ECONOMICS

SOLUTION : PRACTICE PAPER 2

Q. 1. (A)
(1) (3) only a
(2) (2) a, b and c
(3) (2) 1 – b, 2 – a, 3 – d, 4 – c
(4) (3) only a
(5) (1) a, b and c
Q. 1. (B)
(1) Service utility
(2) Monopoly/Oligopoly
(3) Complementary goods
(4) Optional function
(5) Unorganised sector
Q. 1. (C)
(1) Single want
(2) Zero budget
(3) OPEC
(4) Pen and ink
(5) Sri Lanka
Q. 1. (D)
(1) (b) quantity index
(2) (a) flatter
(3) (c) falling
(4) (c) Perfect competition
(5) (b) price theory
Q. 2. (A)
(1) (A) Identified concept : Perfectly Inelastic Demand.
(B) Explanation of concept : When the proportionate change in price of a
commodity brings no (zero) proportionate change in its quantity demanded,
the demand is said to be perfectly inelastic.
(2) (A) Identified concept : Time utility.
(B) Explanation of concept : Utility increased/derived by changing the time of
utilization of a commodity is called time utility.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 1

 (3) (A) Identified concept : Fixed deposit.
(B) Explanation of concept : A fixed deposit is a type of the deposit in which the
saver deposits a certain amount in the form of a deposit in a commercial bank
for a fixed period of time and he can withdraw the amount from the deposit
after a specified period.

(4) (A) Identified concept : Entrepot trade.

(B) Explanation of concept : The process of processing goods imported from
one country and exporting them to another country is called entrepot trade.

(5) (A) Identified concept : Direct tax.

(B) Explanation of concept : A tax which is levied on the income or property of
an individual and so in which the impact and incidence of tax is on same head
is called direct tax.
Q. 2. (B)

(1) Increase in Demand Decrease in Demand

1. Meaning
A rise in demand caused by favourable A fall in demand caused by unfavourable
changes in other factors than price is called changes in other factors other than price is
increase in demand. called decrease in demand.
2. Causes
Increase in demand is caused by : Decrease in demand is caused by :
(1) Rise in income (1) Fall in income
(2) Increased liking for a commodity (2) Decreased liking for a commodity
(3) Decrease in taxes (3) Increase in taxes

(2) Balance of Payments Balance of Trade

1. Meaning
Balance of payments refers to a systematic Balance of trade refers to the difference
record of all international economic between the value of country’s exports and
transactions of a particular country for a imports for a given period.
given period.
2. Concept / Scope
Balance of trade gets included in the Balance of trade is a part of balance of
balance of payments. Therefore, balance payments. Therefore, balance of trade is a
of payments is a broader concept. narrower concept.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) Stock Supply
1. Meaning
Stock refers to the entire quantity of Supply refers to the quantity of a
commodity which exists with the seller at commodity offered for sale at a given price
a given point of time. and at a given point of time.
2. Interrelationship
Stock can exceed supply or stock and Supply and stock can be same. But supply
supply can be same. can never exceed stock.

(4) Private Monopoly Public Monopoly

1. Meaning
Private monopoly refers to sole ownership Public monopoly refers to sole ownership
of the supply of goods or services by the of the supply of goods or services by the
private firm or individual. government.
2. Objective
The main objective of private monopoly is The main objective of public monopoly is
earning the maximum profit. to provide the maximum welfare to the
society.

(5) Laspeyre’s Index Number Paasche’s Index Number

1. Distinctive Feature
A distinctive feature of Laspeyre’s index A distinctive feature of Paasche’s index
number is that it uses a group of number is that it uses a group of
commodities purchased in the base year commodities purchased in the current year
period as the basis of comparison. period as the basis of comparison.
2. Formula
The formula for measuring Laspeyre’s The formula for measuring Paasche’s
index number is as follows : index number is as follows :
∑ P1 q0 ∑ P1 q1
P01 = × 100 P01 = × 100
∑ P0 q0 ∑ P0 q1

Q. 3. (1) The types of demand are as follows :

(A) Total Cost :
(1) Meaning : Total cost is the total expenditure incurred by a firm on the
factors of production required for the production of goods and services.
Total cost is the sum of total fixed cost and total variable cost at various
levels of output.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 3

 (2) Formula : Total cost is calculated as follows : TC = TFC + TVC. Where,
TC = Total Cost, TFC = Total Fixed Cost and TVC = Total Variable Cost.
(a) Total Fixed Cost (TFC) : Total fixed costs are those expenses of production
which are incurred on fixed factors such as land, machinery, etc.
(b) Total Variable Cost (TVC) : Total variable costs are those expenses of
production which are incurred on variable factors such as labour, raw
material, power, fuel, etc.
(3) Example : If a particular manufacturer has incurred a total fixed cost of
` 50,000 and a total variable cost of ` 40,000 for manufacturing 20 fans,
the total cost can be calculated as follows :
TC = TFC + TVC
TC = 50,000 + 40,000
TC = 90,000
Total Cost = ` 90,000.
(B) Total Revenue :
(1) Meaning : Total revenue is the total sales proceeds of a firm by selling a
commodity at a given price. It is the total income of a firm.
(2) Formula : Total revenue is calculated as follows :
Total Revenue = Price × Quantity
(3) Example : If a particular manufacturer sells 20 fans by charging ` 6000
per unit, the total revenue can be calculated as follows :
TR = P × Q
TR = 6,000 × 20
TR = 1,20,000
Total Revenue = ` 1,20,000.
(2) The importance of macroeconomics can be explained with the help of the following
points :
(1) Explanation of functioning of an economy : Macroeconomic analysis gives
an idea of the functioning of an economic system. It helps to understand the
economic behaviour patterns of aggregative variables in a large and complex
economic system.
(2) Explanation of economic fluctuations : Macroeconomics helps to analyse
the causes of fluctuations in national income, total output, trade cycle and
employment level and makes an attempt to control them or reduce their severity.
(3) Study of national income : Study of macroeconomics is of immense
importance as it is related to the study of national income and social accounts.
Without a study of national income, it is not possible to formulate correct
economic policies.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (4) Consideration of economic development : Macroeconomic theories and
models help to understand the economic and social problems of poor and
developing countries such as poverty, inequalities of income and wealth,
differences in the standards of living of the people, etc. It suggests important
steps to achieve economic development in these countries.
(5) Helpful in measuring the performance of an economy : Macroeconomics
helps to analyse the performance of an economy. National Income (NI)
estimates are used to measure the performance of an economy over the time
by comparing the production of goods and services in one period with that of
the other period.
(6) Study of macroeconomic variables : To understand the working of the
economy, macroeconomics focuses upon the study of macroeconomic variables.
In India, main economic problems are related to the macroeconomic variables
such as total income, total output, employment level and general price level in
the economy. Macroeconomics studies the problems related to these
macroeconomic variables.
(7) Study of level of employment : Macroeconomics helps to analyse the general
level of employment and output in an economy.
(Note : Write any four points in the answer.)
(3) The factors influencing elasticity of demand are as follows :
(1) Nature of commodities : Nature of commodities is one of the important
factors influencing the elasticity of demand. We can classify commodities as
necessities, comforts and luxury goods. The necessary goods like salt,
medicines, etc. have less elastic demand. On the other hand, comfort and
luxury goods like cars, perfumes, jewellery, etc. have more elastic demand.
(2) Availability of substitute goods : A commodity having larger number of
substitutes tends to have elastic demand and vice versa. For example, due to the
availability of larger number of substitutes, the demand for cold drinks tends to
be elastic. Similarly due to a lack of substitutes, the demand for salt is inelastic.
(3) Number of uses : A commodity which has specific use has less elastic
demand. For example, a demand for a particular vegetable is less elastic. A
commodity which can be put to several uses has elastic demand. When the
price of such a commodity falls, it is put into various uses. Similarly when
the price of such a commodity rises, it is put only for important purposes. For
example, electricity has elastic demand.
(4) Habits : The demand for habituated goods tends to be inelastic. For example,
a smoker’s demand for cigarettes is inelastic. On the other hand, the demand
for non-habituated goods tends to be elastic. For example, demand for biscuits
is more elastic.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 5

 (5) Durability : Elasticity of demand also gets influenced by the durability of a
commodity. Durable commodities such as washing machine, television set
tend to have elastic demand and the perishable commodities such as milk,
eggs tend to have inelastic demand.
(6) Complementary goods : Demand for complementary goods is inelastic.
Complementary goods are demanded jointly. Therefore, their demand remains
almost fixed. For example, the demand only for sim card or mobile phone
tends to be inelastic. The goods which are not complementary to each other
have more elastic demand. For example, the demand of only magazines or
only cold drinks is elastic.
(7) Income of consumer : The demand for commodities tends to be inelastic
with a rise in income and elastic with a fall in income. For example, a rich
person’s demand for a particular commodity may be inelastic, but a poor
person’s demand for that same commodity may be elastic.
(8) Urgency of needs : The commodities that are needed urgently, i.e. the
commodities whose consumption cannot be postponed have less elastic
demand. For example, demand for medicines. On the other hand, the
commodities that are not needed urgently, i.e. the commodities whose
consumption can be postponed have more elastic demand. For example,
demand for computer.
(9) Time period : In a short run, the demand for specific commodity may tend
to be inelastic. In the long run, a consumer may demand a cheaper substitute
commodity. Thus, the demand for an original commodity tends to be elastic
in the long run.
(10) Proportion of expenditure : If the proportion of expenditure in a person’s
income is small, then demand for the product is relatively inelastic. For
example, newspapers. If the proportion of expenditure is large, then demand
for the product is relatively elastic.
(Note : Write any four points in the answer.)

(4) The importance of Law of DMU can be explained with the help of the following
points :
(1) To the consumer : The Law of DMU guides the consumers in planning their
budget so that they can achieve the maximum satisfaction from the given
income.
(2) To the government : The Law of DMU is helpful to the government in
implementing economic policies such as progressive tax policy, trade policy,
pricing policy, etc.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) To explain paradox of value : The Law of DMU helps in explaining the
paradox of value in use and value in exchange. The Law of DMU explains
how water has less price (value in exchange) though has more value in use.
Similarly the law also explains how diamond has more price (value in
exchange) though has less value in use.
(4) Basis of Law of demand : The Law of Demand is based on the Law of DMU.
Initially, due to more intensity of want, the consumer derives more marginal
utility from the initial units of consumption of a commodity. Therefore,
consumer readily pays more prices for the initial units of a commodity. As
consumer consumes further units of a commodity in quick succession, the
intensity of want decreases and so consumer derives less marginal utility from
the further units of consumption of a commodity. Therefore, consumer demands
further units of consumption of a commodity, only if they are available at
comparatively lower prices.
(5) The features of national income are as follows :
(1) Macroeconomic concept : National income represents income of the economy
as a whole rather than that of an individual. Therefore, national income is a
macroeconomic concept.
(2) Inclusion of value of only final goods and services : In order to avoid double
counting, the value of only final goods and services produced in the economy
are considered. While calculating national income, the value of intermediate
goods or raw materials is not considered. For example, while estimating the
value of sugar, the value of sugar cane is not separately taken into account, as
it is already included in the price of the sugar.
(3) Inclusion of net aggregate value : National income includes net value of
goods and services produced and does not include depreciation cost. (i.e. wear
and tear of capital assets)
(4) Inclusion of net income from abroad : National income includes net income
from abroad, i.e. difference between export value and import value (X-M) and
difference between receipts from abroad and payments made abroad (R-P).
(5) Expressed with reference to financial year : National income is always
expressed with reference to a specific time period. In India, it is calculated for
every financial year, i.e. from 1st April to 31st March.
(6) Flow concept : National income is a flow concept. It shows flow of goods and
services produced in the economy during a financial year.
(7) Expressed in monetary terms : National income is always expressed in
monetary terms. It represents only those goods and services which are
exchanged for money.
(Note : Write any four points in the answer.)
SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 7
Q. 4. (1) I disagree with this statement.
Reasons :
(1) The term ‘microeconomics’ is derived from the Greek word ‘mikros’ which
means a small or millionth part. Thus, microeconomics studies particular unit
of an economy.
(2) Microeconomics studies the economic behaviour of particular household,
individual firm, individual demand, individual supply, individual income, price
of a particular product, etc.
(3) Microeconomics studies how a particular consumer tries to attain maximum
satisfaction and how a particular producer tries to attain maximum profit.
Microeconomics does not include the study of the large aggregates. Thus,
microeconomics is not aggregative but is individualistic in nature.
Therefore, the scope of microeconomics is not unlimited but it is limited.

(2) I disagree with this statement.

Reasons :
(1) Supply gets determined by many other factors. Price is the most important
determinant of supply. Price and supply are directly related to each other.
(2) Besides price, the other factors such as cost of production, state of technology,
government policies, nature of market, prices of other goods, infrastructural
facilities, exports and imports, future price expectation, natural conditions, etc.
also determine the supply of goods.
(3) For example, due to the use of modern technology, the supply tends to increase
at given end. On the other hand, due to the use of outdated technology, supply
tends to decrease. Similarly, the supply of agricultural goods gets largely
determined by natural conditions.
Therefore, price is not the only determinant but is one of the determinants of
supply.
(3) I agree with this statement.
Reasons :
(1) In a monopoly market, there is a single seller or a single producer. Under
monopoly, monopolist has no rivals and he faces no competition.
(2) Under monopoly, entry of other firms is strictly restricted. Under monopoly,
many entry barriers such as natural, economic, technological or legal do not
allow competitors to enter the market.
(3) In monopoly, the monopolist’s individual supply itself becomes the market
supply and the firm itself becomes the industry. Therefore, in monopoly,
monopolist can set any price for his product. The buyers can either buy a
product at a price set by him or go without it. Similarly, he can also follow the
technique of price discrimination for maximizing the profit.
Thus, a seller is a price maker in monopoly.

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (4) I agree with this statement.
Reasons :
(1) Credit creation is an important function of commercial banks. Commercial
banks create credit on the basis of primary deposits.
(2) Commercial banks use demand and term deposits to lend after meeting the
cash reserve requirement. Commercial banks deposit the loan amount in the
borrower’s account when lending a loan.
(3) Thus, loans are made from primary deposits and secondary deposits are made
while lending loans.
Thus, commercial banks create credit.
(5) I disagree with this statement.
Reasons :
(1) Index numbers measure the changes in an economic variable in present times
with reference to the year in the past. This year in the past is known as base
year.
(2) For the calculation of index numbers, the normal year from the past is selected
as the base year. The base year should be normal, i.e. it should be free from
natural calamities, warlike conditions, emergencies, etc. Similarly, it should
not be too distant in the past.
(3) While preparing index numbers with reference to the base year, it is denoted
by the suffix ‘o’. The base year’s index of a selected variable is assumed as
100. The index numbers are measured for the current year on the basis of the
past year.
Thus, index numbers cannot be constructed without the base year.
Q. 5. (1)
(1) Ans. False.
Reasons : On the demand curve AE, the distance of CE is less than that of CA.
Thus, point ‘C’ is close to X-axis. Therefore, the demand at point ‘C’ is not
relatively elastic, but is relatively inelastic.

(2) Ans. False.

Reasons : On the demand curve AE, the distance of BE is greater than that of BA.
Thus point ‘B’ is close to Y-axis. Therefore, the demand at point ‘B’ is not unitary
elastic, but is relatively elastic.

(3) Ans. False.

Reasons : On the demand curve AE, the distance of DE is is equal to that of DA.
Thus point ‘D’ is equal to (equally away from) X-axis and Y-axis. Therefore, the
demand at point ‘D’ is not perfectly inelastic, but is unitary elastic.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 9

 (4) Ans. True.
Reasons : On the demand curve AE, at point ‘A’ the lower segment of the demand
curve is AE and there is no upper segment of the demand curve. Thus at point ‘A’,
the numerical value of upper segment of the demand curve is zero. Thus, at point
‘A’, the distance AE is greater than that of zero. Thus point ‘A’ lies on the Y-axis.
Therefore, the demand at point ‘A’ is perfectly elastic.
(2)
Commodity Base Year Current Year
p0 q0 p1 q1 p1q1 p0q1
X 8 30 12 25 300 200
Y 10 42 20 16 320 160
Total ∑ p1q1 = 620 ∑ p0q1 = 360
∑ p1 q1
Paasche’s index number P01 = × 100
∑ p0 q1
620
∴ P01 = × 100
360
31
∴ P01 = × 100
18
3100
∴ P01 =
18
∴ P01 = 172.222
∴ Paasche’s index number = 172.22

(3) (1) Benefits of nationalisation of banks :

(a) There was an increase in loan disbursement in urban and rural areas.
(b) Agriculture and retail traders started getting more loans.
(2) Commercial banks provide various services such as safe-deposits lockers,
demat facilities, internet banking, mobile banking, etc.
(3) Commercial bank play an important role in the financial system of a country.
They provide various services to individuals as well as business orgnisations
and contribute in economics progress.
Q. 6. (1) Practical difficulties in measuring national income are also known as statistical
difficulties. The practical difficulties in measuring national income are as follows :
(1) Problem of double counting : The greatest difficulty in calculating national
income is of double counting. It arises from the failure to distinguish properly,
between a final and an intermediate product. For example, flour used by a
bakery is an intermediate product and that by a household is a final product.
Therefore, sometimes the flour used by a bakery is taken wrongly as a final
product. This results in the problem of double counting. Double counting leads
to overestimation of national income.

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(2) Existence of non-monetized sector : In a developing country like India,
especially in rural areas, there exists the non-monetized sector. In India,
agriculture, still being in the nature of subsistence farming, a major part of
production is consumed at the farm itself and a very small part produced is
exchanged for other goods and services. Thus, exchange activities are carried
out without the use of money. Therefore, they are not calculated in national
income.
(3) Inadequate and unreliable data : In developing country like India, no
permanent machinery exists for the collection of data. Therefore, adequate and
correct data on production and cost data relating to crops, fisheries, animal
husbandry, forestry, construction workers, small enterprises, etc. are not
available. Besides this, data on unearned incomes, consumption and investment
expenditure of rural and urban population are also not available. This does not
reveal the actual size of national income and it leads to underestimation of
national income.
(4) Depreciation : Depreciation refers to wear and tear of capital assets, due to
their use in the process of production. There are no uniform, common or
accepted standard rates of depreciation applicable to the various capital assets.
Thus, it is difficult to make correct deductions for depreciation due to an
element of subjectivity.
(5) Capital gains or losses : Capital gains or capital losses, which accrue to the
property owners by increase or decrease in the market value of their capital
assets or changes in demand, are not included in the national income because
these changes do not result from current economic activities.
(6) Illiteracy and ignorance : Due to illiteracy and ignorance, small producers do
not keep an account of their production. So they cannot give information about
the quantity or value of their output. This distorts the estimation of national
income.
(7) Difficulties in the classification of working population : In India, working
population is not clearly defined. For instance, farmers in India are not engaged
in agriculture all round the year. Obviously, in the off season, they engage
themselves in alternative occupations. In such a case, it is very difficult to
identify their incomes from a particular occupation. This leads to underestimation
of national income.
(8) Valuation of inventories : Raw materials, intermediate goods, semi-finished
and finished products in the stock of the producers are known as inventories.
Valuation of inventories requires careful assessment. Any mistake in measuring
the value of inventory, distorts the value of the final production of the producer
which in turn distorts the estimation of national income.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 11

 (2) Non-tax sources of revenue of the government are as follows :
(1) Fees : Fee is paid by citizens in return for certain specific services rendered
by the government. For example, education fee, registration fee, etc.

(2) Prices of public goods and services : Modern governments sell various types
of commodities and services to the citizens. A price is a payment made by the
citizens to the government for the goods and services sold to them. For example,
railway fares, postal charges, etc.

(3) Special assessment : The payment made by the citizens of a particular locality
in exchange for certain special facilities given to them by the authorities is
known as ‘special assessment’. For example, local bodies can levy a special
charge on the residents of a particular area where extra / special facilities of
roads, energy, water supply, etc. are provided.

(4) Fines and penalties : The government imposes fines and penalties on those
who violate the laws of the country. The objective of the imposition of fines
and penalties is not to earn income, but to discourage the citizens from violating
the laws framed by the government. For example, fines for violating traffic
rules. However, the revenue from this source is comparatively limited.

(5) Gifts, grants and donations : The government may also earn some income
in the form of gifts by the citizens and others. The government may also
receive grants from the foreign governments and institutions for general and
specific purposes. Foreign aid has become an important source of development
finance for a developing country like India. However, this source of revenue
is uncertain in nature.

(6) Special levies : The government levies duties on those commodities, the
consumption of which is harmful to the health and well-being of the citizens.
Like fines and penalties, the objective of special levies is not to earn income,
but to discourage citizens from the consumption of harmful commodities. For
example, duties levied on wine, opium and other intoxicants.

(7) Borrowings : The government borrows from the citizens in the form of
deposits, bonds, etc. Government also gets loans from foreign governments
and international organizations such as IMF, World Bank, etc. In modern
times, loans are becoming more and more popular source of revenue for the
governments.

(3) (A) Statement of the Law of Demand : According to Dr. Alfred Marshall, “Other
things being equal, the amount demanded rises with a fall in price; and
diminishes with a rise in price.”

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(B) Exceptions : The following are the exceptions to the Law of Demand :
(1) Giffen goods : Sir Robert Giffen from England noticed that in the case of
inferior quality products (Giffen goods), the Law of Demand does not hold
good. When the price of Giffen goods falls, buyer’s real income increases. As
its effect, buyers demand more of superior quality goods. Thus, a fall in the
prices of Giffen goods leads to fall in their demand. For example, as the price
of bread falls, people demand less of bread and more of meat.
(2) Prestige goods : Diamonds, luxury cars, posh bungalows, etc. are considered
as prestige goods. Such goods have a snob appeal. Therefore, prestige goods
are demanded in greater quantities at higher prices.
(3) Speculation : Some consumers anticipate a fall in the price of a commodity
in the near future, so the demand for the commodity in question falls at the
present price. Similarly, some consumers anticipate a rise in the price of the
commodity in the near future, so the demand for the commodity in question
rises at the present price.
(4) Price illusions : Many consumers wrongly assume that high priced goods are
of better quality. Due to this illusion, such buyers demand costlier goods in
greater quantities.
(5) Ignorance : Many times the buyers do not have a complete knowledge of a
market. Due to such ignorance, they demand costlier goods in greater quantities.
(6) Habitual goods : Certain goods like tobacco, cigarettes, etc. are consumed
due to the habits. Therefore, demand of such goods remains constant even if
their prices change.
In all these cases, the Law of Demand becomes inapplicable. Therefore, they are
considered as exceptions to the Law of Demand. The exceptions to the Law of
Demand can be explained with the help of the following diagram :

In the diagram, Y-axis represents the price of a commodity and X-axis represents
the demand of commodity x. From the diagram, it can be seen that the exceptional
demand curve, i.e. DD slopes upwards from the left to the right. In exceptional
cases, the price and demand are directly related to each other. Therefore, the
exceptional demand curve has a positive slope.
________
SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 13