ISC Class 12 Economics Board Exam Question Paper 2017 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) What is meant by ex-ante demand and ex-post demand? [2 Marks]

Answer:
Ex-ante demand refers to the planned or desired amount of demand that consumers are willing to buy during a particular time period. Ex-post demand refers to the amount of goods that consumers actually purchase during a specific period. If the commodity is not available in adequate quantity, the quantity actually purchased (ex-post demand) will be less than the quantity that consumers desire to purchase (ex-ante demand).

Teacher's Note:
a) Ex-ante relates to intentions and plans before the actual market operation, whereas ex-post relates to the actual outcome or realization after the period ends.
b) Students must clearly distinguish between planned figures and realized figures to score full marks.

 

(ii) What is the short-run production function? Explain how is short-run production function different from the long-run production function. [2 Marks]

Answer:
Short-run production function is a period of time when production can be increased only by increasing the application of variable factors while fixed factors remain constant, expressed as Qx = f(L, K).
1. Short-run production function is a 'variable proportions type production function' while the long-run production function is a 'constant proportions type production function'.
2. Short-run production function exhibits a constant scale of output, while long-run production function exhibits a change in the scale of output.

Teacher's Note:
a) Remember that in the short run, at least one factor of production is fixed, whereas in the long run, all factors are variable.
b) Mentioning the mathematical notation Qx = f(L, K) adds clarity to the answer.

 

(iii) Explain one main feature of each:
(a) Monopsony market.
(b) Monopoly market. [2 Marks]

Answer:
(a) Single Buyer: Monopsony is a market structure where there is only one buyer of a commodity, service, or input. It is a case of only one firm purchasing the entire product or factor service.
(b) Single Seller: Monopoly is a market situation where there is only one seller or producer of a commodity, controlling the entire supply of the product and having significant influence over the market price.

Teacher's Note:
a) Emphasize that monopsony focuses on the buyer side, while monopoly focuses on the seller side.
b) Mentioning price-making power under monopoly is crucial for a complete definition.

 

(iv) How is the elasticity of supply different from supply of a commodity? [2 Marks]

Answer:
Supply refers to the absolute quantity of a commodity that a seller is willing to sell corresponding to a given price at a given point in time. On the other hand, elasticity of supply measures the degree of responsiveness or sensitivity of the quantity supplied of a commodity to a change in its price.

Teacher's Note:
a) Supply is a static concept representing quantity at a price, while elasticity is a relative concept measuring the percentage change.
b) Ensure both definitions clearly highlight the distinction between absolute quantity and percentage responsiveness.

 

(v) What is a direct tax? [2 Marks]

Answer:
Direct taxes refer to taxes that are imposed on the property and income of individuals and companies and are paid directly by them to the government. The liability to pay the tax (impact) and the actual burden of the tax (incidence) lie on the same person, and its burden cannot be shifted to others. Examples include Income tax and Corporate tax.

Teacher's Note:
a) The key characteristic of a direct tax is that its incidence and impact fall on the same person.
b) Providing standard examples like income tax or wealth tax is essential.

 

(vi) Give two differences between a time deposit and demand deposit. [2 Marks]

Answer:
1. Demand deposits can be withdrawn at any time by the account holder, whereas time deposits can be withdrawn only after the expiry of a specific period.
2. Demand deposits are chequeable and can be withdrawn through cheques, whereas time deposits are not chequeable.

Teacher's Note:
a) Mentioning the interest rate difference (higher for time deposits) is also an acceptable point.
b) Keep the differences crisp and point-wise as requested.

 

(vii) Explain with the help of an example, the problem of double-counting while calculating national income. [2 Marks]

Answer:
Double-counting arises when the output of a production unit is counted more than once while calculating national income, since the output of one unit can be the input for another. Only final goods should be included. For example, the value of tires would be counted once when they are sold to the car manufacturer, and again when the car is sold to the consumer, leading to overestimation.

Teacher's Note:
a) The problem occurs when intermediate goods are included alongside final goods.
b) Using the classic car and tire or wheat and flour example helps illustrate the concept clearly.

 

(viii) Give a reason for each of the following:
(a) The demand for a good increase when the income of the consumer increases.
(b) X and Y are substitute goods. A rise in the price of X results in the rightward shift of the demand curve of Y. [2 Marks]

Answer:
(a) The demand for a normal good increases when consumer income increases because the consumer's purchasing power increases, enabling them to spend more on goods and services.
(b) A rise in the price of good X makes substitute good Y relatively cheaper, causing consumers to shift their demand from X to Y, shifting the demand curve of Y to the right.

Teacher's Note:
a) Part (a) applies to normal goods where income effect is positive.
b) Part (b) relies on cross-price effect for substitutes, explaining the rightward shift.

 

(ix) Write any two differences between the balance of trade and balance of payment. [2 Marks]

Answer:

Balance of Trade (BOT)	Balance of Payment (BOP)
1. Balance of Trade refers to the difference between amounts of exports and imports of visible items only.	1. It is a comprehensive accounting statement that provides a systematic record of all economic transactions between residents of a country and the rest of the world.
2. It does not record any transactions of capital nature.	2. It records all transactions of current account, capital account, and unilateral transfers.

Teacher's Note:
a) Presenting the answer in a tabular format ensures clarity.
b) Highlight that BOT is a narrow concept and a part of the broader BOP account.

 

(x) Explain the shape of the MC curve. [2 Marks]

Answer:
The Marginal Cost (MC) curve is U-shaped. As output increases, the MC curve slopes downward initially, reaches a minimum point, and then starts sloping upward. This U-shape is due to the law of variable proportions - it is negatively sloped in the initial stage due to increasing returns to the variable factor and positively sloped thereafter due to decreasing returns.

[Figure: U-shaped MC curve showing downward slope, minimum point A at output OQ, and upward slope thereafter against Cost and Output axes]

Teacher's Note:
a) Connect the U-shape of the MC curve directly to the law of variable proportions.
b) Mentioning the initial fall and subsequent rise due to productivity changes is essential.

 

PART II (60 Marks)

Answer any five questions.

 

Question 2.
(a) Explain with the help of a diagram the relationship between total utility and marginal utility. [3 Marks]

Answer:
1. Total utility increases with an increase in consumption as long as marginal utility (MU) is positive.
2. When total utility reaches its maximum, MU becomes zero, known as the point of satiety.
3. When consumption is increased beyond the point of satiety, total utility starts falling as MU becomes negative.

[Figure: Graph with TU curve rising to a maximum point B where MU is zero, and then falling while MU curve goes below the X-axis into negative values against units of consumption]

Teacher's Note:
a) Clearly state the three phases of the relationship between TU and MU.
b) Drawing and labeling the diagram showing the point of satiety is compulsory for full marks.

 

(b) Find the elasticity of demand of x and y on the basis of the demand schedule given below and specify which one is more elastic: [3 Marks]

Good x		Good y
Px (Rs.)	Dx (units)	Py (Rs.)	Dy (units)
8	10	8	10
4	12	6	25

Answer:
For Good x:
Initial Price (\(P\) = 8), New Price (\(P_1\) = 4), \(\Delta P = 4 - 8 = -4\)
Initial Quantity (\(Q\) = 10), New Quantity (\(Q_1\) = 12), \(\Delta Q = 12 - 10 = 2\)
\(E_d = -(\frac{\Delta Q}{\Delta P} \times \frac{P}{Q}) = -(\frac{2}{-4} \times \frac{8}{10}) = 0.4$
For Good y:
Initial Price (\(P\) = 8), New Price (\(P_1\) = 6), \(\Delta P = 6 - 8 = -2\)
Initial Quantity (\(Q\) = 10), New Quantity (\(Q_1\) = 25), \(\Delta Q = 25 - 10 = 15\)
\(E_d = -(\frac{\Delta Q}{\Delta P} \times \frac{P}{Q}) = -(\frac{15}{-2} \times \frac{8}{10}) = 6$
Elasticity of Demand in case of Good y is more elastic (\(6 \gt 0.4\)).

Teacher's Note:
a) State the formula clearly before substituting the values.
b) Compare the numerical values of elasticity to conclude which good is more elastic.

 

(c) Explain any four reasons for the demand curve to be downward sloping. [6 Marks]

Answer:
1. Law of Diminishing Marginal Utility: As consumption of a commodity increases, the marginal utility of each successive unit goes on diminishing, making the consumer willing to pay less for additional units.
2. Income Effect: A fall in the price of a commodity increases the real income of the buyer, enhancing purchasing power and expanding demand.
3. Substitution Effect: When the price of a commodity falls, it becomes relatively cheaper compared to its substitutes, leading consumers to substitute it for costlier alternatives.
4. Size of Consumer Group: When the price of a commodity falls, many new buyers who could not afford it earlier enter the market, expanding total demand.

Teacher's Note:
a) Give clear headings for each point with adequate explanation.
b) Mentioning different uses as a fifth valid alternative point is also accepted by examiners.

 

Question 3.
(a) The difference between AC curve and AVC curve decreases with increase in output but the two curves never touch each other. Justify the statement with the help of a diagram. [3 Marks]

Answer:
The distance between the average total cost (ATC) curve and the average variable cost (AVC) curve gets smaller as production increases because the vertical distance between them represents Average Fixed Cost (AFC). As output increases, AFC continuously falls. ATC never touches AVC because AFC is always positive at all levels of output.

[Figure: Diagram showing AC and AVC curves converging as output increases on the X-axis, with the vertical gap representing falling AFC without touching]

Teacher's Note:
a) State clearly that the vertical gap between ATC and AVC is equal to AFC.
b) Explain mathematically that since AFC can never be zero, ATC and AVC can never intersect.

 

(b) Explain any two characteristics of an indifference curve. [3 Marks]

Answer:
1. An indifference curve (IC) always slopes downward from left to right: This implies that to increase the consumption of X-good, the consumer has to reduce the consumption of Y-good to maintain the same level of satisfaction.
2. Indifference curves are convex to the origin: This property is based on the diminishing marginal rate of substitution (MRS), implying that as the consumer substitutes X for Y, the rate of substitution goes on diminishing.

[Figure: Two diagrams showing a downward sloping IC curve with axes X and Y, and another showing convex to origin curve illustrating diminishing MRS]

Teacher's Note:
a) Clearly state the economic logic behind the downward slope and convexity.
b) Mentioning MRS (Marginal Rate of Substitution) is vital for explaining convexity.

 

(c) Discuss producer's equilibrium in perfect competition, using MR and MC approach. [6 Marks]

Answer:
A firm achieves producer's equilibrium when it maximizes its profits by comparing marginal cost (MC) and marginal revenue (MR). According to the marginal analysis, a firm is in equilibrium when two conditions are fulfilled:
1. MC = MR (Necessary condition): Marginal cost must be equal to marginal revenue.
2. MC curve must cut the MR curve from below (Sufficient condition): At the point of equilibrium, the MC curve must be rising or steeper than the MR curve.
If MC is less than MR, it is profitable for the firm to expand output. If MC is greater than MR, producing more will incur losses.

[Figure: Equilibrium graph showing horizontal AR=MR line and U-shaped MC curve intersecting at points A and E, marking equilibrium at output OM where MC cuts MR from below]

Teacher's Note:
a) Both conditions (MC = MR and MC cutting MR from below) must be stated together for full marks.
b) Explain why point A is not the equilibrium point (since MC is falling and not cutting from below).

 

Question 4.
(a) Fill the blank in the table given below: [3 Marks]

No. of Workers	T.P.	A.P.	M.P.
1	150	150	150
2	230	115	80
3	350	116.67	120

Answer:
For Worker 1: T.P. = 150, M.P. = 150
For Worker 2: A.P. = 115, M.P. = 80
For Worker 3: T.P. = 350, A.P. = 116.67

Teacher's Note:
a) Use formulas \(AP = \frac{TP}{N}\) and \(MP_n = TP_n - TP_{n-1}\) to compute missing values.
b) Round off decimal values for Average Product properly.

 

(b) What is meant by floor price? Explain its impact on producers. [3 Marks]

Answer:
Price floor refers to the minimum legal price fixed by the government above the equilibrium price, which producers must be paid for their produce. Its impact includes protecting producers when market prices fall too low, incentivizing further production, and helping the government build buffer stocks through minimum support prices.

[Figure: Market equilibrium graph with demand DD and supply SS, showing Price Floor set above equilibrium price with surplus output segment]

Teacher's Note:
a) Clearly state that price floor is set above the equilibrium price.
b) Mention examples like Minimum Support Price (MSP) in agriculture to add practical context.

 

(c) Explain any four features of an oligopoly market. [6 Marks]

Answer:
1. Small Number of Big Firms: The market is dominated by a few large firms where each firm holds a significant share of total output.
2. High Degree of Interdependence: Firms are mutually dependent; a change in price or output by one firm prompts immediate counter-reactions from rivals.
3. Entry Barriers: There are strong entry barriers (such as patents or heavy capital requirements) preventing new firms from entering.
4. Non-Price Competition: Firms prefer competing through advertising, brand loyalty, and services rather than lowering prices.

Teacher's Note:
a) Highlight interdependence as the most unique feature of oligopoly.
b) Explain how advertising and non-price competition substitute for price wars.

 

Question 5.
(a) Explain two causes of increasing returns to a factor. [3 Marks]

Answer:
1. Fuller Utilisation of the Fixed Factor: In the initial stages, fixed factors like machinery remain underutilized. Adding variable factors leads to fuller utilization and rising marginal product.
2. Division of Labour and Specialisation: Increased application of variable factors enables task specialization, increasing overall operational efficiency.

Teacher's Note:
a) Relate increasing returns to the initial phase of the law of variable proportions.
b) Mentioning better coordination between fixed and variable factors is also acceptable as a valid point.

 

(b) Differentiate between real cost and money cost with the help of examples. [3 Marks]

Answer:

Real Cost	Money Cost
1. Real cost refers to the total efforts, sacrifices, pain, and discomfort undergone by the owners of factors of production.	1. Money cost refers to the total monetary expenses incurred by a firm in purchasing or hiring factor services and raw materials.
2. It is a subjective concept and cannot be measured precisely in monetary terms.	2. It is an objective concept recorded in the accounting books of a firm (e.g., wages, rent, interest).

Teacher's Note:
a) Emphasize that real cost is psychological/subjective, whereas money cost is explicit and accounting-based.
b) Tabular presentation helps secure full marks.

 

(c) Discuss four determinants of supply of a commodity. [6 Marks]

Answer:
1. Price of the Commodity: There is a direct relationship between price and supply; higher prices encourage higher quantity supplied.
2. Prices of Related Goods: The supply of a good depends on prices of substitutes or complementary goods produced using similar resources.
3. Number of Firms: An increase in the number of firms in the industry increases market supply.
4. Goal of the Firm: If the goal is profit maximization, more is supplied at higher prices; if the goal is sales maximization, more may be supplied even at existing prices.

Teacher's Note:
a) Clearly distinguish between individual and market supply determinants.
b) Other valid determinants like technology and government taxes/subsidies can also be included.

 

Question 6.
(a) Explain how fiscal policy measures can be used to reduce excess demand in an economy. [3 Marks]

Answer:
1. Reduction in Government Expenditure: Curtailing public spending on infrastructure and administration lowers aggregate demand.
2. Increase in Taxes: Raising existing tax rates or levying new taxes reduces disposable income and consumer spending.
3. Increase in Public Borrowing: Selling government securities to the public absorbs excess liquidity from the economy.

Teacher's Note:
a) Define excess demand briefly as a situation where AD exceeds AS at full employment.
b) All fiscal measures aimed at curbing excess demand involve contractionary fiscal policy.

 

(b) Define marginal propensity to consume. How is it different from marginal propensity to save? [3 Marks]

Answer:
Marginal Propensity to Consume (MPC) is the ratio of change in consumption (\(\Delta C\)) to change in total income (\(\Delta Y\)), expressed as \(MPC = \frac{\Delta C}{\Delta Y}\).
Marginal Propensity to Save (MPS) is the ratio of change in desired savings (\(\Delta S\)) to change in total income (\(\Delta Y\)), expressed as \(MPS = \frac{\Delta S}{\Delta Y}\).
The sum of MPC and MPS is always equal to 1 (\(MPC + MPS = 1\)).

Teacher's Note:
a) Include mathematical formulas for both MPC and MPS.
b) Mentioning their fundamental relationship (\(MPC + MPS = 1\)) completes the comparison.

 

(c) Explain how equilibrium level of income can be determined with the help of aggregate demand curve and aggregate supply curve. [6 Marks]

Answer:
According to the modern theory of income determination, equilibrium is reached where Aggregate Demand (AD) equals Aggregate Supply (AS):
1. At intersection point E, planned spending equals total output (\(AD = AS\).
2. When \(AD \gt AS\), planned spending exceeds planned output, leading to a fall in inventory and inducing firms to increase production up to the equilibrium level.
3. When \(AD \lt AS\), planned spending is less than output, leading to accumulation of unsold inventory and forcing firms to cut down production until \(AD = AS\).

[Figure: Income equilibrium graph showing 45-degree AS line intersecting AD curve at point E, marking equilibrium income level OQ]

Teacher's Note:
a) Explain both the equilibrium condition and the adjustment mechanism when \(AD \neq AS$.
b) The 45-degree line representing AS is a key graphical element.

 

Question 7.
(a) What is meant by budget of the government? Give two differences between revenue expenditure and capital expenditure. [3 Marks]

Answer:
Government budget is an annual financial statement of expected receipts and expenditures of the government over a financial year (April 1st to March 31st).

Revenue Expenditure	Capital Expenditure
1. It neither creates any asset nor reduces any liability of the government.	1. It either creates physical/financial assets or reduces government liabilities.
2. It is recurring in nature, incurred for day-to-day running of government.	2. It is non-recurring in nature, incurred for long-term investments and asset acquisition.

Teacher's Note:
a) Define budget with exact dates of the financial year.
b) Tabulate differences based on asset/liability impact and frequency.

 

(b) Discuss the following methods of debt redemption:
(i) Refunding
(ii) Debt conversion [3 Marks]

Answer:
(i) Refunding: It is the process by which the government raises fresh loans through new bonds to pay off maturing old bonds, postponing the financial burden to a future date.
(ii) Debt Conversion: It involves replacing an old high-interest public debt with a new low-interest debt when market interest rates fall, thereby reducing the debt servicing burden for the government.

Teacher's Note:
a) Refunding postpones the liability, while debt conversion reduces the interest burden.
b) Mention that debt conversion requires strong government creditworthiness.

 

(c) Explain four measures to correct disequilibrium in the balance of payment. [6 Marks]

Answer:
1. Depreciation of Domestic Currency: Under flexible exchange rates, depreciation makes domestic goods cheaper and foreign goods expensive, boosting exports and reducing imports.
2. Devaluation: Official lowering of the domestic currency value by the government to correct a persistent BOP deficit.
3. Import Controls: Imposing quotas and tariffs to restrict the volume of imports and save foreign exchange.
4. Promotion of Import Substitutes: Encouraging domestic production of goods previously imported to reduce reliance on foreign supplies.

Teacher's Note:
a) Clearly differentiate between depreciation (market-driven) and devaluation (government-driven).
b) Monetary and fiscal policy measures are also acceptable alternatives.

 

Question 8.
(a) What is meant by repo-rate and reverse repo-rate? [2 Marks]

Answer:
Repo rate is the interest rate at which the Reserve Bank of India (RBI) lends short-term funds to commercial banks against government securities. Reverse repo rate is the rate at which the RBI borrows short-term funds from commercial banks or parks their excess liquidity with itself.

Teacher's Note:
a) Repo rate is used to curb inflation (by making borrowing expensive), while reverse repo absorbs excess liquidity.
b) Ensure precise definitions mentioning the direction of fund flow.

 

(b) Explain the following contingent functions of money:
(i) Employment of factor inputs
(ii) Basis of the credit system [4 Marks]

Answer:
(i) Employment of Factor Inputs: Entrepreneurs make decisions regarding the employment of factor inputs by equating their marginal productivity in value terms with their price expressed in monetary terms.
(ii) Basis of the Credit System: Modern commercial banking and credit instruments like cheques, bills of exchange, and drafts rest entirely on the foundation of money as a standard of deferred payments and liquidity reserve.

Teacher's Note:
a) Explain how pricing factors in money terms guides rational production choices.
b) Highlight that credit instruments cannot exist without an underlying monetary system.

 

(c) Discuss four qualitative measures of the Central Bank to control credit in the economy. [6 Marks]

Answer:
1. Margin Requirements: The difference between the market value of collateral security and the loan amount granted. It is raised during inflation to restrict credit.
2. Rationing of Credit: Fixing credit quotas for different business activities to check speculative lending.
3. Moral Suasion: Persuasion and pressure exercised by the central bank on commercial banks to follow its general credit policy guidelines.
4. Direct Action: Direct punitive measures taken by the central bank against commercial banks failing to comply with its directives (e.g., refusing discounting facilities).

Teacher's Note:
a) Qualitative measures regulate the direction and allocation of credit rather than its overall volume.
b) Give clear headings and brief explanations for each instrument.

 

Question 9.
(a) Distinguish between real GDP and nominal GDP. Which of these is a better indicator of economic welfare and why? [3 Marks]

Answer:

Nominal GDP	Real GDP
1. Calculated at current market prices prevailing in the current year.	1. Calculated at constant base year prices.
2. Can rise due to inflation even when physical output remains constant.	2. Reflects changes only in physical output, neutralizing price fluctuations.

Real GDP is a better indicator of economic welfare because an increase in real GDP reflects a higher availability of goods and services per person, whereas nominal GDP can be misleading due to price inflation.

Teacher's Note:
a) Mention formulas: Nominal GDP = \(P_1 \times Q_1\) and Real GDP = \(P_0 \times Q_1\).
b) Emphasize why Real GDP correctly measures economic welfare.

 

(b) Draw a diagram to show the circular flow of income in a two-sector model with leakage and injection. [3 Marks]

Answer:
In a two-sector model comprising households and firms, savings represent a leakage from the income stream, while investment represents an injection into the income stream through the financial market.

[Figure: Circular flow diagram showing Households, Firms, and Financial Market with factor services, consumption expenditure, factor payments, savings as leakages, and investment as injections]

Teacher's Note:
a) Clearly label households, firms, financial markets, leakages (savings), and injections (investment).
b) Neat diagrammatic representation is essential for full credit.

 

(c) Calculate GNP at FC from the following data by using income method and expenditure method: [6 Marks]

Item	Rs. in crores
(i) Operating surplus	600
(ii) Exports	30
(iii) Imports	60
(iv) Private final consumption expenditure	1000
(v) Net indirect tax	60
(vi) Compensation of employees	900
(vii) Mixed-income of self-employed	160
(viii) Gross domestic capital formation	330
(ix) Depreciation	30
(x) Net factor income from abroad	-20
(xi) Govt. final consumption expenditure	450

Answer:
Income Method:
NDP at FC = Compensation of employees + Operating Surplus + Mixed-income of self-employed
= 900 + 600 + 160 = Rs. 1,660 crores
GNP at FC = NDP at FC + Depreciation + Net factor income from abroad
= 1,660 + 30 + (-20) = Rs. 1,670 crores.

Expenditure Method:
GDP at MP = Private final consumption expenditure + Govt. final consumption expenditure + Gross domestic capital formation + Net Exports (Exports - Imports)
= 1000 + 450 + 330 + (30 - 60)
= 1,780 - 30 = Rs. 1,750 crores
GNP at FC = GDP at MP - Net indirect tax + Net factor income from abroad
= 1,750 - 60 + (-20)
= Rs. 1,670 crores.

Teacher's Note:
a) Show step-by-step calculations for both methods independently.
b) Verify that both income and expenditure methods yield the same final result of Rs. 1,670 crores.