ISC Class 12 Economics Board Exam Question Paper 2019 with Solutions

ISC Class 12 Economics Board Exam Question Paper 2019 with Solutions

PART - I (20 Marks)
Answer all questions.

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

(i) What is meant by product differentiation in monopolistic competition? [2 Marks]

Answer:
Product differentiation refers to the practice of distinguishing a product or service from others to make it more attractive to a particular target market. In monopolistic competition, products of different firms are similar in nature but differentiated in terms of brand name, shape, size, colour, packaging, etc. This creates a perception of product uniqueness in the minds of consumers and gives producers some degree of price control.

Teacher's Note:
a) Emphasize that differentiated products are close substitutes for one another, not perfect substitutes.
b) Mention that branding and non-price competition are key outcomes of product differentiation.

(ii) Explain an indifference map, with the help of a diagram. [2 Marks]

Answer:
An indifference map is a set or family of indifference curves that represents different levels of satisfaction to a consumer. Higher indifference curves represent higher levels of utility, and lower indifference curves represent lower levels of utility.

[Figure: Graph with Goods X on X-axis and Goods Y on Y-axis showing three downward sloping, non-intersecting indifference curves labelled A, B, and C from lowest to highest from origin]

Teacher's Note:
a) State clearly that indifference curves in an indifference map never intersect each other.
b) Highlight that a higher indifference curve placed further away from the origin indicates higher consumption and higher utility.

(iii) Give two examples of each of the following: [2 Marks]
(a) Revenue receipts of the government.
(b) Revenue expenditure of the government.

Answer:
(a) Revenue receipts: Taxes (such as income tax and GST) and interest receipts on loans given by the government.
(b) Revenue expenditure: Interest payments on government borrowings and expenditure on subsidies and defense salaries.

Teacher's Note:
a) Ensure students remember the fundamental definition that revenue receipts neither create liabilities nor reduce assets.
b) Remind students that revenue expenditures do not create physical or financial assets for the government.

(iv) With the help of a diagram, state the behaviour of MP when: [2 Marks]
(a) TP of the variable factor reaches a maximum.
(b) TP of the variable factor falls.

Answer:
(a) When Total Product (TP) reaches its maximum point, Marginal Product (MP) becomes zero.
(b) When Total Product (TP) falls, Marginal Product (MP) becomes negative.

[Figure: Two aligned panels showing Total Product curve reaching maximum when MP touches zero on X-axis, and TP falling while MP drops below the X-axis into the negative region]

Teacher's Note:
a) Connect the relationship clearly using calculus concepts where MP is the first derivative of TP.
b) Point out that students must correctly label axes (Input Unit on X-axis, Total/Marginal Product on Y-axis) in their diagrams.

(v) What is meant by High Powered Money? [2 Marks]

Answer:
High-powered money (also known as monetary base or reserve money) refers to the total monetary liability of the monetary authority of the country (RBI and Central Government). It consists of currency (notes and coins in circulation with the public and cash reserves of commercial banks) and deposits held by the government and commercial banks with the RBI. It is expressed as: H = C + R + OD.

Teacher's Note:
a) Clarify that high-powered money forms the base upon which the commercial banking system creates total money supply through the money multiplier.
b) Ensure all three components (Currency, Reserves, and Other Deposits) are mentioned for full credit.

(vi) Distinguish between depreciation and devaluation. [2 Marks]

Answer:

Teacher's Note:
a) Highlight that depreciation is market-driven, whereas devaluation is a deliberate policy action by monetary authorities/government.
b) Check that students use proper comparative tabular formatting.

(vii) Explain any two precautions to be taken while calculating national income by income method. [2 Marks]

Answer:
1. Transfer incomes (such as scholarships, old-age pensions, and unemployment allowances) must not be included because they are received without any corresponding productive service being rendered.
2. Income from the sale and purchase of second-hand goods should be excluded from national income calculations as their original value has already been counted in the year of their production. However, any brokerage or commission earned on their resale is included.

Teacher's Note:
a) Emphasize that transfer payments do not add to the current flow of goods and services.
b) Remind students to mention capital gains (like capital gains from sale of shares/property) as another common exclusion if applicable.

(viii) Differentiate between accounting cost and opportunity cost. [2 Marks]

Answer:

Teacher's Note:
a) Clarify that accounting costs are essential for profit and loss statements, while opportunity costs are critical for economic decision-making.
b) Ensure clear distinction between explicit and implicit outlays.

(ix) With the help of diagrams, show when the elasticity of supply is: [2 Marks]
(a) greater than one
(b) equal to one

Answer:
(a) Supply is greater than one (Es greater than 1) when the percentage change in quantity supplied is greater than the percentage change in price. The supply curve originates from the Y-axis.
(b) Supply is equal to one (Es = 1) when the percentage change in quantity supplied is equal to the percentage change in price. The supply curve passes through the origin.

[Figure: Two supply diagrams showing a flatter upward sloping curve intersecting Y-axis for Es greater than 1, and a straight-line supply curve passing through origin for Es = 1]

Teacher's Note:
a) Remind students to properly indicate percentage changes in price and quantity on the axes.
b) Check that the geometric intercept property of supply curves is accurately represented.

(x) What is meant by investment multiplier? [2 Marks]

Answer:
Investment multiplier (k) is the ratio of change in total income ($\Delta Y$) to the change in investment ($\Delta I$). It measures the multiple by which total income increases due to an initial increase in investment expenditure. It is expressed as: $k = \Delta Y / \Delta I$ or $k = 1 / (1 - MPC)$ or $k = 1 / MPS$.

Teacher's Note:
a) Explain that the multiplier operates because one person's expenditure becomes another person's income.
b) Mention the direct relationship between Marginal Propensity to Consume (MPC) and the multiplier value.

SECTION B (60 Marks)
Answer any five questions.

Question 2.
(a) How does an increase in income affect the demand for the following: [3 Marks]
(i) A normal good
(ii) An inferior good
(b) Discuss any three reasons for the leftward shift of a supply curve. [3 Marks]
(c) Explain how a consumer attains equilibrium using indifference curve analysis. [6 Marks]

Answer:
(a) (i) Normal good: There is a direct positive relationship between consumer income and demand for a normal good. An increase in income causes the demand curve to shift rightward, meaning consumers buy more at the same price.
(ii) Inferior good: There is an inverse relationship between consumer income and demand for an inferior good. An increase in income causes the demand curve to shift leftward, meaning consumers buy less at the same price.

(b) Three reasons for a leftward shift of a supply curve are:
1. Increase in input prices: Higher prices of factors of production (labour, raw materials) raise production costs, reducing supply.
2. Technological obsolescence: Use of outdated technology reduces productivity and increases production cost, shifting supply to the left.
3. Increase in the price of related goods in production: If producing an alternative good becomes more profitable, producers shift resources, lowering the supply of the current good.

(c) Consumer equilibrium using indifference curve analysis occurs when the consumer maximizes satisfaction given their budget constraint. It requires two conditions:
1. Necessary Condition (First Order): Marginal Rate of Substitution of X for Y must be equal to the price ratio of the two goods ($MRS_{xy} = P_x / P_y$).
2. Sufficient Condition (Second Order): The indifference curve must be strictly convex to the origin at the point of equilibrium (i.e., MRS must be diminishing).

[Figure: Indifference map with budget line tangent to indifference curve IC2 at point E, showing consumer equilibrium where slope of indifference curve equals price line slope]

Teacher's Note:
a) Verify that students explain what happens when MRS is greater than or less than the price ratio.
b) Ensure diagrams for both demand shifts and consumer equilibrium are neatly drawn and correctly labelled.

Question 3.
(a) Discuss two differences between returns to scale and returns to a variable factor. [3 Marks]
(b) With the help of a diagram, explain the relationship between AR and MR of a firm under imperfect competition. [3 Marks]
(c) Discuss any four features of monopoly market. [6 Marks]

Answer:
(a) Two differences between returns to scale and returns to a variable factor:

(b) Under imperfect competition (monopoly or monopolistic competition), a firm can sell more output only by lowering its price. Consequently, both Average Revenue (AR) and Marginal Revenue (MR) slope downwards from left to right. The MR curve lies below the AR curve, meaning MR falls at twice the rate of AR.

[Figure: Downward sloping AR and MR curves from a common Y-intercept, where MR lies strictly below AR and can become zero or negative]

(c) Four features of a monopoly market are:
1. Single seller and large number of buyers: There is only one firm producing the commodity, implying the firm is the industry itself, facing a multitude of buyers.
2. Barriers to entry: There are stringent legal, natural, or economic barriers preventing the entry of new firms.
3. No close substitutes: The product sold by the monopolist has no close substitutes, giving it high market power.
4. Price maker: Because of absolute control over total supply, the monopolist sets its own price.

Teacher's Note:
a) For part (b), students must state the mathematical relationship that MR is the slope of Total Revenue and lies halfway between the Y-axis and the AR curve on the X-axis.
b) Check that features of monopoly cover both demand-side and supply-side structural characteristics.

Question 4.
(a) Explain the various degrees of price elasticity of demand at different points on a straight-line demand curve. [3 Marks]
(b) Show with the help of a diagram, how a perfectly competitive firm earns normal profit in short-run equilibrium. [3 Marks]
(c) Explain with the help of diagrams how equilibrium price changes when there is a simultaneous increase of both, demand and supply. [6 Marks]

Answer:
(a) The price elasticity of demand varies at different points along a straight-line demand curve, measured by the formula: $E_d = \text{Lower Segment} / \text{Upper Segment}$.
- Midpoint of the curve: $E_d = 1$ (unitary elastic).
- Above midpoint: $E_d$ is greater than 1 (elastic).
- Below midpoint: $E_d$ is less than 1 (inelastic).
- At Y-intercept (top point): $E_d = \infty$ (perfectly elastic).
- At X-intercept (bottom point): $E_d = 0$ (perfectly inelastic).

(b) A perfectly competitive firm earns normal profit in the short run when equilibrium price equals both Marginal Cost and Average Cost ($P = MR = MC = AC$).

[Figure: Perfectly competitive equilibrium showing horizontal AR=MR curve tangent to the minimum point of U-shaped AC curve where MC intersects from below]

(c) Simultaneous increase in demand and supply leads to three possible price outcomes depending on the relative magnitude of shifts:
1. When increase in demand is greater than increase in supply: Equilibrium price rises, and equilibrium quantity increases.
2. When increase in demand is equal to increase in supply: Equilibrium price remains constant, and equilibrium quantity increases.
3. When increase in demand is less than increase in supply: Equilibrium price falls, and equilibrium quantity increases.

[Figure: Three separate market equilibrium graphs showing shifts in demand (D to D') and supply (S to S') leading to higher, constant, or lower equilibrium prices]

Teacher's Note:
a) Ensure point-method formula is explicitly stated in part (a).
b) For simultaneous shifts, students must illustrate all three scenarios clearly to secure full marks.

Question 5.
(a) Discuss any two exceptions to the law of demand. [3 Marks]
(b) Study the cost function of a firm given below:
Output (Units): 0, 1, 2, 3
TC (Rs.): 30, 90, 110, 120
Calculate:
(i) AFC
(ii) AC
(iii) MC [3 Marks]
(c) A producer is in equilibrium when MR = MC. Explain this statement with the help of a diagram. [6 Marks]

Answer:
(a) Two exceptions to the law of demand are:
1. Giffen goods: Inferior goods for which an increase in price leads to an increase in quantity demanded due to a dominant negative income effect overriding the substitution effect.
2. Veblen goods (Status symbol goods): Luxury goods like diamonds where consumers buy more at higher prices to display wealth and social prestige.

(b) Calculations based on given data (TFC at output 0 = Rs. 30):

(c) A producer is in equilibrium when profit is maximized. This requires two conditions:
1. $MR = MC$
2. MC must be rising (or MC must intersect MR from below).

[Figure: Producer equilibrium showing U-shaped MC curve intersecting horizontal AR=MR line at two points, with profit maximized at the second intersection point where MC is rising]

Teacher's Note:
a) Verify step-by-step table computation: AFC = TFC / Output, AC = TC / Output, MC = Change in TC / Change in Output.
b) Emphasize that equality of MR and MC alone is not sufficient; the second-order condition (rising MC) is mandatory.

Question 6.
(a) Explain how public expenditure can be used as an instrument of fiscal policy to solve the problem of: [3 Marks]
(i) Income inequality
(ii) Inflation
(b) Differentiate between the revenue and capital components of the union budget. [3 Marks]
(c) Discuss briefly the various components of the balance of payment. [6 Marks]

Answer:
(a) (i) Income inequality: The government can increase public expenditure on welfare schemes, free healthcare, education, and subsidized food for low-income groups, thereby redistributing income and reducing the gap between rich and poor.
(ii) Inflation: To control inflation (excess demand), the government can curtail public expenditure on non-developmental and administrative works, which reduces aggregate demand in the economy.

(b) Difference between revenue and capital components of the budget:

(c) The components of the Balance of Payments (BOP) are:
1. Current Account: Records transactions relating to trade in goods (visible trade), trade in services (invisible trade), income receipts and payments, and unilateral transfers (gifts, grants).
2. Capital Account: Records all international transactions that cause a change in the assets or liabilities of residents or the government, including foreign direct investments (FDI), portfolio investments, and external borrowings.
3. Official Reserve Transactions: Handled by central banks to cover overall balance deficits or surpluses through official reserve asset movements.

Teacher's Note:
a) Ensure students distinguish clearly between fiscal policy measures (budgetary actions) and monetary policy.
b) Check that BOP components clearly categorize current transactions versus capital-asset alterations.

Question 7.
(a) Discuss any two limitations of credit creation by commercial banks. [3 Marks]
(b) Explain two secondary functions of money. [3 Marks]
(c) Discuss any two qualitative methods and any two quantitative methods of credit control used by the Central Bank. [6 Marks]

Answer:
(a) Two limitations of credit creation by commercial banks are:
1. Amount of Cash Reserves: The ability of banks to create credit depends directly on the cash reserves available with them; higher reserves expand credit, while tight reserves restrict it.
2. Credit and Business Conditions: During economic depressions or recessions, business confidence is low, and public demand for loans drops regardless of available bank reserves.

(b) Two secondary functions of money are:
1. Store of Value: Money allows individuals to store purchasing power over time securely without losing value rapidly, overcoming the perishability issue of barter goods.
2. Standard of Deferred Payments: Money serves as a standard unit for future payments, making borrowing and lending agreements straightforward and unambiguous.

(c) Credit control methods used by the Central Bank:
Qualitative Methods:
1. Margin Requirements: The difference between the current market value of security offered and the loan amount sanctioned. Raising margins restricts credit.
2. Credit Rationing: Fixing ceiling limits on loans for specific business sectors to curb speculative hoarding.
Quantitative Methods:
1. Open Market Operations (OMO): Buying and selling government securities in the open market to regulate liquidity.
2. Cash Reserve Ratio (CRR): The minimum percentage of total deposits that commercial banks must keep with the central bank.

Teacher's Note:
a) Ensure qualitative methods are distinguished as selective controls affecting specific sectors, while quantitative methods affect total money supply globally.
b) Check that secondary functions clearly solve specific inconveniences of the barter system.

Question 8.
(a) What is meant by an average propensity to consume? Explain its relationship with average propensity to save. [3 Marks]
(b) Discuss any two fiscal measures to correct a situation of deficient demand in an economy. [3 Marks]
(c) Explain how the equilibrium level of income can be determined with the help of saving and investment approach. [6 Marks]

Answer:
(a) Average Propensity to Consume (APC) is the ratio of total consumption expenditure to total income ($APC = C / Y$).
Relationship with APS: Since total income is either consumed or saved ($Y = C + S$), dividing by Y yields: $C/Y + S/Y = 1$, which means $APC + APS = 1$. Thus, the sum of APC and APS is always equal to 1.

(b) Fiscal measures to correct deficient demand:
1. Increase in Government Expenditure: Expanding public works, infrastructure projects, and subsidies injects purchasing power, boosting aggregate demand.
2. Reduction in Taxes: Lowering direct and indirect taxes increases disposable income, encouraging greater household consumption and business spending.

(c) Determination of equilibrium income using the Saving and Investment ($S = I$) approach:
Equilibrium income is achieved when planned savings equal planned investments ($S = I$).
- When $S$ is greater than $I$: Leakages exceed injections; output remains unsold, forcing producers to cut back production, which lowers national income until $S = I$.
- When $S$ is less than $I$: Injections exceed leakages; aggregate demand exceeds aggregate supply, encouraging producers to expand output, raising national income until $S = I$.

[Figure: Saving and Investment approach graph showing equilibrium point E where upward sloping saving curve S intersects horizontal autonomous investment curve I]

Teacher's Note:
a) Ensure mathematical derivation of $APC + APS = 1$ is explicitly shown.
b) For part (c), explain both equilibrium conditions and the adjustment mechanism when disequilibrium occurs.

Question 9.
(a) Draw a well-labelled diagram to show a circular flow of income in a two-sector model. What happens to the flow of income when savings equal investment? [3 Marks]
(b) What is meant by economic welfare? Explain how GDP is an indicator of economic welfare. [3 Marks]
(c) From the following data, calculate National Income by Output method and Income method: [6 Marks]
(i) Value of output = Rs. 2,500 crores
(ii) Value of intermediate consumption = Rs. 1,300 crores
(iii) Subsidies = Rs. 40 crores
(iv) Rent = Rs. 110 crores
(v) Employer's contribution to social security = Rs. 30 crores
(vi) Profit = Rs. 50 crores
(vii) Wages and salaries = Rs. 340 crores
(viii) Interest = Rs. 10 crores
(ix) Mixed income of self-employed = Rs. 360 crores
(x) Indirect tax = Rs. 180 crores
(xi) NFIA = (-) Rs. 30 crores
(xii) Consumption of fixed capital = Rs. 160 crores

Answer:
(a) The circular flow of income in a two-sector model involves households and firms. Households supply factor services to firms and receive factor payments, which they spend entirely on goods and services produced by firms.
When $S = I$, the circular flow of income continues steadily at a constant level without expansion or contraction.

[Figure: Two-sector circular flow diagram showing real and money flows between Households and Firms, with leakages (Savings) and injections (Investment)]

(b) Economic welfare refers to the overall well-being, prosperity, and standard of living of the population in an economy. GDP is an indicator of economic welfare because a higher GDP generally reflects higher availability of goods and services. However, it is not a perfect measure as it does not account for income distribution, environmental degradation, or non-market transactions.

(c) Calculations:
1. National Income by Output Method:
\( GVA_{MP} = \text{Value of Output} - \text{Intermediate Consumption} \)
\( GVA_{MP} = 2500 - 1300 = \text{Rs. } 1200 \text{ crores} \)
\( NNP_{FC} = GVA_{MP} - \text{Depreciation} - \text{Indirect Taxes} + \text{Subsidies} + \text{NFIA} \)
\( NNP_{FC} = 1200 - 160 - 180 + 40 + (-30) \)
\( NNP_{FC} = \text{Rs. } 870 \text{ crores} \)

2. National Income by Income Method:
\( NNP_{FC} = \text{Wages and Salaries} + \text{Employer contribution to social security} + \text{Rent} + \text{Interest} + \text{Profit} + \text{Mixed Income} + \text{NFIA} \)
\( NNP_{FC} = 340 + 30 + 110 + 10 + 50 + 360 + (-30) \)
\( NNP_{FC} = \text{Rs. } 870 \text{ crores} \)

Teacher's Note:
a) Verify that both methods yield the exact same national income total (Rs. 870 crores), confirming computational accuracy.
b) Ensure all formula steps (GVA to NNP and factor payments aggregation) are written out clearly.