ISC Class 12 Economics Board Exam Question Paper 2015 with Solutions

ISC Class 12 Economics Board Exam Question Paper with Solutions 2015

Part - I (20 Marks)

Answer all questions.

Question 1. Answer briefly each of the following questions (i) to (x): [20 Marks]

(i) Define marginal utility. When can it be negative? [2 Marks]

Answer:
Marginal utility is the net addition made to total utility by the consumption of an additional unit. MU_n = TU_n - TU_n-1. When total utility is falling, marginal utility is negative.

Teacher's Note:
a) Ensure the formula MU = change in TU / change in quantity is clearly understood along with the verbal definition.
b) Students often confuse when MU is zero (maximum total utility) with when MU is negative (decreasing total utility).

(ii) What is meant by production function? [2 Marks]

Answer:
Production function studies the functional relationship between physical inputs and physical outputs of a firm.

Teacher's Note:
a) Mention that it shows the technical relationship under a given state of technology.
b) Avoid writing monetary terms, as production function relates physical inputs to physical outputs.

(iii) Name the market where average revenue is equal to marginal revenue. Give a reason for your answer. [2 Marks]

Answer:
Perfect Competition. Under perfect competition, price remains constant for a firm as it is a price taker. Since price equals average revenue (AR) and price is constant, marginal revenue (MR) is also constant and equal to AR.

Teacher's Note:
a) State both the market form clearly and explain that a horizontal demand curve leads to AR = MR.
b) Do not confuse perfect competition with monopoly or monopolistic competition where AR is greater than MR.

(iv) Give one difference between accounting cost and opportunity cost. [2 Marks]

Answer:
Accounting cost refers to the explicit actual out-of-pocket expenses incurred by a firm on purchasing inputs, whereas opportunity cost refers to the value of the next best alternative foregone.

Teacher's Note:
a) Highlight that accounting costs are recorded in books of accounts, while opportunity costs are implicit and used for decision-making.
b) Give a clear example to earn full credit in comparative definitions.

(v) What is the reason for an indeterminate demand curve under Oligopoly? [2 Marks]

Answer:
The main reason for an indeterminate demand curve under oligopoly is firm interdependence. Because there are few large firms, a price change by one firm leads to reactions by rival firms, making it impossible to predict the exact demand curve.

Teacher's Note:
a) Emphasize the concept of mutual interdependence and rival reactions.
b) Students must mention price rigidity or uncertainty of competitor reactions to secure full marks.

(vi) What is meant by a propensity to consume? [2 Marks]

Answer:
Propensity to consume refers to the proportion of total income or change in income that consumers tend to spend on consumption goods and services rather than save.

Teacher's Note:
a) Differentiate briefly between Average Propensity to Consume (APC) and Marginal Propensity to Consume (MPC).
b) Always state that it relates consumption expenditure to income level.

(vii) Explain discounting bills of exchange as one of the functions of the banks. [2 Marks]

Answer:
Discounting bills of exchange is a form of short-term lending by commercial banks. When a holder of a bill of exchange needs cash before the maturity date, the bank encashes the bill after deducting a small commission (discount), and collects the full amount from the debtor on maturity.

Teacher's Note:
a) Explain that it provides immediate liquidity to the creditor.
b) Clearly mention the deduction of bank discount/commission from the face value of the bill.

(viii) Differentiate between revaluation of currency and appreciation of currency. [2 Marks]

Answer:
Revaluation refers to an official rise in the value of domestic currency in relation to foreign currency under a fixed exchange rate system, whereas appreciation refers to an increase in the external value of domestic currency through market forces of demand and supply under a flexible exchange rate system.

Teacher's Note:
a) The key distinction is government action (fixed exchange rate) versus market forces (flexible exchange rate).
b) Ensure both terms are defined precisely with reference to foreign exchange value.

(ix) How can gross domestic product at factor cost be obtained from the gross national product at market price? [2 Marks]

Answer:
GDP_FC = GNP_MP - Net Factor Income from Abroad (NFIA) - Net Indirect Taxes (NIT).

Teacher's Note:
a) Show the step-by-step adjustment: subtract NFIA to convert National to Domestic, and subtract Net Indirect Taxes to convert Market Price to Factor Cost.
b) Writing formulas with standard macroeconomic abbreviations fetches full credit.

(x) What is meant by revenue deficit? Explain its implication. [2 Marks]

Answer:
Revenue deficit refers to the excess of government revenue expenditure over revenue receipts (Revenue Deficit = Revenue Expenditure - Revenue Receipts). Its implication is that the government is dissaving, meaning it is borrowing not for capital creation, but to finance its daily consumption expenditure.

Teacher's Note:
a) State the formula clearly and explain the economic implication of recurring borrowing.
b) Point out that it indicates a burden on future generations as loans are used for consumption.

SECTION II

Answer five questions from this section.

Question 2.
(a) Discuss the relationship between the income of the consumer and demand for a commodity with respect to normal goods, inferior goods and necessities. [3 Marks]

Answer:
1. Normal goods: There is a direct positive relationship between consumer income and demand. As income increases, demand for normal goods increases, shifting the demand curve to the right.
2. Inferior goods: There is an inverse relationship between consumer income and demand. As income rises beyond a certain level, demand for inferior goods decreases, shifting the demand curve to the left.
3. Necessities: Demand increases with an increase in income up to a certain saturation limit, after which further increases in income do not affect the demand for necessities.

Teacher's Note:
a) Categorize the goods clearly and state the direction of shift in the demand curve.
b) Give examples for normal and inferior goods to make the answer comprehensive.

(b) Differentiate between the extension of demand and an increase in demand, using diagrams. [3 Marks]

Answer:

[Figure: Two separate diagrams. First diagram shows downward movement along demand curve D-D from point A to point B due to price fall. Second diagram shows rightward shift of demand curve from D-D to D₁-D₁ at constant price P₀.]

Teacher's Note:
a) Emphasize the distinction between change in quantity demanded (movement) and change in demand (shift).
b) Label axes (Price and Quantity) and curves correctly in the diagram.

(c) Explain with the help of a diagram the consumer's equilibrium through utility approach. [6 Marks]

Answer:
Consumer equilibrium through the utility approach (two-commodity case) is based on the Law of Equi-Marginal Utility. A consumer maximizes satisfaction when the marginal utility derived from the last rupee spent on each commodity is equal, and total money income is fully spent.
Conditions for consumer equilibrium:
1. \(\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} = MU_M\)
2. Marginal utility must fall as consumption increases.
Numerical Illustration: Given total income = Rs. 5, Price of X = Rs. 1, Price of Y = Rs. 1.
The consumer attains equilibrium by purchasing 3 units of X and 2 units of Y, where the marginal utility per rupee spent on both goods is equal (12 utils) and total utility is maximized at 74 utils.

[Figure: Marginal utility schedule table and graphical representation showing equal per-rupee marginal utility for goods X and Y.]

Teacher's Note:
a) State both equilibrium conditions explicitly.
b) Explain the adjustment mechanism if \(\frac{MU_X}{P_X}\) is greater than \(\frac{MU_Y}{P_Y}\).

Question 3.
(a) Discuss any two properties of the indifference curve. [3 Marks]

Answer:
1. Indifference curves slope downwards from left to right: This implies that to increase the consumption of good X, the consumer must give up some units of good Y to maintain the same level of satisfaction.
2. Indifference curves are convex to the origin: This property is based on the principle of diminishing marginal rate of substitution (MRS), meaning that as a consumer substitutes X for Y, the willingness to give up Y for an additional unit of X diminishes.

Teacher's Note:
a) Explain both properties clearly with economic reasoning.
b) Mentioning diminishing MRS is crucial for explaining convexity.

(b) Draw diagrams to show the elasticity of demand when it is: [3 Marks]
(i) Greater than one
(ii) Less than one
(iii) Unity

Answer:
(i) Greater than one (\(E_d \gt 1\)): A relatively flatter demand curve where percentage change in quantity demanded is greater than percentage change in price.
(ii) Less than one (\(E_d \lt 1\)): A relatively steeper demand curve where percentage change in quantity demanded is less than percentage change in price.
(iii) Unity (\(E_d = 1\)): A rectangular hyperbola where percentage change in quantity demanded is exactly equal to percentage change in price.

[Figure: Three separate demand curves showing elastic (\(E_d \gt 1\)), inelastic (\(E_d \lt 1\)), and unitary elastic (\(E_d = 1\)) shapes.]

Teacher's Note:
a) Draw distinct slopes for elastic and inelastic curves.
b) Explicitly label the rectangular hyperbola for unit elasticity.

(c) Explain the geometric method of calculating the elasticity of supply. [6 Marks]

Answer:
The geometric method (point method) measures elasticity of supply at any given point on a straight-line supply curve by taking the ratio of the intercept on the X-axis to the quantity at that point, or by using the formula \(E_s = \frac{\text{Lower Segment}}{\text{Total Segment}}\) or intercept method.
1. Highly Elastic Supply (\(E_s \gt 1\)): When a straight-line supply curve extends to meet the negative X-axis (intercept on X-axis), \(E_s \gt 1\).
2. Unitary Elastic Supply (\(E_s = 1\)): When the straight-line supply curve passes through the origin, \(E_s = 1\).
3. Less Elastic Supply (\(E_s \lt 1\)): When the straight-line supply curve meets the positive X-axis, \(E_s \lt 1\).
4. Perfectly Elastic Supply (\(E_s = \infty\)): A horizontal straight line parallel to the X-axis.
5. Perfectly Inelastic Supply (\(E_s = 0\)): A vertical straight line parallel to the Y-axis.

[Figure: Five diagrams illustrating geometric elasticity of supply for different degrees (\(E_s \gt 1\), \(E_s = 1\), \(E_s \lt 1\), \(E_s = \infty\), \(E_s = 0\)).]

Teacher's Note:
a) Explain the X-axis intercept rule clearly for straight-line supply curves.
b) Cover all five degrees of elasticity with proper graphical references.

Question 4.
(a) Show with the help of diagrams, the effect on equilibrium price and quantity when:
(i) There is a fall in the price of substitute goods.
(ii) There is a rise in the prices of inputs. [3 Marks]

Answer:
(i) Fall in price of substitute goods: Demand for the given good decreases (shifts left), leading to a fall in both equilibrium price and equilibrium quantity.
(ii) Rise in prices of inputs: Cost of production increases, causing supply to decrease (shift left), leading to a rise in equilibrium price and a fall in equilibrium quantity.

[Figure: Two equilibrium market diagrams showing shift in demand curve leftward for substitute price fall, and shift in supply curve leftward for input price rise.]

Teacher's Note:
a) Clearly distinguish between shifts in demand and shifts in supply.
b) State the resulting direction of price and quantity changes explicitly.

(b) The cost function of a firm is given below: [3 Marks]

Calculate:
(i) AFC
(ii) AVC
(iii) MC

Answer:

Teacher's Note:
a) Fixed Cost (FC) is 100 at zero output. Calculate VC as TC - FC.
b) AFC = FC / Output, AVC = VC / Output, and MC = change in TC / change in output.

(c) Explain the law of variable proportions with the help of a diagram. [6 Marks]

Answer:
The Law of Variable Proportions states that as the quantity of a variable factor is increased, keeping other factors constant, the Total Product (TP) initially increases at an increasing rate, then at a diminishing rate, and finally at a negative rate.
Three Stages of the Law:
1. Stage I (Increasing Returns): TP increases at an increasing rate and Marginal Product (MP) rises, reaches a maximum, and starts falling. This occurs due to better utilization of fixed factors and specialization.
2. Stage II (Diminishing Returns): TP increases at a diminishing rate and MP falls, ultimately reaching zero where TP is maximum. This is the optimal stage of production where a rational producer operates.
3. Stage III (Negative Returns): TP starts declining and MP becomes negative due to overcrowding and poor coordination between factors.

[Figure: TP and MP curves showing three distinct stages of production with inflection point, maximum TP, and zero/negative MP.]

Teacher's Note:
a) Clearly define the behavior of TP and MP in each of the three stages.
b) Explain why Stage II is the stage of rational decision-making for a producer.

Question 5.
(a) Discuss two features of monopoly. [3 Marks]

Answer:
1. Single seller and large number of buyers: Under monopoly, there is only one firm producing the entire market supply, meaning the firm and the industry are one and the same.
2. Barriers to entry and exit: There exist strong legal, natural, or economic barriers (such as patents, licenses, or economies of scale) that prevent new firms from entering the industry.

Teacher's Note:
a) Highlight absence of close substitutes as an additional key feature.
b) State that the monopolist is a price maker.

(b) Show with the help of a diagram, how a perfectly competitive firm earns normal profit in short-run equilibrium. [3 Marks]

Answer:
A perfectly competitive firm earns normal profit in short-run equilibrium when the price (AR = MR) is tangent to the minimum point of the Short-Run Average Cost (SAC) curve at the profit-maximizing output where SMC = MR.

[Figure: Perfectly competitive firm equilibrium diagram showing SMC curve intersecting MR at output Q, where SAC is tangent to price line P = AR = MR, representing zero economic profit / normal profit.]

Teacher's Note:
a) Ensure the tangency condition between SAC and price line is clearly drawn at the minimum point of SAC.
b) State the equilibrium conditions: SMC = MR and SMC must cut MR from below.

(c) Explain how a producer can maximise profit by using MR and MC curves. [6 Marks]

Answer:
To maximize profit, a producer must satisfy two essential conditions using Marginal Revenue (MR) and Marginal Cost (MC) curves:
1. Necessary Condition: Marginal Cost must be equal to Marginal Revenue (\(MC = MR\)). If \(MR \gt MC\), producing more adds more to revenue than cost, so output should expand. If \(MC \gt MR\), producing extra units incurs more cost than revenue, so output should contract.
2. Sufficient Condition: The Marginal Cost curve must cut the Marginal Revenue curve from below. At the equilibrium output where \(MC = MR\), MC must be rising.
Graphical Explanation: If MC cuts MR at two points (e.g., A and E), point A represents an upward-sloping MR or falling MC where profit is not maximized. Point E represents equilibrium because MC intersects MR from below and is rising thereafter.

[Figure: Firm equilibrium graph showing MR and MC curves, illustrating intersection points A and E, where E is the stable profit-maximizing equilibrium.]

Teacher's Note:
a) Clearly state both conditions for producer equilibrium.
b) Explain why point A is rejected and point E is accepted as equilibrium.

Question 6.
(a) Find the value of additional investment made by the government, when MPC is 0.5 and the increase in income (\(\Delta Y\)) = Rs. 1,000. [3 Marks]

Answer:
Given: MPC = 0.5, \(\Delta Y\) = Rs. 1,000.
Investment Multiplier (\(K\)) = \(\frac{1}{1 - MPC}\) = \(\frac{1}{1 - 0.5}\) = \(\frac{1}{0.5}\) = 2.
We know that \(K = \frac{\Delta Y}{\Delta I}\).
\(2 = \frac{1000}{\Delta I}\)
\(\Delta I = \frac{1000}{2}\) = Rs. 500.

Teacher's Note:
a) Show formula for multiplier in terms of MPC first.
b) Substitute values systematically to arrive at the investment change (\(\Delta I\)).

(b) What is meant by autonomous consumption? Explain with the help of a diagram. [3 Marks]

Answer:
Autonomous consumption refers to the minimum level of consumption expenditure that occurs even when national income is zero (\(Y = 0\)). It is financed through past savings or borrowings to sustain basic human survival.
In the consumption function equation \(C = \bar{C} + bY\), \(\bar{C}\) represents autonomous consumption.

[Figure: Consumption function diagram showing intercept \(\bar{C}\) on the Y-axis at zero income level, with consumption line C rising above the 45-degree line.]

Teacher's Note:
a) Clearly define that consumption does not fall to zero even when income is zero.
b) Label the intercept on the Y-axis as autonomous consumption in the diagram.

(c) Explain the concept of deficient demand with the help of aggregate demand and aggregate supply curves. Discuss one physical and one monetary measure to correct it. [6 Marks]

Answer:
Deficient demand refers to the situation where actual Aggregate Demand (AD) falls short of Aggregate Supply (AS) corresponding to the full employment level of output in the economy. This gives rise to a deflationary gap.
Graphical Explanation: In the AD-AS model, full employment equilibrium occurs where AD intersects AS at the full employment output level. When investment expenditure decreases, the AD curve shifts downward, creating a deflationary gap (vertical distance between full employment AD and deficient AD) and leading to underemployment equilibrium.
Measures to correct deficient demand:
1. Physical Measure: Reduction in public expenditure (though to correct deficient demand, government expenditure should actually be increased; however, physical measures involve public works adjustments. Note: Official key states reduction in public expenditure or increase in public investment; increase in public expenditure boosts AD).
2. Monetary Measure: Increase in money supply through central bank policies like reduction in bank rate, CRR, or SLR, or purchase of securities in open market operations.

[Figure: AD-AS macroeconomic diagram showing full employment equilibrium, deficient demand shift, and deflationary gap.]

Teacher's Note:
a) Define deflationary gap clearly as the excess of full employment output over actual aggregate demand.
b) Clearly distinguish between monetary and fiscal/physical measures of correction.

Question 7.
(a) Discuss two qualitative methods of credit control. [3 Marks]

Answer:
1. Credit Rationing: A method by which the Central Bank fixes a ceiling or limit on the maximum amount of loans and advances that commercial banks can grant, either in total or for specific sectors.
2. Moral Suasion: A combination of persuasion and pressure exercised by the Central Bank on commercial banks to follow its general monetary directives and credit policies through meetings and appeals.

Teacher's Note:
a) Mention other qualitative tools like margin requirements and direct action for completeness.
b) Emphasize that qualitative methods control the direction rather than just the volume of credit.

(b) Explain any two secondary functions of money. [3 Marks]

Answer:
1. Store of value: Money allows individuals to store purchasing power over time because it is durable, liquid, and widely accepted, overcoming the lack of store-of-value in barter systems.
2. Standard of deferred payments: Money facilitates future payments and borrowing/lending transactions by providing a uniform standard of value over time, eliminating the problem of quality fluctuation in goods under barter.

Teacher's Note:
a) Distinguish clearly between primary functions (medium of exchange, measure of value) and secondary functions.
b) Explain how the store of value function solves the limitations of perishable goods in barter.

(c) Discuss the various components of the current account of the balance of payment. [6 Marks]

Answer:
The current account of the Balance of Payments records all international transactions relating to export and import of goods, services, and unilateral transfers. Its main components are:
1. Merchandise (Visible Trade): Refers to the export and import of physical, tangible goods. The balance of visible exports and imports constitutes the Balance of Trade.
2. Invisibles (Services): Refers to international transactions in services such as shipping, banking, insurance, tourism, and communication.
3. Unilateral Transfers (Transfers): Refers to one-way unrequited transfers such as gifts, donations, grants, and remittances received from or sent abroad by governments and private individuals.
4. Investment Income: Refers to international earnings in the form of rent, interest, and profits generated on foreign investments and loans.
5. Compensation of Employees: Refers to wages and salaries earned by residents working abroad or non-residents working in the domestic country.

Teacher's Note:
a) Clearly categorize visible trade, invisible trade, and transfer payments.
b) Emphasize that current account records non-capital transactions.

Question 8.
(a) Highlight two differences between sales tax and income tax. [3 Marks]

Answer:

Teacher's Note:
a) Use a tabular format to clearly contrast direct and indirect taxes.
b) Mention shifting of tax burden as the primary differentiating factor.

(b) What is meant by: [3 Marks]
(i) Union budget
(ii) State budget

Answer:
(i) Union Budget: It is the annual financial statement prepared by the Central Government presenting the estimated receipts and expenditures of the central government for the entire country for the upcoming financial year.
(ii) State Budget: It is the annual financial statement prepared by the government of a particular state detailing its own estimated revenues and expenditures for that specific state administration.

Teacher's Note:
a) Distinguish between central jurisdiction and state jurisdiction in fiscal administration.
b) Mention that both budgets consist of revenue and capital components.

(c) Explain four ways of Redemption of Public Debt. [6 Marks]

Answer:
Redemption of public debt refers to the repayment of government loans. Four main methods are:
1. Sinking Fund Approach: The government regularly sets aside a portion of its budget revenue into a separate fund (sinking fund) over time, which is used to pay off the public debt upon maturity.
2. Conversion of Loans: This involves converting high-interest public debt into low-interest public debt, thereby reducing the annual interest burden on the government.
3. Utilization of Budgetary Surplus: When the government runs a budget surplus (where public revenue exceeds public expenditure), the surplus funds are utilized to pay off outstanding public debt.
4. Terminal Annuity: The government repays the public debt in equal annual installments, which include both principal repayment and interest, spread out over a specified period until the debt is fully cleared.

Teacher's Note:
a) Explain sinking fund and loan conversion as the most common methods.
b) Note that budgetary surplus is rare in developing economies.

Question 9.
(a) With the help of a diagram, show the circular flow of income in a two-sector model with Savings and Investment. [3 Marks]

Answer:
In a two-sector economy with households and firms, the inclusion of capital markets introduces savings and investment. Households save a part of their income (leakage/withdrawal), while firms borrow through financial institutions for capital formation and investment (injection). Equilibrium is maintained when total leakages (Savings) equal total injections (Investment).

[Figure: Circular flow diagram for a two-sector economy with households, firms, capital market, showing savings leakage and investment injection flows.]

Teacher's Note:
a) Clearly define leakages (savings) and injections (investment).
b) Label households, firms, and the capital market clearly in the flow diagram.

(b) The growth of the Gross Domestic Product is not a real indicator of economic welfare. Discuss two reasons to justify the given statement. [3 Marks]

Answer:
1. Externalities: GDP does not account for positive or negative externalities. For instance, industrial growth may increase GDP, but the accompanying environmental pollution and health hazards reduce societal welfare without being subtracted from GDP.
2. Distribution of GDP: GDP measures total output, but not how it is distributed among the population. If GDP rises but the income inequality widens (wealth concentrated among the rich while the poor become poorer), overall economic welfare may actually decline.

Teacher's Note:
a) Explain both externalities and income distribution clearly as limitations of GDP.
b) Conclude that GDP is a measure of output, not welfare.

(c) From the following data, calculate \(GNP_{MP}\) and \(NNP_{FC}\) by Expenditure Method. [6 Marks]

Answer:
1. Calculation of \(GDP_{MP}\) (Expenditure Method):
\(GDP_{MP}\) = Private Final Consumption Expenditure + Government Final Consumption Expenditure + Gross Domestic Capital Formation + Net Exports
Where Gross Domestic Capital Formation = Net Domestic Capital Formation + Consumption of Fixed Capital (Depreciation) = \(380 + 170 = 550\)
\(GDP_{MP}\) = \(1000 + 550 + 550 + (-30)\) = Rs. 2,070 crores.

2. Calculation of \(NNP_{FC}\):
\(NNP_{FC}\) = \(GDP_{MP}\) - Consumption of Fixed Capital + Net Factor Income from Abroad (NFIA) - Net Indirect Taxes (NIT)
\(NNP_{FC}\) = \(2070 - 170 + (-20) - 150\) = Rs. 1,730 crores.

Teacher's Note:
a) Explicitly add depreciation to net domestic capital formation to get gross domestic capital formation.
b) Show all formula adjustments clearly to ensure accuracy.