AHSEC| CLASS 12| ECONOMICS| SOLVED PAPER - 2017| H.S. 2ND YEAR
2017
ECONOMICS
Full
Marks: 100
Pass
Marks: 30
Time:
Three hours
The
figures in the margin indicate full marks for the questions
PART - A
1. (a) Define service. 1
Ans:- Service is an intangible
economic activity that involves the performance of tasks or activities for the
benefit of consumers. Unlike goods, which are tangible products that can be
stored and owned, services are consumed at the point of delivery and cannot be
physically possessed. Examples include healthcare, education, and
entertainment.
(b) Fill in the blank:
The allocation of scarce resources and distribution of the final
goods and services are the central problems of any economy. 1
(c) What is a demand function?
1
Ans:- The demand function is a
mathematical representation that describes the relationship between the
quantity of a good that consumers are willing and able to buy and the various
factors that influence this demand, such as its price, consumer income, and preferences.
It can be expressed in simple form as Qd=f(P), where Qd
is the quantity demanded and P is the price of the good. More complex forms may
include additional variables such as income and the prices of related goods,
represented as Qd=f(P,Y,Pr,T).
(d) What happens to total
product when marginal product is zero? 1
Ans:- When marginal product (MP) is
zero, it indicates that adding an additional unit of input does not increase
total output. At this point, total product remains constant because no further
increase in input contributes to an increase in output. This usually occurs at
the point of diminishing returns in production.
(e) What does a vertical supply
curve imply? 1
Ans:- A vertical supply curve means
that the quantity supplied of a commodity remains constant despite changes in
price. This situation often occurs in markets where supply is fixed or limited,
such as with unique goods or resources whose quantity cannot be increased,
which reflects perfectly inelastic supply.
(f) Why is average total cost
(ATC) greater than average variable cost (AVC)? 1
Ans:- Average total cost (ATC) is
greater than average variable cost (AVC) because ATC includes both variable
costs (costs that change with production level) and fixed costs (costs that do
not change with production level). Since fixed costs are spread over all units
produced, they add up to the total cost per unit, making ATC higher than AVC,
which accounts only for variable costs. Thus, the relationship can be
summarized as:
where TFC is total fixed cost
and Q is the quantity produced.
2.
State the meaning of microeconomics and macroeconomics. 2
Ans:-
Meaning of Microeconomics and Macroeconomics:-
Microeconomics is the branch of economics
that studies individual agents such as households and firms and their
interactions in specific markets. It focuses on the decision-making processes
of these agents, the allocation of resources, and the determination of prices
based on supply and demand.
Macroeconomics, on the other hand, examines
the entire economy. It analyzes aggregate indicators such as national income,
unemployment rate, inflation, and overall economic growth. Macroeconomics
attempts to understand how different sectors of the economy interact and how
government policies can affect economic performance.
3.
Why does a budget line slope downward? 2
Ans:- The budget line slopes
downward because of the trade-offs between two goods that a consumer faces due
to his limited income. As a consumer decides to purchase more of one good (say
good 1), he must reduce the quantity of the other good (good 2) according to
his capacity. This reflects the opportunity cost of choosing one good over the
other. The slope of the budget line represents the rate at which good 2 must be
sacrificed to obtain an additional unit of good 1, which is determined by the
prices of both goods.
4.
If the total utilities of 4 and 5 units of a commodity for a consumer are 56
and 60 respectively, calculate the marginal utility of 4 units of it for him. 2
Ans:-
Calculating Marginal Utility:-
To calculate the marginal
utility (MU) for the fourth unit of a good when the total utilities for 4 and 5
units are 56 and 60, respectively:
MU=TU5 −TU4=60−56=4
Thus, the marginal utility of
the fourth unit is 4.
5.
State any two exceptions of the law of demand. 2
Ans:-
Exceptions to the Law of Demand:-
(i) Giffen Goods: These are inferior goods whose
demand increases as the price rises, which is contrary to the law of demand.
This occurs because the income effect is greater than the substitution effect.
An example of this was seen during the Irish potato famine, where high potato
prices led people to buy more potatoes because they could no longer afford more
expensive alternatives such as meat.
(ii) Veblen Goods: These are luxury goods whose
demand increases with rising prices because they hold status symbol appeal.
Consumers perceive high prices as a sign of high quality and desirability,
leading to increased consumption despite the higher cost. Examples include
designer handbags and luxury cars.
6.
Define the term “long-run” as used in production. 2
Ans:- Definition of
"Long-Run" in Production:- The term "long-run" in
production refers to a period during which all factors of production and costs
are variable. Unlike the short run, where at least one factor is fixed, the
long run allows firms to adjust all inputs, including capital and labour,
enabling them to achieve optimum production level and scale. This flexibility
facilitates adjustments in production techniques and capacity in response to
market conditions and technological progress.
7.
State any two assumptions of the law of variable proportions. 2
Ans:-
Assumptions of the Law of Variable Proportions:-
(i) Technology is constant: It is assumed that the state
of technology remains unchanged during the analysis. This means that any change
in output is due only to changes in input quantities.
(ii) Homogeneity of factors: The factors of production
(such as labour and capital) are assumed to be homogeneous, which means that
they are of uniform quality and can be substituted for one another without
affecting productivity.
8.
Distinguish between supply and stock. 4
Ans:-
Difference between supply and stock:-
Supply refers to the quantity of a commodity
that producers are willing and able to sell at different prices in a specific
period of time. It is influenced by various factors including price, production
cost and market conditions.
In contrast, stock refers to the total quantity of a
commodity available at a given time, regardless of whether it is for sale or
not. While supply can change depending on market dynamics, stock remains
constant until it is sold or replenished. Thus, supply is dynamic and
responsive to market conditions, while stock is constant and reflects the
existing inventory at any given time.
Or
Explain briefly any four factors
affecting supply of a commodity.
Ans:- Factors affecting the
supply of a commodity:-
(i) Price of the commodity: There is a direct relationship
between the price of a commodity and its supply; as prices rise, producers are
encouraged to supply more because of greater potential profits14.
(ii) Prices of other goods: The supply of a commodity can
be influenced by the prices of related goods. If the price of a substitute good
rises, producers may divert resources from the original good to maximize
profits.
(iii) Prices of factor inputs: Changes in the cost of
production inputs (such as labour and raw materials) directly affect supply.
Higher input costs generally reduce supply, while lower costs increase it.
(iv) State of technology: Advances in technology can
reduce production costs and increase efficiency, thereby increasing supply.
Conversely, outdated technology can hinder production and reduce supply.
9. Explain
the law of supply with the help of a supply schedule. 4
Ans:-
Law of Supply with Supply Schedule:-
The law of supply states that
there is a direct relationship between the price of a commodity and the
quantity supplied. This relationship can be represented through a supply
schedule:
|
Price (per unit) |
Quantity supplied (units) |
|
Rs. 10 Rs. 20 Rs. 30 Rs. 40 |
100 200 300 400 |
As seen in this schedule, as
soon as the price rises by Rs. 10, the demand for a good increases. As price of
goods increases from Rs. 100 to Rs. 40, quantity supplied increases from 100
units to 400 units, indicating that higher prices encourage producers to supply
more.
10.
State the relationship between average cost (AC) and marginal cost (MC) using diagram.
4
Ans:-
Relationship between Average Cost (AC) and Marginal Cost (MC):-
The relationship between
average cost (AC) and marginal cost (MC) can be illustrated with a diagram:
(a) When MC is below AC, AC
decreases.
(b) When MC is equal to AC, AC
is at its minimum.
(c) When MC is greater than AC,
AC begins to increase.
This relationship shows that MC
affects AC; thus, understanding this interaction helps firms determine the
optimal production level.
In this diagram, the downward
slope of AC shows the reduction in average cost as output increases until it
reaches its minimum point.
11.
State the distinction between explicit cost and implicit cost. Give one example
of each of them. 2+2=4
Ans:-
Difference between Explicit Cost and Implicit Cost:-
Explicit costs refer to direct payments made for
inputs into production, such as wages and rent. For example, if a firm pays Rs
1,000 for raw materials, this is an explicit cost.
Implicit costs, on the other hand, represent
the opportunity costs associated with using resources owned by the firm rather
than renting or selling them. An example would be the income forgone by an
entrepreneur who invests their time in their business rather than working
elsewhere; if they could earn Rs 50,000 annually in another job but choose to
run their business instead, this amount represents an implicit cost.
12.
Write down three characteristics of monopolistic competition. State whether the
output produced by a firm under such a market is higher/ lower than or equal to
that of a firm under perfect competition. 3+1=4
Ans:-
Characteristics of Monopolistic Competition:-
(i) Multiple Sellers: Multiple firms compete in the
market, but sell differentiated products.
(ii) Product differentiation: Each firm offers products that
are slightly different from one another.
(iii) Free entry and exit: Firms can enter or exit the
market without any significant barriers.
In terms of output comparison
with perfect competition, firms in monopolistic competition generally produce
less than firms under perfect competition because of their ability to set
prices above marginal cost due to product differentiation. Thus, the output
produced under monopolistic competition is less than the output produced under
perfect competition.
Or
"Monopoly firm is a price
maker" - Explain.
Ans:- Monopoly Firm as Price
Maker:- A monopoly firm is a price maker because it has significant market
power to set prices above marginal cost due to a lack of competition. Unlike
firms in perfect competition that are price takers (accept market prices), a
monopolist can influence market prices by adjusting its output levels. The
monopolist faces a downward-sloping demand curve; thus, to sell more units, it
must lower its price. This ability to set prices allows monopolists to maximize
profits by setting optimal output levels where marginal revenue equals marginal
cost, thus enabling them to charge higher prices than in competitive markets.
13.
Explain the two basic conditions of consumer's equilibrium assuming that the
consumer consumes only two goods. 6
Ans:- Consumer Equilibrium with Two
Goods:- In economics, consumers reach equilibrium when they maximize their
utility within the limits of their budget. When considering two goods, the
conditions for consumer equilibrium can be defined by the following two basic
conditions:-
(i) Equal marginal utility per dollar
spent: The
first condition for consumer equilibrium is that the ratio of the marginal
utility of each good to its price should be equal. This can be expressed
mathematically as:
where:
(a) MUx is the marginal
utility of good X,
(b) Px is the price
of good X,
(c) MUy is the
marginal utility of good Y,
(d) Py is the price
of good Y.
This condition ensures that consumers allocate their income in such a
way that they receive the same amount of utility per dollar spent on each good.
If this condition is not met, consumers can increase their total utility by
reallocating their spending between the two goods.
(ii) Budget constraint: The second condition for
consumer equilibrium is that the total expenditure on the two goods should be
equal to the consumer's income. This can be represented as:
where:
(a) Qx and Qy
are the quantities of goods X and Y consumed,
(b) I is the total income
available to the consumer.
This condition ensures that the consumer does not spend more than his
budget while maximizing his utility. The consumer will adjust his consumption
of goods X and Y until he reaches a point where his budget is fully spent
without overspending.
Together, these conditions define a point on the consumer's indifference
curve that touches the budget line, reflecting maximum satisfaction given their
financial constraints.
Or
Explain the concepts of change
in quantity demanded and change in demand using suitable diagrams.
Ans:- Change in quantity
demanded vs. change in demand:-
Understanding the difference
between change in quantity demanded and change in demand is important in
economics, as they have different effects on market behaviour.
Change in quantity demanded: Change in quantity demanded
refers to the movement along a given demand curve due to a change in the price
of the commodity. This relationship is represented by the law of demand, which
states that, all else being equal, an increase in price leads to a decrease in
quantity demanded and vice versa.
Diagram Explanation:-
(a) When price decreases from
P1 to P2, quantity demanded increases from Q1 to Q2. This movement along the
demand curve represents an increase in quantity demanded.
Change in demand: In contrast, change in demand
refers to a shift of the entire demand curve due to non-price factors such as
changes in consumer preferences, income levels or prices of related goods
(substitutes and complements).
Diagram Explanation:-
(a) If consumer preferences
change positively towards a product, the demand curve shifts from D1 to D2,
resulting in an increase in demand at each price level.
(b) Conversely, if preferences
decrease or if there is a negative economic impact, the demand curve may shift
to the left from D1 to D3, reflecting a decrease in demand at all price levels.
14.
The demand and supply functions of a firm under perfectly competitive market
are given below:
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