HALF-YEARLY EXAMINATION PAPER 2014

CLASS XII

SUBJECT : ECONOMICS

Time Allowed : 3 Hours Maximum Marks : 100

ANSWERS
1. Option B. How to produce.
2. Option C. tea and coffee
3. Option B. Contraction of demand.
4. Option B. constant MRT.
5. Option C. downward sloping line.
6. Problem of ‘what to produce’: The problem of what to

produce means which goods and services are to be produced and in what quantity. For
example: the choice can be between consumer goods and capital goods. Within
consumer goods, it is necessary to decide whether to produce luxuries or necessities.
More of one commodity can be produced only at the cost of producing less of other
commodity. On the PPC shown, the problem of what to produce is the problem of
choosing between the points on the curve like A, B, C or D.

7. Output (units) 1 2 3 4
TR (Rs.) 4 6 6 4
MR (Rs.) 4 2 0 -2
 AR (Rs. ) 4 3 2 1

8. Main causes of the rightward shift of the supply curve are:

a) An improvement in technology leads to a decline in the cost of production by the
firm and as a result firms supply more than before at the same price. This is because
the profit margin of the firms increases. Thus, supply would increase implying a
rightward shift of the supply curve.
b) A fall in price of inputs: This has the same effect as improvement in technology. A
fall in price of inputs like wages, raw materials etc, reduces the unit cost of production
and therefore firms would like to supply more than before at the given price. As a
result, supply curve shift to the right.
c) A fall in price of other goods: Suppose wheat and sunflower are the two goods
that a
farmer can produce. If the price of sunflower falls, then it would be more profitable
for the farmer to produce and sell more wheat. Therefore, the supply of wheat would
increase even though the price of wheat remained the same. Thus, the supply curve
for wheat would shift to the right.

9. When the price of a good falls , it has the following two effects that lead a consumer to
buy more of that commodity:
a) Income effect: when the price of a commodity falls, the real income of the consumer
i.e. his purchasing power increases. As a result, he can now buy more of a commodity.
This is called income effect. This causes increase in quantity demanded of the good
whose price falls.
b) Substitution effect: when the price of a good falls, it becomes relatively cheaper
than other goods. This induces the consumer to substitute the cheaper commodity for
the other commodity which is now relatively expensive. This is called substitution
effect. It causes increase in demand for the commodity whose price falls.

10. AFC: It is the per unit fixed cost of producing a commodity. It is obtained by
dividing the total fixed cost by quantity of output.
AFC = TFC/Q
AFC decreases with an increase in the level of output.
AVC: It is the per unit variable cost of producing a commodity. It is obtained by dividing
the total variable cost by the quantity of output.
AVC = TVC/Q
AVC decreases but after reaching the stage of minimum cost, it starts increasing.

11. 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 additional amount of
output at the same price. Hence, XYZ Co. is not a price taker but a price maker.

12. Following are the features of perfect competition:

a) Large number of buyers and sellers: there are large number of buyers and sellers
in perfect competition. The number of sellers is so large that an individual seller
produces a small portion of the total output of the market i.e. each seller is too small
to influence the price in the market. Similarly, the number of buyers is so large that an
individual buyer purchases an insignificant portion of the total output in the market.
Therefore, no buyer can influence the price. Thus, both sellers and buyers are price
takers.
b) Homogenous product: the goods sold by different sellers under perfect
competition are homogenous or identical in every respect like quality, size, design etc.
the products are perfect substitutes of one another. As a result, no seller can charge a
higher price for the product it sells otherwise he will lose his customers.
c) Freedom of entry and exit: This mean that new firms are free to enter and existing
firms can leave the market at any time. This ensures that there are neither abnormal
profits nor losses by any firm in the long – run. If firms are making abnormal profits,
new firms enter and raise total supply of the market. This reduces the market price
and wipes out profit. In case the firms are incurring losses, some existing inefficient
firms will leave the industry and reduce total supply. This raises the price till the
losses are wiped out.
13. When proportionate increase in demand is less than the increase in supply, then
equilibrium price will fall but the equilibrium quantity will rise. The diagram below
illustrates this point.

In the diagram, when the supply curve shifts to the right from S1S1 to S2S2 and demand
curve shifts to the right from D1D1 to D2D2, the equilibrium price falls from OP to OP1 but
the equilibrium quantity rises from OQ to OQ1.

14. The law of supply states that there is a direct relationship between quantity
supplied of the commodity and price of the commodity. It implies that higher the price,
greater the quantity supplied and lower the price, smaller the quantity supplied.
Assumptions:
a) No change in technology.
b) Prices of inputs remain constant.
c) Prices of other goods do not change.
Law of supply can also be explained with the help of the following supply schedule and
supply curve:
Price Supply
(units)

1 100
2 200
3 300
The above schedule and curve shows that with the rise in the price from Re 1 to Rs 2
and Rs 3, the quantity supplied of the commodity rises from 100 units to 200 and 300
units.

15. The demand of a commodity and price of its substitute goods are directly related to
each other. When the price of the substitute good (say coffee) falls, its demand rises and
the demand for the commodity (say tea) falls and as a result the demand curve for tea
shift to the left. This is shown below:

In the diagram, demand curve of X (say tea) is shown by the DD curve. With the fall in
the price of the substitute good (say coffee), the quantity demanded of good X falls from
OQ1 to OQ at the same price OP. The demand curve shifts leftwards to D1D1.

b) The demand of a commodity and favourable changes in the taste of the buyers are
directly related to each other. When there is a favourable change in the taste of the
buyer, the demand of the commodity rises and as a result the demand curve of the
commodity shifts to the right. This is shown below:
In the diagram, demand curve of X is shown by DD curve. With a favourable change in
taste and preferences of the buyer, the demand of the commodity rises from OQ to OQ1
at the given price OP, the demand curve shift rightwards to D1D1.

SECTION B
1. Option C. Resources are inefficiently used.
2. Option B. car and petrol
3. Option D. Decrease in demand.
4. Option C. Increasing MRT.
5. Option C. Falls.

6. PPC shifts to the right because of the following reasons:-

(a) When resources increase or grow, more of the two goods can be produced. For
eg., when more capital is accumulated or new natural resources are discovered and
used for production, PPC shifts to the right.
(b) PPC also shifts to the right when there is an improvement in technology. When
technological progress takes place, it is possible to produce more of two goods with a
given amount of resources.

7. Output 1 2 3 4
TVC 60 112 180 256
TFC 100 100 100 100
TC 160 212 280 356
MC - 52 68 76

8. A. ELASTIC SUPPLY :- When the percentage change in quantity supplied is more

than percentage change in price, the supply is said to be elastic. In this case the
coefficient of price elasticity of supply is greater than unity, i.e., es > 1
B. INELASTIC SUPPLY :- When the percentage change in quantity supplied is less
than percentage change in price, the supply is said to be inelastic. In this case coefficient
of price elasticity of supply is less than unity, i.e., es < 1.

C. UNIT ELASTIC SUPPLY :- When the percentage change in quantity supplied is

equal to the percentage change in price, the supply is said to be unit elastic. In this case,
the coefficient of price elasticity of supply is equal to unity, i.e., es = 1.

9. Assumptions of indifference curve analysis are:

a) It assumes that utility is ordinally measurable, i.e. the consumer can rank all the
commodities in the order of his preferences.
b) With given money income and prices of the goods, the consumer will make those
choices by which he can maximize his total satisfaction.
c) Consumer is consistent in his choice of goods and services i.e. if he prefers X over Y in
one period, he will not choose good Y over X in another period or treat them as
indifferent.
d) Diminishing marginal rate of substitution exists.
e) Tastes and habits of consumers remains constant.

10.

Shape of TFC - Fixed cost are the cost which do not change in the short run irrespective
of change in output. For eg., rent of a building, salaries of permanent staff etc. Total fixed
curve will be horizontal line parallel to the x-axis because total fixed cost always
remains constant.
Shape of AFC - Average fixed cost means per unit cost on fixed factors. Average fixed
cost is obtained by dividing the total fixed cost by the number of units produced. With
the increase in output, average fixed cost goes on declining. Thus, the average fixed cost
will be a downward sloping curve.

11. 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 the
demand is elastic, the increase in taxi fares reduces the total revenue of the
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 cost
(higher wages for taxi drivers but fewer taxis and fewer drivers).

12. (i) Under Perfect Competition, AR=MR.

Here, industry is the price maker and firm is the price taker. A firm has to accept the
price as given by the industry. At this price a firm can sell any amount of the commodity
it wants to sell. This means that with the sale of every additional unit, additional
revenue(i.e. MR) and average revenue(i.e. AR) will be equal to the price and thus equal
each other.

(ii) Under Monopoly, AR>MR.

Here ,more of a commodity can be sold at a lower price and thus AR>MR. AR and MR
curves of a firm becomes downward sloping indicating more units of output can be sold
at a lower price. MR curve is below AR curve because sale of extra unit forces down the
price at which all units can be sold.

13. (i) In a perfectly competitive market, at any price lower than the equilibrium, the
quantity demanded for a commodity exceeds quantity supplied. It is called a situation
of excess demand. Excess demand pushes up the market price by causing competition
among the buyers. A rise in price leads to contraction of demand and expansion of
supply. The rise in price continues till it reaches the equilibrium price at which quantity
demanded is equal to quantity supplied.

In the diagram, at price OP1, the quantity demanded is OQ1 but quantity supplied is
OQ0. So there is excess demand equal to Q0Q1. As a result of this excess demand, the
price will rise till OP is reached at which quantity demanded is equal to quantity
supplied.

(ii) In a perfectly competitive market, at any price greater than the equilibrium price,
the quantity supplied of a commodity exceeds quantity demanded. It is called a situation
of excess supply. Excess supply causes a fall in price by causing competition among the
sellers. A fall in the price leads expansion of demand and contraction of supply. The fall
in price continues till it reaches the equilibrium price at which quantity demanded is
equal to quantity supplied.
In the diagram, at price OP2, the quantity supplied is OQ2, but demanded is OQ. So there
is excess supply equal to QQ2. As a result of excess supply, the price will go on declining
till OP is reached at which quantity demanded is equal to quantity supplied.

14. Given es = 1.25

Price (RS) Supply (units)
10 4
30 ?
es = (change in qs/ change in p) * p/qs

1.25 = (change in qs/ 20 ) * 10/4

change in qs = (1.25 * 20 * 4)/10 = 10

New supply = 4 + 10 = 14.
15. (i) The demand for a commodity and unfavourable change in the taste of a buyer
are inversely related to each other. When there is unfavourable change in the taste of a
buyer for a commodity, the demand for the commodity falls at the same price and as a
result the demand shifts to the left. The following diagram shows the effect:

In the diagram, demand curve of X is shown by the DD curve. With an unfavourable

change in the taste of a buyer for a commodity, the quantity demanded of good X, falls
from OQ to OQ1 at the same price OP. The demand curve shifts leftward from DD to
D1D1.
(ii) The demand for an inferior good and change in the income of the buyer are
inversely related to each other. When there is a fall in the income of a buyers, the
demand for the inferior good rises and as a result, the demand
curve shifts to the right. The following diagram shows the effect :

In the diagram, demand curve of X (inferior good) is shown by DD curve. With the fall in
the income of the buyer, the quantity demanded of inferior goods rises from OQ to OQ1
at the same price OP. The demand curve shifts rightwards from DD to D1D1.

PARIMAL SINGHAL