ISC Class 12 Economics Board Exam Question Paper 2018 with Solutions

ISC Class 12 Economics Board Exam Question Paper with Solutions 2018

Part - I (20 Marks)

Answer all questions.

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

(i) Define deficit financing. [2 Marks]

Answer:
Deficit financing is a budgetary situation when government expenditure is higher than the revenue and the difference is made up by borrowing or printing new funds.

Teacher's Note:
a) Ensure you mention that the budgetary gap is covered through borrowings or creation of new currency.
b) Students often confuse deficit financing with fiscal deficit; be precise about the financing aspect.

(ii) Differentiate between Current Account and Capital Account of Balance of Payment. [2 Marks]

Answer:

Teacher's Note:
a) Tabular format is best for differentiation questions in economics.
b) Remember that current account affects national income directly, while capital account affects assets and liabilities.

(iii) What is meant by price discrimination in the monopoly market? [2 Marks]

Answer:
A monopolist may charge different prices for his product from different sets of consumers at the same time. It is known as price discrimination.

Teacher's Note:
a) Price discrimination is a unique feature of monopoly where the same product is sold at different prices to different buyers.
b) Mention that it occurs at the same time for the definition to be complete.

(iv) Define total utility. How is marginal utility derived from total utility? [2 Marks]

Answer:
Total utility is the sum total of marginal utilities derived from the consumption of different units of a commodity.
\( TU_n = U_1 + U_2 + \dots + U_n \)
Marginal utility is the net addition made to total utility by the consumption of an additional unit.
\( MU_n = TU_n - TU_{n-1} \)

Teacher's Note:
a) Always include the mathematical formula to secure full marks.
b) Clearly distinguish between aggregate sum (TU) and change in sum (MU).

(v) Explain the overdraft facility given by banks. [2 Marks]

Answer:
An overdraft allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank allows current account customers to borrow a set amount of money.

Teacher's Note:
a) State clearly that this facility is generally provided to current account holders.
b) Emphasize that interest is charged only on the overdrawn amount, not the sanctioned limit.

(vi) Define implicit cost. How is it different from explicit cost? [2 Marks]

Answer:
Implicit cost refers to the cost of self-supplied factors or the factors owned and employed by the firm itself, e.g., the salary of an entrepreneur. Whereas explicit cost is the expense incurred for outside payment or hired factors.

Teacher's Note:
a) Implicit costs are estimated/imputed costs, while explicit costs are actual cash payments made to outsiders.
b) Giving examples for both adds clarity to the answer.

(vii) Why is price per unit equal to AR and MR under perfect competition? [2 Marks]

Answer:
Under perfect competition, a firm is a price taker, and the price remains constant at all levels of output. Since AR is total revenue divided by output, and price is constant, AR equals price. Furthermore, since price is constant, every additional unit sold adds an amount equal to the price, making MR equal to AR and price.

Teacher's Note:
a) State the price-taker assumption clearly.
b) Mention that AR = TR / Q = (P \times Q) / Q = P.

(viii) Explain the meaning of the following:
(a) Full employment
(b) Involuntary unemployment. [2 Marks]

Answer:
(a) Full employment: It is a situation in which all those people who are willing to work at the prevailing wage rate get work.
(b) Involuntary unemployment: Involuntary unemployment is a situation in which people are able to work and willing to work at existing rate of wages but do not get work.

Teacher's Note:
a) Highlight the key phrase "willing and able to work at the prevailing wage rate".
b) Note that involuntary unemployment excludes those who are voluntarily unemployed or unwilling to work.

(ix) Explain two differences between factor income and transfer income. [2 Marks]

Answer:

Teacher's Note:
a) Focus on whether a productive service is rendered or not as the primary basis.
b) Mention national income inclusion status as the second key point.

(x) With the help of diagrams, show how equilibrium price and quantity of a commodity are affected when:
(a) Demand is perfectly elastic and supply decreases.
(b) Supply is perfectly elastic and demand increases. [2 Marks]

Answer:
(a) When supply decreases, the supply curve shifts to the left. Since demand is perfectly elastic (horizontal demand curve), the equilibrium price remains unchanged, but the equilibrium quantity falls.
(b) When demand increases, the demand curve shifts to the right. Since supply is perfectly elastic (horizontal supply curve), the equilibrium price remains unchanged, but the equilibrium quantity rises.

[Figure: Two separate equilibrium diagrams showing shifts in curves with horizontal or vertical elastic lines]

Teacher's Note:
a) Ensure the diagrams clearly indicate the shift in curves and the resulting price and quantity changes.
b) Point out that perfectly elastic curves are horizontal, which keeps price constant regardless of shifts in the opposite curve.

SECTION B

Question 2.
(a) Differentiate between the contraction of demand and decrease in demand, using diagrams. [3 Marks]

Answer:

[Figure: Two diagrams, one showing upward movement along a demand curve, the other showing a leftward shift of the demand curve]

Teacher's Note:
a) Emphasize movement along the curve versus shift of the curve.
b) Price change causes contraction, while changes in other factors cause decrease.

(b) "The supply curve of labour is an exception to the law of supply." Justify the statement, using a diagram. [3 Marks]

Answer:
The law of supply states that rise in price leads to an increase in supply. However, in the case of labour supply, as the wage rate rises beyond a certain critical point, workers prefer more leisure to work. Consequently, the supply of labour falls, making the supply curve backward-bending.

[Figure: Backward bending labour supply curve showing wage rate on Y-axis and labour supply on X-axis, bending backwards after critical wage Wc]

Teacher's Note:
a) Explain the tradeoff between income and leisure at higher wage rates.
b) Label the critical wage rate clearly on the diagram.

(c) A consumer consumes goods X and Y. Given below is his marginal utility schedule for goods X and Y. Suppose, the price of X is Rs. 2, Y is Rs. 1 and income Rs. 12. State the law of Equimarginal utility and explain how the consumer will attain equilibrium. [6 Marks]

Answer:
Law of Equimarginal Utility states that a consumer gets maximum satisfaction when marginal utility of money spent on different goods is equal, and he spends his entire income on them.
Condition for equilibrium:
\( \frac{MU_X}{P_X} = \frac{MU_Y}{P_Y} = MU_m \)
and expenditure equals income: \( (P_X \times Q_X) + (P_Y \times Q_Y) = \text{Income} \).
Dividing MU values by respective prices (P_X = 2, P_Y = 1):
Unit 1: MU_X/P_X = 16/2 = 8, MU_Y/P_Y = 11/1 = 11
Unit 2: MU_X/P_X = 14/2 = 7, MU_Y/P_Y = 10/1 = 10
Unit 3: MU_X/P_X = 12/2 = 6, MU_Y/P_Y = 9/1 = 9
Unit 4: MU_X/P_X = 10/2 = 5, MU_Y/P_Y = 8/1 = 8
Unit 5: MU_X/P_X = 8/2 = 4, MU_Y/P_Y = 7/1 = 7
Unit 6: MU_X/P_X = 6/2 = 3, MU_Y/P_Y = 6/1 = 6
Equilibrium is attained when 1 unit of X and 4 units of Y are consumed, giving MU per rupee as 8, and total expenditure = (Rs. 2 \times 1) + (Rs. 1 \times 4) = Rs. 6 + ... wait, correction: (2 \times 1) + (1 \times 4) = 2 + 4 = 6? Let us check the budget constraint: if consumer buys 1 unit of X and 4 units of Y, expenditure is (2 \times 1) + (1 \times 4) = Rs. 6. Wait, income is given as Rs. 12. Let us check other combinations where ratio is equal:
When MU_X/P_X = 4 (at 5th unit of X) and MU_Y/P_Y = 4 (not in table).
Let us check combinations for Rs. 12:
If Q_X = 4 and Q_Y = 4: expenditure = (2 \times 4) + (1 \times 4) = Rs. 12. At Q_X = 4, MU_X/P_X = 5. At Q_Y = 4, MU_Y/P_Y = 8. Not equal.
Let us check where ratios are equal: MU_X/P_X = 4 and MU_Y/P_Y = 4 (not listed). Let's check MU_X/P_X = 7 and MU_Y/P_Y = 7: Q_X = 2 (MU_X/P_X = 7), Q_Y = 5 (MU_Y/P_Y = 7). Expenditure = (2 \times 2) + (1 \times 5) = 4 + 5 = Rs. 9.
Let's check the official answer: consumer purchases 1 unit of good X and 4 units of good Y? Wait, official text states: expenditure = (Rs. 2 \times 4) + (Rs. 1 \times 4) = Rs. 12 where units of X bought is 4 and Y is 4? Wait, text says: spending (Rs. 2 \times 4 + Rs. 1 \times 4) = Rs. 12. (Typo in original official solution formula text, but total expenditure is 12).

Teacher's Note:
a) Always show the per-rupee marginal utility table clearly by dividing MU by price.
b) Verify that the total expenditure matches the given income constraint.

Question 3.
(a) Explain any two factors affecting the price elasticity of demand. [3 Marks]

Answer:
1. Nature of commodities: Necessaries have inelastic demand because they are essential for survival (e.g., food), whereas luxuries have elastic demand.
2. Availability of substitutes: A commodity with a large number of close substitutes has a highly elastic demand because consumers can easily switch if the price rises.

Teacher's Note:
a) Clearly state the factor name and explain its inverse or direct relationship with elasticity.
b) Provide appropriate examples for each factor.

(b) Derive a market supply schedule from two hypothetical individual supply schedules. [3 Marks]

Answer:
Market supply is obtained by horizontally summing the individual supply schedules of all producers in the market at various prices.

Teacher's Note:
a) Explain that market supply is the horizontal summation of individual supplies.
b) Ensure the arithmetic addition for each price level is accurate.

(c) If more variable factors are employed to fixed factors, the total product increases initially at an increasing rate and finally, it decreases. Explain this law with the help of a diagram. [6 Marks]

Answer:
This phenomenon is explained by the Law of Variable Proportions, which states that as we increase the quantity of only one input keeping other inputs fixed, total product initially increases at an increasing rate, then at a decreasing rate, and finally at a negative rate.
The law operates in three stages:
1. First Stage (Increasing Returns to a Factor): TP increases at an increasing rate and MP rises due to better utilization of fixed factors and specialization.
2. Second Stage (Diminishing Returns to a Factor): TP increases at a decreasing rate and MP falls, ending where MP is zero and TP is maximum.
3. Third Stage (Negative Returns to a Factor): TP declines and MP becomes negative due to poor coordination between fixed and variable factors.

[Figure: Law of Variable Proportions diagram showing Total Product (TP) and Marginal Product (M) curves across three stages]

Teacher's Note:
a) Clearly define all three stages with reference to TP and MP behavior.
b) Point out that rational producers always operate in the second stage.

Question 4.
(a) Explain the shapes of the total fixed cost curve and the average fixed cost curve. Give one reason each to justify the shape of the two curves. [3 Marks]

Answer:
1. Total Fixed Cost (TFC) curve is a horizontal straight line parallel to the X-axis because fixed costs do not change with the level of output.
2. Average Fixed Cost (AFC) curve is a downward-sloping rectangular hyperbola because total fixed cost is constant, and dividing it by an increasing output yields a continuously falling AFC.

[Figure: Two separate small graphs showing horizontal TFC and rectangular hyperbola AFC curves]

Teacher's Note:
a) Emphasize that TFC remains constant irrespective of output level.
b) Use the term rectangular hyperbola for AFC to score maximum marks.

(b) Explain the concept of Maximum Price Legislation with the help of a diagram. [3 Marks]

Answer:
Maximum Price Legislation or Price Ceiling refers to fixing the maximum price of a commodity at a level lower than the equilibrium price by the government to protect consumers. At this controlled price, excess demand (shortage) occurs because quantity demanded exceeds quantity supplied.

[Figure: Demand and supply equilibrium diagram with a price ceiling line below equilibrium price showing excess demand]

Teacher's Note:
a) State that price ceilings are typically imposed on essential goods like food grains.
b) Mention that it leads to problems like black marketing and shortages.

(c) Explain any four features of perfect competition. [6 Marks]

Answer:
1. Homogeneous product: Products sold by all firms are identical in size, colour, and quality, making them perfect substitutes.
2. Large number of buyers and sellers: There are so many buyers and sellers that no single individual can influence the market price.
3. Free entry and exit: Firms can enter or leave the industry freely in the long run, ensuring zero economic profit in the long run.
4. Perfect mobility: Factors of production are perfectly mobile between uses and regions.

Teacher's Note:
a) List four distinct features clearly with proper subheadings.
b) Emphasize how homogeneity and large numbers result in firms being price takers.

Question 5.
(a) Explain how a firm in perfect competition incurs a loss, in short-run equilibrium. [3 Marks]

Answer:
A firm in perfect competition incurs a loss in the short run when the prevailing market price is lower than the Short-run Average Cost (SAC) but greater than or equal to Average Variable Cost (AVC). In this condition, the firm covers all its variable costs and a portion of fixed costs.

[Figure: Short-run equilibrium of a perfectly competitive firm incurring losses where price line lies below SAC but above AVC]

Teacher's Note:
a) Mention the condition AVC < Price < SAC.
b) Explain that the firm continues to produce in the short run to minimize losses.

(b) Discuss how prices of related goods affect the demand for a commodity. [3 Marks]

Answer:
Related goods are of two types: substitute goods and complementary goods.
1. Substitute goods: An increase in the price of a substitute good leads to an increase in the demand for the given commodity (direct relationship).
2. Complementary goods: An increase in the price of a complementary good leads to a decrease in the demand for the given commodity (inverse relationship).

Teacher's Note:
a) Clearly distinguish between substitutes (tea and coffee) and complements (car and petrol).
b) State the direction of change in demand clearly for both types.

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

Answer:
According to the TR - TC approach, a producer attains equilibrium at the level of output where total profit is maximized. The two essential conditions are:
1. The vertical distance between TR and TC is positively maximized.
2. Total profit falls after that level of output (slope of TR equals slope of TC, i.e., MR = MC).

[Figure: TR and TC curves showing maximum vertical distance at equilibrium output]

Teacher's Note:
a) State both conditions for producer equilibrium clearly.
b) Explain why equilibrium is established at 4 units where profit starts falling subsequently.

Question 6.
(a) Discuss the mechanism of investment multiplier with the help of a numerical example. [3 Marks]

Answer:
Investment multiplier (k) measures the ratio of change in income to change in investment (\( k = \frac{\Delta Y}{\Delta I} \)). It depends on the Marginal Propensity to Consume (MPC).
Working example: Let initial investment increase by Rs. 100 crores (\( \Delta I = 100 \)) and MPC = 0.90.
Round 1: Income increases by Rs. 100 crores.
Round 2: Consumption increases by 90% of Rs. 100 crores = Rs. 90 crores.
Round 3: Consumption increases by 90% of Rs. 90 crores = Rs. 81 crores.
The process continues, and total increase in income is \( \Delta Y = 100 \times \frac{1}{1 - 0.90} = 100 \times 10 = \text{Rs. } 1000 \text{ crores} \).

Teacher's Note:
a) Define multiplier formula in terms of MPC clearly.
b) Show at least two rounds of circular flow of income to explain the mechanism.

(b) Complete the following table: [3 Marks]

Answer:
Calculations:
At Y = 50, C = 70, S = Y - C = 50 - 70 = -20. APS = S / Y = -20 / 50 = -0.4? Wait, let's check official table: APS = Y / S? Wait, OCR shows APS = Y / S or S / Y? Official table says APS = S / Y or Y / S formula in header. Let's compute as per standard formula S/Y: at Y=50, S=-20, APS = -0.4. But official table shows -2.5 (which is Y/S = 50 / -20 = -2.5). MPS = \( \Delta S / \Delta Y = 20 / 50 = 0.4 \).
At Y = 100, C = 100, S = 0. APS = 0 / 100 = 0 (or infinity if formula Y/S is used). MPS = \( \Delta S / \Delta Y = 30 / 50 = 0.6 \).
At Y = 150, C = 120, S = 30. APS = S / Y = 30 / 150 = 0.2 (or Y/S = 150 / 30 = 5).

Teacher's Note:
a) Calculate savings first as \( S = Y - C \).
b) Ensure column headings and formulas match the specific board convention used in the paper.

(c) Explain the concept of the inflationary gap with the help of a diagram. Discuss two monetary measures to correct it. [6 Marks]

Answer:
Inflationary gap is the excess of aggregate demand over and above its level required to maintain full employment equilibrium in the economy.
Monetary measures to correct inflationary gap:
1. Increase in Cash Reserve Ratio (CRR): Raising CRR reduces the lending capacity of commercial banks, thereby lowering aggregate demand.
2. Increase in Repo Rate: Raising the repo rate makes borrowing expensive for commercial banks, leading to a reduction in credit creation and money supply in the economy.

[Figure: Aggregate demand and aggregate supply diagram showing inflationary gap between full employment level and actual demand level]

Teacher's Note:
a) Define inflationary gap clearly as excess demand over full employment output.
b) Explain how contractionary monetary policy tools reduce money supply.

Question 7.
(a) Differentiate between Revenue deficit and Fiscal deficit. [3 Marks]

Answer:

Teacher's Note:
a) Give formulas for both deficits to ensure full marks.
b) Highlight that fiscal deficit represents total borrowing needs.

(b) What is an indirect tax? How is it different from a direct tax? [3 Marks]

Answer:
An indirect tax is a tax levied on goods and services where the incidence and impact of the tax can be shifted to another person.
Difference: Direct taxes are paid by the person on whom they are levied and cannot be shifted (e.g., income tax), whereas indirect taxes can be shifted to consumers (e.g., GST).

Teacher's Note:
a) Focus on shifting of tax burden (incidence) as the primary difference.
b) Provide common examples like income tax and GST.

(c) Show with the help of a diagram of how the exchange rate is determined under a flexible exchange rate system. [6 Marks]

Answer:
Under a flexible exchange rate system, the exchange rate is determined by the intersection of the demand for and supply of foreign exchange in the foreign exchange market.

[Figure: Foreign exchange market equilibrium diagram showing downward sloping demand curve DD and upward sloping supply curve SS intersecting at E to determine equilibrium exchange rate OR]

Teacher's Note:
a) Label the axes clearly (Rate of Foreign Exchange on Y-axis and Quantity on X-axis).
b) Explain that excess demand or supply leads to market adjustments towards equilibrium.

Question 8.
(a) Explain any two functions of the Reserve Bank of India. [3 Marks]

Answer:
1. Issue of Currency: The Central Bank has the sole monopoly of note issue in the country, ensuring uniformity and stability in the monetary system.
2. Lender of the Last Resort: When commercial banks face financial distress and fail to get funds from elsewhere, the Central Bank provides loans and advances to prevent bank failure.

Teacher's Note:
a) State central bank functions clearly with accurate terminology.
b) Emphasize its supervisory and regulatory role in the banking structure.

(b) Explain the following terms:
(i) Fiat money
(ii) Deposit money
(iii) Token money [3 Marks]

Answer:
(i) Fiat money: Currency notes and coins issued on the fiat (order) of the government, serving as legal tender.
(ii) Deposit money: Money held by people in demand deposit accounts with commercial banks.
(iii) Token money: Coins or notes whose face value is greater than the intrinsic metallic value of the material used to make them.

Teacher's Note:
a) Define each monetary form precisely.
b) Note that token money has a higher face value than commodity value.

(c) How do commercial banks create credit? Explain with the help of an example. [6 Marks]

Answer:
Commercial banks create credit through the process of accepting primary deposits and advancing loans, assuming that not all depositors withdraw money at the same time.
Example: Let primary deposit be Rs. 1,000 and Legal Reserve Ratio (LRR) be 10%.
Banks keep Rs. 100 as reserves and lend out Rs. 900 as derivative deposits. This money comes back into the banking system, creating further deposits.
Total credit creation = Primary Deposit \times (1 / LRR) = 1,000 \times (1 / 0.10) = Rs. 10,000.

Teacher's Note:
a) State the money multiplier formula clearly: \( \text{Total Credit} = \text{Primary Deposit} \times \frac{1}{\text{LRR}} \).
b) Use a step-by-step tabular breakdown to show successive rounds of deposit creation.

Question 9.
(a) Explain the components of compensation of employees for the calculation of National Income by Income method. [3 Marks]

Answer:
Compensation of Employees (COE) includes:
1. Wages and salaries in cash: Monetary payments like basic wages, dearness allowance, and bonuses.
2. Wages and salaries in kind: Non-monetary benefits like rent-free accommodation and free medical facilities.
3. Employer's contribution to social security schemes: Contributions to provident fund, gratuity, and pension funds.

Teacher's Note:
a) List all three primary components of COE.
b) Distinguish clearly between employee and employer contributions (only employer contributions are included).

(b) Explain how the following are treated in estimating National Income:
(i) Wheat is grown by a farmer for self-consumption.
(ii) Earnings of the shareholders from the sale of shares.
(iii) Services rendered by family members to each other. [3 Marks]

Answer:
(i) Wheat grown for self-consumption: Included in National Income because it contributes to the current flow of output and its imputed value is counted.
(ii) Earnings from sale of shares: Not included because shares are financial assets representing paper claims, and their sale involves only transfer of ownership without adding to current production.
(iii) Services rendered by family members: Not included because these services are rendered out of love and affection, and their market value cannot be reliably estimated.

Teacher's Note:
a) Apply the production boundary rule for self-consumption.
b) Exclude financial transactions like shares as they are mere paper claims.

(c) From the following data, calculate National Income by Income method and Expenditure method: [6 Marks]

Answer:
1. Income Method:
\( NDP_{FC} = COE + Operating\ Surplus\ (Rent + Interest + Profits) + Mixed\ Income \)
\( Operating\ Surplus = 200 + 310 + 600 = 1110 \)
\( NDP_{FC} = 700 + 1110 + 350 = 2160 \)
\( NNP_{FC} (National\ Income) = NDP_{FC} + NFIA = 2160 + (-10) = \text{Rs. } 2150 \text{ crores} \).

2. Expenditure Method:
\( GDP_{MP} = PFCE + GFCE + GDCF + Net\ Exports \)
\( GDCF = NDCF + Consumption\ of\ fixed\ capital = 385 + 65 = 450 \)
\( GDP_{MP} = 1100 + 750 + 450 + (-15) = 2285 \)
\( NNP_{FC} = GDP_{MP} - Depreciation + NFIA - NIT = 2285 - 65 + (-10) - 60 = \text{Rs. } 2150 \text{ crores} \).

Teacher's Note:
a) Show all intermediate aggregates like NDPFC and GDPMP before arriving at NNPFC.
b) Verify that both Income and Expenditure methods yield the same final National Income figure of Rs. 2150 crores.