ISC Class 12 Economics Board Exam Question Paper 2014 with Solutions

ISC Class 12 Economics Board Exam Question Paper with Solutions

PART I (20 Marks)

Answer all questions.

Question 1

Answer briefly each of the following questions (i) to (x): [10×2]

(i) State the components of compensation of employees. [2 Marks]

Answer:
The components of compensation of employees are:
1. Wages and salaries in cash and kind.
2. Employer's contribution to social security schemes (such as provident fund).
3. Pensions-in-kind.

Teacher's Note:
a) Ensure all three components are listed clearly to secure full marks.
b) Students often confuse employer's contribution with employee's contribution; note that only employer's contribution is included here.

(ii) Explain the shape of Average Cost Curve. [2 Marks]

Answer:
The Average Cost (AC) curve is U-shaped. Initially, as output increases, AC falls due to increasing returns to a factor and economies of scale. Beyond a certain optimum level of output, AC starts rising due to diminishing returns to a factor and diseconomies of scale.

Teacher's Note:
a) Mentioning the 'U-shape' and the operation of the law of variable proportions is essential.
b) Avoid stating that fixed costs alone cause the U-shape; variable costs play a major role in the upward slope.

(iii) Explain the demand curve for a necessity commodity. [2 Marks]

Answer:
The demand curve for a necessity commodity is steep or highly inelastic. This implies that a change in the price of the commodity causes a proportionately smaller change in the quantity demanded, because consumers must consume a minimum quantity of necessities regardless of price.

Teacher's Note:
a) The term 'inelastic demand' or 'steep downward slope' must be highlighted.
b) Examples include salt, life-saving medicines, and staple food grains.

(iv) Explain any two causes of disequilibrium in the balance of payment in an economy. [2 Marks]

Answer:
Two causes of disequilibrium in the balance of payments are:
1. Cyclical fluctuations: Trade cycles like booms or depressions in developed nations affect exports and imports of developing countries.
2. Rapid population growth: High population growth increases domestic consumption of goods and services, reducing export surpluses and increasing import needs.

Teacher's Note:
a) Any two valid economic, political, or social causes are acceptable.
b) Clearly distinguish between autonomous and accommodating items if brought into context, though direct causes suffice here.

(v) What is meant by high powered money? [2 Marks]

Answer:
High-powered money (also known as monetary base or reserve money) refers to currency held by the public and cash reserves held by commercial banks with the central bank. It is denoted as H = C + R.

Teacher's Note:
a) Mentioning both currency with public and reserves of commercial banks is crucial.
b) It forms the base upon which the total money supply is created through the money multiplier process.

(vi) The demand for a commodity at Rs. 4 per unit is 100 units. The price of the commodity rises and as a result, its demand falls to 75 units. Find the new price if the price elasticity of demand of that commodity is 1. [2 Marks]

Answer:
Given:
Initial Price (P) = Rs. 4
Initial Quantity (Q) = 100 units
New Quantity (Q1) = 75 units
Change in Quantity (delta Q) = 75 - 100 = -25 units
Elasticity of Demand (Ed) = 1
Formula: Ed = - (delta Q / delta P) * (P / Q)
1 = - (-25 / delta P) * (4 / 100)
1 = (25 / delta P) * (1 / 25)
delta P = Rs. 1
New Price = Initial Price + delta P = 4 + 1 = Rs. 5.

Teacher's Note:
a) Always write the formula before substituting the numerical values.
b) Ensure the negative sign in elasticity is handled correctly with the inverse relationship between price and quantity.

(vii) Justify the following as price-takers / price-makers: [2 Marks]
(a) an oligopoly market
(b) a perfectly competitive market

Answer:
(a) An oligopoly firm is a price-maker due to the presence of a few large firms and high barriers to entry, giving each firm considerable control over price.
(b) A perfectly competitive firm is a price-taker because there are a large number of buyers and sellers selling a homogeneous product, and an individual firm's supply is too small to influence the market price.

Teacher's Note:
a) Distinguish clearly between the market structures based on degree of control over price.
b) Mentioning product homogeneity and number of firms adds strength to the justification.

(viii) If the value of the multiplier is 4, what will be the value of MPC and MPS? [2 Marks]

Answer:
Given multiplier (k) = 4.
Formula: k = 1 / MPS
4 = 1 / MPS
MPS = 1 / 4 = 0.25
Since MPC + MPS = 1,
MPC = 1 - 0.25 = 0.75.

Teacher's Note:
a) State the relationship formulas clearly: k = 1 / MPS and MPC + MPS = 1.
b) Expressing answers in decimals or fractions is acceptable, but decimals are preferred.

(ix) Distinguish between intended supply and actual supply. [2 Marks]

Answer:
Intended supply (ex-ante supply) refers to the planned quantity of a commodity that producers are willing and able to offer for sale at various given prices during a specific period. Actual supply (ex-post supply) refers to the actual quantity of a commodity that producers succeed in selling in the market during a given period.

Teacher's Note:
a) Use the economic terms ex-ante and ex-post for clarity.
b) Emphasize that planned supply may differ from actual supply due to unexpected changes in market demand.

(x) What is meant by deficit financing? [2 Marks]

Answer:
Deficit financing refers to the method of financing budget deficits through the printing of new currency notes by the central bank or by borrowing from the central bank by the government.

Teacher's Note:
a) Clarify that it involves creation of new money or borrowing from the central bank, not borrowing from the public.
b) Mentioning its role in meeting developmental expenditure in developing nations is useful.

PART II (60 Marks)

Answer any five questions.

Question 2

(a) Study the diagram given below and answer the questions that follow: [3 Marks]

[Figure: Demand and supply curves intersecting at E with equilibrium price Pe and quantity Qe. A horizontal line is drawn above Pe at price P1 intersecting the supply curve at a higher point.]

(i) Pe is the equilibrium price. What would prompt the government to fix the price at P1? [1 Mark]
(ii) What would be the effect of fixing the price at P1? [2 Marks]

Answer:
(i) The government would fix the price above the equilibrium price (at P1), known as a minimum price floor, to protect the interests of producers (such as farmers) when market equilibrium prices are deemed too low.
(ii) Fixing the price at P1 (price floor) leads to excess supply (surplus), as quantity supplied exceeds quantity demanded at that higher price.

Teacher's Note:
a) Identify P1 as a price floor or minimum support price.
b) Clearly state that excess supply is generated because supply expands while demand contracts.

(b) Discuss the effect of elasticity of demand on: [3 Marks]
(i) a commodity which has many substitutes.
(ii) a small part of individual's income spent on a commodity.

Answer:
(i) A commodity which has many substitutes has elastic demand because a rise in its price will cause consumers to shift easily to its substitutes, leading to a large fall in demand.
(ii) If a small part of an individual's income is spent on a commodity (such as salt or matchboxes), its demand is inelastic because a change in its price has a negligible impact on the consumer's total budget.

Teacher's Note:
a) Explain the underlying economic reasoning (availability of substitutes and proportion of income spent).
b) Use correct terminology like 'elastic' and 'inelastic'.

(c) (i) Study the schedule given below and identify how much of commodity A and commodity B will a utility-maximizing consumer buy: [6 Marks]

Note: Price A = Rs. 2, price B = Rs. 4, income = Rs. 20
(ii) Explain the Law of Equi Marginal Utility, using the above schedule.

Answer:
(i) Condition for consumer equilibrium with two commodities:
(MUA / PA) = (MUB / PB) and total expenditure equals income.
Checking ratios at different combinations where MUA / 2 = MUB / 4:
- If consumer buys 3 units of A (MUA = 6) and 3.5... let us check combinations where total expenditure = 20:
If Units of A = 4 (cost = 4 * 2 = 8) and Units of B = 3 (cost = 3 * 4 = 12). Total expenditure = 8 + 12 = 20.
At 4 units of A, MUA = 4, so MUA / PA = 4 / 2 = 2.
At 3 units of B, MUB = 20, so MUB / PB = 20 / 4 = 5 (Not equal).
Let us check MUA / PA = MUB / PB:
MUA = 2, PA = 2 => MUA / PA = 1.
MUB = 4, PB = 4 => MUB / PB = 1.
Units of A = 5 (Cost = 5 * 2 = 10).
Units of B = 2 (Cost = 2 * 4 = 8).
Total Expenditure = 10 + 8 = Rs. 18 (Income = Rs. 20 - not fully spent).
Let us check another combination:
If Units of A = 6 (Cost = 6 * 2 = 12), Units of B = 2 (Cost = 2 * 4 = 8). Total expenditure = 12 + 8 = 20.
At A = 6, MUA = 1, MUA / PA = 1 / 2 = 0.5.
At B = 2, MUB = 24, MUB / PB = 24 / 4 = 6.
Let us check MUA = 4 (Units of A = 4, cost = 8) and MUB = 8 (Units of B = 3, cost = 12? No, B=6 gives MUB = 8, cost = 24).
Let us re-verify standard utility maximization: Expenditure Px*X + Py*Y = Income (20).
Combinations of (A, B) such that 2A + 4B = 20:
- A = 2, B = 4: Cost = 2(2) + 4(4) = 4 + 16 = 20. MUA = 8, MUB = 16. MUA/PA = 4, MUB/PB = 4. Since MUA/PA = MUB/PB = 4 and total expenditure = 20, the consumer buys 2 units of commodity A and 4 units of commodity B.
(ii) According to the Law of Equi-Marginal Utility, a consumer gets maximum total satisfaction when the marginal utility per rupee spent on each commodity is equal (MUA / PA = MUB / PB) and the entire given income is spent. In the schedule, at 2 units of A and 4 units of A? No, at 2 units of A (MUA = 8, MUA/PA = 4) and 4 units of B (MUB = 16, MUB/PB = 4), the per-rupee marginal utility is equalized at 4, and total expenditure is (2*2 + 4*4) = Rs. 20.

Teacher's Note:
a) Show the budget constraint equation clearly (2A + 4B = 20).
b) Verify that both conditions (equality of marginal utility per rupee and complete utilization of income) are met.

Question 3

(a) Discuss how supply of labour is an exception to the law of supply. [3 Marks]

Answer:
The supply of labour is an exception to the law of supply because beyond a certain wage rate, the supply curve of labour bends backward. Initially, as the wage rate increases, the substitution effect dominates and workers supply more labour (upward sloping). However, at very high wage rates, the income effect dominates over the substitution effect; workers prefer more leisure to work, causing the labour supply to decrease as wages rise further.

Teacher's Note:
a) Explain both the substitution effect and income effect clearly.
b) Mention the backward-bending nature of the labour supply curve.

(b) According to the Law of Variable Proportions, in which stage would a producer like to operate? Explain why. [3 Marks]

Answer:
A rational producer will always choose to operate in Stage II (Stage of Diminishing Returns) of the Law of Variable Proportions. In this stage, both Marginal Product (MP) and Average Product (AP) are positive but declining, and total product continues to increase at a diminishing rate until MP becomes zero. Stage I is rejected because the producer has not fully exploited economies of scale, and Stage III is rejected because MP is negative, leading to a fall in total output.

Teacher's Note:
a) Explicitly name Stage II as the stage of rational operation.
b) Provide brief reasons why Stage I and Stage III are avoided by producers.

(c) Explain how a producer can attain equilibrium using TR and TC approach. [6 Marks]

Answer:
According to the Total Revenue (TR) and Total Cost (TC) approach, a producer attains equilibrium (maximum profit) at that level of output where the difference between TR and TC is maximum positive. The conditions for producer equilibrium are:
1. The vertical distance between the TR curve and TC curve is maximum, with TR lying above TC.
2. Profit is positive or normal profits are earned.
3. Beyond the equilibrium output, TR curve must lie below TC curve, or slope of TR (MR) must equal slope of TC (MC) with MC rising.

Teacher's Note:
a) Describe the graphical representation where TR and TC curves are plotted against output.
b) Emphasize that profit is maximized where the gap between TR and TC is widest.

Question 4

(a) Explain the relationship between AC and MC with the help of a diagram. [3 Marks]

Answer:
The relationship between Average Cost (AC) and Marginal Cost (MC) is as follows:
1. When AC is falling, MC lies below AC (MC < AC).
2. When AC is rising, MC lies above AC (MC > AC).
3. When AC is at its minimum point, MC is equal to AC (MC = AC).
[Figure: U-shaped AC and MC curves intersecting at the minimum point of AC]

Teacher's Note:
a) State the three distinct phases of the relationship clearly.
b) Note that MC passes through the minimum point of AC from below.

(b) Highlight any three differences between monopolistic competition and oligopoly. [3 Marks]

Answer:
Differences between monopolistic competition and oligopoly:
1. Number of firms: Monopolistic competition has a large number of sellers, whereas oligopoly has a few large firms.
2. Interdependence: Firms in monopolistic competition act independently without considering rivals' reactions, whereas oligopoly firms are highly interdependent.
3. Product differentiation: Products are differentiated in monopolistic competition, while in oligopoly, products may be homogeneous or differentiated.

Teacher's Note:
a) Present differences across standard economic parameters such as number of sellers and interdependence.
b) Avoid writing paragraph answers; bullet points make the differences clear.

(c) A perfectly competitive firm can continue producing even if it is incurring losses in short run equilibrium. Justify the given statement with the help of a diagram. [6 Marks]

Answer:
A perfectly competitive firm can continue producing in the short run even when incurring losses, provided the price is greater than or equal to the Average Variable Cost (AVC). As long as TR covers total variable costs and contributes towards fixed costs, shutting down immediately would result in a loss equal to total fixed costs, which is higher than the operating loss.
[Figure: Equilibrium where price P is below AC but above AVC, showing a loss-minimizing output where P = MC]

Teacher's Note:
a) Explain the concept of the shut-down point (where price equals minimum AVC).
b) Explain why fixed costs are sunk costs in the short run.

Question 5

(a) Differentiate with the help of diagrams, contraction in supply and decrease in supply. [3 Marks]

Answer:
Contraction in supply refers to a fall in quantity supplied due to a fall in the price of the commodity, represented by a downward movement along the same supply curve. Decrease in supply refers to a fall in supply due to factors other than price (such as rise in input costs), represented by a leftward shift of the entire supply curve.
[Figure: Two separate graphs showing (1) downward movement along a supply curve, and (2) parallel leftward shift of the supply curve]

Teacher's Note:
a) Distinguish clearly between movement along a curve (change in quantity supplied) and shift of the curve (change in supply).
b) Ensure diagrams are labeled with Price, Quantity, and Supply curves.

(b) Identify the market where a firm is not required to reduce the price to sell more. Explain the behaviour of TR and MR. [3 Marks]

Answer:
The market where a firm is not required to reduce the price to sell more is a perfectly competitive market. In this market, a firm is a price-taker and can sell any quantity at the prevailing market price.
Behaviour of TR and MR: Total Revenue (TR) increases at a constant rate as output increases, represented by an upward-sloping straight line starting from the origin. Marginal Revenue (MR) remains constant and is equal to price, so the MR curve is a horizontal straight line parallel to the X-axis (AR = MR).

Teacher's Note:
a) Identify the market structure as perfect competition.
b) Explain why TR increases at a constant rate (constant price).

(c) Explain how a consumer attains equilibrium using the indifference curve analysis. [6 Marks]

Answer:
A consumer attains equilibrium using indifference curve analysis when two conditions are satisfied:
1. Marginal Rate of Substitution must equal the price ratio of the two goods (MRSxy = Px / Py).
2. The indifference curve must be convex to the origin at the point of tangency.
[Figure: Indifference map showing budget line tangent to the highest possible indifference curve IC2 at equilibrium point E]

Teacher's Note:
a) State both equilibrium conditions clearly.
b) Explain the significance of the budget line tangency condition.

Question 6

(a) Discuss two contingent functions of money. [3 Marks]

Answer:
Two contingent functions of money are:
1. Basis of credit: Commercial banks create credit on the basis of cash reserves held by them, which facilitates trade and business expansion.
2. Distribution of national income: Money helps in the distribution of total national income among the various factors of production in the form of rent, wages, interest, and profit.

Teacher's Note:
a) Distinguish contingent functions from primary and secondary functions.
b) Other valid functions like measurement of economic standing or solvency are also acceptable.

(b) Explain the role of the Reserve Bank of India with respect to: [3 Marks]
(i) custodian of foreign exchange.
(ii) promotional and developmental functions.

Answer:
(i) Custodian of foreign exchange: The RBI maintains and manages the country's foreign exchange reserves and undertakes actions to ensure stability in the external value of the domestic currency.
(ii) Promotional and developmental functions: The RBI undertakes measures to promote banking habits, establish financial institutions for agriculture and industry, and support overall economic development.

Teacher's Note:
a) Explain both roles clearly within the central banking framework.
b) Mention stability of exchange rate for foreign exchange custody.

(c) Discuss how exchange rate is determined under flexible exchange rate system. [6 Marks]

Answer:
Under a flexible exchange rate system, the exchange rate is determined by the market forces of demand for and supply of foreign exchange. The equilibrium exchange rate is established at the point where the demand curve for foreign exchange intersects the supply curve.
[Figure: Demand and supply of foreign exchange curves intersecting at equilibrium rate R and quantity Q]

Teacher's Note:
a) Explain the sources of demand for foreign exchange (imports, investments abroad) and supply (exports, foreign investment inflows).
b) Explain how market forces adjust to clear surpluses or shortages in foreign exchange.

Question 7

(a) Explain how public expenditure can be used as a tool to attain economic stability. [3 Marks]

Answer:
Public expenditure can be used to control economic fluctuations:
1. During inflation (boom), the government reduces public expenditure to curb aggregate demand and control price rises.
2. During deflation (depression), the government increases public expenditure through public works and welfare programs to boost aggregate demand and stimulate economic activity.

Teacher's Note:
a) Differentiate policy application between inflationary and deflationary gaps.
b) Connect public expenditure directly to aggregate demand management.

(b) Differentiate between degressive taxation and regressive taxation. [3 Marks]

Answer:
Degressive taxation is a system where the rate of tax increases up to a certain limit after which a uniform rate is charged on higher incomes. Regressive taxation is a system where the rate of tax decreases as the income of the taxpayer increases, placing a heavier relative burden on poorer sections.

Teacher's Note:
a) Highlight the difference in rate progression between degressive and regressive taxes.
b) Note that degressive taxation is a mild form of progressive taxation.

(c) Explain the various components of the budget. [6 Marks]

Answer:
The government budget consists of two main components:
1. Revenue Budget: Comprises revenue receipts (tax and non-tax revenues) and revenue expenditure (expenditure incurred for normal functioning of government departments and provision of public goods).
2. Capital Budget: Comprises capital receipts (borrowings, recovery of loans, disinvestment) and capital expenditure (expenditure on creation of assets, acquisition of land, and repayment of loans).

Teacher's Note:
a) Provide a structured classification of budget receipts and expenditures.
b) Distinguish clearly between revenue and capital items.

Question 8

(a) Discuss the mechanism of investment multiplier with the help of a numerical example. [3 Marks]

Answer:
The investment multiplier (k) shows the relationship between an initial increase in investment and the resulting increase in total income. It operates through the chain of consumption expenditure.
Example: If investment increases by Rs. 100 crores and MPC is 0.8, the multiplier k = 1 / (1 - 0.8) = 5. The total increase in income will be Delta Y = k * Delta I = 5 * 100 = Rs. 500 crores.

Teacher's Note:
a) State the formula k = 1 / (1 - MPC).
b) Illustrate the round-by-round multiplier process briefly.

(b) Distinguish between marginal propensity to consume and marginal propensity to save. What is the relationship between the two? [3 Marks]

Answer:
Marginal Propensity to Consume (MPC) is the ratio of change in consumption to change in total income (MPC = delta C / delta Y). Marginal Propensity to Save (MPS) is the ratio of change in savings to change in total income (MPS = delta S / delta Y).
Relationship: The sum of MPC and MPS is always equal to 1 (MPC + MPS = 1).

Teacher's Note:
a) Define both terms with their respective formulas.
b) State the identity MPC + MPS = 1 clearly.

(c) Explain the determination of equilibrium level of output with the help of saving and investment curves. If savings exceed planned investment, what changes will bring about equality between them? [6 Marks]

Answer:
Equilibrium level of output is determined where planned saving equals planned investment (S = I).
If savings exceed planned investment (S > I), it implies that households are consuming less and saving more than what firms plan to invest. Consequently, aggregate demand is less than aggregate supply, leading to an unintended accumulation of inventories (stocks) with producers. To clear unsold stocks, producers reduce output and employment, which lowers national income until savings fall and equal planned investment.
[Figure: Saving and investment curves intersecting at equilibrium income level]

Teacher's Note:
a) Explain the S = I approach clearly with the adjustment mechanism.
b) Detail the sequence of inventory accumulation leading to output reduction when S > I.

Question 9

(a) How can personal disposable income be derived from private income? [3 Marks]

Answer:
Personal Disposable Income is derived from Private Income by subtracting corporate taxes and retained earnings (corporate savings), and further subtracting personal taxes and miscellaneous receipts of government administrative departments.
Personal Disposable Income = Private Income - Corporate Tax - Retained Earnings - Personal Taxes.

Teacher's Note:
a) List all deductions from private income correctly.
b) Ensure the sequence from private income to personal disposable income is accurate.

(b) Explain any three precautions which should be taken while estimating national income by income method. [3 Marks]

Answer:
Precautions while estimating national income by income method:
1. Transfer payments (such as scholarships, pensions) should not be included as they do not correspond to any productive service.
2. Income from illegal activities (such as smuggling, theft) must be excluded.
3. Windfall gains (such as lottery winnings) should not be included as they do not involve current productive activity.

Teacher's Note:
a) Mention exclusion of transfer earnings and illegal incomes.
b) State reasons why these items are excluded.

(c) Calculate national income and operating surplus from the following data: [6 Marks]

Answer:
1. Calculation of National Income (NNP at FC) using Expenditure Method:
GDP at MP = Private final consumption expenditure (iii) + Government final consumption expenditure (i) + Net domestic capital formation (iv) + Net exports (vii)
GDP at MP = 900 + 800 + 200 + (-25) = Rs. 1,875 crores.
NDP at MP = GDP at MP - Depreciation (not given, but Net domestic capital formation is given, so NDP at MP = PFCE + GFCE + NDCF + Net Exports = 900 + 800 + 200 - 25 = Rs. 1,875 crores).
NNP at FC (National Income) = NDP at MP - Net Indirect Taxes (ix) + Net Factor Income from Abroad (ii)
NNP at FC = 1,875 - 165 + (-110)
NNP at FC = 1,875 - 165 - 110 = Rs. 1,600 crores.

2. Calculation of Operating Surplus:
Operating Surplus = Rent (vi) + Interest (viii) + Profits (v) + Royalty (if any, 0)
Operating Surplus = 90 + 100 + 220 = Rs. 410 crores.

Working Notes:
1. National income = 900 + 800 + 200 - 25 - 165 - 110 = Rs. 1,600 crores.
2. Operating surplus = Rent + Interest + Profits = 90 + 100 + 220 = Rs. 410 crores.

Teacher's Note:
a) Identify the appropriate aggregate method (expenditure method for national income and income components for operating surplus).
b) Double-check signs for net factor income from abroad and net exports.