AHSEC| CLASS 12| ECONOMICS| SOLVED PAPER - 2016| H.S. 2ND YEAR
2016
ECONOMICS
Full Marks: 100
Pass Marks: 30
Time: Three hours
The figures in the margin indicate
full marks for the questions
1. (a) What is a mixed economy? 1
Ans:- A
mixed economy is an economic system that incorporates elements of both
capitalism and socialism. It combines private ownership and free market
principles with government intervention and public ownership in some sectors.
This approach aims to balance the efficiency of market-driven economies with
the equitable distribution of resources and social welfare objectives.
(b) What is
opportunity cost? 1
Ans:-
Opportunity cost refers to the value of the next best alternative that is given
up when making a decision. It represents the benefits that could have been
obtained by choosing a different option rather than the one chosen.
Understanding opportunity cost helps individuals and businesses evaluate the
relative value of different options.
(c) Give one
example of complementary goods. 1
Ans:- An
example of complementary goods is pancakes and maple syrup. These products are
typically consumed together, enhancing the overall experience of eating
pancakes.
(d) Fill in the
blank: 1
AC = AVC + AFC.
Ans:- The
equation can be completed as: AC = AVC + AFC. Here, AC stands for average
cost, AVC stands for average variable cost and AFC stands for average fixed
cost.
(e) What does
the average fixed cost (AFC) curve look like? 1
Ans:- The
average fixed cost (AFC) curve generally slopes downward as production
increases. This is because fixed costs are spread over a larger number of
units, causing the AFC per unit to decrease as production increases.
(f) Give an
example of variable cost. 1
Ans:- An
example of a variable cost is the raw materials used in production. Unlike
fixed costs, variable costs change with the level of production; as more
products are made, more raw materials are needed, increasing the total variable
cost.
2. Mention two central problem of an economy. 2
Ans:- Central Problems of the Economy:-
(i) What to
produce? - This problem involves deciding which goods and services should
be produced in an economy, keeping in view the limited resources available. It
refers to the need to give preference to some products over others depending on
social needs and preferences.
(ii) How to
produce? - This refers to the choice of production techniques, whether
labour-intensive methods or capital-intensive methods are to be used. This
decision affects efficiency, costs and the level of employment in the economy.
3. Mention any two determinants of market demand. 2
Ans:- Determinants of Market Demand:-
(i) Price of
the commodity: The price of the commodity itself significantly affects
demand; generally, as prices fall, demand rises, and vice versa.
(ii) Consumer
Income: Changes in the level of consumer income affect purchasing power,
thereby affecting the demand for normal and inferior goods differently.
4. The total money income of a consumer is M and he
spends his entire money income on the consumption of two commodities, viz. X
and Y. The price of X and Y are PX and PY respectively.
State the equation of his budget line. 2
Ans:- Budget Line Equation:-
For a consumer
with total money income M who spends it on two goods X and Y whose prices are PX
and PY respectively, the budget line equation is:
PX⋅X+PY⋅Y=M
This equation
shows all the combinations of goods X and Y that the consumer can purchase from
his income.
5. What is marginal rate of substitution? 2
Ans:- Marginal Rate of Substitution (MRS):-
The marginal
rate of substitution is defined as the rate at which a consumer is willing to
give up one commodity in exchange for another, while the level of utility
remains the same. Mathematically, it is expressed as:
MRS=− dY/dX
It shows how
much of commodity Y a consumer will give up in order to obtain an additional
unit of commodity X.
6. Mention two determinants of the supply curve of a
firm. 2
Ans:- Determinants of the supply curve:-
(i)
Production cost: Changes in the cost of inputs or production techniques can
shift the supply curve. Higher costs generally reduce supply.
(ii)
Technology: Advances in technology can increase efficiency, leading to an
increase in supply at every price level.
7. Explain the relation between market price and marginal
revenue of a price taking firm. 2
Ans:- Relation between market price and marginal
revenue:-
In a
price-taking firm (perfect competition), the market price is equal to marginal
revenue (MR). This means that each additional unit sold adds exactly the market
price to total revenue, indicating that firms cannot influence market prices
because of competition. Thus:
P=MR
This
relationship holds true as long as firms are operating under conditions of
perfect competition, where they are price takers rather than price makers.
8. If the total product with 5 units of a variable factor
is 55, calculate the average product of it. If the factor is increased by 1
more unit as a result of which the total product becomes 60, what will be the
marginal product? 4
Ans:- To solve this problem, we have to calculate
both average product and marginal product based on the given information.
Or
Explain the
conditions for equilibrium of a firm. 4
Ans:- To
achieve equilibrium, a firm must satisfy specific conditions that ensure it is
maximizing its profits.
The key
conditions for a firm's equilibrium are:-
(i) Profit
Maximization: The primary condition for equilibrium is that the firm must
maximize its profit. This occurs when the difference between total revenue (TR)
and total cost (TC) is at its greatest. In practical terms, this means the firm
should produce output levels where it has no incentive to either increase or
decrease production.
(ii)
Marginal Cost Equals Marginal Revenue: A fundamental requirement for
equilibrium is that the firm's marginal cost (MC) must equal its marginal
revenue (MR). This condition indicates that the cost of producing one more unit
of output is exactly balanced by the revenue gained from selling that unit. If
MC is less than MR, the firm can increase profits by producing more; if MC is
greater than MR, producing additional units would lead to losses.
(iii) MC
Curve Behavior: For stability in equilibrium, the MC curve must intersect
the MR curve from below. This means that at the point where MC equals MR, the
MC curve should be rising. If it were to intersect from above, it would
indicate an unstable equilibrium where any slight increase in output would lead
to greater costs than revenues, prompting the firm to reduce output.
(iv)
Long-Run Considerations: In the long run, firms also need to ensure that
price (P) equals average cost (AC) for equilibrium under perfect competition.
This condition ensures that firms earn normal profits, and no new firms will
enter or exit the industry, maintaining a stable market environment.
These conditions
collectively ensure that a firm operates efficiently and profitably within its
market structure.
9. What is meant by Returns to scale? Explain the various
returns to scale. 1+3=4
Ans:- Returns to scale is a fundamental concept in
economics that examines how the output of a production process changes in
response to proportional changes in all inputs. The concept is particularly
relevant in the long run, where all factors of production – such as labour,
capital and materials – may vary. Understanding returns to scale helps firms
analyse their production efficiency and make informed decisions about resource
allocation.
Types of
Returns to Scale:-
Returns to
scale can be classified into three main types:-
(i) Constant
Returns to Scale (CRS): In this scenario, an increase in inputs results in
a proportional increase in output. For example, if a firm doubles its inputs
(labour and capital), the output also doubles. This shows that the firm
maintains a consistent level of efficiency regardless of the scale of
production. Mathematically, if F(aK,aL)=aF(K,L) for any positive constant a,
then the production function exhibits constant returns to scale.
(ii)
Increasing Returns to Scale (IRS): Increasing returns to scale occur when
outputs increase by a greater proportion than the increase in inputs. For
example, if a firm doubles its inputs and gets more than double the output, it
experiences increasing returns to scale. This often occurs as a result of
improved efficiency or synergies that arise when production is increased.
Formally, this can be expressed as F(aK,aL)>aF(K,L).
(iii)
Diminishing Returns to Scale (DRS): Diminishing returns to scale occur when
an increase in inputs results in a proportionately smaller increase in output.
For example, if doubling the inputs results in less than double the output, the
firm is experiencing diminishing returns to scale. This situation may arise due
to inefficiencies or management challenges when production is increased. The
mathematical representation is F(aK,aL)<aF(K,L).
Conclusion:-
In summary, returns to scale provide information on how changes in input levels
affect outputs in production processes. It is important to understand whether a
firm experiences constant, increasing or decreasing returns to scale to
optimize production strategies and improve overall efficiency.
Or
Distinguish
between returns to factor and returns to scale. 4
Ans:- Returns
to factor and returns to scale are two important concepts in economics that
relate to production processes, but they focus on different aspects of how
inputs affect output.
Returns to
factor:- Returns to factor refers to the relationship between the amount of
a specific input (such as labour or capital) and the resulting output in a
production process. It examines how changes in a particular factor affect
output while holding other factors constant. It can be analysed in three ways:-
(i)
Increasing returns: When adding more of a specific input leads to a more
than proportionate increase in output.
(ii) Constant
returns: When increasing an input leads to a less than proportionate
increase in output.
(iii)
Diminishing returns: When adding more of an input leads to a less than
proportionate increase in output. This concept is particularly useful for understanding
the marginal productivity of individual inputs, which helps firms determine the
optimal amount of each input to use to maximise output.
Returns to
scale:- On the other hand, returns to scale looks at how output changes
when all inputs are increased simultaneously. This concept is considered in the
long run, when all factors of production can be varied. The types of returns to
scale include:-
(i)
Increasing returns to scale: When increasing all inputs by a certain
percentage leads to a greater percentage increase in output.
(ii) Constant
returns to scale: When increasing all inputs by a certain percentage leads
to a similar percentage increase in output.
(iii)
Decreasing returns to scale: When increasing all inputs by a certain
percentage leads to a smaller percentage increase in output.
In short,
while returns to factor focuses on the effect of changing a specific input on
output, returns to scale assesses how changes in all inputs collectively affect
the level of output. Both concepts are important for firms that want to
optimize their production processes and resource allocation strategies.
10. The production function of a firm is given as Q = 2L1/2K1/2.
Calculate the level of output when it employs 25 units of Labour (L) and 16
units of Capital (K). 4
Ans:-
11. The marginal revenue (MR) schedule of a production
unit is given below. Calculate the total revenue (TR) and the average revenue
(AR) schedules. 4
|
Q |
MR |
|
1 2 3 4 5 6 |
21 19 17 11 7 3 |
Ans:- To calculate total revenue (TR) and average
revenue (AR) schedules based on the given marginal revenue (MR) schedule, we
can follow these steps:
(i) Calculate
total revenue (TR): Total revenue at each quantity level can be calculated
by adding MR to the previous TR value. Since we start from zero, TR for the
first unit sold is equal to the MR of that unit.
(ii)
Calculate average revenue (AR): Average revenue is calculated by dividing
total revenue (TR) by quantity (Q).
Given data:-
Quantity
(Q): 1, 2, 3, 4, 5, 6
Marginal
revenue (MR): 21, 19, 17, 11, 7, 3
Step-by-step
calculation:-
12. Write down four characteristics of monopoly market. 4
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