Section A: Microeconomics
q1.
The total cost at 5
units of output is Rs 30. The fixed cost is Rs 5. The average variable cost at
5 units of output is: .
a)
Rs 25
b)
Rs 6
c)
Rs 5
d)
Re 1
Solution
c) Rs. 56.
q2.
What
policy initiatives can the government undertake to increase the demand of milk
in the country? Mention any one. .
Solution
Give
subsidies to reduce price.
Undertake health campaigns to promote the positive effects of milk
consumption.(Any 1).
q3.
Which
of the shaded area in the diagrams below represent total utility?
(a) (b) (c) (d)
For blind candidates:
What
does the area under the marginal utility curve depict?
a)
Average Utility b) Total Utility
c)
Indifference Curve d) Consumer equilibrium
Solution
c) Indifference
Curve
q4.
Using a diagram
explain what will happen to the PPC of Bihar if the river Kosi causes
widespread floods?
For blind candidates:
State
two assumptions of a PPC. Explain what will happen to the PPC of the Bihar if
the river Kosi causes widespread floods.
Solution
If
the river Kosi causes widespread floods in Bihar, it will lead to destruction
of resources in Bihar. This will shift the PPC leftward.
Initial PPC is PP.
With
floods, the PPC will shift to P1P1
q5.
State
the central problems of an economy.
Solution
The
central problems of an economy are:
(i) What
to produce and in what quantity?
(ii) How
to produce?
(iii) For
whom to produce?
q6.
State
whether the following statements are True or False. Justify your answer. .
a)
Average product rises only where marginal product rises.
b) Total cost rises only
when marginal cost rises.
Solution
(a) False: Average product rises as long as
marginal product is greater than average product. Here marginal product could
be rising or falling. .
(b) False:
Total cost rises at a diminishing rate when marginal cost falls and total cost
rises at an increasing rate when marginal cost increases.
q7.
Explain
the effects of a 'price ceiling'. .
OR
Explain
the effects of a ‘price floor’.
Solution
'Price
ceiling' is the maximum price that sellers can legally charge for a product or
a service.
Since
this price is below equilibrium price, there is excess demand in the
market. With shortages, sellers tend to hoard the product. It could also lead
to
black marketing.
OR
‘Price
floor’ is the minimum price fixed by the government at which sellers can
legally sell their product.
Since
this price is above equilibrium price, there is excess supply in the market.
Since there is surplus, sellers can attempt to sell their product at a price
below the floor price.
q8.
Explain
the implications of freedom of entry and exit of firms under perfect
competition. .
Solution
Freedom of entry and exit of firms under perfect
competition means that there are no costs or barriers a firm faces to enter or
exit the market. The implication of this is that in the long run each firm
earns only normal profit. .
Suppose in the short run, existing firms are earning
super normal profits, new firms enter the industry as they are attracted by
profits. This raises the market supply and reduces the market price. As firms
accept the lower market price, profits reduces. This process continues till
profits reduce to normal levels in the long run.
The
opposite occurs if firms are earning losses as firms leave the industry. This
reduces market supply and raises market price till losses get wiped out and
firms earn only normal profit in the long run.
q9.
A
good is an 'inferior' good for one and at the same time 'normal 'good for
another consumer. Do you agree? Explain with the help of an example. .
Solution
Yes,
the same good can be inferior for one person and normal for another.
Whether a good is normal or inferior is determined by the income level of the
consumer. A good which is a normal good for a consumer with a lower income,
may become an inferior good for a consumer with higher income.
For
example, coarse cloth may be a normal good for a low income consumer, but for a
high income consumer it may be an inferior good as she can afford a better
quality cloth.
Thus,
when a consumer moves to a higher income level, she may consider coarse cloth
as being below their income status, and has the ability to buy more expensive
fine cloth, thus considering coarse cloth as being inferior.
q10.
Explain
why an indifference curve is convex to the origin?
OR
A
consumer consumes two goods X and Y. What will happen if MUx/Px is greater than
MUy/Py?.
Solution
An
indifference curve is convex to the origin due to diminishing marginal rate of
substitution (MRS). Diminishing MRS means that the number of units of 'Good Y'
that a consumer wants to substitute for one extra unit of 'Good X' goes on
decreasing as the consumption of Good X increases. As consumption of Good X
increases, the willingness to pay for it diminishes (due to the law of
diminishing marginal utility). This payment is.
in
terms of the units of Good Y sacrificed. Thus, MRS diminishes along an
indifference curve, which makes it convex to the origin.
OR
If
MUx/Px is greater than MUy/Py, then it means that the satisfaction a consumer
derives from spending a rupee on Good x is greater than the satisfaction
derived from spending a rupee on Good Y.
The
consumer will relocate her income – substitute Good X for Good Y.
As
the consumption of Good X increases its marginal utility will fall. As the
consumption of Good Y decreases, it marginal utility will increase. This is due
to the law of diminishing marginal utility.
This
process will continue till MUx/Px becomes equal to MUy/Py and the consumer is
in equilibrium.
q11.
Explain
the condition of equilibrium of a firm based on marginal cost and marginal
revenue. .
Solution
Suppose
the firm produces at an output level where MC<MR.
• This
means that the firm’s cost incurred on the last unit is less than the revenue
earned on the unit.
• Firm
earns a profit on the last unit.
• This
incentivizes the firm to produce more output.
Suppose
the firm produces at an output level where MC>MR
·
This
means that the firm’s cost incurred on the last unit is more that the revenue
earned on it.
• Firm
makes a loss on the last unit.
• This
incentivizes the firm to produce less output. .
Thus,
a firm earns maximum profit where MC=MR. Should MC=MR occur at more than one
output level, then the firm maximizes profit if MC>MR after the output where
MC=MR. If not, then MC<MR and it is in the firm’s interest to produce more
to maximize profit. .
Thus,
profit for a firm is maximized at an output where:
(a) MC=MR
(b) MC>MR
after the output where MC=MR.
q12.
What
is meant by change in supply and change in quantity supplied?
Solution
Change in quantity
supplied means when more is supplied at a higher price (expansion) or when less
is supplied at a lower price (contraction). It leads to an upward or downward
movement along the supply curve.
It
is caused due to a change in the own price of the commodity, other factor
affecting supply are held constant.
Change in supply means
more is supplied at the same price (increase) or less is supplied at the same
price (decrease).
It
leads to a rightward or leftward shift of the supply curve.
It
is caused due to a change in other factors affecting supply and not a change in
the own price of the commodity. .
q13.
The
following headline appeared in the Hindustan Times on 2 August 2014:
"Crop damaged
in Himachal sent tomato prices roaring in Delhi." .
Use a diagram and
economic theory to analyse the statement.
OR
On 19 December 2013, the following
news item was printed in the Economic Times:
Households in Southern India prefer to
eat oranges for breakfast as banana plantations in Kerala have been destroyed
and price of apples and grapes have also risen.
Use a diagram and economic theory to
analyse the impact of the rise in price of apples and grapes on the market of
oranges.
For blind candidates:
The following headline appeared in the
Hindustan Times on 2 August 2014:
“Crop damaged in Himachal sent tomato
prices roaring in Delhi." .
Analyse the statement based on
economics theories.
OR
On 19 December 2013, the following
news item was printed in the Economic Times:
Households in Southern India prefer to
eat oranges for breakfast as banana plantations in Kerala have been destroyed
and prices of apples and grapes have also risen.
Analyse the impact of the rise in
price of apples and grapes on the market of oranges.
Solution
When the tomato crop was damaged in
Himachal the supply of tomatoes decreases. This means that the supply curve
shifts leftward to S'S'.
At the prevailing market price (OP),
there was an excess demand of AE. In this situation, buyers would have competed
to raise the market price. As market price would have risen, quantity demanded
of tomatoes would have contracted and the quantity supplied would have
expanded. This process would have continued till a new equilibrium price was
reached at OP1, where market demand is equal to market supply. OP1
is higher than the old price of tomatoes.
This explains how prices in Delhi rose
when the tomato crop got damaged in Himachal.
OR
When the price of apples and grapes
rises, consumers will substitute with these fruits with the relatively cheaper
oranges. Thus, demand for oranges will increase and the demand curve shifts
rightwards to D’D’.
At the prevailing market price (OP),
there was an excess demand of AE. In this situation, buyers would react by
competing with each other and raise the market price. As market price rises,
quantity demanded of oranges contracts and the quantity supplied expands. This
process will continued till a new equilibrium price is reached at OP1,
where market demand is equal to market supply. OP1 is higher than
the old price of oranges.
Therefore, the equilibrium price of
oranges increases and the equilibrium quantity also increases when the price of
apples and grapes rises in Southern India.
q14.
A consumer consumes only two goods.
Explain the conditions that need to be satisfied for the consumer to be in
equilibrium under indifference curve analysis. .
Solution
Let a consumer consume Good X and Good
Y. A consumer attains equilibrium when:.
1) MRSXY
= 
2) MRSXY must be
decreasing due to the law of diminishing marginal utility.
MRSXY is the
number of units of Good Y a consumer in willing to sacrifice for an extra unit
of Good X.
is the ratio of
prices that prevail in the market and gives the actual units of Good Y that
need to be sacrificed to obtain an extra unit of Good X in the market.
Suppose
MRSXY >
• It
means that the consumer is willing to sacrifice more of Good Y than she needs
to give up actually in the market for an extra unit of Good X.
• The
consumer gains and increases consumption of Good X.
• As
consumption of Good X increase, its marginal utility declines.
• Thus,
the willingness to pay for additional units of Good X (in terms of Good Y)
falls.
• Process continues till MRSXY
=
Suppose
MRSXY <
·
It
means that the consumer is willing to sacrifice less of Good Y than is actually
required in the market for as extra unit of Good X.
·
The
consumer loses and reduces the consumption of Good X.
·
As
consumption of Good X decreases, its marginal utility increases.
·
Thus,
MRSXY increases.
·
The
process continues till MRSXY =
Section B: Macroeconomics
q15.
Read the following
dialogue between two people
Sita : I want 1kg of potatoes
Rani: What will you give in exchange?
Sita : I can give you 2 litres of
milk in return for the potatoes.
Rani: I don't need milk. I want a pair
of shoe.
Which of the following problem is
being faced by Sita and Rani in their exchange process?
a)
Lack of double coincidence of wants
b)
Absence of common units of value
c)
Lack of store of value
d) Lack of standard
of deferred payment
Solution
a) Lack of double
coincidence of wants
q16.
What
is repo rate?
Solution
Repo rate or repurchase rate
is the rate at which commercial banks borrow money from the Central Bank for a
short period by selling their financial securities to the Central Bank. .
q17.
Which
of the following is a characteristic of a good?
a)
Intangible
b)
Can be stored
c) Production
and consumption must happen simultaneously
d) Cannot
be transferred
Solution
b) Can be
stored
q18.
The government
budget has a revenue deficit. This gets financed by: .
A. Borrowing.
B. Disinvestment.
C. Tax revenue.
D. Indirect taxes.
a) A and D
b) C and D
c) A and B
d) C and
D
Solution
c) A and B
q19.
Which of the
following statement is not true for fiscal deficit?
A fiscal deficit:
a) represents
the borrowing of the government.
b) is
the difference between total expenditure and total receipts of the government
c) is
the difference between total expenditure and total receipts other than
borrowing
d) increases the
future liability of the government
Solution
b) is the
difference between total expenditure and total receipts of the government
q20.
What
is the role of a Central Bank in the following exchange rate?
a) Fixed exchange
b) Floating exchange
c) Managed
floating
Solution
The role of the Central Bank in maintaining the foreign
exchange rates under different regimes is:
a)
Fixed
exchange rate system: A Central Bank actively uses its foreign currency
reserves to maintain the officially determined exchange rate.
b)
Floating
exchange rate system: A Central Bank does not maintain any reserves of foreign
currency as the market automatically adjusts to determine the market driven
exchange rate.
c)Managed
Floating: A Central Bank enters the foreign exchange market to buy/sell foreign
currency in order to control fluctuations and volatility in the market. .
q21.
In an economy the
autonomous investment is 100 and the consumption is C=80+0.4Y. Is the economy
in equilibrium at an income level 400? Justify your answer. .
OR
In an economy the
autonomous investment is 60 and the marginal propensity to consume is 0.8. If
the equilibrium level of income is 400, then the autonomous consumption is 30.
True or False? Justify your answer.
Solution
At
equilibrium AD = Y
AD = C+I = Y
80+0.4Y+100 = Y.
0.6Y = 180.
Y = 
= 300
Since the given income of
400 is greater than equilibrium level of income, the economy is not at
equilibrium. It is at a situation where aggregate demand is greater than the
aggregate output produced in the economy.
OR
At equilibrium AD = C +I =
Y
I = 60
C = C0 + bY = C0
+ 0.8Y.
If equilibrium level of
income is 400, then C = C0 + 0.8x400 =C0 +320.
Thus, 60+C0+320
= 400
C0 = 20
The given value of autonomous
consumption is incorrect. The correct value is 20. .
q22.
In an economy planned
saving is greater than planned investment. Explain how the economy achieves
equilibrium level of national income. .
Solution
Suppose planned saving is higher than planned
investment. It means that households are not consuming as much as the firms had
anticipated. In other words, planned output is greater than planned demand.
As a result, producers see a rise in their inventory
level, beyond the planned level. To bring back inventory to the planned level,
producers cut down production. This reduces aggregate output. The process
continues till aggregate demand equals the output produced in the economy i.e.
planned investment becomes equal to planned saving.
q23.
Only
one Product X is produced in the country. Its output during the year 2012 and
2013 was 100 units and 110 units respectively. The market price of the product
during the year was Rs 50 and Rs 55 per unit respectively. Calculate the
percentage change in real GDP and nominal GDP in year 2013 using 2012 as the
base year. .
Solution
|
Year
|
Physical Output
(Units)
|
Market Price Per
Unit (Rs.).
|
Real GDP (Rs)
Using base Year Prices
|
Nominal GDP (Rs.)
Using Current Year Price.
|
|
|
2012
|
100
|
50
|
5000
|
5000
|
|
|
2013
|
110
|
55
|
5500
|
6050
|
|
Percentage
change in:
Real
GDP = 
Normal
GDP = 
q24.
What is meant by “balance
of payment” account? Distinguish between the "balance on current
account" and "balance of trade" account. In which account would
remittances from family members from abroad be accounted? .
Solution
Balance of payment account
records the inflows and outflows of foreign exchange of a country during a
period of time.
'Balance of Trade' is the
difference between exports of goods and imports of goods i.e. between visible
inflows and visible outflows of foreign exchange. 'Balance on current account'
is the difference between the sum of both visible and invisible (Service,
income and transfers) inflows and outflows of foreign currency.
Remittances from family
members from abroad is accounted for under unilateral transfers of the current
account. .
q25.
State the various
components of the Income Method that are used to calculate national income. .
OR
State any four precautions
that need to be kept in mind when using the value added method for calculating
national income. .
Solution
The various components that are used under the income
method to calculate national income are:
- Compensation of
employees which includes - wages and salaries in cash and kind and
employers' contribution to social security benefits.
- Operating surplus -
which includes rent and royalties, interest and profit earned by a firm.
- Mixed income of self
employed which includes any income that has 2 or more factor income, which
cannot be accounted for separately.
- Net factor income
from aboard, which in the difference between factor income from aboard and
factor income to abroad.
OR
The precautions that need to be kept in mind when using
the value added method of calculating national income are:
i)
Avoid
double counting of goods and services as these tend to inflate national income
estimates.
ii)
Do
not include the value of second hand goods being sold as their value was accounted
for at the time of first production.
iii)
Include
imputed value of own account production in total output as output has been
produced.
iv)
Include
the imputed value of owner occupied dwellings as houses provide housing
services.
q26.
In the government of India's
budget for the year 2013-14, the Finance Minister proposed to raise
the excise duty on cigarettes. He also proposed to increase income tax on
individual earning more than Rs. one crore per annum. .
Identify and explain the
types of taxes proposed by the Finance Minister. Was the objective only to earn
revenue for the government? What possible welfare objectives could the
Government be considering?.
Solution
Excise duty - Indirect tax
Indirect tax is a tax
where the payer and the bearer of the tax are different people.
Income tax - Direct tax
Direct tax is a tax where
the payer and bearer of the tax is the same person.
Besides the objective of raising more revenue, the
proposals also serve some welfare objectives. Firstly, raising excise duty on cigarettes
will make them more expensive. The price rise is expected to discourage
cigarette smoking, which will positively impact the health of people and raise
their welfare. .
Secondly, raising income tax on income above Rs. one
core will reduce the gap between the rich and poor people. In other words,
income inequalities will reduce.
Thirdly, the extra revenue
raised from these proposals could be spent on health education and other
welfare enhancing schemes to improve the welfare of the poor.
q27.
Draw a straight
line consumption curve. From it derive the saving curve. Explain the process of
derivation on the diagram, show: .
a) The income
level at which APC=1
b) The
income level at which APS is negative
For blind candidates:
Explain the process of
working of the 'investment multiplier' with the help of a numerical example.
Solution
Diagram
(a) gives a straight line consumption curve.
Consumption (c) + saving (s) = income (Y)
At zero level of income, there is an autonomous
consumption of OC. The corresponding saving at this income level is (-)OC. The
saving curve starts at (-)C.
At the income level OB, where the 45o
reference line intersects the consumption curve, C=Y. At this income level,
saving in equal to zero. Thus, we get point B on the x-axis of the saving
curve. .
By
connecting (-)C and B, we get the saving curve.
· At
income level OB, APC = 1 as APC = 
and at the income
level C= Y.
· A
level of income at which APS is negative is any level of income less than OB.
APS=
and here saving
is negative.
q28.
a) What is meant
by Cash reserve ratio? How does it increase the money supply in the
economy?
b) What
is meant by Open market operation? How does it reduce the money supply in
the economy?
Solution
Cash reserve ratio
is the ratio of bank deposits that commercial banks must keep as reserves with
the Central Bank.
When CRR falls, commercial
banks keep lower reserves with the Central Bank. This releases funds that were
earlier held with the Central Bank for commercial banks to lend. As lending
increases, the money creation in the economy expands and money supply in the
economy increases.
Open market operations
refers to the sale and purchase of government securities by the Central Bank in
the open market.
When there is a need to
reduce the money supply in the economy, the Central Bank starts selling
government securities. Those who buy make payments by cheques to to the central
bank. The money flows from commercial banks to the Central Bank. This reduces
the deposits held by commercial banks. This reduces money supply as well as the
money creation power of the commercial banks.
q29.
Find
(a) National Income and (b) Gross National Disposable Income. .
Rs
Crore
i. Net current
transfer from abroad 5.
ii. Private final
consumption expenditure 200 .
iii. Subsidies 20
.
iv. Net domestic
fixed capital formation 40 .
v. Net factor
income to abroad 10 .
vi. Government
final consumption expenditure 50 .
vii. Change
in stock (-)10 .
viii.Net imports (-)20
.
ix. Consumption of
fixed capital 30 .
x. Indirect
tax 60.
xi. Exports 100.
OR
Find
(a) Private Income and (b) National Income.
i. Personal
disposable income 350.
ii. Income
from property and entrepreneurship 50.
accruing
to the government administrative departments
iii. Savings
of non-departmental enterprises 25.
iv. Direct
personal tax 10.
v. Net
factor income from abroad (-)5.
vi. Indirect
taxes 15.
vii. Current
transfers to the rest of the world 20.
viii. Savings
of private corporate sector 25.
ix. Corporation
tax 15.
x. Current
transfers from government 30.
Solution
(a)
National
income using expenditure method:
|
(ii)+ (vi) + (iv) + (vii) – (viii) – (x)
+ (iii) – (v)
200 + 50 + 40 -10 +20 -60
+20 -10
= Rs 250 crores
|
(b) Gross
National disposable income
|
National income + (ix) + (x) – (iii) +
(i)
|
|
= 250 + 30 + 60 – 20 + 5
|
|
= Rs 315 crores
OR
(a)
Private Income
(i) + (iv) + (viii) + (ix)
= 350 + 10 + 15 + 25
= Rs 400 crores
(b) National Income
Private income + (vii) – (x) + (ii) +
(iii)
= 400 + 20 - 30 + 25 + 50
= Rs 465 crores
|
