Answer Key

2018-19
Class: 12 Worksheet Number: 12/Eco/01/AK
Subject: Economics Unit 1–Introduction to Economics

Section A
Each question carries 1 mark:
1. State two features of resources that give rise to an economic problem.
The two characteristics of economic resources which give rise to economic problem are:
• Resources are limited
• And, these resources have alternative uses

2. What is the meaning of the central problem ‘for whom to produce’?

The Economic Problem “for whom to produce” refers to the production of goods and services
for those who have the capacity to buy them. Thus, the problem ‘For whom to produce’ amounts
to the problem of distribution of income among income earners. This is because the capacity to
buy goods and services depends on income.

3. Why does the problem of choice arise?

Problem of choice arise due to scarcity of resources, resources have alternative uses and human
wants are unlimited.

4. Define marginal rate of transformation.

Marginal Rate of Transformation(MRT) can be defined as the ratio of number of units of a good
sacrificed to produce one more unit of the other good in a two good economy.

5. Define Microeconomics.
Microeconomics is a study of how individual economic units, firms, households and industries
make economic decisions, that is, choices.

6. What is an opportunity cost?

Opportunity cost is defined as the value of the benefit that is foregone by choosing an alternative
rather than the other.

7. Give examples of microeconomic studies.

The studies like relation between price and demand of a good, price and supply of a good, price
determination are all examples of microeconomic studies.

8. What is meant by economizing of resources?

Economizing resources means making optimum utilization of scarce resources in order to satisfy
human wants.

9. Why do we need to economize resources?

There is a need for economizing resources as the society doesn’t have enough resources,
resources have alternative uses and human wants are unlimited.

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10. What does movement along a PPC curve indicate?
A movement along PPC curve indicates a change in the combination of production of goods i.e.
to produce more units of one good we need to sacrifice the production of another (MRT). So
movement from left to right.

11. Give two reasons for an outward shift in a PPC curve.

The two reasons for outward shift of the PPC are:
• Increase in resources - In a two goods economy we can’t produce more of both goods with
limited resources. However, when resources increase, we can produce more of both the goods.
Thus, when the resources increase, PP curve shifts outwards.
• Improvement in technology –improvement in technology means that resources can be use
more efficiently now so the production of both goods increases. Thus, the PP curve shifts
outwards.

12. What does the slope of a PPB indicate?

The slope of the PPB (Production Possibility Boundary) is marginal rate of transformation
(MRT). MRT can be defined as the ratio of number of units of a good sacrificed to produce one
more units of the other good, in a two good economy.

13. Give two examples of the growth of resources.

The two examples of growth of resources are:
• Foreign direct investment and Foreign institutional Investment
• Improvement in technology

14. What do you understand by ‘How to produce’?

The problem of “How to produce” means that what technique should be employed in producing
goods and services. There are two techniques of production :
a. Labour intensive – uses more of labour than capital
b. Capital intensive- uses more of capital than labour.
15. Make a production possibility schedule where the PPF is a straight line.

Combinations Good X Good Y Rate of sacrifice /

(Units) (Units) MRT/ MOC
A 0 10 -
B 1 8 2Y:1X
C 2 6 2Y:1X
D 3 4 2Y:1X
E 4 2 2Y:1X
F 5 0 2Y:1X
16. Define Macroeconomics.
Macroeconomics is that part of economic theory which deals with the aggregate units of the
economy as a whole. for e.g. Aggregate demand, aggregate supply etc.
17. Which of the following countries will face the central problems?
a) India
b) China
c) Japan
d) All the above
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18. Value of a factor in its next best alternative use is:
a) Social cost
b) Opportunity cost
c) Marginal rate of substitution
d) PPC

19. PPC will shift to the left when

a) There is underutilization of resources
b) Growth of resources
c) Technological improvement
d) Loss of resources because of natural calamities
20. A teacher has a job offer from three schools. School ABC offers a salary of 40, 000 and
School PQR offers a salary of 45, 000 and school MNO offers a salary of 50, 000. What will
be the opportunity cost?
a) 40, 000
b) 45,000
c) Nil
d) 50, 000

21. State one example of positive economics.

 Higher Taxes on Cigarettes causes people to smoke less due to the increased price
 Demand falls when Price Rises
 Income Inequality exists in all countries

Each question carries 3 marks:

22. Why a PPC is concave to the origin?

The PP curve is concave because marginal rate of transformation, which is also its slope,
increases continuously as more and more of one good is produced by reducing the quantity of
the other good. It means that to produce more and more units of one good each time the quantity
of the other good is scarified at an increasing rate. MRT increases because no resource is equally
efficient in production of all goods.

23. How is PPC affected by unemployment in the country? Explain.

Unemployment should not be confused with loss of resources which causes the PPC to shift
inward. Unemployment in an economy means that there is inefficient utilization or under-
utilization of resources (labour). This causes the economy to operate at a point inside the
production possibility curve i.e. point A in the diagram which means that the resources are not
fully employed.

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B
Good Y A

O P X
Good X

24. Define PPC. Why is it downward sloping from left to right?

A PP curve or frontier is the locus of the various combinations of the two goods that can be
produced in a two goods economy with fixed resources, assuming full and efficient utilization of
these resources.
It is downward sloping from left to right because to produce more quantity of one good, the
society has to sacrifice quantity of the other good due to limited resources.

25. What is opportunity cost? Explain with the help of an example.

The opportunity cost of using a given resource is defined as the value of the next best use to
which that resource could be put.
Suppose an individual, who is in search of employment finds that he has 3 possible
opportunities. In one case, he is offered Rupees 10,000 per month; in another case, he’s offered
Rupees 8000 per month; and in another he is offered Rupees 6000 per month. Surely, if working
conditions in all 3 cases are same, he will avail Rupees 10000 a month job. The next best
alternative before him was Rupees 8000 a month job. He forgoes his alternative to avail Rupees
10,000. To him, this Rs. 8000 is the opportunity cost.

26. Identify the following as the subject matter of microeconomics or macroeconomics.

a) Price determination of a commodity – Microeconomics
b) Iron and Steel Industry – Microeconomics
c) General Price Level - Macroeconomics
d) Government Budget - Macroeconomics
e) Supply by a firm – Microeconomics
f) National Income – Macroeconomic

27. How are the economic problems solved in:

a) In a Centrally Planned Economy, all decisions regarding ‘what to produce’, ‘how to
produce’ and ‘for whom to produce’ are taken by the central authority appointed by the
Government. Decisions are taken with a view to maximizing social welfare and not profit
maximization.
What to produce -Those goods are produced which the central authority finds most useful
for the society or those goods and services which are demanded by masses.
How to produce-That technique of production is used which is socially desirable or useful.
For whom to produce – goods are produce for masses even when it does not yield profit.

b) In a Market Economy, all the economic problems are solved by the market forces of
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demand and supply. There is a mutually beneficial exchange between producers and
consumers and resources are allocated through the interaction of market forces.
What to produce – Producers produce those goods which are more in demand which leads to
high price and high price means high profit for the producer or those goods which are higly
demanded.
How to produce – Producers usesthat technique of production which keep the cost of
production very low.
For whom to produce- Producers produce for those who can afford to pay high price. Poorer
sections of the society are often ignored causing an economic divide.

28. ‘Massive unemployment shifts PPC to the left’. Defend or Refute. Give reason in support
of your answer.
I refute this statement. As unemployment is not same as loss of resources which causes the PPC
to shift left. Unemployment in an economy means that there is inefficient utilization or under-
utilization of resources (labour).
This causes the economy to operate at a point inside the production possibility curve which
means that the resources are not fully employed (economy not operating at its full potential).

29. State the assumptions on which PPC is based. Bring out the significance of the
assumption- ‘Resources are not equally efficient in the production of both goods.
Assumptions on which PPC is based on:
a) Amount of resources in an economy are fixed.
b) Technology is given and constant.
c) All resources are efficiently and fully employed.
d) No resource is equally efficient in producing all goods. This assumption is significant as
it helps determining the slope of PPC, which is concave in nature.

30. Giving reasons state whether the following statements are true or false:
a) True. Marginal opportunity cost is the cost incurred to no. of units of good sacrificed to
produce an additional unit of the other good.

b) True. When an economy operates under PPC it shows inefficient utilization of resources and
when an economy operates on PPC it shows full and efficient utilization of the resources.
Any point outside PPC is an unattainable combination.

c) False. If there are underutilizations of resources, an economy will always operate inside
PPC. With fuller utilization of resources on PPC.

31. What is likely to be the impact of “Make in India” appeal to the foreign investors, by
Prime Minister of India, on the production possibility frontier of India.
Make in India’ appeal to the foreign investors by the Prime Minister of India would lead to an
addition in new stock of resources (due to FDI and FII) and advancement in technology.
The productive capacity of the economy will increase and the economy can now produce more
quantity of both the goods. This would lead to an outward shift of PPC. Diagrammatically, PPC
will shift from PP to P1P1.

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P1
P
Good Y

O P P1 X
Good X

32. What is likely to be the impact of effort towards reducing unemployment on the
production potential of the economy? Explain.
Unemployment in an economy means that there is inefficient utilization or under-utilization of
resources (labour). With the increase in employment opportunities, production capacity of the
economy will increase i.e. output will increase from Actual to potential level. This causes the
economy to move from point A to B.

B
Good Y A

O P X
Good X

33. How does MOC determine the slope of PPC? Support your answer using schedule and a
diagram.
Marginal opportunity cost is the no. of units of good sacrificed to produce an additional unit of
the other good. The behavior of MOC determines the shape of the PPC. A typical PPC is
concave in shape which means to produce one more unit of a good we need to increasingly
sacrifice the production of another good.

Combinations Good X Good Y Rate of sacrifice

(Units) (Units) / MRT/ MOC
A 0 10 -
B 1 9 1Y:1X
C 2 7 2Y:1X
D 3 4 3Y:1X
E 4 0 4Y:1X

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34. Distinguish between a market economy and a centrally planned economy.

On the basis of Market economy Centrally planned

economy
Definition Market economy is a free Centrally planned
economy in which central economy is the one in
problems are solved by the which the central problems
market forces of demand and are addressed by some
supply. central authority of the
government.
Objective Profit is the principle objective Social welfare is the
of the production activity. principle objective of the
production activity
Role of government There is no direct intervention The government plays an
by the government. active role in the process
of production
Competition Competition exists No competition
35. Explain the central problem of ‘for whom to produce’.
For whom to produce is related to problem of distribution of income:
 Factoral distribution of income
 Inter personal distribution of income.
(with explanation as discussed in class)
36. Explain the central problem of ‘choice of technique’.
Choice of technique is related to choosing either: labour intensive technique or capital intensive
technique. (with explanation as discussed in class)
Each question carries 4 marks :
37. Explain the problem related to the allocation of resources. Briefly explain the following
situations:
Allocation of resources means fuller and efficient utilization of resources. This is a problem as
resources are limited, also with alternative uses where as human wants are unlimited.
a) Any point on the PPC - Any point on the PPC implies that the resources are fully and
efficiently employed.
b) Any point inside the PPC - Any point inside the PPC implies that the resources are not fully
used. There is inefficient and under-utilization of resources
c) Any inward shift of PPC - implies that there is a decrease in the no. of resources at hand.
d) Any outward shift of PPC - implies that there is an increase in the no. of resources at hand or
improvement in the technology.
38. Explain the problem of ‘what to produce’.
This problem has two dimensions:
a) What goods and services are to be produces and
b) In what quantity goods and services are to be produced.
The problem becomes complex when the choice is to be made across consumer goods or capital
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goods. It cannot be either- or choice. Because both consumer and capital goods are of
significance. Consumer goods are essential to promote quality of life. Capital goods are
essential to increase production capacity.
39. Explain the problem of ‘distribution of income’ with the help of an example.
The problem of distribution amounts to the problem of “for whom to produce”.
It refers to the production of goods and services for those who have the capacity to buy them.
The capacity to buy goods and services depends on income. More income means more capacity
to buy. Thus, the problem ‘For whom to produce’ amounts to the problem of distribution of
income among income earners.
It has two aspects
Factoral distribution of income of different factors of production i.e income share of different
factors of production wages for labour, interest for capital ,rent for land and profit for
entrepreneur
Interpersonal distribution refers to distribution between firms and households in the society.
Whether it is factoral income distribution or interpersonal distribution, it all revolves around the
question of equality.
Eg. The problem before the producer is to decide what should be the wage rate, the rental, the
interest rate, the profit rate etc.

40. Define PPC. Draw the shape of PPC when MOC is

A PP curve or frontier is the locus of the various combinations of the two goods that can be
produced in a two goods economy with fixed resources, assuming full and efficient utilization of
these resources.

a) Decreasing

b) Constant

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c) Increasing

Each question carries 6 marks :

41. How are central problems solved in different economies?

a) In a Socialist/centrally planned economy – Refer to ans. no 26
b) In a Capitalist/market economy – refer to ans. no 26
c) Mixed economies shares the merits of market economies as well as centrally planned
economies. Decisions regarding; ‘what, how and for whom to produce ‘are taken on the
basis of market forces as well as on the basis of social considerations. In certain areas of
production, producers are free to take their decisions with a view to maximizing profits. In
certain areas, decision is taken entirely on the basis of social considerations. For example- in
India producers are free to produce cloth or steel to maximize profits. But railways are the
monopoly of the government.

42. Distinguish between Microeconomics and Macroeconomics.

On the basis of Microeconomics Macroeconomics
Meaning It is a study of individual It is a study of an economy as a
economic units in an whole.
economy.
Alternative name Also known as the Price Also known as Theory of
theory. income and employment
Instrument of Main instruments used for Main instruments used for
study/tools the study are demand and study include aggregate
supply. demand and aggregate supply.
Method of study It uses partial equilibrium It uses general equilibrium
analysis analysis
Subject matter Efficient and effective Economic growth with
allocation of resources stability.
Assumption It is assumed that while It is assumed that while
studying micro economics studying macroeconomics
macroeconomic variables are microeconomic variables are
constant. constant.

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43. Draw PPC to represent the following:

a) Underemployment of resources -Point A
Y

B
Good Y A

O P X
Good X

b) Fuller utilization of resources-- Points B

c) Growth of resources - Parallel Outward shift

Y
P1
P
Good Y

O P P1 X
Good X

d) Massive unemployment due to layoffs during depression – Same as (a)

e) Destruction of factories on account of earthquake- Inward Shift

Y
P1
P
Good Y

O P P1 X
Good X

f) A lot of people died in Tsunami- Parallel inward shift (same as (e))

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44. Why do central problems of an economy arise? Explain the central problem of ‘for whom
to produce’?
The main reasons for the problem is:
Scarcity of resources
Unlimited wants
Alternative uses
The problem of distribution amounts to the problem of “for whom to produce”.
It refers to the production of goods and services for those who have the capacity to buy them.
The capacity to buy goods and services depends on income. More income means more capacity
to buy. Thus, the problem ‘For whom to produce’ amounts to the problem of distribution of
income among income earners.
It has two aspects
Factoral distribution of income of different factors of production i.e income share of different
factors of production wages for labour, interest for capital ,rent for land and profit for
entrepreneur
Interpersonal distribution refers to distribution between firms and households in the society.
Whether it is factoral income distribution or interpersonal distribution, it all revolves around the
question of equality.
Eg. The problem before the producer is to decide what should be the wage rate, the rental, the
interest rate, the profit rate etc.
Section B
45. Complete the following table and draw a PPC on the basis of the same.
Production of Production of MOC
Combination Good X Good Y
A 0 100 -
B 1 90 10Y:1X
C 2 70 20Y:1X
D 3 40 30Y:1X
E 4 0 40Y:1X
(Plot PPC as discussed in class)

Section C
Each question carries 3 marks :

46. “Economics is about making choices in the presence of scarcity”. Explain.

The Economic problem which is the problem of choice is due the fact that 1) Human wants are
unlimited 2) Resources to satisfy these wants are limited or scarce and 3) These resources have
alternative uses. Economics essentially studies the problem of allocating these scarce resources
optimally to satisfy maximum of unlimited wants. Since, economics is a study of optimum
utilization of scarce resources it can be said that “Economics is making choices in the presence
of scarcity”
47. Make a PP Schedule where the PPC is convex to the origin.
The Production Possibility Curve is convex to the origin when the MOC or the MRT diminishes
as we move to a different combination of goods to be produced. (concave – when the MRT
increases with each extra unit, convex – when MRT decreases with each extra unit)

Combinations Good X Good Y Rate of sacrifice /

(Units) (Units) MRT/ MOC

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A 1 8 -
B 2 4 4Y:1X
C 3 2 2Y:1X
D 4 1 1Y:1X
48. “Although water is available in plenty yet it is scarce whereas rotten vegetables are rare
but not scarce.” Explain the reason for this paradox.
Although water is available in plenty, yet it is scarce whereas rotten vegetables are rare but not
scarce.”This is because:
a. There is an unlimited want of water
b. Water is a limited natural resource (as consumable water is limited)
c. There are alternate uses of water. For example water is used for domestic, industrial and
agricultural purposes
On the other hand rotten vegetables have no demand; hence, even if they’re rare there will be no
scarcity.
49. A machine is capable of producing only one type of good. What is the opportunity cost of
the machine in producing other good?
By definition opportunity cost refers to the value of next best use the resource can be put to.
Since the machine is capable of producing only one type of good. The opportunity cost of this
machine would be zero.

Section D
Each question carries 3 mark :
50. Government of India has started promoting foreign capital. What is its economic value in
context of transformation curve?
Every economy tries to increase its resources so that more goods can be produced, and the
government can do this by promoting foreign capital. PP Curve is based on the assumption that
resources are fixed. Thus, when Foreign Capital increases, we can produce more of both the
goods. Graphically, when foreign capital increases, the PP Frontier shifts upwards/outward.
51. Explain the impact of Swachh Bharat Abhiyan on transformation line.
Swachh Bharat Campaign: The Abhiyan was launched by Prime Minister NarendraModi with
an aim to make India clean. Aim is to provide sanitation facilities to every family, including
toilets, solid and liquid waste disposal systems, village cleanliness, and safe and adequate
drinking water supply.
This will have a positive impact on the health and wellbeing of the people which will enable
them to work efficiently, production capacity of the economy will increase i.e. output will
increase from Actual to potential level. This causes the economy to move from point A to B.
Y

B
Good Y A

O P X
Good X

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