Course II PUC Subject: Economics

Max Marks: 50 Duration:

Part A

I Choose the correct Answer 1x3=3

1).Which of the following is an example of microeconomic study?

(a) National Income (b) Foreign Trade (c) Unemployment (d) Consumer behavior

2 ) Suppose a consumer has Rs100 to spend on two goods A and B. If the price of A is Rs20 per unit and the price of B is Rs15 per unit, which of
the following combination the consumer cannot buy?

(a) 2 units of A and 4 units of B (b) 5 units of A (c) 7 units of B (d)2 units of A and 3 units of B

3) Law of demand shows relation between:

a) Income and price of commodity (b) Price and quantity of commodity (c) Income and quantity (d) Demand and supply

II Fill in the blanks 1x3=3

4) Want satisfying power of a commodity or service is _______

5)_____ cost is cost of foregone or sacrificed alternatives
6) Computer hardware and computer hardware are examples of _____ goods

III Match the following 1 X 3 =3

7)

a)Mixed economy i) Based upon facts

b)What to produce ii)Co – existence of public and private sectors

c)Positive Economics iii) economic problem

IV. Answer the following in a sentence or a word 1X3=3

8)What is demand

9)What is Mixed economy

10)What is production possibility curve

Part B

Answer the following in about 4 sentences each 2 x 5 = 10

11) What is indifference map? Explain briefly with a diagram

12)Distinguish between micro and macro economics

13)Briefly explain normative economics

14)What are the assumptions of law of demand

15) What are the exceptions to the law of diminishing marginal utility

Part C

Answer the following in 12 sentences each 4 x 3 = 12

16).Explain the changes in budget line when (a) income changes (b) price of the good changes

17.Explain the determinants of demand.

18) Briefly explain the problems of economy

Part D

Answer the following in 20 sentences each 6 x 2 = 12

19)Explain the law of diminishing marginal utility with suitable schedule and diagram

20)Explain the properties of indifference curve with suitable diagrams

Part E

Answer the following question 4x1=4

21)

A Consumer wants to consume two goods.:- Banana and mangao. The price of Bananas is Rs.4 and the price of Mangoes is Rs.5. The consumer
income is Rs.20.

(a) How much Bananas can she consumes if she spends her entire income on that good?

(b) How much Mangoes can she consumes if she spends her entire income on that good?

(c) Draw a budget line for the above

(d) If the consumer income increase to Rs.40, how much bananas can she consume if she spends her entire income on that good?
Scheme and solution

Part A

Instructions: Answering all questions of Part A is compulsory

I Choose the correct Answer 1x3=3

1).Which of the following is an example of microeconomic study?

(a) National Income (b) Foreign Trade (c) Unemployment (d) Consumer behavior

2 ) Suppose a consumer has Rs100 to spend on two goods A and B. If the price of A is Rs20 per unit and the price of B is Rs15 per unit, which of
the following combination the consumer cannot buy?

(a) 2 units of A and 4 units of B (b) 5 units of A (c) 7 units of B (d)2 units of A and 3 units of B

3) Law of demand shows relation between:

a) Income and price of commodity (b) Price and quantity of commodity (c) Income and quantity (d) Demand and supply

II Fill in the blanks 1x3=3

4) Want satisfying power of a commodity or service is __UTILITY_____

5)_OPPORTUNITY____ cost is cost of foregone alternatives
6) computer hardware and computer software are examples of Complementary goods

III Match the following 1 X 3 =3

7)

a)Mixed economy i) Based upon facts

b)What to produce ii)Co – existence of public and private sectors

c)Positive Economics iii) economic problem

a –ii, b-iii, c-i

IV. Answer the following in a sentence or a word 1X3=3

8)What is demand

Desire + willingness to buy + ability to pay

9)What is Mixed economy

An Economy where there is co existence of both private and public sector

10)What is production possibility curve

A production–possibility frontier (PPF) or production possibility curve (PPC) is a curve which shows various combinations of the amounts of two
goods which can be produced with the given resources and technology

Part B
Answer the following in about 4 sentences each 2 x 5 = 10

11) What is indifference map? Explain briefly with a diagram

A group or combination of indifference curve is a indifference map (1)

(1)

In the above diagram there are three IC curves. IC1, IC2 and IC3. This is indifference map

12)Distinguish between micro and macro economics

Microeconomics deals with an individual or an household, whereas macroeconomics deals with the nation as a whole, companies and firms.

Examples of microeconomics are Individual demand, individual supply,price of a product, marginal utility etc. Examples of macroeconomics are
accounting of National income, poverty, unemployment etc.

13)Briefly explain normative economics

Normative economics is fiction. They are not facts; rather they are opinions of economists who tell us what they think. It can be true for some

And false for some. And these statements mentioned under normative economics are not verifiable. They cannot be tested either.

14 )What are the assumptions of law of demand

No change in consumer income, No change in consumer taste, fashion and preferences, No change in price of related goods, no change in
population, no change in government policy, no change in weather conditions

15) What are the exceptions to the law of diminishing marginal utility

The Law of diminishing marginal utility does not apply to Knowledge, wealth & Money, Rare collections, abnormal persons etc.,

Part C

Answer the following in 12 sentences each 4 x 3 = 12

16).Explain the changes in budget line when (a) income changes (b) price of the good changes
17. Explain the determinants of demand

The five determinants of demand are:

1. The price of the good or service.

2. Income of buyers.

3. Prices of related goods or services. These are either complementary, those purchased along with a particular good or service, or
substitutes, those purchased instead of a certain good or service.

4. Tastes or preferences of consumers.

5. Expectations. These are usually about whether the price will go up.

18. Briefly explain the problems of economy

Problem # 1. What to Produce and in What Quantities?

The first central problem of an economy is to decide what goods and services are to be produced and in what quantities. This involves allocation of
scarce resources in relation to the composition of total output in the economy. Since resources are scarce, the society has to decide about the goods
to be produced: wheat, cloth, roads, television, power, buildings, and so on.

Problem # 2. How to Produce these Goods?

The next basic problem of an economy is to decide about the techniques or methods to be used in order to produce the required goods. This
problem is primarily dependent upon the availability of resources within the economy.

If land is available in abundance, it may have extensive cultivation. If land is scarce, intensive methods of cultivation may be used. If labour is in
abundance, it may use labour-intensive techniques; while in the case of labour shortage, capital-intensive techniques may be used.

Problem # 3. For whom is the Goods Produced?

The third basic problem to be decided is the allocation of goods among the members of the society. The allocation of basic consumer goods or
necessities and luxuries comforts and among the household takes place on the basis of among the distribution of national income.

Whosoever possesses the means to buy the goods may have then. A rich person may have a large share of the luxuries goods, and a poor person
may have more quantities of the basic consumer goods he needs.

Problem # 4. How Efficiently are the Resources being Utilised?

This is one of the important basic problems of an economy because having made the three earlier decisions, the society has to see whether the
resources it owns are being utilised fully or not. In case the resources of the economy are lying idle, it has to find out ways and means to utilise them
fully.

Problem # 5. Is the Economy Growing?

The last and the most important problem is to find out whether the economy is growing through time or is it stagnant

Economic growth takes place through a higher rate of capital formation which consists of replacing existing capital goods with new and more
productive ones by adopting more efficient production techniques or through innovations.

This leads to the outward shifting of the production possibility curve

19)Explain the law of diminishing marginal utility with suitable schedule and diagram

Law of Diminishing marginal utility

The Law Of Diminishing Marginal Utility states that other things remaining equal, as consumption increases the marginal utility derived from each
additional unit declines.

The relationship between Marginal Utility and Total Utility can be shown by the following table and diagram as follows:

In both the diagrams OX line shows bread. In diagram No. 1 OY line shows Marginal Utility and is diagram No. 2 OY line shows Total Utility. As the
number of bread increases Marginal Utility goes on diminishing and Total Utility goes on increasing—To remember:

1) Marginal Utility goes on diminishing with the consumption of every
additional unit of bread.
(2) Total Utility goes on increasing with the consumption of every
additional unit but at a diminishing rate.
(3) Total Utility is the sum total of the Marginal Utilities derived from
all the units consumed.
(5) When Marginal Utility becomes negative, Total Utility decreases.
(6) Increase in Total Utility depends on Marginal Utility.
(7) Since Marginal Utility diminishes, Total Utility increases at a
diminishing rate.
(8) When Marginal Utility is Zero, Total Utility is maximum.

(4) When Marginal Utility becomes 0, total utility does not increase. (9) When Marginal Utility is negative, Total Utility declines.
Assumptions of law of diminishing marginal utility

 Consumer should be rational

 Consumer’s mental outlook should not change
 Unit of good should not be very few or small. In such a case, the utility may not be measured accurately
 Utility can be measured in the cardinal number.
 Marginal utility of money remains constant
 All the units of consumption are homogeneous.
 There is continuous consumption of the commodity i.e, there is no time gap between the successive units of consumption.
 The units of consumptions are identical in size
 There is no change in tastes, nature, fashion and habits of the consumer.

20)Explain the properties of indifference curve with suitable diagrams

Properties of indifference curves are as follows:

(1) Indifference Curves are Negatively Sloped:
The indifference curves must slope down from left to right. This means that an indifference curve is negatively sloped. It slopes downward because
as the consumer increases the consumption of X commodity, he has to give up certain units of Y commodity in order to maintain the same level of
satisfaction.

In fig. 3.4 the two combinations of commodity cooking oil and commodity wheat is shown by the points a and b on the same indifference curve.
The consumer is indifferent towards points a and b as they represent equal level of satisfaction.

At point (a) on the indifference curve, the consumer is satisfied with OE units of cooking oil and OD units of wheat. He is equally satisfied with OF
units of cooking oil and OK units of wheat shown by point b on the indifference curve. It is only on the negatively sloped curve that different points
representing different combinations of goods X and Y give the same level of satisfaction to make the consumer indifferent.

(2) Higher Indifference Curve Represents Higher Level of satisfaction:

A higher indifference curve that lies above and to the right of another indifference curve represents a higher level of satisfaction and combination on
a lower indifference curve yields a lower satisfaction. In other words, we can say that the combination of goods which lies on a higher indifference
curve will be preferred by a consumer to the combination which lies on a lower indifference curve.
 In this diagram (3.5) there are three indifference curves, IC 1, IC2 and IC3 which represents different levels of satisfaction. The indifference curve
IC shows greater amount of satisfaction and it contains more of both goods than IC 2 and IC1 (IC3 > IC2 > IC1). The Indifference Map is the graphical
3

representation of two or more indifference curves.

(3) Indifference Curve are Convex to the Origin:

This is an important property of indifference curves. They are convex to the origin (bowed inward). This is equivalent to saying that as the consumer
substitutes commodity X for commodity Y, the marginal rate of substitution diminishes of X for Y along an indifference curve.

In this figure (3.6) as the consumer moves from A to B to C to D, the willingness to

substitute good X for good Y diminishes. This means that as the amount of good X is increased by equal amounts, that of good Y diminishes by
smaller amounts. The marginal rate of substitution of X for Y is the quantity of Y good that the consumer is willing to give up to gain a marginal unit of
good X. The slope of IC is negative. It is convex to the origin.

(4) Indifference Curve Cannot Intersect Each Other:

Given the definition of indifference curve and the assumptions behind it, the indifference curves cannot intersect each other. It is because at the
point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is impossible.

In fig 3.7, two indifference curves are showing cutting each other at point B. The combinations represented by points B and F given equal satisfaction
to the consumer because both lie on the same indifference curve IC 2. Similarly the combinations shows by points B and E on indifference curve
IC1 give equal satisfaction top the consumer.
 If combination F is equal to combination B in terms of satisfaction and combination E is equal to combination B in satisfaction. It follows that the
combination F will be equivalent to E in terms of satisfaction. This conclusion looks quite funny because combination F on IC 2 contains more of good
Y (wheat) than combination which gives more satisfaction to the consumer. We, therefore, conclude that indifference curves cannot cut each other.

(5) Indifference Curves do not Touch the Horizontal or Vertical Axis:

One of the basic assumptions of indifference curves is that the consumer purchases combinations of different commodities. He is not supposed to
purchase only one commodity. In that case indifference curve will touch one axis. This violates the basic assumption of indifference curves.

In fig. 3.8, it is shown that the indifference curve IC touches Y axis at point C and X axis at point E. At point C, the consumer purchase only OC
commodity of rice and no commodity of wheat, similarly at point E, he buys OE quantity of wheat and no amount of rice. Such indifference curves are
against our basic assumption. Our basic assumption is that the consumer buys two goods in combination.

21)

A Consumer wants to consume two goods.:- Banana and mangao. The price of Bananas is Rs.4 and the price of Mangoes is Rs.5. The consumer
income is Rs.20.

(a) How much Bananas can she consumes if she spends her entire income on that good?

(b) How much Mangoes can she consumes if she spends her entire income on that good?

(c) Draw a budget line for the above

(d) If the consumer income increase to Rs.40, how much bananas can she consume if she spends her entire income on that good?

Ans:

a)If the consumer spends her entire income on Bananas, she can buy 5 bananas

b)If the consumer spends her entire income on mangoes, ,she can buy 4 mangoes

c) Drawing of budget line

d)If the consumer income increases to Rs.40, the number of bananas that she can consume is 10, if she spends her entire income on bananas.
An enquiry of middle class families of a certain city revealed that on an average the percentage expenses on different
groups were: Food 25, rent 12, fuel and lighting 20 and others 43 and the respective group indices were 350, 275, 230
and 150. Calculate the Cost of living index number by family budget method.