The Shri Ram School First Term Examination - 2007-08 Class - XII Economics
The Shri Ram School First Term Examination - 2007-08 Class - XII Economics
The Shri Ram School First Term Examination - 2007-08 Class - XII Economics
Time: 3 hrs. M.M.: 100 Answers must e written on the !a!er !ro"i#e# se!aratel$% &ou will not e allowe# to write #urin' the (irst )* minutes% This time is to e s!ent in rea#in' the +uestion !a!er% The time 'i"en at the hea# o( the !a!er is the time allowe# (or writin' the answers% The +uestion !a!er contains , !rinte# si#es% The paper consists of 2 sections. In Section A, all questions are compulsory. In Section B 5 out of 8 questions have to be attempted. However all subparts of a question should be attempted together. Section A /Attem!t all +uestions in this section0 Q1. Q#. [30]
-ote.
What is mar'inal rate o( su stitution of a commodity and how does it affect the indifference c r!e" [#] What is the im$ortance of e%asticity of demand in &international tra#e' and &tax !olic$ o( the 'o"ernment1% [#] (a%c %ate ))*fc from +)*m$. [#]
What is the rationa%e -ehind the sellin' costs inc rred -y a firm nder mono!olistic com!etition" [#] What determines the s%o$e of the u#'et line" 2!
0ow do yo meas re $rice e%asticity sin1 !oint metho# on a non-linear #eman# cur"e" 2raw and i%% strate. [#] 2ifferentiate -etween 2R3 an# 423. [#]
0ow does the st dy of microeconomics he%$ in 5a%%ocation of reso rces6 and 5economic efficiency6" [#]
Q7.
2!
Q10. What is the difference -etween mar5et !rice6 normal !rice an# secular !rice7 [#] Q11. :f a commodity6s $rice fa%%s -y 10; and it6s tota% e9$endit re rises -y #0;< what is the $rice e%asticity of demand" [#] Q1#. When wi%% an increase in demand im$%y an increase in = antity - t no chan1e in e= i%i-ri m $rice" [#] Q13. 89$%ain the 8 ac5war# en#in' su!!l$ cur"e o( la our9 in terms of effort and %eis re. [#] [#] Q1,. What is the 5!oint o( in(lexion'" 0ow does it affect tota% $rod ct and mar1ina% $rod ct" [#] Q1.. 2ifferentiate -etween mone$ cost and economic cost. S8(T:>) ? B Attem!t an$ (i"e o( the (ollowin'. Q1. @aA (ritica%%y disc ss the law o( su!!l$. [3] [#]
@-A 0ow do yo ca%c %ate !rice elasticit$ o( su!!l$ $ the !oint metho#7 [.] @cA What is the !ara#ox o( !o"ert$ ami#st !lent$" [#] Q#. @aA 89$%ain the !ario s #e'rees o( elasticit$ o( #eman#. Assist yo r answer with the he%$ of s ita-%e e9am$%es and dia1rams. @-AWhen wo %d the demand c r!e -e $ositi!e%y s%o$in1" 2isc ss. Q3. @aA (ritica%%y e9amine the mar'inal !ro#ucti"it$ theor$ o( wa'es. @-A 2isc ss the mo#ern theor$ o( rent. [4] [/] [3] "!
Q,. [a] 89$%ain the re%ationshi$ -etween TR6 2R6 an# AR un#er Im!er(ect com!etition with the he%$ of a$$ro$riate dia1rams.
[3]
[-]What is the re%ation -etween the a"era'e an# mar'inal cost" Why does the AB( reach it6s minim m -efore the minim m of AT(" 0ow is the M( re%ated to the fi9ed costs" [,C#C1] Q.. @aA (om$are the lon' run e= i%i-ri m $osition of the firm nder !er(ect com!etition to that of a firm nder im!er(ect com!etition% [3] @-A Q/. @aA @-A 0ow is the su!!l$ cur"e of the firm deri!ed from its A4C c r!e in the short r n" [3] 2isc ss the Circular (low o( national income in an o$en economy. [3] 0ow wi%% yo ca%c %ate !ri"ate income6 !ersonal income an# 3:I from --3 at (actor cost" [3] 89$%ain the law o( "aria le !ro!ortions and disc ss its three sta1es.[3] 2isc ss the reasons -ehind the sha$e of the DA(. [3]
Q3.
@aA @-A
Q4.
@aA 2isc ss the $rofit ma9imiEation r %es for an im$erfect%y com$etiti!e firm. [4] #b$ 2ifferentiate -etween 1ross and net interest as we%% as 1ross and $rofit.
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[#]
(%ass F::
%conomics
)% The rate at which one 'oo# is sacri(ice# to consume one unit o( the other 'oo#6 remainin' at the same le"el o( satis(action is calle# 2RS%% /)m50 Gor e9am$%e< if : choose to s%ee$ %ater -y one ho r -eca se : am s$endin1 that time finishin1 a -ooH : am readin1< the mar1ina% rate of s -stit tion for e9tra readin1 is the %oss of one ho r of s%ee$. The indifference c r!e ana%ysis is -ased on diminishin1 mar1ina% rate of s -stit tion. This means as cons mer s -stit tes more and more of one commodity for another commodity< he wi%% -e $re$ared to 1i!e $ %esser nits of %ater for each additiona% nit of the former. MIS determines the s%o$e of the indifference c r!e and ca ses it to -e con!e9 to the ori1in. 2. %lasticity of demand has relevance in international trade as it helps in determining the effect of e&port and import duties on e&ports and imports and thus the effect on balance of payments. It also helps I government policy, as the policy of devaluation should be followed only if the demand of e&ports is elastic. If the government wants to impose e&cise duties or sales ta&, it can increase it's revenue by imposing ta& on those goods, which have an inelastic demand. (. )*+mp , depreciation-**+mp **+mp , *et Indirect Ta&es-**+fc *IT- Indirect ta&es,subsidies! ,. The rationa%e -ehind inc rrin1 se%%in1 costs -y a firm nder mono$o%istic com$etition is $rod ct differentiation. As a%% the 1oods are simi%ar< and there is intense com$etition -etween a%% se%%ers for the same tar1et 1ro $ in the marHetJ the com$any tries to create a differentiation in its $rod ct< to create -rand reco1nition and 1rad a%%y -rand %oya%ty. e.1. *romise tooth$aste is ad!ertised as ha!in1 c%o!e oi% to com-at toothache and decayJ (o%1ate is said to ha!e a mint f%a!o r for day %on1 freshnessJ >9yfresh was said to contain o9y1en<. >ther sa%es $romotion techni= es may inc% de $rice?c ttin1< disco nts< door?to?door cam$ai1ns< free-ies with the $rod ct and so on. .. The s%o$e of the - d1et %ine is de$endent on the re%ati!e $rice ratios of the two 1oods -o 1ht in com-ination. :t is e= a% to *9K*y where *9 is the
$rice of the 1ood shown on the 9?a9is and *y the $rice of the 1ood shown on the y?a9is. /.
A
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3.
MI*MMar1ina% $hysica% $rod ct of a factor m %ti$%ied -y the mar1ina% re!en e of the $rod ct it $rod ces. Mar1ina% re!en e $rod cti!ity may -e defined as the addition to tota% re!en e res %tin1 from the em$%oyment of one more nit of a factor of $rod ction BM*M the !a% e of mar1ina% $rod ct of a factor is the mar1ina% $hysica% $rod ct of a factor m %ti$%ied -y the $rice of the $rod ct it $rod ces. iA A%%ocation of reso rces: Microeconomics< thro 1h the st dy of $rice mechanism< shows which 1oods are $rod ced and in what = antities. Th s it de$icts the a%%ocation of reso rces in the economy thro 1h cons mer and $rod cer -eha!ior. @1mHA 8conomic efficiency: Microeconomics a%so s 11ests $o%icies to achie!e o$tima% or efficient a%%ocation of reso rces so as to ma9imiEe socia% we%fare thro 1h the st dy of we%fare economics.@1mHA
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@iiA
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/ monopolist usually pursues the policy of price discrimination. He charges different price to different consumers 012 TH% 3/4% )115. If he 6nows price elasticity of demand, he can charge higher price to consumers with inelastic demand for his product, as their demand will not fall with increase in price. He will charge a lower price to consumers with elastic demand. The $rice that $re!ai%s for !ery short $eriod is ca%%ed &MarHet $rice'. The s $$%y of the commodity is fi9ed< that is the s $$%y c r!e is $erfect%y ine%astic. 0ence demand is a-%e to inf% ence the $rice. Don1 $eriod refers to the $eriod< which is %on1 eno 1h to ena-%e the ind stry to adN st its s $$%y com$%ete%y to the chan1e in demand. The firm
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can chan1e its sca%e of $rod ction. The $rice that $re!ai%s in the marHet in the %on1 r n is ca%%ed the &)orma% $rice'. Bery %on1 $eriod refers to time $eriod in which f %% adN stment can -e done -oth to demand and s $$%y. This means that s $$%y can adN st to a%% factors that effect demand of a commodity %iHe chan1e in $o$ %ation or chan1e in techni= e of $rod ction. The $rice that $re!ai%s in !ery %on1 $eriod is ca%%ed the &Sec %ar $rice'. With the fa%% in the $rice of the commodity< when the e9$endit re increases< the demand is e%astic in this case< accordin1 to the tota% e9$endit re method. :ncrease in demand im$%ies increase in the e= i%i-ri m = antity with no chan1e in the e= i%i-ri m $rice< when the s $$%y a%so increases in the same $ro$ortion or if the s $$%y c r!e is $erfect%y e%astic.Q Assist yo r answer with the dia1ramR.
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21 2# S1 S# 21 2#
81
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13.
At %ow %e!e%s of wa1es< the s $$%y of %a-o r increases as the wa1e increases $ to a certain %e!e%. This is -eca se worHers are wi%%in1 to worH for shorter ho rs if wa1es are hi1her< in order to enNoy more %eis re @1marH for e9$%anation and 1 marH for 1ra$hA
8ages 82
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1,.
:n the three sta1es of %aw of !aria-%e $ro$ortions< in the first sta1e< the tota% $rod ct increases thro 1ho t. Ti%% a certain o t$ t< it increases at an increasin1 rate and after that it increases at a decreasin1 rate. This $oint at which the s%o$e of the tota% $rod ct chan1es is ca%%ed the *oint of :nf%e9ion. The tota% $rod ct increases at a decreasin1 rate after the $oint of inf%e9ion. This im$%ies the mar1ina% $rod ct increase ti%% the $oint of inf%e9ion and starts decreasin1 after that. 0ence the s%o$e of M* is $ositi!e -efore the $oint of inf%e9ion and ne1ati!e after the $oint of inf%e9ion. Money $ayments made -y the firm to the owners of the !ario s factor ser!ices re= ired in the $rod ction of a commodity is Hnown as money cost or the e9$%icit cost. 8conomic cost inc% des e9$%icit cost< im$%icit cost and the norma% $rofits. :m$%icit cost refers to the estimated !a% e of the in$ ts owned -y the firm and sed -y it in its own $rod ction nit. )orma% $rofit is defined as the minim m $ayment< which a $rod cer m st 1et in order to ind ce him to ndertaHe the risH of $rod ction. 0ence the economic cost inc% des a%% three a-o!e?mentioned costs.
1..
S8(T:>) B Q1. [a] 2isc ss the %aw of s $$%y. [#] State the conditions nder which it wi%% ho%d 1ood. [#] 2efine indi!id a% and marHet s $$%y. [1]2isc ss at %east two cases where %aw of s $$%y does not a$$%y. [Two e9ce$tions to %aw of s $$%y]. [#] 2efine $rice e%asticity of s $$%y [interce$tK distance] [1K# ]. S6 2isc ssion of each ty$e with acc rate dia1rams [1S].
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[c]
This $arado9 can -e e9$%ained in the case of a1ric %t re< where a - m$er cro$ -rin1s in sma%%er income to the farmers. :t ha$$ens d e to ine%astic demand of a1ric %t ra% $rod cts. A - m$er cro$ red ces the $rices of the a1ric %t ra% $rod cts and as the demand is ine%astic the farmer6s income 1oes down. 0ence the $arado9 of $o!erty amidst $%enty.
Q#.
[a]
Bario s de1rees of $rice e%asticity of demand?A%% fi!e de1rees of $rice e%asticity< name%y $erfect%y e%astic< e%astic< nitary< ine%astic and $erfect%y ine%astic sho %d -e disc ssed. :n each case fo%%owin1 feat res sho %d -e mentioned? )ame of the e%asticity 2efinition 2ia1ram 89am$%e Ba% e
[-]
The demand c r!e is $ward s%o$in1 in case of e9ce$tions to the %aw of demand?(ases of +iffen 1oods< artic%es of sno- a$$ea%J 89$ectation re1ardin1 f t re $rices< 8mer1encies and Q a%ity $rice re%ationshi$ sho %d -e disc ssed. Mar1ina% theory of $rod cti!ity?Write the statement of the theory. 2efine M**< A**< AI*< MI* and BM* -rief%y. 2raw the s ita-%e dia1rams. 2isc ss the re%ation -etween BM* and MI* nder $erfect and im$erfect com$etition. +i!e few ass m$tions. 89$%ain the theory with the he%$ of the dia1ram. 2isc ss the criticisms. Modern theory of rent. Write the statement. 2efine economic rent< act a% earnin1s and transfer earnin1s and the re%ation -etween them. 89$%ain the three cases of economic rent for different e%asticities. 8ach case sho %d -e disc ssed with the he%$ of neat%y %a-e%ed dia1ram. +i!e the definitions of TI< AI and MI. Onder im$erfect com$etition< with the he%$ of a ta-%e and 1ra$hs of TI< AI and MI the -eha!io r sho %d -e disc ssed. +i!e reasons At o t$ t where MIM0 and TI is ma9im m< e%asticity on demand c r!e or AI c r!e at that $oint is 1. Why nder im$erfect com$etition< TI first increases at a diminishin1 rate and then %ater it starts fa%%in1" Why AI and MI fa%% with increase in the o t$ t" Why is the fa%% in MI do -%e the fa%% in AI"
Q3.
[a]
[-]
Q,.
[a]
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Accordin1%y disc ss the re%ation -etween< TI and MI and AI and MI as the o t$ t increases. Ie%ation -etween AT( and M( sho %d -e disc ssed with the he%$ of s ita-%e dia1ram. [*a1e #0# of the te9t-ooH] AB( reaches it6s minim m -efore the minim m of AT( -eca se when decreasin1 ret rns to the factor starts o$eratin1< Which means that e!ery nit of %a-o r sed does not add so m ch to the o t$ t< the AB( starts risin1. Since AT( is the s m of AG( and AB(< it contin es to fa%% as initia%%y fa%% in AG( is more than rise in AB( hence fa%% in AG( contin es to $ %% down the AT(.Dater when rise in AB( -ecomes more than fa%% in AG( at hi1her o t$ ts< the AT( a%so rises. Mc is not re%ated to the fi9ed costs. M( is the addition to the tota% cost when another nit of o t$ t is $rod ced. B t there is no chan1e in the fi9ed cost with increase in the o t$ t. 0ence M( is inde$endent of the fi9ed costs. Don1 r n e= i%i-ri m of the firm nder $erfect com$etition with the he%$ of s ita-%e dia1ram sho %d -e e9$%ained. Ieasons why firms maHe on%y norma% $rofits in the %on1 r n sho %d -e e9$%ained c%ear%y. Gor im$erfect com$etition< -oth mono$o%y and mono$o%istic com$etition need to -e disc ssed.
Q..
[a]
b!
$rice
S#
S1 0 o t$ t = antity *ro$er dia1ramM#marHs 89$%anation of a%% the cost c r!es and why it does not start -e%ow AB( M, marHs. Q/. [a] Go r sector mode% of circ %ar f%ow of incomeJ the mode% that inc% des ho seho%ds< firms< ca$ita% marHet< 1o!ernment and rest of the wor%d sho %d -e e9$%ained. A%% the com$onents of money f%ow and rea% f%ow -etween the different sectors sho %d -e e9$%ained with the he%$ of the dia1ram 1i!en on the $a1e 3.. of the te9t-ooH. *ri!ate income is the tota% of factor income[inc% din1 retained $rofits of the cor$orations]from a%% so rces and c rrent transfers from 1o!ernment and rest of the wor%d accr in1 to the $ri!ate sector. 0ence *ri!ate incomeM ))$fc? income from $ro$erty and entre$rene rshi$ accr in1 to the 1o!ernment commercia% enter$rises and administrati!e de$artments?sa!in1s of the non de$artmenta% enter$rises of the 1o!ernment Cinterest on nationa% de-tCnet c rrent transfers from the 1o!ernmentCnet c rrent transfers from a-road. *ersona% income is the income act a%%y recei!ed -y $ersons from a%% so rces in the form of factor incomes and c rrent transfer $ayment s d rin1 the year. 0ence $ersona% incomeM*ri!ate income? ndistri- ted $rofits? cor$orate $rofits ta9?retained earnin1s of forei1n com$anies. *ersona% dis$osa-%e income is that $art of $ersona% income which is a!ai%a-%e to the indi!id a%s to -e sed the way they %iHe. 0ence *ersona% dis$osa-%e incomeM *ersona% income?$ersona% ta9es? misce%%aneo s recei$ts of the 1o!ernment administrati!e de$artments. Q3. a Daw of !aria-%e $ro$ortions?
[-]
Write the statement of the %aw. 2efine T*< A* and M*. 2isc ss the sha$e and -eha!io r of T*< A* and M* as the nits of !aria-%e factor a$$%ied to the fi9ed factor 1oes $. 2raw the dia1ram< neat%y %a-e%ed and c%ear%y definin1 each sta1e. +i!e reasons for increasin1< diminishin1 and ne1ati!e ret rns to the factor. -. Ieasons -ehind the sha$e of DA(?:t is O?sha$ed d e to economies and diseconomies of sca%e. +i!e 3 reasons each for interna%< e9terna% economies and interna%< e9terna% diseconomies. Q4. @aA 2efine TI and T( @1 marHA Acc rate%y draw TI and T( @# marHsA Show ma9. $rofit thr 6 $rofit c r!e or thr 6 $ara%%e% tan1ents to the two c r!es. @# marHsA 0ence deri!e first condition: MIM M( @1 marHA M( c ts MI from -e%ow with 1ra$h and e9$%anation as to why the %atter $oint is e= i%i-ri m and not the former one. @#marHsA @-A cons %t te9t-ooH. @cA <<