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Full Marks : 100
Pass Marks :30
Time : Three Hours
The figures in the margin indicate full marks for the questions.
Q. No 1 (a-f) carries 1 Mark each 1×6= 6
Q. No 2 – 7 carries 2 Mark each 2×6= 12
Q. No 8-12 carries 4 Mark each 4×5= 20
Q. No 13 & 14 carries 6 Mark each 6×2= 12
Part-A Total Mark carries 50
Q. No 15 (a – f) carries 1 Mark each 1×6= 6
Q. No 16-21 carries 2 Mark each 2×6= 12
Q. No 22-26 carries 4 Mark each 4×5= 20
Q. No 27 & 28 carries 6 Mark each 6×2= 12
Part-B Total Mark carries 50
Total (PART A & B): 50+50=100
1. (a) What does a Production Possibility Curve indicate? 1
Answer:- Production Possibility Curve is a curve which shows all Possible Combinations of two goods that can be produced by making full use of given resources and technology in an economy.
(b) If an increase in the price of good X increases the demand for good Y, then how are the two goods related? 1
Answer:- The two goods are related to substitute goods.
(c) Total Variable Cost (TVC) will be When total product is zero. 1
(d) A firm earns normal Profit when——- 1
Answer:- (ii) AR=AC
(e) In a centrally Planned economy , which of the following takes all economic decisions ? 1
(i) Central Bank
(iii) Both Government and Central Bank
Answer:- (iii) Government
(g) What are the shapes of AR and MR curves for a firm under non-competitive Market structure ? 1
2.Mention two reasons that give rise to economic problems. 2
Answer:- The Economic Problem basically called the central economic problem. Economic Problem is the Problem of resource allocation or Making choices in the use of scarce resources having alternative uses. The two reasons for rising economic problem is——-
(i) Limited resources and
(ii) Unlimited wants.
3. What is a budget line ? Why does it slope downward ? 1+1=2
Answer:- It shows all those combinations of two goods which a consumer can buy spending his entire money income on the two goods at their given prices. Symbolically, the budget line can be written algebraically as follow:
PxX +PyY =M
Px = price of good X
Py =price of good Y
X = good X
Y = good Y
In this diagram, the two-commodity case is discussed. The consumer spends his entire income on these two goods. With his entire income, the consumer can either purchase OA amount of Good Y or OB amount of Good X or he can purchase any combination of good X and Y that lies on the Budget Line as shown by a linear downward sloping curve AB in the figure.
4. If a unit tax is imposed, how does it impact the short-run supply curve of a firm ? show with the help of diagrams. 2
Answer:- When Governments imposed tax to individuals or firms in order to increase its revenue. Considering taxes to firms, these taxes will increase the price of goods being produced and sold, which translates into a welfare loss. However, a distinction between the loss in consumer and producer surplus must be made. The impact on both surpluses depends on the period analysed.
We understand with the help of diagrams in the short-run say this tax imposed on the firm. both consumers and producers suffer from the tax imposed. The new tax increases the price of goods. The price of goods will increase to cover these losses. The supply curve shifts to the left and demand remains unchanged.
5. What is the “break-even point” of a firm ? At which point of the AC curve, a firm under perfect competition breaks-even ? 1+1=2
Answer :- Break event point for a firm is determined at the level of output where TR=TC OR its AR=AC.
This is also known as “no profit no loss” or “normal Profit” situation Graphically, it is represented as in fig.
It would be seen quantity from figure:
(i) Equilibrium point=E
(ii) Equilibrium output = OQ
(iii) MR=MC=QE=QP (price)
(iv) AR=AC=QE=OP (price)
6. What does price elasticity of supply mean ? Briefly explain 2
Answer :- Elasticity of supply is a relative measure of the responsiveness oa supply to change in the price of a commodity. It measures the percentage change in the quantity supplies due to a change in the price of the commodity.
Elasticity of supply can be measured with the help of percentage method:
⋀q= Change in supply
⋀p= Change in price
P= Price before change
Q= Supply before change
7. What is a monopolistic competitive market ? 2
Answer :- It is blending of perfect competition and monopoly as its products are not identical but different though they are close substitutes for each other. Also, in this competition there are a large number of firms and these are freedom of entry into the and exist from the industry for example bathing soaps of different brands like lux, Hamam, Godgej etc. Thus the producer of “Hamam” has a monopoly of producing it but he has to face competition from the manufactures done, Jai etc. Which are close substitutes of hamam. Hence it cannot totally ignore the price-output policies of other competition in the market.
8. Discuss four features of the indifference curve. 4
1. Indifference curves slope downward to the right.
2. Every indifference curve to the right represents a higher level of satisfaction.
3. Indifference curve will not touch the axis.
4. Indifference curves cannot intersect each other.
9. Define and draw average cost and average variable cost curve. Why these two curve cannot touch each other ? 4
Answer :- The shape of the average cost (AC) and average variable (AVC) cost curve depends upon the shape of the Average fixed cost (AFC) curve.
AC = AFC + AVC
AC = Total Cost/Output
AVC = TVC/output
In the beginning, we find that as output increases average variable cost (AVC) and average fixed cost (AFC) both fall, average cost (AC) curve falls sharply. When AVC has started raising and AFC is falling , AC and AVC ( costs such as wages or cost of supplies) curves continue to fall with increase in output because the gap between them is AFC, which continues to decline with rise in output. Not only this, initially, with the increase in output, AVC falls. So, AC must fall .
AC may continue to fall if the fall in AFC is more than the rise in the AVC curve. But with further increases in output, it would start rising AVC but never cut AC and AFC fall vener zero.
(a) AC and AVC curves never intersect each other as AFC can never be zero.
(b) Due to the Law of Variable Proportions both AC and AVC curves are U- shaped.
The Total Cost (TC) schedule of a production unit is given below. Find out TFC, TVC, AC and MC. 4
At zero unit of quantity TC = TFC and TFC is fixed. So than TFC is 10.
TVC = TC – TFC
ATC = TC / Q
MC = TCn – TCn-1
10. Mention four differences between perfect competition and monopoly. 4
Answer :- The differences between perfect competition and monopoly are as follows:
(i) Large number of buyers and sellers.
(ii) There is free entry and exit.
(iii) Homogeneous product produced.
(iv) Perfect knowledge among buyers.
(v) No transportation cost.
(vi) AR and MR curves are straight lines parallel to the X-axis.
(vii) Uniform price prevails in the market.
(viii) Firms have no control over the price. The Price is determined at the industry level.
(ix) Price is equal to the marginal cost at the equilibrium output.
(x) Price is less and output more than monopoly.
(i) Single seller.
(ii) There are barriers to entry.
(iii) Single firm producing a commodity which has no close substitutes.
(iv) perfect knowledge may exist and the monopolist as a result may practice price discrimination.
(v) Transportation costs are present.
(vi) AR and MR lines are downward sloping.
(vii) Price is not uniform because of price discrimination.
(viii) there is no difference between the firm and industry and firm have considerable control over the price.
(ix) Price is greater than marginal cost at the equilibrium point.
(x) Price is higher and output smaller than perfect competition.
11. Explain with the help of a diagram, how shifting of the supply curve of a commodity affects its equilibrium price and output. 4
Answer :- shifting of the supply curve of a commodity affects its equilibrium price and output.
we understands with the help of diagram given below—-
The supply curves SS and S’S’ show the effect of an increase in supply as a result of a favorable change in the conditions of supply (such as a reduction in the costs of production because of productivity improvements)— S’S’ being the new supply curve. Before the increase in supply, the equilibrium price was P0 and the equilibrium output was Q 0. As a result of the increase in supply, excess supply occurs at the price P0, causing suppliers to lower the price in order to expand demand. A new equilibrium price is established at P1 with a higher equilibrium output at Q1. Notice again that a change in conditions of supply does not cause a shift in the demand curve.
12. What do you understand by returns to a scale ? Write the meaning of constant , increasing and decreasing returns to scale. 1+3=4
Answer :- When all factors or inputs required for the production of a goods are increased in the same proportion, the increase in output so obtained represents returns to scale. Because it is only in the long run that all factors can be suitably increased, returns to scale are relevant for the long run.
(a) Constant returns to scale :- if all factors used for the production of commodities are increased in a given proportion and output increases in the same proportion, returns to scale are said to be constant.
(b) Increasing Returns to Scale:- increasing returns to scale occurs when a given percentage change in all the factors of production (say z) causes output to increase in a greater proportion.
(c)Diminishing Returns to Scale:- it refers to a situation when the quantity of factors of production is increased in such a way that proportion of factors remains unchanged, and output increases in a smaller proportion as compared to increase in the quantity of factors of production. It is a case of diminishing returns to scale. Diminishing returns to scale implies increasing costs.
State the reasons behind the working of the law of diminishing marginal product.
Answer :- This law presents a logical explanation of consumers behaviour. The law was presented systematically by Prof.Alffed Marshall. The law states that as consumers consume successive units of a commodity the marginal utility goes on diminishing.
Suppose a consumer has to consume oranges. He may get utility from the different units of oranges as follows.
It could be seen in the table above that the consumer gets marginal utility equal to Rs. 30 from the 1st unit of orange. As he consumes additional units of orange, the marginal utility goes on diminishing. From the 7th unit the consumer does not get any utility. I.e. , marginal utility falls to zero. It is called point of saturation. If he continues or oranges beyond 7th unit,he gets negative marginal utility.
In the above figure AB is the marginal utility curve. The downward slope of the MU curve indicates that the law of diminishing marginal utility operates on the consumption of orange. Point of saturation is reached when 7 units of oranges are consumed. At this point marginal utility falls to zero.
Suppose, the price of one unit or orange is Rs. 1.5 in the market, as shown by the price line RP, consumer attains equilibrium at point E, when the marginal utility of oranges (i.e., MU) is equal to the per unit price of orange (i.e, Px) Symbolically, the equilibrium condition according to the law of diminishing marginal utility can be shown as follows:
In this way the law of diminishing marginal products is working.
13. State and explain the law of demand with the help of an imaginary schedule and diagram. 6
Answer :- law of demand : We know that demand is always at point. Demand for any commodity has no meaning unless it is stated in terms of price. We generally see that the demand for any commodity is relatively low at higher price and it increases with the decrease in price. It is called the law of demand in economics. This law explains the functional relationship between the quantity demanded and price. Prof. Marshall has defined it as, “If other things remain the same, the amount demanded increases with a fall in price and diminishes with a rise in price.” Hence there exists an inverse relationship between the price and quantity demanded. This law can be explained with the help of the following demand schedule and diagram.
This schedule and diagram shows that the demand for sugar of a household will be more at lower prices and less at higher price.
(i) Total Product (TP)
(ii) Average Product (AP)
(iii) Marginal Product (MP)
Explain the relation between AP and MP with the help of suitable diagram 1+1+1+3=6
Answer :- (i) Total Product (TP) : Total product is the total physical output corresponding to each set of input, Total product rises at an increasing rate first then it keeps increasing at a diminishing rate and for further increasing in input it starts declining. The shape of the total product is shown in Fig.
(ii) Average Product (AP) : Average product is equal to total product divided by the amount of the variable factor (L).
Average product curve is inverted U-shaped. It increases as the variable factor increases and then it falls. The shape of the average product is shown in Fig.
(iii) Marginal Product (MP) : Marginal product is the addition to total product by the employment of an additional factor input.
It can be also be written as MPa=ΔTP/ΔL
If labour (L) is the variable factor input. The shape of the Marginal product is shown in Fig.
The relation between AP and MP are as follows:
(a) The highest point of the total product curve coincides with the point where the marginal product becomes zero.
(b) When the marginal product becomes negative, then the contribution of the additional unit of the factor becomes negative then the total product starts falling. Average product keeps on increasing as long as the marginal product is higher than it.
(c) When a marginal product cuts it and becomes less than it, the Average product starts falling.
(i) What is a production function ? 1
Answer :- The production is the name of the relation between physical inputs and physical outputs of a firm.
(ii) What do you mean by fixed factor and variable factor of production ? Give Examples.
Answer :- (a) Fixed factor : i) It does not change with change in quantity of output.
ii) Explains are rent, wages of permanent staff insurance charges are examples of fixed cost.
(b) Variable factor :- i) It changes with change in quantity of output.
ii) Explains Cost of raw material expressed on electricity etc.
(iii) The production function of a firm is given by Q=2L2K2.
Find out the maximum possible output that the firm can produce with 5 units of L and 2 Units of K. What is the maximum possible output the firm can possible with zero (0) units of L and 10 units of K ?
15. (a) What is the relation between MPC and MPS ? 1
Answer:- Relation between MPC and MPS : MPS+MPC=1 OR MPC=1-MPS OR MPS=1-MPC
(b) What is the investment ? 1
Answer:- Investment refers to expenditure incurred by the producers on the purchase of capital goods during a year. Three important elements of investment are revenues, cost and expectations.
(c) What do you mean by “velocity of circulation” of money ? 1
Answer:- Velocity of Circulation of money refers to the average number of times a single unit of money changes hands in an economy during a given period of time. It can also be called velocity of money or the velocity of circulation of money.
(d) Who is known as the “lender of last resort” ? 1
Answer:- This function of the central bank originated out of the rediscounting function performed by the central bank. Their discount facility raises the liquidity of the credit structure. It provides additional funds to banks for converting the same of their earning assets into cash, when the cash reserves fall drastically.
(e) What is the government budget? 1
Answer:- Budget is a statement of estimates of the government receipts and government expenditure during the period of the financial year. The finance Minister presents the budget both ih the Lok Sabha and Rajya sabha.
(f) In which year GST came into effect in India ? 1
Answer:- 1 July 2017
16. Define intermediate good. How are intermediate goods different from capital goods ? 1+1=2
Answer:- Intermediate goods: These goods are used for the production of other goods. They are not available for immediate consumption.
Intermediate goods are used for the production of other goods and Capital goods are defined as all goods produced for use in future production processes.
17. What is an investment multiplier ? If Rs 200 crore increase in investment increases income by 800 crore, then what will be the value of investment multiplier ? 1+1=2
Answer:- It is believed that an initial increment in investment leads to a greater increase in income.
Multiplier express the relationship between increase in investment due to increase in income.
Multiplier(k) = Change in income / Change in investment
Multiplier(k) = ΔY / ΔI
ΔY = 800
ΔI = 200
Multiplier(k) = Change in income / Change in investment
= 800 / 200
18. Write the differences between ex-ante investment and ex-post investment. 2
Answer:- The differences between ex-ante investment and ex-post investment are as followers —-
(a) It refers to the planned or intended investment during a particular period of time.
(b) It is imaginary (intended), in which a firm assumes the level of investment on its own.
(c) It is planned on the basis of future expectations.
(a) It refers to the actual level of investment during a particular period of time.
(b) It is factual or original that signifies the existing investment of a particular time.
(c) It is the actual result of variables.
19. Mention two points of superiority of selective Credit Measures over Quantitative Credit Control measures. 2
Answer:- Selective credit control is meant to control the credit creation by means of qualitative control methods. So as to control the inflationary pressure in a country by checking the bank credit to non-essential uses
(i) These controls can correct the sectoral imbalances arising out of economic progress. They can also stabilize the relative prices.
(ii) It has got flexibility which makes the Selective Credit Controls (SCCs) very popular to control the stresses and strains of a growing economy.
(iii) The SCCs can Control the demand for loans and supply of loans. They have significantly widened the scope of monetary policy.
(iv) Undesirable activities like speculation hoarding and unwanted development of some sectors can be restricted by the adoption of SCCs.
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