Value Based Questions

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1 Subject : Economics Class : XII Value Based Questions PART A : INTRODUCTORY MICROECONOMICS Unit-I Introduction to Microeconomics 1. India is a labour abundance and capital scarce economy. Which technique of production should be used to produce the commodity? 1 2. As water resources are limited in our country, how can we economise the water resources so that it would not become a future problem for us? Give any two suggestions A teacher is getting ` 6,000 per month as salary. If he leaves the job and starts tuition work, he is expected to earn ` 5,000 per month. What would be his opportunity cost? 1 4. A doctor has a private clinic in New Delhi and his annual earnings are ` 10 lakhs. If he works in a government hospital in New Delhi, his annual earnings are ` 8 lakhs. What is the opportunity cost of having a clinic in New Delhi? 1 5. With the same of amount of resources, a farmer can feed the following combination of goats and horses : 1 Goats Horses Option I Option II Given the option available with him, what is the opportunity cost of the farmer of feeding one horse? Unit-II Consumer Behaviour and Demand 1. Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire income. The prices of the two goods are ` 6 and ` 8 respectively. How much is the consumer s income? 1 2. A new steel plant comes up in Jharkhand. Many people who were previously unemployed in the area are now employed. How will this affect the demand curve for colour TV and Black and White TVs in the region? 1 3. In order to encourage tourism in Goa, the Government of India suggests Indian Airlines to reduce airfare to Goa from the four major cities, Chennai, Kolkata, Mumbai and New Delhi. If the Indian Airlines reduces the air fare to Goa, how will this affect the market demand curve for air travel to Goa? 1 4. There are train and bus services between New Delhi and Jaipur. Suppose that the train fare between the two cities comes down. How will this affect the demand curve for bus travel between the two cities? 1 5. A dentist was charging ` 300 for a standard cleaning job and per month it used to generate a total revenue equal to ` 30,000. She has since last month increased the price of dental cleaning to ` 350. As a result, fewer customers are now coming for dental cleaning, but the total revenue is now ` 33,250. From this, what can we conclude about the elasticity of demand for such a dental service? 1 6. Suppose the price of a movie seen at a theatre rises from ` 120 per person to ` 200 per person. The theatre manager observes that the rise in prices causes attendance at a given movie to fall from 300 persons to 200 persons. What is the price elasticity of demand for movies? 1 7. If the local pizzeria raises the price of a medium pizza from ` 60 to ` 100 and quantity demanded falls from 700 pizzas a night to 100 pizzas a night, what is the price elasticity of demand for pizzas? 3 (1)

2 8. As a result of high wage settlement in the New York City due to taxi strike of several years ago, taxi owners increased taxi fares. Was this the right decision? 3 9. If the market demand for agricultural commodities is price-inelastic, would a bad harvest lead to an increase or a decrease in the incomes of farmer as a group? Why? Suppose a consumer want to consume two goods which are available only in integer units. The two goods are equally priced at ` 10 and the consumer s income is ` (i) Write down all the bundles that are available to the consumer. (ii) Among the bundles that are available to the consumer, identify those which cost her exactly ` An ice cream seller sells ice cream for ` 30 each. Lakshmi, who loves ice cream has already eaten 3. Her marginal utility from eating 3 ice creams is 90. Suppose further that, for her, the marginal utility of one rupee is 3. Should she eat more ice cream or should she stop? 4 Unit-III Producer Behaviour and Supply 1. Suppose a firm is producing a level of output such that MR > MC. What should the firm do to maximise the profits? 1 2. If a farmer grows rice and wheat, how will an increase in the price of wheat affect the supply curve of rice? 1 3. A new technique of production reduces the marginal cost of producing stainless steel. How will this affect the supply curve of stainless steel utensils? 1 4. If the quantity supplied increases by 15% in response to a 15% increase in price, what is the nature of elasticity of supply? 1 5. Because of cyclone in a coastal area, the sea level covers a lot of rice fields. This reduces the productivity of land. How will it affect the supply curve of that region? 3 6. Suppose that a sole proprietorship is earning total revenue of ` 1,00,000 and is incurring explicit costs of ` 75,000. If the owner could work for another company for ` 30,000 a year, would you conclude that the firm is incurring an economic loss or getting profit? 3 7. A firm is working under conditions of perfect competition in the market where the prevailing price of its product is ` 16 per unit. What will be the firm s total revenue, average revenue and marginal revenue as the firm expands its output from 1 unit to 5 units? 3 8. Bozzo s burgers is a small restaurant and a price taker. The table below provides the data of Bozzo s output and costs in Rupees. 4 Qty T.C TFC TVC AVC ATC MC (i) If burgers sell for ` 14, what is Bozzo s profit maximising level of output? (ii) What is the total variable cost when 60 burgers are produced? (iii) What is the average fixed cost when 20 burgers are produced? (iv) Between 10 to 20 burgers, what is the marginal cost (per burger)? (2)

3 Unit-IV Forms of Market and Price Determination 1. The market for handtools (such as hammer and screwdriver is dominated by Draper, Stanley and Craftman.) This market can be best described by which market structure? 1 2. If the firm in the toothpaste industry have the following market shares, which market structure would best describe the industry? 1 Market Share (3) (% of market) Toothpaste 18.7 Dentipaste 14.3 Shinibright 11.6 I can t believe its not toothpaste 9.4 Brighter than white 8.8 Pastystuff 7.4 Others In 2001, the Supreme Court of India banned smoking in public places. How is this likely to affect the average price of cigarettes and the quantity sold? 1 4. New discoveries of oil reduce the price of petrol and diesel. Consider their affect on the market for new cars New environmental regulations require that the drug industry use a more environment friendly technology whose running costs are higher but which discharges less toxic chemicals than before. How would it affect the price of drugs? 1 6. Suppose that the demand curve for the XYZ company slopes downward and to the right. Would you conclude that the firm is a price taker or a price maker? Give reasons China is a big manufacturer of telephone instruments. It has recently become a member of WTO, which means that it can sell its product in other member countries like India. Suppose that it does export a large number of telephone instruments to India. 4 (a) How will it affect the price and quantity sold of telephone instrumentation in India? (b) Suppose that the demand for telephone instruments is relatively elastic. How will it affect India s total expenditure on telephone instruments? PART B : INTRODUCTORY MACROECONOMICS Unit-VI National Income and Related Aggregates 1. How is the value of an output of an enterprise related to its sales and change in stock? 1 2. A farmer purchases ` 1,000/- worth of seeds, ` 2,000 worth of fertilizers and pays ` 1,500 as water charges to raise a wheat crop. He produces 50 quintals of wheat and sells the same at ` 200 per quintal. Calculate the value added by a farmer How do we treat the income of locally recruited staff in a foreign embassy and an international organisation? 4. Ms. Shweta pays ` 1,000 towards premium on her full life policy with the LIC. Is this a part of compensation of employees? 1 5. How will you treat ` 5000 earned per month by Mr. Jagdish Sharma against hiring out his bus to a neighbouring school? 1

4 Unit-VII Money and Banking 1. How do demand deposits of commercial banks function as money, when they are neither coins nor the notes in hand? Give your views What type of losses a depositor has to bear if he withdraws his fixed deposit before the due date of maturity? 1 3. What will be the effect of a fall in CRR on money supply? What will be the effect of a rise in SLR on money supply? What will be the effect of a rise in bank rate on money supply? 3 Unit-VIII Determination of Income and Employment 1. Suppose the economy is in the grip of recession. To overcome the recession, the government undertakes a new investment of ` 500 crores. How much national income will be increased if the marginal propensity to consume of the society is 0.75? 3 2. In an economy the actual level of income is ` 500 crore whereas the full employment level of income is ` 800 crore. The MPC is Calculate the increase in investment required to maintain the full employment level of income Indian economy is in the grip of rising prices. Explain any two measures to control the situation. 3 Unit-IX Government Budget and the Economy 1. Who collects sales tax in India - the central government or the state government? 1 2. If you were to be appointed as the Finance Minister of India, which taxes would you prefer : direct taxes or indirect taxes and why? 4 3. India is suffering from the problem of inequalities in the distribution of income and wealth. How can a budget be used as an instrument? 4 4. India is suffering from the problem of fiscal deficit for the last many years. Explain any two steps In India, for the last several years, there has been deficit in the revenue account. How is it met or financed? 4 Unit-X Balance of Payments 1. What is the likely effect of depreciation or devaluation of a currency of the countries foreign trade? 1 2. India is suffering from the problem of Current Account Deficit (CAD). How is it met or financed? 3 3. If inflation is higher in country A than in country B and the exchange rate between the two countries is fixed, what is likely to happen to trade balance between the two countries? 3 4. Suppose balance of payment of current account of India in a year was ( ) 2579 million US$, whereas balance on its capital account was 8409 million $, how will it affect the foreign exchange reserve of India? 3 5. Is rising reserve of India s foreign exchange a sign of rising production activity in the economy? Explain. 3 (4)

5 ANSWERS Unit-I 1. India should adopt labour intensive technique. 2. (i) Rainwater should be preserved and used for rain harvesting. (ii) Water wastage should be avoided i.e. economical use of water. 3. The opportunity cost of school job is ` 5,000 p.m., that the teacher could have earned in the next best alternative use, that is doing tuition work. 4. The opportunity cost of opening a clinic in New Delhi is ` 8 lakhs, that he could have earned in the next best alternative use that is, working in a government hospital in New Delhi. 5. The opportunity cost to the farmer of feeding one horse is 3 goats i.e. Thus, the opportunity cost of feeding one horse is 3 goats. Unit-II = = Given : X 1 = 6, P 1 = 6 X 2 = 8, P 2 = 8 We know that M = P 1 X 1 + P 2 X 2 = = = ` With the increase in income of various households, demand curve for colour TVs and black and white TVs in the region will shift rightward implying that demand for TVs will increase. 3. If air fare to Goa is reduced, there would be movement along the same demand curve. There will be an increase in quantity demanded. 4. Train and bus services are substitutes to each other. If the train fare (price of a substitute) comes down, the demand for bus travel will decrease. As a result, there would be leftward shift of the demand curve for bus travel. 5. Price TE (` ) (`) , ,250 By the total expenditure method, we find that with a rise in price, total expenditure on the dental service increases, therefore its demand is less than unit elasticity. 6. Given Price Units (` ) q. p By percentage method, ed = = = = 0.5 pq (5)

6 7. Given : p q (`) (Units) q. p By percentage method, ed = = = = =.8 pq The answer depends on the price elasticity of demand for taxi rides in New York City. If the demand for taxi rides is price-inelastic, the decision was correct. If demand is elastic, then increasing taxi fares reduces the total revenue of taxi owners. In order to see what happened to the total profits of taxi owners, we must compare this decrease in total revenue with the change in total costs (higher wages for taxi drivers but fewer taxis and fewer taxi drivers). Unfortunately, in the real world we often do not have (and it might be difficult) to get estimates of the elasticities necessary to reach correct decisions. 9. A bad harvest is reflected in a decrease in supply (i.e., an upward shift in the market supply curve of agricultural commodities). Given the market demand for agricultural commodities, this decrease in supply causes the equilibrium price to rise. Since the demand is price-inelastic, the total receipts of farmers as a group increase. When the demand for an agricultural commodity is price-inelastic, the same result can be achieved by reducing the amount of land under cultivation for the commodity. This is done in some farmaid programs. 10. (i) All the bundles that are available to the consumer are as under : (0, 0) (0, 1) (0, 2) (0, 3) (0, 4) (1, 0) (1, 1) (1, 2) (1, 3) (2, 0) (2, 1) (2, 2) (3, 3) (3, 1) (4, 0) (ii) Following bundles cost exactly ` 40 (0, 4) (1, 3) (2, 2) (3, 1) (4, 0) 11. For equilibrium of a consumer the following condition must be fulfilled : MU of Ice-cream Price of Ice-cream = MU of a rupee. Given MU of eating 3 ice-creams = 90. Now, price of ice-cream = ` 30 and marginal utiliy of rupee = 3. Substituting these in the above condition, we have : =3 3=3 Thus, the condition for consumer s equilibrium is fulfilled. She should stop eating more ice-creams. (6)

7 Unit-III 1. MR = MC is the condition for maximum profits. In the given question MR > MC, thus the firm has the capacity to increase production so as to earn maximum profits. So the firm increases its production. 2. The supply curve of rice would shift to the left i.e. decrease at the same price. 3. The marginal cost of production of utensils will also fall. A fall in the cost of production will induce the producers to offer increased quantity for sale. Hence, the supply curve of the stainless steel utensils will shift to the right. 4. % change in quantity supplied e= S % change in price 15% = 1 15% = Thus elasticity of supply is unity. 5. With a fall in the productivity of the land, the output of rice will fall. Less stocks will be available with the farmers to offer for sale. Even if the price of rice rises, producers will not be in a position to offer more quantity for sale. Thus, the supply curve of rice will shift to the left. 6. Economic profit TR TC (Explicit cost + Implicit cost) = 1,00,000 (75, ,000) = 5000 (loss) So the firm is incurring an economic loss. 7. Output (Units) Price (`) TR AR MR Bozzo s burgers are a small restaurant and a price taker. The table below provides the data of Bozzo s output and costs in Rupees. Qty. TC TFC TVC AVC ATC MC (i) Profit maximisation condition is MR = MC. Here profit maximum level of output is 40. Here MC=(14) = MR (14) (ii) When Q = 60. TVC = ` 960 TFC 100 (iii) AFC (20) = = 5 Q 20 = ` (iv) MC = TC = = = ` 9 Q (7)

8 Unit-IV 1. Oligopoly market best describes the situation. 2. Oligopoly market best describes the market structure of toothpaste industry. 3. Due to ban on smoking in public places, demand curve is likely to shift leftward. As a result, price of cigarettes and the quantity sold will decrease. 4. Due to reduction in prices of petrol and diesel, the demand for new cars will increase because petrol and diesel is complementary to car. 5. Due to higher cost of production technology, supply curve of drugs will shift leftward. Lesser supply will increase the price of drugs. 6. Since the demand curve of XYZ Co. is downward sloping, it has to lower its price to sell additional units of output, whereas in perfect competition, the demand curve is parallel to x-axis as the firm can sell any amount of the output at the same price. Hence XYZ Co. is not a price taker but a price maker. 7. (a) Availability of Chinese telephone instruments in India will reduce the price and increase the quantity sold. (b) If the demand for telephone instruments is relatively elastic, India s total expenditure on telephone instruments will increase. Unit-VI 1. Value of output = Sales (= Price quantity sold) + S (Closing stock Opening stock) 2. Value of output = = ` 10,000 Intermediate cost = = ` 4500 Thus, Value added by a farmer = 10, = ` Their income is treated as compensation of employees from abroad. 4. No, any contribution made by an employee herself to any insurance scheme is not a part of compensation of employees. 5. Income earned by way of lease is rental income, and hence form part of operating surplus and is included in national income. Unit-VII 1. Demand deposits of banks serve as bank. By drawing cheques against them, they can be used to make payments for exchange of goods and services. 2. A depositor will loose interest if he withdraws his fixed deposits before due date. 3. (i) With a fall in CRR, the availability of credit increases and as a result the supply of money increases. (ii) With a rise in SLR, the availability of credit decreases and as a result the supply of money decreases. (iii) With a rise in bank rate, the availability of credit decreases and as a result the supply of money decreases. Unit-VIII 1. Increase in National Income = K. I Multiplier (K) = = = = 4 1 MPC Given : I = ` 500 crores Increase in national income = = ` 2000 crores (8)

9 2. Y required to achieve full employment = = ` 300 crores MPC = Y =. I 1 MPC =. I =. I 0.25 I = 300 = ` 75 crores 4 Thus, increase in investment requires to achieve full employment is ` 75 crores. 3. (i) Rising prices can be controlled by reducing government expenditure, especially non-development expenditure such as expenditures on public administration, defence and subsidies on non-merit goods and other wasteful expenditure. (ii) Monetary policy measures such as increase in cash reserve ratio, mopping of excess liquid reserves with the banks through open market operations by the central bank so as to reduce the availability of credit and as a result rising prices can be controlled. Unit-IX 1. State governments collect sales tax in India 2. There is really nothing to choose between direct taxes and indirect taxes as such. Both of them have their relative merits and demerits. Both direct taxes and indirect taxes are not substitutes for each other. They are complementary to each other. Objectives of taxation are common to both types of taxes. These objectives are (i) to raise resources for the government, (ii) to raise the rate of investment in the country through the curtailment of consumption and (iii) to raise the incremental saving ratio. Similarly they differ from each other as (i) indirect taxes reach all the sections of the society; direct taxes cannot reach all the sections. (ii) direct taxes can be highly progressive; indirect taxes are generally proportional. (iii) indirect taxes can be easily used to influence the consumption of specific commodities; direct taxes cannot be thus used. In short, it is necessary to strike a balance between direct taxes and indirect taxes as a source of tax revenue. 3. A budget can be used as an instrument to reduce the inequalities in the distribution of income and wealth in the following ways : (i) Tax rates should be made progressive and strict measures should be adopted to check tax evasion by the rich people. (ii) Tax base should be broadened by bringing agriculturing incomes within the ambit of income tax. (iii) More services should be brought in net of indirect taxes. (iv) Expenditure on social sector such as education, health care and housing for the poor, should be raised. (v) Expenditure on special anti poverty and employment schemes be increased so as to bring more people above the poverty line. (vi) Public distribution system should be inferred so that only poor should get food grains and other essential items at subsidised prices. (9)

10 4. Two measures to deal with the problem of fiscal deficit : (i) To curtail capital expenditure which is measured in projects of capital formula and other developmental activities. (ii) To raise revenue receipts by mobilising resources through taxation. 5. Two measures to reduce revenue deficit : (i) Government should reduce revenue expenditure. (ii) To increase taxes, both direct and indirect. Unit-X 1. Depreciation of a currency, namely : (i) encourages exports from a country and (ii) discourages imports from the rest of the world. 2. Current Account Deficit (CAD) in balance of payments occurs when the sum of receipts of foreign exchange on account of trade in visible and invisible is less than the sum of payments of foreign exchange on account of trade in visibles and invisibles. A CAD implies that a country has contracted to spend more foreign exchange than it has been able to earn during the year. A CAD can be financed by different sources : (i) A country may use a part of its gold stocks and make payments to foreigners by means of gold. (ii) A country may draw upon the reserves of foreign currencies and foreign securities. (iii) A country may borrow foreign exchange from different officials and private sources. (iv) It may mobilise foreign exchange by attracting deposits from foreigners and investment of capital by foreigners. 3. If inflation is higher in country A than in country B, and the exchange rate between the two countries is fixed, the trade balance of country A will be deficit while that of country B will be surplus. In case of inflation in country A and prices of country B remaining constant, imports of country A will rise or exports of country A will decline. As a result, trade balance of country A will be unfavourable and trade balance of country B will be favourable. 4. Since surplus of balance on capital accounts (8409 million US $) exceeds deficit 2579 million US$) there will be addition of 5830 million US$ to the foreign exchange reserves of India ( = 5830 million US$) 5. A current account deficit need not be a cause for alarm. Current account deficit should be compared with the rise in investment (and increase in capital stock). There is less causes to worry if the increase in current account deficit reflects a rise in investment because it will increase future output. On the other hand, there is a cause to worry if the increase in current account deficit reflects smaller saving or a larger budget deficit because it indicates higher private or government consumption. (10)

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