CBSE Sample Papers for Class 12 Economics Compartment Delhi -2014

Time allowed : 3 hours Maximum marks 100

GENERAL INSTRUCTIONS

All questions in both the sections are compulsory.
Marks for questions are indicated against each.
Questions No. 1-5 and 17-21 are very short-answer questions carrying 1 nick each. They are required to be answered in one sentence each.
Questions No. 6-10 and 22-26 are? short-answer questions carrying 3 marks each. Answers to them should normally not exceed 60 words each.
Questions No. 11-13 and 27-29 are also short-answer questions carrying 4 marks each. Answers to them should normally not exceed 70 words each.
Questions No. 14-16 and 30-32 are long-answers questions carrying 6 marks each. Answers to them should normally not exceed 100 words each.
Answers should be brief and to the point and the above word limit should be adhered to as far as possible.

SETI

SECTION A
Question.1 Name the economic value achieved through the spread of education in the context of production potential.
Answer. In the context of production potential through the spread of education, the economic value achieved would be better quality and more output along with increase in income and standard of living.

Question.2 Give the meaning of utility.
Answer. Utility means actual or expected satisfaction to a consumer from the consumption of a good.

Question.3 Give two examples of implicit costs.
Answer.Two examples of implicit costs:

Estimated salary of the owners.
Estimated rent of the building owned by the owner of business.

Question.4 When is supply of a good said to be price inelastic?
Answer. When the percentage change in quantity supplied is less than the percentage change in price, then the supply for such a commodity is said to be price inelastic.

Question.5 Why does average fixed cost fall With increase in output?
Answer. As total fixed cost is constant in the short run, the average fixed cost falls with every increase in output.

Question.6 Why does the problem of ‘what to produce’ arise? Explain.
Answer. See Q. 11, 2010 (I Delhi). [Page 60

Question.7 A and B are substitute goods. Explain,the effect of rise in price of A on the demand for B.

Answer. Substitute goods are a pair of goods which can be used in place of each other. Demand for a given commodity is affected if the price of its substitute falls or rises. For example, Demand for commodity B will increase (its price remaining the same) if price of its substitute, commodity A rises, because then commodity B will become relatively cheaper. Thus, a rise in the price of substitute good A will increase the consumer’s demand for the given substitute good B.
or
Explain any two causes of “increase” in demand.
Answer. When demand rises due to change in factors other than price, it is called increase in demand. Causes of increase in demand are:

Rise in price of substitute goods In case of substitutes, an increase in the price of one substitute will increase the demand for the other substitute. For example, a rise in the price of tea will lead to a.fise.in the demand of coffee.
Fall in price of complementaryrgoods. The demand for a good and price of its complementary good are negatively related. A decrease in price of a complementary good increases the demand for the rommodity in question. For exampleT a fall in the price of petrol causes an increase in the demand for cars.

Question.8 Calculate marginal cost at each level of output:

Answer.

Question.9 At a price of Rs 10 per unit the supply of a good is 80 units. When its price rises to Rs 12 per unit, its supply rases by 20 per cent. Calculate price elasticity of supply.
Answer.

Question.10 Explain any two causes of a rightward shift in supply curve.
Answer. The supply Curve can shift rightwards because of the following two reasons:

Upgradation of technology. Adv&need and improved technology reduces the cost of
production and raises the profit margin leading to a rightward shift in the supply curve.
Decrease in price of factors of production. When price of factors of production falls,
cost of production falls and profit margin rises. It increases the supply shifting the supply curve rightwards

Question.11 A consumer consumes only two goods and is in equilibrium. Show that price and . M demand for a good, are inversely related. Explain using utility analysis.
Answer.

Question.12 The quantity demanded of a good is 150O units at the price of Rs 10 per unit. Its price elasticity of demand is (-)1.5. Calculate its quantity demanded, when its price falls to Rs 8 per unit.
Answer.

Or
Explain the geometric method of calculating price elasticity ofdemand.
Answer. See Q. 7, 2009 (I Outside Delhi).

Question.13 State the main features of a perfectly competitive market.
Answer. Perfect competition refers to a market situation where there are very large number of buyers and sellers dealing in a homogeneous product at a price fixed by the industry. The various features of Perfect Contention are:

Very large number of buyers and sellers. This implies that the share of each seller. and each buyer in the total supply and demand respectively is so insignificant that
they cannot influence the market price.
Homogeneous product. This mean’s that all the firms in the market produce the same products. This ensures uniform price in the market.
Freedom of entry and exit. It ensures absence of abnormal Profit and losses in the long run. When there will be abnormal profits, new firms will enter and abnormal profits will vanish and vice-versa
Perfect knowledge about market and technology. This implies that no consumer is prepared to pay a higher price and that each producer incurs the same per unit cost for the product.

Question.14 Explain consumer’s equilibrium with the help of indifference curve analysis.
Answer. Consumer’s equilibrium refers to a situation in which a costumer defines the maximum satisfaction. The equilibrium will be at a point where consumer’s (satisfaction is maximum subject to-limited money bundle of goods from those available in the budget set.
He would be in equilibrium only at such point which is common between the budget line and the highest attainable indifference curve.
equilibrium Conditions are:

Or
A consumer consumes only two goods. Explain consumer’s equilibrium with the help of utility analysis.
Answer. A consumer in consumption of two commodities will be in equilibrium when he spends his limited income in such a way that the ratios of marginal utilities of the two commodities and their respective prices are equal arid MU falls as consumption increases.. Therefore, the two necessary conditions to attain consumer’s equilibrium in case of two commodities are:

Question.15 Explain the conditions of producer’s equilibrium with the help of a numerical example. Use marginal cost and marginal revenue approach.
Answer. Producer’s equilibrium means that Combination of price and output which yields the producer maximum profit, and the profit declines as more is produced.
According to MR-MC approach, Producer’s equilibrium refers to the stage of that output level at which:
MC = MR
Every producer aims to maximize the total profits. For this, a firm compares its MR with its MC. Profits will increase as long as MR exceeds MC and profits will fall if MR is less than MC. So, equilibrium is not achieved when MC < MR as it is possible to add to profits by producing more. The producer is also not in equilibrium when MC>MR because benefit is less than the cost. It means, the firm will be at equilibrium only when MC = MR. Output beyond this level will reduce profits.

In the above table, the producer will be in equilibrium when he produces 5 units of output as at this level his profits are maximum and both the conditions of equilibrium are satisfied.

Question.16 Explain the meaning of excess supply of a commodity and its chain of effects on price, demand and supply of the commodity, (use diagram)
Answer.

Note: Explain the meaning of ‘excess supply of a commodity and its chain of effects on price, demand and supply of the commodity, (use a schedule)
Answer.Please read the answer above and add:

In the above table, equilibrium price is Rs 3 per unit and equilibrium quantity is 30 units. But suppose the market price is Rs 4 at which market supply is greater than the market demand. Competition among the sellers will lead to a decline in the price which will increase the demand and decrease supply to 30 units which is the equilibrium quantity.

SECTION B
Question.17 Define national income.
Answer. It refers to net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

Question.18 Give the meaning of capital goods.
Answer. Capital goods are those final goods which help in production of other goods and services, for example, plant and machinery, equipments etc.

Question.19 What are time deposits.
Answer. Time deposits are fixed deposits and refer to those non-withdrawable (by cheques) deposits, in which an amount is deposited with the bank for a fixed period of time at a fixed^tSrebf Interest

Question.20 Give two examples of non-tax revenue receipts.
Answer. Interest and Profits are two examples of non-tax revenue receipts

Question.21 What is a government budget?
Answer. A government budget is an annual statement, showing itemwise estimates of receipts and expenditures during a iiscal year.

Question.22 Explain the circular flow of income.
Answer. The flow of production, income generation and Expenditure involving different sectors of the economy is known as circular flow of income. Circular flow of income refers to continuous circular movement of aggregate value of goods and services between households and firms, either as factor payments, or as expenditure on goods and services. In an economy, money keeps on flowing in the form of income and expenditure among the different sectors of the economy. The movement of factor payments from production dnits to households and that of payment for goods and services from households to firms is called money flow as shown by the outer loop in the given diagram.

The flow of factor services from households to firms and flow of goods and services from _ firms to households is called real flow.

Question. 23 Explain the ‘store of value’ function of money.
Answer. See Q. 23,2012 (I Deffii).
Or
Explain the role of central bank as a “Banker to1 the government.”
Answer. See Q 23 2010(II Delhi).

Question.24 Give the* meaning of average propensity to save. What is its relation with average propensity to consume?
Answer. Average propensity to save refers to the ratio of Savings to the corresponding level of Income.

Question.25 Explain the meaning of investment multiplier. What can be its minimum and maximum value?
Answer.

Question.26 Distinguish between current account and capital account of the balance of payments account on the basis of its components.
Answer.

Question. 27 How do commercial banks create credit? Explain with the help of an example.
Answer. Commercial banks accept deposits from the general public known as primary deposits and keeping a percentage of these deposits in reserve (known as Legal Reserve Ratio), advance the balance of the deposits of other customers. While advancing them loans, banks deposit the amount in their accounts and again keeping a percentage of the deposits (Legal Reserve Ratio), further advance the balance amount to others. This process continues and is known as credit creation by banks. In this way banks create credit many times more than the primary deposits. The phenomenon of credit creation can be explained by taking a hypothetical example, where primary deposit is Rs 1,000 and legal reserve ratio (LRR) is 20%. Say, Mr. A deposits?1,000. Keeping Rs 200 (20%) in reserve, the balance of T640 is advanced as loan to C. This process continues and finally total deposits created are Rs 5,000, i.e., 5 times more. So money multiplier is 5. This process becomes clear, looking at the schedule given below:

Or
Explain the meaning of open market operations. How is it used by the central bank to control money supply?
Answer. Open market operations refers to buying and selling of government securities by the central bank from/to the public and the commercial banks.

Sale of securities by the central bank reduces the reserves of the commercial banks. It adversely affects the commercial banks’ ability to create credit and therefore decreases the money supply in the economy.
Purchase of securities by the central bank increases the reserves and raises the commercial banks’ ability to give credit. This increases the money supply in the economy.

Question.28 Calculate “Net value added at factor cost” from the following data:

Solution.

Question. 29 The central bank takes steps to control rise in the price of foreign exchange. Explain the economic values it involves as far as the common man is concerned.
Answer. In a managed floating system the foreign exchange rate is determined by the market forces. However, the central bank needs to intervene in this system in order to restrict the fluctuations in the exchange rate within certain limits. A rise in the exchange rate adversely affects imports and the developmental process of the country. Inability to import might lead to inflation in the economy which would adversely affect the common man eroding his purchasing power.

Question.30 Calculate “Personal Disposable Income”:

Answer.

Answer.

Question.31 (a) Distinguish between autonomous investment and induced investment. (b) On the basis of the following information about an economy, calculate its equilibrium level of income:
(i) Autonomous consumption 100
(ii)Marginal propensity to consume 0.75
(iii) Investment 5000
Answer.

Question.32 Distinguish between the following.. Also give an example of each.
(a) Direct tax and Indirect tax
(b) Revenue expenditure and Capital expenditure
Answer.

SET III

Note: Except for the following questions, all the remaining questions have been asked in Set I.
SECTION A
Question.2 Define marginal utility.
Answer. It is the additional utility derived from the consumption of one more unit of the given commodity.

Question.3 Give two examples of fixed costs.
Answer. Examples of fixed cost: (i) Salary of Permanent Staff and (ii) Insurance Premium.

Question.4 Give one reason for “decrease” in supply of a good.
Answer. One reason for decrease in supply of a good—Increase in the price of inputs.

Question.8 Calculate average variable cost at each level of output:

Answer.

Question.9 10 per cent increase in the price of a good raises its supply from 150 units to 180 units.
Calculate its price elasticity of supply.
Answer.

Question.15 At what level of output will the producer be in equilibrium? Give reasons for your’ answer. (Use marginal cost and marginal revenue approach)

Answer.

The producer is in equilibrium at the 4th unit of output because at this level of output both the equilibrium conditions are being satisfied, i.e.,
(i) MC = MR
(ii)MC > MR after MC = MR output level.

SECTION B
Question.17 Define national product.
Answer. National product refers to the net money value of all the final goods and services produced by the normal residents of a country during a period of one year.

Question.18 Define consumption goods.
Answer. Consumption goods refer to those goods which satisfy the wants of the consumers directly.

Question.20 Give two examples of indirect taxes.
Answer. Examples of indirect taxes: (i) Sales tax and (ii) Excise duty.

Question.31 (a) Distinguish between autonomous consumption and induced consumption. 6 (b) From the following data about an economy, calculate its equilibrium level of income:

Marginal propensity to consume 0.5
Autonomous consumption 300
Investment 6000

Answer. (a) Autonomous Consumption. Even when income (Y) is zero, there is some minimum . consumption, known as autonomous consumption which is always positive. It is denoted as C.
Induced consumption. When income increases consumption also increases. But, the rate of increase in consumption is less than the rate of increase in income (Keynesian Psychological Law of Consumption). This portion of increased consumption is termed as induced consumption.
Consumption function is represented as:

Question.32 Distinguish between the following:
(a) Revenue receipts and Capital receipts
(b) Revenue deficit and Fiscal deficit
Answer.
(a) Revenue receipts and Capital receipts. See Q. 23, 2013 (I Outside Delhi).
(b) Revenue deficit and Fiscal deficit. See Q. 23(Or), 2013 (I Delhi).

SET III

Note: Except for the following questions, all the remaining questions have been asked in Set I and Set II.
SECTION A
Question.2 Define demand for a good.
Answer. Demand is the quantity of a commodity that a consumer is willing and able to buy at each possible price of that commodity during a given period of time.

Question.3 Give two examples of variable costs.
Answer. Examples of variable costs;

Wages of casual labour and
Payment for raw material.

Question.4 When is supply of a good said to be perfectly elastic?
Answer. When there is an infinite supply at a particular price and the supply becomes zero with a slight fall in price, then the supply of such a commodity is said to be perfectly elastic.

Question.8 Calculate marginal cost at each level of output:

Answer.

Question.9 Supply of a good rises from 200 units to 240 units as a result of 20 percent rise in its price. Calculate its price elasticity of supply.
Solution.

Question.15 Giving reasons find out the level of output at which producer will be in equilibrium. Use marginal cost and marginal revenue approach)

Answer.

SECTION B
Question.17 Give two examples of intermediate goods.
Answer. Examples of intermediate goods:

Milk used in a dairy shop for resale and
Coal used in a factory for further production.

Question.18 Define investment.
Answer. Investment or Capital formation refers to addition to the capital stock of anjconomy.

Question.20. What is a direct tax?
Answer. Taxes that are imposed on property and income of individuals and companies which are paid directly by them to the government are called direct taxes.

Question.31
(a) Distinguish between Aggregate Demand and Aggregate Supply.
(b) From the following data about an economy, calculate its equilibrium level of income:
(i) Marginal propensity to consume 0.8
(ii)Investment 5000
(iii) Autonomous Consumption 500
Answer.
(a) Aggregate Demand (AD) refers to the total value of final goods and services which” all the sectors of an economy are planning to buy at a given level of income during a period of one accounting year.
Even though AD has four components, we assume that AD is a function of only consumption expenditure and investment expenditure i.e., AD = C + I
AD curve has a positive slope indicating that as the income increases, aggregate expenditure also increases.
Aggregate Supply (AS) refers to money value of goods and services that all the producers are willing to supply in an economy in the given period.
Since aggregate supply is equal to national income and income is either consumed or ‘ ‘ saved, therefore,
AS = C + S
Aggregate supply curve is a 45° line drawn from the origin indicating that every point on this line is equidistant from X and Y axis.

Question.32 Explain the objectives of resource allocation and income distribution in a government budget.
Answer. Objective of resource allocation. Through the budgetary policy, government aims to reallocate resources in accordance with the economic (profit maximisation) and social (public welfare) priorities of the country. The government can influence the allocation of resources by encouraging the private sector through tax concessions, subsidies etc. to undertake certain production in public interest. If private sector does not take interest, government can directly undertake production. Objective of income distribution. Economic inequality is an inherent part of every economic system. The Government aims to reduce such inequalities through its budgetary policy by imposing taxes on the rich and spending more on the welfare/of the poor. Increased taxes will reduce the income of the rich and government spending will raise the standard of living of the poor thus reducing inequalities in the distribution of income.

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