8
P = 50%
% change in quantity
ep = % change in price
% change in quantity
0.8 =
50%
40% = % change in quantity
Hence, supply increases by 40%.
9. Complete the following table:
Units of Labour Average Product (Units) Mar ginal Product (Units)
1 16 _________
2 20 _________
3 _________ 20
4 18 _________
5 _________ 8
6 14 _________
Ans. Units of Average Product Marginal Product
TP
Labour (Units) (Units)
1 16 16 16
2 20 24 40
3 20 20 60
4 18 12 72
5 16 8 80
6 14 4 84
10. Explain “freedom of entry and exit to firms in industry” feature of monopolistic competition.
Ans. Every firm is free to enter into the industry and come out from the industry as and when it
wishes.
The implication of this assumption is that given sufficient time, all firms in the industry
will be earning just normal profit.
Suppose the existing firms are earning super normal profits. Attracted by the positive profits,
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22. STUDYmate
the new firms enter the industry. The industry’s output, i.e., market supply goes up. The price
comes down. New firms continue to enter till economic profits are reduced to zero.
Now suppose the existing firms are incurring losses. The firms start leaving the industry.
The industry’s output starts falling and price starts going up. All this continues till losses are
wiped out. The remaining firms in the industry once again earn just the normal profits.
12. Give the meaning of producer’s equilibrium. A producer 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.
Ans. Producer’s equilibrium means that combination of price and output which yields the producer
maximum profit and the profit declines as more is produced.
Two conditions of producer’s equilibrium are
(a) MC = MR;
(b) MC curve cuts the MR curve from below.
MR is the addition to total revenue from the sale of one more unit of output and MC is the
addition to total cost for increasing the production by one unit.
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.
Condition 1: MC = MR. This can be explained with the help of illustration and diagram.
Output (Units) Marginal Revevenue (In `) Marginal Cost (In `)
1 10 10
2 10 5
3 10 2
4 10 5
5 10 7
6 10 10
7 10 13
8 10 15
Two other situations may exist
(a) MR > MC. At output level less than OQ, MR > MC, this implies that the firm is earning
profit on the last unit of output. The marginal profit provides an incentive to the firm to
increase production and move towards OQ units of output. Therefore when MR > MC,
the firm increases output to maximise its profit. Y
Revenue and Cost
(b) MR < MC. At output level more than OQ, MR MC
< MC. This implies that the firm is making R K
(in Rs.)
P AR = MR
a loss on its last unit of output. Hence, in
Producer’s
order to maximise profit, a rational producer
equilibrium
decreases output as long as MC > MR. Thus
O X
the firm moves towards producing OQ units Q1 Q
of output. Output (in units)
In the diagram, AR = MR = P. The marginal cost (MC) curve is U-shaped. Now, the condition of
MR = MC is satisfied at two points; R and K. However, profits are maximised at point K,
corresponding to OQ level of output.
Condition 2; MC cuts MR curve from below. MC = MR at two points R and K in the diagram
but profits are maximised at point K, corresponding to OQ level of output.
Between OQ1 and OQ levels of output, MR exceeds MC, therefore firm will not stop at point R
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23. STUDYmate
but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at
point K.
SECTION-B
27. Calculate “sales” from the following data:
(` in Lakhs)
(i) Intermediate cost 700
(ii) Consumption of fixed capital 80
(iii) Change in stock (–)50
(iv) Subsidy 60
(v) Net value added at factor cost 1300
(vi) Exports 50
Ans. NVAFC = 1300
GVAmp = NVAFC 1300
+ Dep. + 80
+ NIT – 60 (Subsidy)
1320 Lakhs
GVAmp + IC = GVOmp
1320 + 700 = GVOmp
2020 = GVOmp
Sales = GVOmp – Change in Stock
Sales = 2020 – (–50)
Sales = 2070 Lakhs
31. C = 50 + 0.5 Y is the consumption function where C is consumption expenditure and Y is
National Income and investment expenditure is 2000 in an economy. Calculate
(i) Equilibrium level of (national) income
(ii) Consumption expenditure at equilibrium level of (national) income
Ans. C = 50 + 0.5 Y
I = 2000
(i) Equilibrium level of income
S = –50 + 0.5 Y
I = 2000
S=I
–50 + 0.5 Y = 2000
0.5Y = 2000 + 50 = 2050
Y = 4100
(ii) C at Y = 4100
C= 50 + 0.5 (4100) = 2100
Consumption = 2100 at equilibrium level of income.
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24. STUDYmate
32. Complete the following table:
Consumption Marginal Propensity
Savings (`) Income (`)
Expenditure ( `) to Consume
100 50 150
175 75 ______ ______
250 100 ______ ______
325 125 ______ ______
Ans. Consumption Marginal Propensity
Savings (`) Income (`)
Expenditure ( `) to Consume
100 50 150 –
175 75 250 0.75
250 100 350 0.75
325 125 450 0.75
×·×·×·×·×
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