# Economics (318) - April' 2016 | NIOS SENIOR SECONDARY Solved Papers

## ECONOMICS (April’ 2016)(318)NIOS SENIOR SECONDARY Solved PapersTime: 3 HoursMaximum Marks: 100

1. The coefficient of correlation ranges between

(a) 0 and 1 (b) -1 and +1

(c) minus infinity and plus infinity (d) 1 and 100

2. Total expenditure on a commodity rises, when its price. Demanded for the commodity will be:

(a) unit elastic (b) More than unit elastic

(c) Less than unit elastic (d) Perfectly elastic

3. Total fixed cost is Rs. 100 and Total variable cost of producing 10 units of a commodity is Rs. 200. Average Total cost of producing 10 units will be:

(a) 10 (b) 20 (c) 30 (d) 200

4. Marginal cost equals Average Total cost when Average Total cost is :

(a) Minimum (b) Maximum

(c) Falling (d) Rising

5. By deducting intermediate consumption expenditure and net indirect taxes from value of output , we set:

(a) Net Value added at factor cost

(b) Net value added at market price

(c) Gross value added at factor cost

(d) Gross value added at market price

6. The expenditure in goods and services purchased for resale by production unit is:

(a) Intermediate cost (b) value of final product

(c) value of output (d) Factor cost

7. Domestic income will be more than national income when net factor income from abroad is:

(a) Positive (b) Zero

(c) Negative (d) More than domestic income

8. At equilibrium level of national income:

(a) Aggregate demand > Value of total output

(b) Aggregate demand < Value of total output

(c) Investment >Savings

(d) Aggregate demand = value of total output

9.  Which one of the following is a measure to correct excess demand in the economy?

(a) Increase in rate of taxes

(b) Buying of government securities by central bank from commercial banks.

(c) Decrease in variable reserve ratio

(d) Increase in Bank rate.

10. In an economy, level of income in Rs. 10,000 crores and at this level of income,, consumption expenditure is Rs. 7,000 crores. Value of APS is:

(a) 0.7 (b) 0.3 (c) 1.4 (d) None of the above

11. Find the Spearman’s coefficient of correlation form the following data:

X:- 50,55,60,65,70,62,58,66,51,57

Y:- 13,15,16,18,20,14,17,19,21,22 3

Solution:-

 X Y R1 R2 d2=(R1-R2)2 50556065706258665157 13151618201417192122 10853146297 10875396421 0044425044936 d2=126

r=1-6d2N3-N

r=1-6×126103-10

r=1-756990

=-0.24

12. State any three differences between Micro-economics and Macro-economics. 3

Ans.:- The following are the differences between Micro-economics and Macro-economics

 Basis Microeconomics Macroeconomics Meaning The branch of economics that studies the behaviour of an individual consumer, firm, family is known as Microeconomics. The branch of economics that studies the behaviour of the whole economy, (both national and international is known as Macroeconomics. Assumption It assumes that all macro-economic variables are constant. It assumes that all micro-economic variables are constant. Business Application Applied to operational or internal issues Environment and external issues.

13. How is the price elasticity of demand of a commodity affected by availability of its close substitution? Explain. 3

Ans.:- Price elasticity of demand of a commodity affected by availability of its close substitution – Demand for a commodity with large number of substitutes will be more elastic. The reason is that even a small rise in its prices will induce the buyers to go for its substitutes. For example, a rise in the price of Pepsi encourages buyers to buy Coke and vice-versa.

Thus, availability of close substitutes makes the demand sensitive to change in the prices. On the other hand, commodities with few or no substitutes like wheat and salt have less price elasticity of demand.

14. How is the supply of a commodity affected by the change in price of other related goods? Explain. 3

Ans.:- As resources have alternative uses, the quantity supplied of a commodity depends not only on its price, but also on the prices of other commodities. Increase in the prices of other goods makes them more profitable in comparison to the given commodity. As a result, the firm shifts its limited resources from production of the given commodity to production of other goods. For example, increase in the price of other good (say, wheat) will induce the farmer to use land for cultivation  of wheat in place of the given commodity (say rice).

15. Market price of a commodity is higher than the equilibrium price. Explain the chain of effects till the market reaches equilibrium.         3

Ans.:- If the price of above the equilibrium price, there will be excess supply for the product since the quantity supplied exceed quantity demanded, meaning producers are willing to sell more than consumers are willing to buy. This mismatch between demand and supply will cause the price to decrease. Firms will decrease the price they change for their limited demand and consumers will pay the lower price to get one of the many available. This happens till the market reaches equilibrium.

16.From the data given below, calculate Gross Value added at factor cost:

(in thousand)

(i) Decrease in stock 30

(ii) Sales 400

(iii) Consumption of fixed capital 20

(iv) Intermediate Consumption expenditure 150

(v) Indirect taxes 30

(vi) Subsidies 10 3

17. What are the transfer income? How are they treated in the estimation of National income? Give one example of such incomes. 3

Ans.:- A transfer income are basically non-exhaustive meaning they actually do not contribute to any capacity building or capital formation. Rather these are governments spending on providing benefits to various vulnerable sections of the society i.e., subsidies, providing income to unemployed people, interest subvention etc.

The transferred payments or incomes do not cause any production of goods and service in the economy therefore, the transfer payments or incomes are not included in the estimation of national income.

Examples of transfer income include welfare, financial aid, social security, and government making subsidies for certain businesses (firms)

18. In an economy,. Investment increases by Rs 400 crores and MPC in 0.8. Calculate total increase in income in the economy. 3

19. How do the Commercial banks create credit? Explain with the help of a numerical example. 3

Ans.:- There are two ways in which a bank creates credit:-

1. By advancing loans on the cash credit bases or by an overdraft arrangement;

2. By purchasing securities and paying for them with its own cheques.

Let us see the actual process. Suppose a customer deposits Rs 1,000 in a bank. The bank has to pay him interest ; therefore the bank must seek a safe and profitable investment for this amount. That is, it must lend it to somebody in order to earn interest. But this amount is not actually paid out to the borrowers; it is retained by the bank to meet its obligations, i.e./ to pay to those of its depositors who need cash, and draw cheques for the purpose.

Suppose the bank in which a depositor has deposited Rs. 1000 keeps 20 per cent-cash reserve to meet the demand of depositors. This means that, as soon as the bank has received a deposit of Rs. 1,000, it will make up its mind to advance loans up to the amount of Rs. 5,000 (only one-fifth reserve is kept). When, therefore, a businessman comes to the bank with a request for a loan of Rs. 5,000, he may be sure of being granted accommodation to this extent, provided, or course, his credit is good

20. Distinguish between Revenue Receipts and Capital Receipts in a government budget. Give one example of each. 3

Ans.:- The following are the differences between Revenue receipts and capital receipts in a government budget:-

 Basis Capital Receipts Revenue Receipts Meaning Capital Receipts are the income generated from investment and financing activities of the business. Revenue Receipts are the income generated from the operating activities of the business. Shown in Balance Sheet. Income statement. Nature Non-Recurring Recurring

Example of capital receipts:- a sale of fixed assets.

Example of Revenue receipts:- interest received.

21. State the steps involved in calculating of standard deviation in continuous series by assumed mean method. 4

Ans.:- Steps involved in the calculation of Standard Deviation:-

1. Find out the mid-values of carious class-groups.

2. Then take deviations from assumed mean and denote these deviations by d.

3. If the class-intervals are equal, take a common factor and divide these deviations (as in step (ii)) and denote them by d.

4. Multiply these deviations by their respective frequencies and obtain the total as ∑d'.

5. Square the deviations and multiply them by their frequencies and obtain ∑d'2.

6. In the end, substitute these values in the following formula:

22. State the Central problem ‘what to produce’ with the help of an example. 4

Ans.:- An economy has millions of commodities to produce. It has to decide which goods and service to be produced and that should be in sufficient quantity, as all the goods cannot be produced due to scarcity of resources, e.g. an economy has to decide whether to produce luxury goods or inferior goods, capital goods or consumer goods.

This problem has two dimensions:

1. Types of goods to be produced.

2. Quantity of goods to be produced.

23. Explain any two reasons responsible for the operation of law of demand. 4

Ans.:- Causes of operation of Law of Demand:-

1. Law of Diminishing Marginal Utility:- The operation of law of demand can be explained on the basis of the law of diminishing marginal utility. The law states that as more of a commodity is purchased, its marginal utility to the consumer will be less and less. Therefore the consumer while purchasing the commodity values less and less the additional units of the commodity. So he will purchase more only if price falls.

2. Income Effect:- When price of a good falls, real income of the consumer rises. If the consumer has \$5. Then he can purchase 3 units of apple. If price falls to \$3 then to purchase same 3 units, the consumer will spend \$ 3x3 = \$9. This leaves a surplus of \$6 with the consumer. Thus a fall in price has the same effect of increase in money income and hence is known as the income effect of a price reduction.

24. If the price of a commodity rises by 20% and as a result its quantity supplied increases from 100 units to 125 units. Calculate price elasticity of supply of the commodity. 4

Solution:-

Given, Price of a commodity rises by 20% and quantity supplied increases from 100 units to 125 units

Therefore % change in quantity supplied = 25/100 X 100

= 25%

Price elasticity of supply = %change in quantity

% change in price

= 25/20

= 1.25

25. What is meant by ‘Monopolistic Competition’? Describe any tree main characteristics of monopolistic competition. 4

Ans.:- ‘Monopolistic Competition’- Under, the Monopolistic Competition, there are a large number of firms that produce differentiated products which are close substitutes for each other. In other words, large sellers selling the products that are similar, but not identical and compete with each other on other factors besides price.

Three main characteristics of Monopolistic Competition are:-

1. Large number of sellers:- In a market with monopolistic competition, there are a large number of sellers who have a small share of the market.

2. Product differentiation:- In monopolistic competition, all brands try to create product differentiation to add an element of monopoly over the completion products. This ensures that the product offered by the brand does not have a perfect substitute.

3. Freedom of entry or exit:- Like in perfect competition, firms can enter and exit the market freely.

26. What is Marginal Propensity to consume (MPC)? How is it related to Marginal Propensity to save (MPS)? 4

Ans.:- Marginal Propensity to consume (MPC):-  The marginal propensity to consume (MPC) is the proportion of an aggregate raise in pay that a consumer spends on the consumption of goods and services, as opposed to saving it.

The marginal propensity to save and the marginal propensity to consume are both measurements relative to the amount of expendable income in the budget of individuals and businesses alike. The measurement is also relative to a population as a whole and measuring against a population set reveals important data about consumer spending and savings that is valuable for industry and government data.

27. The following data provide the information about weekly wages of 100 workers in a firm. Calculate arithmetic mean by using step deviation method.

Wages (Rs.):- 300-400, 400-500, 500-600, 600-700, 700-800, 800-900

No. Of workers:-   10, 10, 30, 15, 15, 20 6

Solution:-

 Wages No. of workers(f) Mid-value(m) d=M-AA=550 d’=d/ii=100 fd’ 300-400400-500500-600600-700700-800800-900 101030151520 350450550650750850 -200-1000100200300 -2-10123 -20-100153060

⅀ f= 100 fd'=75

Mean = A + fd'   X i

f

= 550 + 75   X 100

100

= 550+75

= 625

28. What is Index number? What are the issues to be kept in mind in the construction of index numbers? 6

Ans.:- Index number are the tools for measuring changes in the magnitude o a group of related variables over time with respect to vase year.

The following are the issues to be kept in mind in the construction of index numbers:-

1. Difficulties in the Selection of the Base Period.

2. Difficulties in the selection of Commodities.

3.  Difficulties in the Collection of Prices.

4. Arbitrary Assigning of Weights.

5. Difficulty of Selecting the Method of Averaging.

6. Difficulties Arising from Changes Overtime.

7. Not All Purpose.

8. International Comparisons not Possible.

9. Comparisons of Different Places not Possible.

10. Not Applicable to an Individual.

29. Explain any three properties of indifference curves. 6

Ans.:- Three properties of indifference curves are as follows:-

1. Indifference Curves are Downward Sloping:-  Virtually all indifference curves have a negative slope. That is, they slope downward from left to right. The slope of an indifference curve shows the rate of substitution between two goods, i.e. the rate at which an individual is willing to give up some quantity of good A to get more of good B. If we assume that the individual likes both goods, the quantity of good B has to increase as the quantity of good  A decreases, to keep the overall level of satisfaction the same. Because both axes each represent one of the two goods, this relationship results in a downward sloping curve.

2. Higher Indifference Curves Are Preferred to Lower Ones:- Consumers will always prefer a higher indifference curve to a lower one. This is due to the basic economic assumption that “more is always better”. Just think about it, if someone were to ask you if you wanted a free slice of pizza or an entire pizza for free, what would you say? Who says no to free pizza, right? Now, of course it’s not always that simple, but in basic economic theory we can assume that consumers have a preference for larger quantities.

3. Indifference Curve Cannot Intersect:- It is impossible for two indifference curves to cross. To understand why this is the case, we can look at what would happen if they did intersect. As we know, all combinations of good A and good B that lie on the same indifference curve make the consumer equally happy. Therefore, if two indifference curves were to cross, they would both have to provide the consumer with the same level of satisfaction, because the exact point where they intersect (i.e. point A) is on both curves.

30. Explain the relationship between Total Product, Average Product and Marginal Product. 6

Ans.:- Total Product

In simple terms, we can define Total Product as the total volume or amount of final output produced by a firm using given inputs in a given period of time.

Marginal Product

The additional output produced as result of employment an additional unit of the variable factor input is called the Marginal Product. Thus, we can say that marginal product is the addition to Total Product when an extra factor input is used.

Marginal Product = change in output / change in input

Average Product

It is defined as the output per unit of factor inputs or the average of the total product per unit of input and can be calculated by dividing the Total Product by the inputs (variable factors).

Average Product = Total Product / units of Variable Factor Input

Relationship between Marginal Product and Total Product

1. When the Marginal Product (MP) increases, the Total Product is also increasing at an increasing rate. This gives the Total Product curve a convex shape in the beginning as variable factor inputs increase. This continues to the point where the MP curve reaches its maximum.

2.  When the MP declines but remains positive, the Total Product is increasing but at a decreasing rate. This givens the Total product curve a concave shape after the point of inflexion. This continues until the Total product curve reaches its maximum.

Relationship between Average Product and Marginal Product

1. When Average Product is rising, Marginal Product lies above Average Product.

2. When Average Product is declining, Marginal Product lies below Average Product.

3. At the maximum of Average Product, Marginal and Average Product equal each other.

31. From the data given below, calculate (a) National income and (b) Gross National Disposable income.

Rs. (in crores)

1. Net indirect taxes 100

2. Wages and salaries 700

3. Employer’s contribution to social schemes   10

4. Consumption of fixed capital 150

5. Rent 70

6. Mixed income of self employed 500

7. Net factor income from abroad (-) 20

8. Interest 120

9. Profit 300

10. Net current transfers from rest of the world 30. 6

32. What is money? Describe the ‘Store of Value’ and ‘Standard of Deferred Payment function of money. 6

Ans.:- According to the Bank of England, in modern economy, money is a type of IOU, but one that is special because everyone in the economy trusts that it will be accepted by other people in exchange for goods and services.

Functions of Money as:-

1. ‘Store of value’:- This can refer to any asset whole “value” can be used now or used in the future i.e. its value can be retrieved at a later date. This means that people can save now to fund spending at a later date.

2. Standard of deferred payment:- This refers to the expressing of the value of a debt i.e. if people borrow today, then they can pay back their loan in the future in a way that is acceptable to the person who made the loan.

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