Eco-12th_rtb_for-school_set-2_sol.pdf

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Hints/Solutions to Practice Board Paper Economics (Class – XII) Code No. 30/2 1. (a)

[1]

OR (a) 2.

Rs. 72

[1]

3. (a)

[1]

4.

[1]

TVC OR



The vertical distance between TFC and TC is TVC and it keeps on increasing as output increases.

5.

Price elasticity of good X =



Good X



30 × 100 Percentage change in quantity demanded 150 = Price elasticity of good X = =2 10 Percentage change in price Price elasticity of good X = 2 1 ed y ⇒ 2(2) = Edy 2 4 = Edy Ed x =

Good Y

Price elasticity of good Y = 4=



1 Price elasticity of good Y 2

Percentage change in quantity demanded Percentage change in price

%∆Q 5 × 100 20



4 × 25 = 100%



Quantity demanded rises by 100%.

6.

When government imposes heavy taxes on liquor and gives subsidies on milk production of liquor falls whereas production of milk rises.



\ That resources are redistributed in an economy which is shown by a movement along the PPC curve.



Thus, there will be no shift in PPC as the resources are neither increased or decreased. OR



The PPC of Syria will shift leftwards from PP to P′P′.



Loss of life and property will decrease the production potential (or production capacity) of the economy of Syria.

 [9]

Y P Good P′ Y

0

P′ P Good X



Help that can be offered:



Financial help by governments of other countries.

7.

X

Technological help by government of other countries. (a) (i) True, for a horizontal demand curve the slope is zero. ∆P ∆P = O, ∴ Slope of demand curve = ∆Q Slope of demand curve (ii) False, petrol and petrol cars are complementary goods. Therefore, demand of petrol car will decrease due to rise in price of petrol. Thus, the demand curve for petrol cars will shift leftwards due to rise in the price of petrol. (b) Rohini will consume ice-creams till total utility is maximum and marginal utility is zero i.e. point of saturation. 8. (a) Monopolistic Competition Features: • Freedom of Entry or Exit: Every firm is free to enter into the industry and come out from the industry as and when it wishes. Implication: Implication of this assumption is that given sufficient time all firms in the industry will be earning just normal profit. • Product Differentiation: Under monopolistic competition, products of different firms are neither completely homogeneous as in perfect competition nor entirely distinct as in monopoly. Here each firm produces a product that is somewhat different from the products of its competitors but not entirely distinct. They are close substitutes for one another but are not perfect substitutes. Implication: The feature of product differentiation gives monopoly power to the firm. A firm is able to influence the price of its product to some extent since the product sold by the firm is different than sold by other firms. Since there are many competitors in the market therefore price determined by the firm has to be within the close range of the substitutes in the market. Demand curve is therefore more elastic due to presence of substitute in the market. (b) Oligopoly Features: • Mutual Interdependence: The most important characteristic feature of oligopoly is interdependence among its firms. The number of sellers is small in this market and each of these firms contribute a significant proportion in the total sales. As a result when any one of them undertakes any measure to promote its sale it directly affects other firms and they also immediately react. Hence every firm decides its policy after taking into consideration the possible reactions of its rival firms. Thus every firm is affected by the activities of other firms and it affects others also. • Indeterminateness of demand curve: In an oligopolistic market when a firm lowers down the price to promote its sale it affects other firms also. Hence as a reaction rival  [10]

firms also starts to reduce their prices. In this situation the first firm may not be able to increase its sale as much as it has thought of at the time of reducing the price. Since it is difficult to estimate the probable reactions of rival firms, the demand curve (or average revenue curve) faced by an oligopolistic firm is indeterminate and shifting.

Price (in Rs.)

OR (a) Free Entry or Exit of Firms: The industry is characterised by freedom of entry and exit of firms. In a perfectly competitive market, there are no barriers to entry or exit of firms. Entry or exit may take time, but firms have freedom of movement in and out of an industry. Since resources are assumed to be mobile, entry or exit is relatively costless. Implication: 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, 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. (b) Price floor or minimum price: It refers to the minimum price (above the equilibrium price), fixed by the government which the producers must be paid for the produce. Minimum price is fixed up by the government when government feels that the price determined by the market forces of demand and supply is too low to enable producers to make profits. Most well known examples of imposition of price floor are agricultural price support programmes and minimum wage legislation. Support Price : It is the minimum guaranteed price assured to the farmers. The objective is to save the farmers from losses if the market price falls too low. The effect of floor price can be understood with the help of a diagram.

Quantity demanded and supplied (in unit) Suppose, equilibrium price determined by market forces of demand and supply forces is too low at OP. Government will then announce support price higher than equilibrium price to protect the interest of farmers and to provide incentive to them for further production. Let’s assume government fixes OP1 as support price. At OP1, quantity supplied is more than quantity demanded resulting in excess supply (= LK). The excess supply is purchased by the government either to increase the buffer stock or for exports. This way government insulates the farmers from fluctuations in their income which is caused by price variations in the free market. 9. (a) At equilibrium, • MC = MR; • 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. Under perfect competition, P = MR = MC.  [11]



Thus, at equilibrium P = MC, which proves that price cannot be higher than MC at equilibrium. Two other situations may exist (i) 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. (ii) 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. 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 but will continue to produce to take advantage of additional profit. Thus, equilibrium will be at point K. (b) In the headline came in HT, on 3rd October 2018, “Labour is on strike and is demanding more wages”. When the amount payable to factors of production increases the cost of production also increases. This decreases the profitability. So, the seller reduces the supply of the commodity. Thus SS curve shifts leftwards. OR Output

Price

TVC

TR

MR

MC

1 2 3 4 5 6

20 18 16 14 12 10

20 32 42 50 60 72

20 36 48 56 60 60

20 16 12 8 4 0

20 12 10 8 10 12



At equilibrium,



•



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.



Thus, equilibrium will be at 4 units of output.

10. (a)

MC = MR;

(i)

•

MC curve cuts the MR curve from below.

Explicit cost

Wages per worker per annum × No. of workers + Interest on borrowed capital + Payment for transportation of goods + Telephone charges + Depreciation + Insurance Premium  [12]



= 40 × 45 +

15 400 × 2000 + 100 + 70 + + 72 100 20

= 1800 + 300 + 100 + 70 + 20 + 72

= `2362 crore (ii) Implicit cost

= Interest on self supplied capital + Imputed annual wages of manager + Annual rental value of factory building owned by himself.

15 × 2000 + 400 + 300 100 = `1000 crore =



(b)

(i)

False, as output increases the difference between average total cost and average variables cost falls but they both don’t meet each other as the difference between them is average fixed cost which can never be zero.



(ii)

False, because profit is the difference between total revenue and total cost of a firm.



(iii) False, AC is minimum when AC and MC are at the optimum level of production.

11. In the situation given, the market demand for ‘Air purifiers’ will increase. The demand curve will shift rightward from DD to D1D1.

When the original demand curve DD and supply curve SS intersect each other then equilibrium is determined at point E. OQ is the equilibrium quantity and OP is the equilibrium price.



Supply remaining unchanged increase in the demand leads to a rightward shift in demand curve from DD to D1D1. At equilibrium price OP, excess demand (= EF) is created. Due to excess demand buyers compete with each other and price begins to rise. When price rises these is contraction along the demand curve from F to E1 and expansion along the supply curve from E to E1. Price continues to rise till excess demand is wiped out.

Conclusion: (a) Market Equilibrium shifts from E to E1 (b) Equilibrium price rises from OP to OP1 (c) Equilibrium quantity also rises from OQ to OQ1. MU X MU Y , the consumer should buy more of Y and less of X. As per law of < PX PY MU X MU Y = diminishing marginal utility MU from Y will fall till . PX PY

12. (a) False, if



(b)

False, as there is increase in one more member the family expenditure on milk increased. It will lead to rightward shift in demand curve.



(c)

False, different points on an indifference curve represents same level of satisfaction.



(d)

False, utility does not mean usefulness of a commodity. Liquor might give utility but it is not useful.



(e)

False, two indifference curves never intersect each other as they never give same level of satisfaction.



(f)

False, the slope of indifference curve is marginal rate of substitution. It declines because of law of diminishing marginal utility. OR  [13]

(a) It is the rate at which the consumer is willing to sacrifice one good to obtain one more unit of the other good. Price of good X (b) Slope of budget line = (Market rate of exchange) Price of good Y P (c) At point A, MRSXY > X implies that the consumer is willing to sacrifice more units of Y PY 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. PX implies consumer is willing to sacrifice less units of Y than what PY 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.



(d)

At point B, MRSXY <



(e)

Consumer attain equilibrium:





•



• MRSXY is declining.

Slope of indifference curve = Slope of budget line i.e. MRSXY = PX/PY.



In the diagram, equilibrium is at point C, where the budget line touches the highest attainable indifference curve IC2 within consumer’s budget.



Bundles on the indifference curve IC1 (i.e., points A and B) are lying on a lower indifference curve i.e. will have lower utility levels as compared to the tangency point C. Therefore, the consumer will choose only the tangency point on the budget line.

13. (c)

[1]

14. Difference between the ‘market value of security offered’ and the ‘value of amount lent’ is called margin requirement. [1] OR

Money supply is a stock variable because it is defined as the amount of money held by the public at any point of time.

15. (c)

[1]

16. Escheat refers to the claim of government on the property of a person who dies without leaving behind any legal heir or a will. [1] 17. (i)

At equilibrium ⇒ Y = C + I



Y = 300 + 0.6Y + 500



Y = 800 + 0.6Y



0.4Y = 800

Y = `2000 crore

(ii)



At equilibrium level of income, Y = `2000 crore C = 300 + 0.6Y

⇒ C = 300 + 0.6 (2000)

= 300 + 1200

C = `1500 crore At equilibrium,

S=Y–C



= 2000 – 1500

S = `500 crore

(iii)

k=

1 1 − MPC  [14]

1 k = 1 − 0.6 1 k= 0.4

k = 2.5



∆Y ∆I 2500 − 2000 2.5 = ∆I 500 ∆I = 2.5



DI = `200 crore



Increase in Investment = `200 crore



k=

OR

1 1 − MPC 4 If MPC = = 0.8 5 1 1 k= = =5 1 − 0.8 0.2 k=5 k=

If MPC =

1 = 0.5 2

1 =2 1 − 0.5 MPC and investment multiplier are directly related to each other. As the value of MPC falls, the value of k also falls. 18. (a)  Since saving is negative at zero level of consumption and it increases with increase in income. Saving curve starts Break even point Y = C, S = 0 from negative intercept and is an APS = 0 upward sloping line as shown in the diagram. (b) To draw a consumption curve from a saving curve, draw a 45° line from the origin. (c)  Take OC equal to OS on the Y-axis. This gives the starting point C of the consumption curve. (d) Draw a perpendicular from point B intersecting the 45° line at B1. (e) Join points C and B1 and extend upwards to obtain the consumption curve CB1. (f) Consumption will therefore be positive at zero level of income. APS will be zero where saving is equal zero and consumption is equal to income. This happens at break-even point as shown in the diagram.

k=

19. (a)

Revenue expenditure. It neither leads to increase in asset nor reduction in liability.



(b)

Capital expenditure. It leads to creation of asset.



(c)

Revenue expenditure. It neither leads to increase in asset nor reduction in liability.



(d)

Capital expenditure. It leads to creation of asset.  [15]

20. (a)

Reverse Repo Rate: It is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend to RBI as their money is in safe hands with a good interest rate. RBI makes use of this tool when it feels that there is excess money supply in the banking system.



An increase in reverse repo rate induces the bank to transfer more funds to RBI due to attractive interest rates and vice versa.

(b) Banker of the Government



(i)

Banking Business : As a government’s bank, it accepts deposits, makes payments, carries out exchange and remittances on behalf of the government.

(ii) Extends Loans : It provides short term credit to the government by printing money against its security, bills to finance government deficit. (iii) Agent : A central bank also provides various services as agent of the government. It manages public debts. It undertakes payment of interest on this debt, and all sorts of other services relating to public debt. (iv) Advisor : Central bank gives advice to the government regarding taxation interest rates, credit expansion etc.

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. OR



Commercial banks are considered producers of money when unlike government and RBI, they do not issue coins or notes in the Indian economy. This is explain with the help of example.



Credit creation by the banks is determined by



(i)

The amount of initial fresh deposits and



(ii)

The Legal Reserve Ratio (LRR) = (CRR + SLR).



It is further assumed that all the money that goes out of bank as loans is redeposited in the banks. Deposits

Loans

Cash reserves

Initial

1,000

800

200

I Round

800

640

160

II Round

640

512

128

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

•

5000

4000

1000



Let LRR be 20% and there is a fresh deposit of `1,000. As required, the banks keep 20% i.e 200 as cash and lend the remaining `800. Those who borrow use this money for making payments. As assumed those who receive payments put the money back into the banks. In this way banks receive fresh deposits of `800. The banks again keep 20% i.e. 160 as cash and lend `640, which is also 80% of the last deposits. The money again comes back to the banks leading to a fresh deposit of `640. The money goes on multiplying in this way, and ultimately total money creation is:



Total money creation = Initial deposit ×



Thus money / deposit multiplier is defined as the multiple by which deposits can increase due to an increase in initial deposit.

1 1 . = 1000 × = 5000 ` LRR 20%

 [16]

21. Net National Product at factor cost

= Price per unit × Output sold with in boundary of India + Purchases by foreigner in India + Unsold stock at end of year - Single use producer good – (GST – financial help given by  Fixed asset value  government to domestic producers) – Depreciation  + (Net compensation of  No. of years  employees from abroad + Net retained earnings from abroad – Net income from property and entrepreneurship to abroad)



 200  ⇒ (10 × 300) + 10 + 30 − 40 − [100 − 20] −  + (30 + 10 − 5)  10 



⇒ 3010 – 10 – (80) – 20 + 35



⇒ `2935 lakh



National Income = `2935 lakh

22. (a)

(i)



(ii) Yes, it will be included in domestic income. It is earned within domestic territory of India.



(iii) Yes, it is included as it is part of GDCF.



No, it will not be included in the income as it is non-factor domestic receipt as the loan is not used for production.

(b) (i) Income Method



Gross National Product at factor cost



= Wages & salaries + Employer’s contribution to social security schemes + Operating surplus + Mixed income + Depreciation (Gross capital formation – Net capital formation) – Net factor income to abroad



= 800 + 100 + 160 + 600 + 30 – 20

= `1670 crore (ii) Expenditure Method

Gross national product at factor cost

= Private final consumption expenditure + Government final consumption expenditure + Gross capital formation + Net exports – Net indirect taxes – Net factor income to abroad

= 1000 + 450 + 330 + (30 – 60) – 60 – 20

= `1670 crore OR (a) Externalities not taken into account in GDP, but affect welfare:

(i)

When the activities of one result in benefits or harms to others with no payment received for the benefit and no payment made for the harm done, such benefits and harms are called externalities. Activities resulting in benefits to others are called positive externalities and increase welfare whereas those resulting in harm to others are called negative externalities and thus decrease welfare.



(ii)

GDP does not take into account these externalities. For example, construction of a flyover or a highway reduces transport costs and journey time of its users who have no contributed anything towards its cost. Therefore, taking only GDP as an index of welfare understates welfare.



(iii) Similarly, GDP also 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. Therefore, taking only GDP as an index of welfare overstates welfare.



Gross domestic product at factor cost

(b)



= Compensation of employers + Rent + Interest + Profits + Depreciation  [17]



To calculate depreciation



Depreciation = Gross domestic capital formation – Net fixed capital formation + Change in stock



= 300 – (200 + 50)



= Rs. 50 crore

GDPFC = 800 + 200 + 150 + 100 + 50

= Rs. 1300 crores



Factor Income from abroad

GNPMP = GDPPC + Net indirect taxes + Net factor income from abroad

1400 = 1300 + 120 + (FIFA – FITA)



1400 = 1300 + 120 + FIFA – 60



1400 – 1360 = FIFA



40 = FIFA



Factor income from abroad = Rs. 40 crore

23. (a)

Official reserve transactions refers to transactions by the central bank that cause changes in its official reserves of foreign exchange. Such transactions take place when a country withdraws from its stock of foreign exchange reserves to finance deficit in its overall balance of payments (BOP). A country with surplus in its overall BOP leads to rise in foreign exchange reserves.



Official reserve transactions are very important as they help to bring a balance in the country’s overall balance of payments. So, such transactions act as accommodating item in BOP.



(i)

(b)

(ii)

False, autonomous transactions take place in both current and capital account. False, purchase of tea from Darjeeling by Jazz of London is recorded on credit side of current account. It is known as export of goods.

(iii) False, devaluation is reduction in value of domestic currency by the government under fixed exchange rate system.

On the other hand, depreciation is decrease in value of domestic currency due to market forces of demand and supply under flexible exchange rate system.

24. (i)

False, inflationary gap shows the gap by which actual AD exceeds the AD required to establish full employment equilibrium.



(ii)

False, APS can never be equal to 1 as consumption can never be zero. S ≠ Y and APC can be equal to one as consumption can be equal to income at break even point.



(iii) False, the value of multiplier is 1 when MPC = 0



(iv) True, excess of planned saving indicate that household are not consuming as much as firms expected them to. Therefore, stock of goods tends to pile up.

vvvvv

 [18]