AHSEC| CLASS 12| ECONOMICS| SOLVED PAPER - 2018| H.S. 2ND YEAR
2018
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 market economy. 1
Ans:- The
market economy is an economic system where resources are owned and controlled
primarily by individuals or businesses, and goods and services are allocated
through voluntary transactions based on the forces of supply and demand. In
this system, government intervention is minimal, allowing market dynamics to
determine output and pricing.
(b) What does
a point below the production possibility frontier indicate? 1
Ans:- A
point located below the production possibility frontier (PPF) indicates
inefficiency in resource use. This means that the economy is not producing at
its maximum potential, as it could generate more output with the available
resources.
(c) What is
meant by inferior goods? 1
Ans:-
Inferior goods are types of goods whose demand increases when consumer income
falls, and conversely, demand decreases when income rises. This behavior is the
opposite of normal goods, where demand increases with income. Examples include
generic brands or second-hand products.
(d) What is
an indifference curve? 1
Ans:- An
indifference curve shows a graphical depiction of different combinations of two
goods that provide the same level of satisfaction or utility to the consumer.
The consumer is indifferent between these combinations, meaning that they have
no preference for one combination over the other.
(e) If there
is no change in quantity demanded despite a change in the price of a commodity,
what will be the price elasticity (ep) of demand? 1
Ans:- If
there is no change in the quantity demanded of a commodity despite a change in
its price, the price elasticity of demand (EP) is considered to be zero,
indicating perfectly inelastic demand. This means that consumers will continue
to buy the same quantity regardless of price changes.
(f) What is a
production function? 1
Ans:- A
production function describes the relationship between the inputs used in
production and the resulting output. It shows how changing quantities of inputs
– such as labour and capital – affect the quantity of goods produced. The
function can help determine the most efficient combination of inputs to
maximise output.
2. Distinguish between positive economics and normative
economics. 2
Ans:- Difference between Positive and Normative
Economics:-
(i) Positive
economics is concerned with describing and explaining economic phenomena
based on objective data and factual analysis. It answers questions about “what
is” in the economy, focusing on observable outcomes and relationships, such as
“increasing tax rates leads to a decrease in total tax revenue”.
(ii)
Normative economics, on the other hand, is concerned with value judgments
and opinions about how the economy should be. It addresses questions of “what
ought to be”, which often involve subjective attitudes and moral
considerations, such as “unemployment is worse than inflation”.
3. Mention any two important factors determining price
elasticity of demand. 2
Ans:- Factors determining price elasticity of demand:-
(i)
Substitutes: The availability of close substitutes affects elasticity; the
more substitutes are available, the more elastic the demand.
(ii)
Necessity versus Luxury: Goods that are necessities do not have elasticity
of demand, while luxury goods are usually more elastic in demand.
4. Suppose, when the price of a good is Rs. 4, the
quantity demanded is 25 units. As price increases to Rs. 5, the quantity
demanded falls to 20 units. Calculate the price elasticity of demand. 2
5. Can there be some fixed cost in the long run? Justify
you answer. 1+1=2
Ans:- In economic theory, all costs are variable in
the long run, which means firms can adjust all inputs and costs. Therefore,
there cannot be fixed costs in the long run because firms have the flexibility
to change their production capacity and operating scale.
Or
What is
marginal product of an input? 2
Ans:- The
marginal product of an input refers to the additional output generated by
adding one more unit of that input while keeping all other inputs constant. It
measures how much additional output is generated when one additional unit of a
factor (such as labor or capital) is used.
6. Write down the concept of normal profit. 2
Ans:- Normal profit is defined as the minimum level
of profit required for a company to remain competitive in the market. This
occurs when total revenue equals total cost (including both explicit and
implicit costs). In this situation, economic profit equals zero, which means
the firm covers all its opportunity costs but does not earn additional profit.
7. What is monopolistic competition? 2
Ans:- Monopolistic competition is a market structure
in which many firms sell products that are similar but not identical. Each firm
has some degree of market power due to product differentiation, allowing them to
set prices above marginal cost. This type of competition provides a greater
variety of choices for consumers but also results in less efficiency than
perfect competition.
8. What does the Average Fixed Cost (AFC) curve look
like? Why does it look so? 1+3=4
Ans:- Average Fixed Cost (AFC) Curve:-
The average
fixed cost (AFC) curve is characterized by a downward sloping shape. This
occurs because as production increases, total fixed cost (TFC) remains constant
while being spread over a larger number of units produced. Mathematically, AFC
is calculated as:
AFC = Q/TFC
where TFC is
total fixed cost and Q is the quantity produced. As production Q increases, AFC
decreases, causing the curve to slope steadily downward. For example, if a
factory incurs fixed costs of Rs 1000 and produces 100 units, the AFC is Rs 10
per unit. If production doubles to 200 units, the AFC decreases to Rs 5 per
unit.
This downward
trend reflects the spreading of fixed costs over more units, making it cheaper
to produce each unit as production increases. As a result, the AFC curve never
rises; It decreases only as long as output increases.
Or
What is meant
by Returns to Scale? Give the meanings of various stages or Returns to Scale.
1+3=4
Ans:- Returns
to scale:-
Returns to scale
refers to how a firm's output changes in response to a proportional change in
all inputs.
It can be
classified into three stages:-
(i)
Increasing returns to scale: In this stage, when all inputs are increased
by a certain percentage, output increases by a greater percentage. For example,
doubling all inputs can more than double the output. This is usually due to
efficiencies gained from large-scale operations.
(ii)
Constant returns to scale: Here, increasing all inputs by a certain
percentage leads to an equal percentage increase in output. For example, if the
inputs are doubled, the output also doubles. This stage shows that the firm
operates at the optimal scale without any inefficiencies.
(iii)
Decreasing returns to scale: In this scenario, increasing all inputs by a
certain percentage leads to a less than proportional increase in output. For
example, doubling the inputs may result in less than double the output due to
factors such as management challenges arising at scale or resource limitations.
Understanding
these stages helps companies make strategic decisions regarding expansion and
resource allocation based on their operational capacity at different levels of
production.
9. What is an isoquant? Why are the isoquants downward
sloping? 2+2=4
Ans:- An isoquant is a curve that shows all
combinations of two factors of production that give the same level of output.
It shows the trade-offs between these inputs, typically capital and labor,
while maintaining a constant output level. The term "isoquant"
derives from the Greek words "iso", meaning equal, and
"quant", meaning quantity, indicating that each point on the curve
corresponds to the same amount of output produced.
Isoquants are
downward sloping because of the theory of diminishing marginal rates of
technical substitution (MRTS). This theory states that as a firm substitutes
one input for another (for example, increasing labor while decreasing capital),
the additional output gained from using more of one input will eventually
decrease. As a result, to maintain the same level of output, the firm must
reduce the quantity of the other input to compensate, leading to a negative
slope. The convex shape of the isoquant reflects this decreasing MRTS, which
shows that the rate at which one input can be substituted for another decreases
as more of one input is used.
10. What does a firm wish to achieve? What three
conditions must hold for a profit maximising firm in the short-run? 1+3=4
Ans:- A firm primarily aims to maximize profits. This
involves determining the optimal level of output and using resources
efficiently to minimize costs while maximizing revenue from sales.
Three
conditions for profit maximization in the short run:-
(i) Marginal
cost equals marginal revenue (MC = MR): A firm should produce up to the
point where the cost of producing an additional unit is equal to the revenue
generated from that unit.
(ii) Price
above average variable cost (P > AVC): In the short run, a firm will
continue to produce as long as the market price is greater than its average
variable costs. If not, it may choose to temporarily shut down operations.
(iii)
Efficient use of resources: To ensure efficient use of resources and avoid
unnecessary costs the firm should operate on the downward sloping portion of
its short run average cost curve.
Or
The
production function of a firm is given as Q = 5L1/2K1/2.
Calculate the level of output (Q) when it employs 25 units of labour (L) and 9
units of capital (K). 4
11. Explain two characteristics of perfectly competitive
market. 4
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