Economics (318) - Oct' 2016 | NIOS SENIOR SECONDARY Solved Papers

13. Price of a commodity falls from R10 per unit to R8 per unit and as a result its demand rises from 40 units to 50 units. Calculate the price elasticity of demand of the commodity. 3 

Solution:-

Ep= ∆Q   X  P

        ∆P       Q.

Where P means price, Q means Quantity demand, ∆Q   means change in quantity and ∆P means change in price.

 By putting the value we gat

                   10   x     10

    2            40

= 100

    80

= 1.25

14. How is the supply of a commodity affected by increase in price of other goods? Explain. 3 

Ans.:- The supply of a commodity affected by increase in price of other goods, as resources have alternative uses, the quantity supplied of a commodity depends mot only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation of wheat in place of the given commodity (say, rice).

15. At a given level of output, marginal cost and marginal revenue of a firm are equal. Is the firm necessarily in equilibrium? Explain. 3 

16. Explain ‘real flow’ and ‘money flow’ of income in a two-sector economy. 3 

Ans.:- Real flow is the exchange of goods and services between household and firms whereas money flow is the monetary exchange between two sectors.

In real flow household sector supplies raw material, land, labour, capital and enterprise to firms and in return firms sector provides finished goods and services to household sector. Whereas in money flow, firm sector gives remuneration in the form of money to household sector a wages and salaries, rent, interest etc.

17. Calculate ‘net value added at factor cost’ from the data given below : 3    

Rs (in lakh) 

(i) Change in stock  600 

(ii) Intermediate consumption expenditure 10,000

 (iii) Sales 20,000 

(iv) Indirect taxes   500 

(v) Subsidies  100

 (vi) Depreciation   300

18. What is meant by marginal propensity to consume? State any four factors that determine the marginal propensity to consume in an economy. 3

Ans.:- Marginal Propensity to Consume (MPC), is an economic calculation that measures the amount of additional income consumers are willing to spend on goods and services rather than saving it.

Four factors that determine the marginal propensity to consume in an economy are:-

1. Income:- Income is the most important factor which determines the consumption expenditure in a society. The greater the level of disposable income, the higher is the consumption expenditure with a fall in income, the consumption demand of household goes down.

2. Distribution of income:- Consumption function depends on the way in which the income is distributed. Greater the inequality-in income distribution, lower will be the propensity to consume, greater the equality in income distribution,  higher will be the propensity to consume.

3. Wage level:- If the wage rate arises, the consumption function shifts upward. If the rise in price level is more in proportionate to the rise in wage, the real wage will fall and consumption function will shift downward.

4. Rate of interest:- A significant rise in interest rate will induce people to consume less and save more in order to gain from the higher rate interest.

19. What are meant by revenue receipts and capital receipts in a government budget? Give one example of each. 3

Ans.:- Government receipts which neither create liabilities nor reduce assets are called revenue receipts. These are proceeds of taxes, interest and dividend on government investment, cess and other receipts for services rendered by the government. Eg. Tax Revenue and Nontax revenue.

Government receipts which either create liabilities or reduce assets are called capital receipts. Thus when govt. raise funds either by incurring a liability or by disposing off its assets, it is called a capital receipts. eg., Borrowings are treated capital receipts because they create liability.

20. The following hypothetical data relate to the government budget :  

   Rs. (in arab) 

(i) Borrowings 15 

 (ii) Revenue receipts 100

  (iii) Revenue expenditure 130  

(iv) Interest payments 5 

 (v) Capital receipts 90  

Calculate the (a) revenue deficit, (b) fiscal deficit, and (c) primary deficit.

21. Explain the steps involved in the calculation of mean deviation. 4 

Ans.:- The following steps are involved in the computation of mean deviation:

1. Compute mean or median of the series.

2. Take deviations d= X – A from either mean or median ignoring + - sings.

3. Obtain total of these deviations, i.e., ∑IDI where two parallel lines (II) indicate that absolute values are taken by ignoring + - sings.

4. Divide the above total , i.e., in step  (iii) by the number of items, i.e.,

M.D. =  ∑IDI

                 N

22. Why do economic problems arise? Explain. 4 

Ans.:- An economic problem is basically the problem of choice which arises because of scarcity of resources. Human wants are unlimited but means to satisfy them are limited. Therefore, all human wants cannot be satisfied with limited means. Wants differ in intensity and limited resources have alternative uses. In such a background, every consumer tries to satisfy his maximum wants. Therefore, one has to choose as to what goods one should consume and in what quantity. Economic problem arises the movement problem of choice arises. Actually speaking, economic problem is basically the problem of choice.

23. Describe the effect of increase in prices of related goods on the demand of a commodity. 4 

Ans.:- The rise in the price of related goods is directly related to the other factors affecting demand.

Related goods are also known as substitute goods or complements.

When there is increase in the price of a particular good then it will bound to increase the demand for its substitute and whenever there is decrease in the price of a good then it is bound to decrease the demand for its substitute.

24. Suppose that total fixed cost is R120. Find out total variable cost and marginal cost at each level of output from the following data : 4

Output (in units) : 1 2 3 4

 Average total cost (in Rs.) : 240 160 140 160

Solution:-

25. What happens when there is (a) excess demand, and (b) excess supply of a commodity in a market? Explain. 4 

Ans.:- (a) Excess demand:- In this situation, excess supply has exerted downward pressure on the price of the product. A market Shortage occurs when there is excess demand- that is quantity demanded is greater than quantity supplied. The increase in price will be too much for some consumers and they will no longer demand the product.

(b) Excess Supply:- excess supply is a market condition when the quantity supplied is greater  than the demand for a commodity at the prevailing market price. It occurs at a price greater than the equilibrium price level. Effectively excess supply is wiped out of the market.

26. Give the meaning of the following : 4

 (a) Bank rate (b) Open market operations

Ans.:- (a) Bank rate:- A bank rate is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans. Managing the bank rate is a method by which central banks affect economic activity.

(b) Open market operations (OMO):- Open market operations refer to a central bank’s buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system.

 27. What are index numbers? State any four uses of index numbers. 6

Ans.:- Index numbers are the statistical tools which measure changes in the magnitude of a variable (like price, quantity of output, sales, export etc.) with respect to chosen base year. They measure average change in a group of related variables over two different situations.

The following are the uses of index numbers :- 

1. Helpful in Measuring Changes in Value of Money:-  Index numbers are widely used in the measurement of changes in the value of money. The value of money depends on its purchasing power which in turn depends on the prices of the commodities.

2. Helpful to Policy Makers:- Index numbers are very useful for the policy makers. For example, the employers depend upon cost of living index for deciding the increase in the dearness allowance of their employees. Similarly, they play the role of a useful guide in policy formulation towards inflation, unemployment, agriculture, industrial production etc. Index numbers serve as a useful guide to the business community in planning their decisions.

3. To Simplify the Facts:- There are certain changes whose measurement is not possible without index numbers. They make possible the measurement of relative changes of a group of related variables.

4. They Reveal General Trends:- Index numbers help us to study the general trend of a phenomenon so as to draw important conclusions.

28. Using ‘assumed mean method’, calculate Karl Pearson’s coefficient of correlation from the following data: 6

 Price (in R) : 20 40 60 80 100 120 140

 Supply (in kg) : 400 200 500 1000 400 1100 1200 "

29. Explain the following properties of indifference curves : 6

 (a) Convex to origin (b) Slopes downwards from left to right 

Ans.:- (a) Convex to origin:- Indifference curves are convex to the origin because the marginal utility of each product consumed decreases with subsequent consumption. This convex relationship is based upon an idea dubbed the marginal rate of substitution, which is represented by the formula  (Z = change in X/ change in Y).

(b) Slopes downwards from left to right:- This is an important feature of Indifference Curve. If the total satisfaction is to remain the same, the consumer must part with a diminishing number of bananas as he gets as increasing stock of oranges. The loss of satisfaction to the downward movement must be made up by the gain through the rightward movement. As such the Indifference Curve must slope downwards to the right.

30. State and explain the ‘law of variable proportions’ in the context of total product and marginal product. Use diagram to explain. 6

Ans.:- “The law of variable proportion states that if the inputs of one resource is increased by equal increment per unit of time while the inputs of other resources are held constant, total output will increase, but beyond some point the resulting output increases will become smaller and smaller”.

 Three stages of the law:

1. First stage:- First stage starts from point ‘O’ and sends up to point ‘F’. At point F average product is maximum and is equal to marginal product. In this stage, total product increases initially at increasing rate up to point E. Between ‘E’ and ‘F’ it increases at diminishing rate. Similarly marginal product also increases initially and reaches its maximum at point ‘H’. Later on, it begins to diminish and becomes equal to average product at point T. In this stage, marginal product exceeds average product (MP>AP).

2. Second stage:- It begins from the point F. In this stage, total product increases at diminishing rate and is at its maximum at point ‘G’ CORRESPONDINGLY MARGINAL PRODUCT DIMINISHES RAPIDLY AND BECOMES ‘Zero’ at point ‘C’. Average product is maximum at point ‘I’ and thereafter it begins to decrease. In this stage, marginal product is less than average product (MP<AP).

3. Third stage:- This stage begins beyond point ‘G’. Here total product starts diminishing. Average product also declines. Marginal product turns negative. Law of diminishing returns firmly manifests itself. In this stage, no firm will produce anything. This happens because marginal product of the labour becomes negative. The employer will suffer losses by employing more units of labourers. However, of the three stages, a firm will like to produce up to any given point in the second stage only.

Or

What is production function? State and explain the law of variable proportions in the context of total product and marginal product. 6 

Ans.:- In economics, a production function gives the technological relation between quantities of physical inputs and quantities of output of goods.

Second part see the above answer

31. Calculate (a) national income, and (b) private income from the data given below: 6   

  Rs. (in crore)

 (i) Consumption of fixed capital 100 

(ii) Compensation of employees 700

 (iii) Income from property and entrepreneurship   accruing to government 40 

(iv) Savings of non-departmental enterprises 60 

(v) National debt interest 10 

(vi)Rent 250 

(vii) Interest 200 

(viii) Net factor income from abroad 10 

(ix) Profit 150

 (x) Mixed income of self-employed 400

 (xi) Net current transfers from government 30 

(xii) Net current transfers from rest of the world 20 

(xiii) Net indirect taxes 50 

32. Explain the following functions of money with examples: 6 

(a) Medium of exchange (b) Measure of value 

Ans.:-(a) Medium of exchange:- Money’s most important function is as a medium of exchange to facilitate transactions. Without money, all transactions would have to be conducted by barter, which involves direct exchange of one god or service for another. The difficulty with a barter system is that in order to obtain a particular good or service from a supplier, one has to possess a good or service of equal value, which the suppler also desires. In other words, in a barter system, exchange can take place only if there is a double coincidence of wants between two transacting parties. The likelihood of a double coincidence of wants, however, is small and makes the exchange of goods and services rather difficult. Money effectively eliminates the double coincidence of wants problem by serving as a medium of exchange that is accepted in all transactions, by all parties, regardless of whether they desire each others’ goods and services.

(b) Measure of value:- Money acts as a unit of account or money is the measure of exchange value. This means that money is a sort of common denominator, through which the exchange value of all goods and services can be expressed without any difficulty. Innumerable exchange rates under the barter system earlier caused enormous trouble in the transactions of all kinds.