Q.1 Name two central problems facing an economy.

Ans. Two problems are:

1) What to produce
2) How to produce

Q.2 Define the term utility.

Ans. Utility is the satisfaction derived from the consumption of a good.

Q.3 What do you men by demand schedule?

Ans. A demand schedule refers to a tabular statement containing different quantities

of a commodity that would be demanded at different prices

Q.4 Draw a variable cost curve

Ans.

Q.5 What is a cartel?

Ans. A cartel is a business combination under which firm coordinates their output and
pricing policy

Q.6 What are the characteristics of PPC?

Ans.
Production Possibility Curve has two basic properties: -
(1) It slopes downwards.
Production possibility curve slopes downwards from left to right. It is because in a
situation of full employment of the resources production of one good can be
increased by decreasing the production of other good only. More of one good will
means less of the other. So it has downward slope.
(2) It is concave to the origin.
Production Possibility Curve is concave to the origin which shows the operation of the
law of increasing marginal opportunity cost. Opportunity cost of producing cloth is
the quantity of wheat, which may be sacrificed. As the shifting of resources is done
from one good to another good the rate of sacrifice increases and it leads to the fact
that PPC is concave to the origin
Q.7 What is budget line? Give an example.

Ans. The budget line represents all the commodities which a consumer can purchase
with his entire money income. Let us have two commodities x and y their respective
prices are Rs P1 and Rs P2 the consumer entire income is Rs 100. Then, the budget
line can be written as follows:
P1x + P2Y =100

Q.10 What are the factors that determine the price equilibrium under perfect
competition?

Determination of equilibrium:
Under perfect competition, the price of a commodity is determined by the general
interaction of market forces of demand and supply in the industry.
1. Market demand: It refers to the sum total of demand of commodity by all the
buyers in the market.

2. Market Supply: It refers to the total supply of a commodity by all the firms in
the market.

3. Equilibrium between demand and supply: In a perfectly competitive market,

price is determined by interaction of market forces of demand and supply in the
industry

Q.11 What are the assumption of Indifference curve?

Ans. The assumptions underlying Indifference Curves are as follows:

1. Utility is ordinal it can be measured according to order or preference.
2. Consumer is a rational Person he wants maximum satisfaction with his money
income.
3. The consumer is assumed to be consistent is his choice of goods and services.
4. The law of diminish marginal rate substitution exist is the economy.
5. Consumer preferences remain constant.

Q.12 The demand for the good at the price of Rs 4 is 25. Suppose the price of
the good increases to Rs 5 and as a result, the demand for the good falls to
20 units, Calculate price elasticity of demand

Ans.

=0.8

.
Q.12 Illustrate the relationship between MU and TU by a suitable example

Ans. Relationship of these concepts of utility is explained with the help of a table.
Quantity of Total utility Marginal
oranges eaten Utility
0 0 -
1 8 8
2 14 6
3 18 4
4 20 2
5 20 0
6 18 -2
1. As more and more oranges are consumed, the marginal utility derived from
each successive unit goes on diminishing. But the total utility increases up to
a limit.
2. Marginal utility of the first four units being positive total utility goes on
increasing.
3. Marginal utility of the fifth unit is zero. In this situation total utility is
maximum (20)
4. Marginal utility of the sixth unit is negative (-2). As a result of it, total utility
of sixth units falls to 18 utilities.

Q.15 Discuss the Law of Return to Scale.

Ans. Return to scale refers to a situation in which all factors are varied in the same
proportion. Return to scale is a long period production function, which explains the
behaviour of output when all inputs are changed in the same proportion. There are
three types of law of return to scale.
1. Law of increasing return to scale
2. Law of Constant return to scale
3. Law of diminishing return to scale
Increasing Return scale – when % change is output in more than % change in
input then increasing return to scale exist in the economy.
1. Constant Return to scale- When % change in out put is equal to the %
change in input the stage is said to be constant return to scale.
2. Diminishing Return to scale-When % change in output in less than the %
change in input the diminishing return to scale will exist in the economy.
Scale of Input Total Physical Marginal Physical Product
L+C Product
1+1 10 10
2+2 30 20
4+4 80 50
5+5 130 50
6+6 220 90 L= Labour
7+7 260 60 C= Capital
Q.15 Explain the relationship between marginal cost and average cost

Ans. The relationship between marginal cost and average cost can be discussed as
under

1. Marginal cost is less than average cost when average cost falls due to
increase in output.
2. Marginal cost is equal to average cost when average cost is minimum. In this
situation marginal cost curve intersect average cost curve at its minimum
point.
3. Marginal cost is more than average cost when average cost rises.

Q.16 Explain the concept of total product, marginal product and average
product and show their relationship

Ans. Total Product – It refers to the total amount of goods produced by a firm with
the available input during a specified period of time.
Marginal Product- It refers to change is total product due to an additional unit of
factor of production used.
MP= TPn-TPn-1

Average Product – It is the per unit production of the variable factor relationship—

1. When total product rises at an increasing rate, marginal product and average
product both increases.
2. When total product rises at a constant rate marginal product is zero and
average product is constant.
3. When total product diminishes the marginal product is negative and average
product will fall.

Q.17 When is the national income at its equilibrium?

Ans. The national income is at its equilibrium when aggregate demand is equal to the
aggregate supply.

.18 State the relationship between average propensity to consume and

average propensity to save.

Ans. The sum of average propensity to consume and average propensity to save is
always 1.
APC + APS =1

Q.19 What is barter?

Ans. Barter means the exchange of goods for goods

Q.20 What is Banking?

Ans. Banking means accepting, for the purpose of lending or the investment of
deposits, money from the public, repayable on demand or otherwise and
withdrawable by cheque, draft, and order or otherwise

Q.21 Write two examples of indirect taxes.

Ans. Two Indirect taxes are:

i) Sales Tax
ii) Excise Duty

Q.22 How are the following treated in estimating the national income?
1) Consultation fee by doctor
2) Purchase of medicine by a patient
3) Free uniform suipplied to nurses in a hospital

Ans. 1) Consultation fee received by a doctor is included in the national income since
the doctor produces services for the patients.
2) Purchase of medicines by a patient is also included in the national income as it is
the expenditure on purchase of medicines produced in an economy.
3) Fee uniform supplied to nurses in a hospital is a part of total expenditure in an
economy on goods and services. Therefore, it will be included in the national income.

Q.23 What are the functions of Central Banks?

Ans. The functions of Central Banks are given here:

1. Issuing of currency
2. Banker to government
3. Banker’s bank and supervisor
4. Controller of credit and money supply
5. Custodian of foreign exchange

Q.24 What is the relationship between transaction demand for money and
value of transactions.

Ans. The transaction demand for money of the economy is fraction of total value
(volume) of transaction over a unit period of time.
Symbolically :

M d K.T
T
Q.25 What do you mean by Capital receipts?

Ans.
Capital receipts are government receipts that create liabilities or reduce assets.
Capital receipts constitute borrowing of the government. In capital receipts, the
government is under obligation to return the amount along with interest. There are
three major sources of capital receipts:
(i) Borrowings
(ii) Recovery of loans
(iii) Resale of shares of public sector undertakings (or Disinvestment of PSUs).
Q.25 What are the sources of financing deficit ?

Ans. There are three sources by which the government can finance its deficit. These
are:
1. Borrowings from public and foreign government.
2. Withdrawing from its cash balances with RBI.
3. Borrowings from the RBI.

Q.28 Show the difference between Revenue Expenditure and

Capital Expenditure.

Ans. Following are the main points of difference between revenue expenditure and
capital expenditure
Revenue Expenditure Capital Expenditure
(i) It does not result into creation of (i) It results into creation of assets.
assets.
(ii) It is financed out of revenue receipts. (ii) It is financed out of the capital
receipts.
(iii) It includes items such as interest, (iii) It includes expenditure on capital
payments, maintenance of general, accounts of general, economic, social and
social, economic and defence services; defence services; loans to state and
subsidies and grants to states and union union territories for financing plan
territories and grants to foreign projects; and loans to foreign
governments. governments.

Q.28 Define fiscal deficit

Fiscal deficit is defined as the excess of all expenditure over total receipts reduced by
borrowings. Fiscal deficit does not take into borrowings. In terms of formula,
Fiscal deficit = Total budget expenditure-Total budget receipts net of
borrowings.

OR
Fiscal deficit is the difference between the government's total expenditure and its
total receipts excluding borrowing

Gross fiscal deficit = total expenditure - (Revenue receipts + non-debt

creating capital receipts)

.29 What are the sources of supply of Foreign Exchange ?

Ans. Sources of Supply of Foreign Exchange are given below :

1. When foreigners purchase home country’s (say India’s) goods and
services through exports (by India).
2. When foreigners invest in bonds and equity shares of the home country
(say India).
3. When currency dealers and speculators cause flow of foreign currency in
the domestic economy.
4. When Indian workers working abroad send their savings to families in India.
5. When foreign tourists come to India
Q.31 What precautions must be taken while estimating national income by
income method?

Ans. The following precautions should be taken into consideration while estimating
national income by income method:
1. Transfer payment should not be included
2. Value of the production for self consumption and imputed rent of owner
occupied
3. Houses have to be included
4. Illegal incomes should not be included
5. Windfall gains should not be included
6. Death duties, gifts tax wealth tax and tax on windfall gains are paid from the
past savings or wealth therefore are not a part of national income.
7. While calculating national income profit before deduction of corporation tax
will not be included
8. If a person receives money by selling some second hand goods that amount
will not be included.

Q.32 What is the relationship between multiplier and MPS?

Ans. There is inverse relationship between multiplier and marginal propensity to

save. Multiplier i.e. K is the reciprocal of MPS. Higher the value of MPS, lower will be
the size of multiplier and vice versa. It can be proved by taking the value of MPS
equal to i)0.5, ii)0.4.

i) Multiplier in the first case =1/MPS

=1/0.5
=10/5
=2.
ii) Multiplier in the second case =1/MPS
=1/0.4
=10/4
=2.5
Thus we see that multiplier is 2 when MPS is 0.5 and it increases (i.e. the value is
2.5) when the value of MPS decreases to 0.4 from 0.5.