CBSE Guess > Papers > Important Questions > Class XII > 2008 > Economics > Economics By : Mr. Niraj Lalwani

Economics

Q. 1. Why do central problems arise in an economy? ( 1 Marks)

Ans. Central problems arise in an economy due to scarcity of resources having alternative uses in relation to unlimited wants.

Q. 2. What is the general shape of the APP curve? (1 Marks)

Ans. APP curve first rises and then falls when more units of a factor are employed.

Q. 3. What do the returns to scale refer to?

Ans. Returns to scale relates to increase in output when all the inputs are increased in the same proportion.

Q. 4. What are volume discount? (1 Marks)

Ans. Volume discount is the discount on price when a large quantity is purchased

Q. 5. Define monopoly. (1 Marks)

Ans. Monopoly refers to a market situation in which there is a single seller and there is no close substitute of the commodity sold by the monopolist.

Q. 6. Explain how scarcity and choice go together? (3 Marks)

ANS- Resources refer to all the factors of production. Scarcity means that resources which  produce goods and services are less in relation to their demand.  Though these resources are scarce they can be used for producing different goods. Due to scarcity of these resources, an economy cannot produce all the goods and services as required by its citizens. So some wants will have to remain unfulfilled. Therefore choice has to be made which means decision-making. If the resources were unlimited like sunshine or air then there would be no problem of choice. So scarcity and choice is inseparable.

Q. 7. What do you understand by the term Rationality in economics? (3 Marks)

Ans. Rationality refers to the tendency of an individual to promote his self-interest. A consumer is rational in his behavior if he attempts to maximise his satisfaction while he is spending money on the purchase of different goods and services. Likewise a producer is rational, if he attempts to maximise his profits.

Q. 8. Explain concept of marginal cost with the help of an example.

Ans. It is the addition to the total cost by using an additional unit of a commodity for example cost of 10 kg sugar is Rs. 200 while cost of 11kg sugar is Rs. 220 therefore the marginal cost is Rs 20 (220-200).

Classify the following into Fixed Cost and Variable Cost:

1. Rent for a shed
2. Minimum Telephone Bill 
3. Cost of Raw Material
4. Wages to permanent staff
5. Interest on Capital
6. Payment for transportation of goods

Ans. Fixed Cost     -   (1),(2),(4),(5)
Variable Cost  -          (3),(6),(7),(8)

Q. 9. What is meant by law of diminishing return to scale? Why do they arise? (3 Marks)

Ans. Law of diminishing return to scale refers to a proportionate increase in the output is less than the proportionate increase in input. For example if there is 20% increase in input as a result of that only 15% increase in output

Diminishing returns to scale are due to diseconomies to scale. As the scale of production continues to be expanded beyond a certain limit, there is a difficulty of management and coordination. This leads to wastage, decline in efficiency, etc. and causes diminishing returns to scale.

Q. 10. State three features of Monopoly market. Describe any one.

Ans. Following are the three features of monopoly market:
          1) A single seller
          2) No close substitute of the product
          3) No freedom of entry of new firm
1) A single Seller:
There is only one seller (or firm) of a commodity in the market with the reason that there is no distinction between industry and firm. The firm itself is the industry and has full control over the supply of the commodity. The monopolist may be an individual, a firm or a group of firm or a government corporation or even government itself.

Q. 11. Explain the meaning of normal goods and inferior goods.

Ans. Normal Goods: Normal goods are those goods for which the demand rises with every increase in the income of the consumer. In other words, in case of normal goods, there is a direct relationship between the income of a consumer and his demand for normal goods. Eg. Rice and wheat are the normal goods.

Inferior Goods: These are the low quality goods and their demand decrease when there is an increase in the income of the consumer. In other words there is an inverse relationship between the income of a consumer and his demand for normal goods. Eg. Peanuts and tonned milk are the normal goods.

Q. 12. What is meant by returns to a factor? What lead to increasing returns to a factor?

Ans. Returns to a factor relates to the behaviour of total output as one variable input say labour is varied. It is a short run concept.

Following factors lead to increasing returns to a factor:

1. Optimum combination of factors: In the beginning when quantities of a variable factors are applied to fixed factors, the system moves towards achievement of optimum combination of factors because then underutilised fixed factors (building, machine, land etc) are better and more fully used leading to increasing returns.
2. Specialisation: A greater degree of division of labour greatly raises productivity of labour and other factors.

Q. 13. Which cost, fixed or variable, determines marginal cost?

Ans. Variable cost determines marginal cost. The reason is that the fixed cost do not change with change in level of output. It is the variable cost only which changes with the level of output. MC by definition is the addition made to total cost due to an additional unit of commodity produced. And this addition, in TC is due to variable cost only as fixed cost remains constant. Therefore, MC depends on variable cost.

Q. 14. A person’s total utility scheduled is given below.

Derive his marginal utility schedule.

Q. 15. Distinguish between returns to a factor and returns to a scale. What are the factors that give rise to increasing returns to scale in long run?

Ans. Following are the main differences between returns to a factor and return to a scale:

1. Returns to a factor relates to the behaviour of total output to a change in one factor only whereas returns to scale relates to the behaviour of output to change in all the factors in the same proportion.
2. Returns to a factor apply when one factor alone is variable and the other factors remaining fixed whereas Returns to scale applies when all factors are variable.
3. The former applies in short period whereas the latter applies in long period.

Q. 16. Describe the FAD theory of famines.  6 Marks

Ans. According to FAD (Food Availability Decline) theory of famines, as the total availability of food grains falls, the price of food grains rises so much that the poor people can’t afford to buy even minimum amount of food grains for survival. This causes starvation at a massive scale taking the shape of famine. The casual link is that a large scale decline in food supply pushes the market price up to such a level that many poor people can no longer afford to buy the minimum amount for survival.

Q. 17. Define national income or national product

Ans. National Income or national product is the money value of all the final goods and services produced by a country during an accounting year.

Q. 18. What is a durable good?

Ans. A durable good is a good which may be used over and over again for a long time, because it does not lose its value through a single use.

Q. 19. Mention the types of loans and advances made by the banks.

Ans. Cash Credit, Demand loans, Short-term loans, overdrafts etc. are the types of loans and advances.

Q. 20. Give two examples of direct tax?

Ans. Two examples of direct tax are:

1. Income Tax
2. Wealth Tax

Q. 21. What are the two transactions that determine balance of trade?

Ans. Two transactions are:

1. Imports
2. Exports

Q. 22. Distinguish between the domestic product & national product

Ans. Domestic Product refers to the value of goods and services produced in a country during a year whereas the value of goods and services produced within the country or outside a country is called a National product.

So their distinction is on the basis of the territories in which the goods and services are produced

Q. 23. Write a short note on the aggregate supply

Ans. Aggregate supply refers to the flow of goods and services in an economy during a given period of time. It may also be called national income or national product. It is the aggregate cost of producing the output.

There are two components of aggregate supply, consumption and savings. Symbolically,

AS=C+S

Aggregate supply increases proportionally to the increase in employment. Aggregate supply can increase only till full employment is reached

Q. 24. Give the relationship between APC and APS.

Ans. The sum of average propensity to consume and average propensity to save is equal to one because,
    Y=C+S.
Dividing both sides by Y, we get,
    Y/Y=C/Y+S/Y
    1=APC+APS
    i.e. APC=1-APS
      APS=1-APC

Q. 25. What is Currency Deposit Ratio (Cdr)?

Ans. Currency Deposit Ratio (Cdr) is the ratio of currency held by public to their holding of bank deposit. Symbolically:

Cdr = Currency with public
Banks deposits

Q. 26. What are the functions of Central Banks ?

Ans. The functions of Central Banks are given here:

1.  Issuing of currency
2. Banker to government
3. Banker’s bank and supervisor
4. Controller of credit and money supply
5. Custodian of foreign exchange

Q. 27. What are the sources of financing deficit?  (3 Marks)

Ans. There are three sources by which the government can finance its deficit. These are:

1. Borrowings from public and foreign government.
2. Withdrawing from its cash balances with RBI.
3. Borrowings from the RBI.

Q. 28. What is meant by net factor income from abroad? Explain its components

Ans. Net factor income from abroad may be defined as the income received from abroad for rendering factor services abroad and income paid for the factor services rendered by non residents in the domestic territory of a country.

The components of net factor income from abroad are:

1. Net compensation of the employees: It is equal to the difference between the compensation of employees received by resident workers that are living and employed abroad and similar payments made to non resident workers.
2. Net Income from property and entrepreneurship: It is equal to the difference between the net income received by way of interest, rent and profits by the residents and similar payments made to the rest of the world.
3. Net Retained earning from abroad: It is equal to the difference between retained earning of the foreign countries in the country and retained companies located abroad.  National income= Domestic Factor + Net Factor income from abroad

Q. 29. Explain the functions of money.

Ans. Functions of money are given here:

1. Money as the Medium of Exchange: Medium of exchange is the basic or primary functions of money. Money acts as a medium of exchange or as a medium of payments.
2. Money as a Unit of Account: Money serves as unit of account or a measure of value. Money is the measuring rod, i.e. , it is the unit in  terms of which the values of other commodities and services are measured and expressed.
3. Money as the standard of Deferred Payments : The use of money as the standard of deferred or delayed payments immensely simplifies borrowings and lending operations and thereby facilitates the formation of capital markets and the work of financial intermediaries like Stock Exchange, Investment Trust and Banks.
4. Money as a store of value: Money can store value of goods in liquid form. By spending it we can get any commodity in future.

Q. 30. What do you mean by Cash Reserve Ratio(CRR) ?

Ans. Every commercial bank under law has to deposit with Central bank a minimum percentage of its demand and its deposits. This percentage is called as CRR. A high CRR means smaller deposits and lesser loans. By changing CRR, Central bank controls the lending capacity and credit availability of banks. Recently RBI has raised CRR from 5.5% to 6% w.e.f. March 3, 2007 to contain inflation. Statuary Liquidity Ratio (SLR) is an other measure adopted by RBI

Q. 31. What is balanced budget ? Describe merits and demerits of a balance budget.

Ans. Balanced budget is a budget in which estimated government revenue raised by the government is equal to government expenditure.

Following are the merits of balanced budget :

1. A balanced budget avoids wasteful expenditure on the part of the government.
2. A balanced budget ensures financial stability.

Following are the demerits of a balanced budget :

1. A balanced budget restricts the freedom of action on the part of the government.

A balanced budget hampers the process of economic growth particularly in developing economy.

Q. 32. Explain the psychological law of consumption. Also write down its assumption.

Ans. According to Keynes fundamental psychological law, individuals are likely to make higher consumption as their income increases but not as much as the increase in their income. This law is also known as propensity to consumer consumption function. This law is based on following propositions:

Consumption tends to increase with every increase in income. Income may be zero, but consumption is always positive.

1. When aggregate income increases, consumption expenditure also increases but by a smaller amount.
2. When income increases, the increment of income will be divided in certain proportion between consumption spending and saving.
3. As income increases, both consumption and saving will go up.

Assumptions of the law given by Keynes:

1. Habits of the people regarding spending do not change or propensity to consume remains same.
2. Conditions are normal in the economic system. There is no war, revolution, hyperinflation etc.
3. Existence of capitalistic economy behaviour of consumption.

Q. 33. Distinguish between APC and MPC. The value of which of these two can be greater than one and when?

Ans. The value of consumption function at a particular level of national income is called average propensity to consume. APC is the ratio of aggregate consumption of national income.

APC=C/Y
Where, C=aggregate consumption and
Y=aggregate income.

Marginal propensity to consume can be defined as the ratio of change in consumption to change in income. It indicates that part of additional income which is not spent on consumption.

MPC=∆C/∆Y
∆C=Change in consumption
∆Y=Change in income
MPC=Marginal propensity to consume

The value of average propensity to consume may be greater than one if past savings are consumed in the current year or borrowings are taken into use for consumption in the current year. Then consumption may be more than income and the value of APC will be greater than one.

Q. 34. Show the difference between Balance of Trade and Balance of Payment.

Ans. The difference between Balance of Trade and Balance of Payment is given below: