ECONOMICS

SOLUTION : PRACTICE PAPER 1

Q. 1. (A)
(1) (b) avoid double counting
(2) (a) Dx = f (Px)
(3) (c) 100
(4) (b) develop industry, agriculture, and other key sectors
(5) (c) Prof. Hugh Dalton
Q. 1. (B)
(1) Air conditioners
(2) Mutual fund
(3) Patents
(4) Individual demand
(5) Wages
Q. 1. (C)
(1) Total Outlay/Total Expenditure Method
(2) Fine
(3) Utility
(4) Depreciation
(5) Commercial banks
Q. 1. (D)
(1) (c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(2) (c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(3) (d) Both (A) and (R) are true and (R) is not the correct explanation of (A).
(4) (c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(5) (c) Both (A) and (R) are true and (R) is the correct explanation of (A).
Q. 2. (A)
(1) (A) Identified concept : Payment of factor price/reward.
(B) Explanation of concept : The factors of production, viz. land, labour, capital
and entrepreneur are essential for the production of goods. These factors of
production get rewards in the form of rent, wages, interest and profit respectively
from the producer for participating in the production process.
(2) (A) Identified concept : Export trade.
(B) Explanation of concept : The sale of goods and services by one country to
another country is called export trade.
SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 1
 (3) (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.
(4) (A) Identified concept : Product for self-consumption.
(B) Explanation of concept : The product for self-consumption is the part of the
product that is set aside to meet the needs of oneself and one’s family.
(5) (A) Identified concept : Monopoly market.
(B) Explanation of concept : In a monopoly market, a unique product having no
close substitutes is produced and sold by the monopolist.
Q. 2. (B)

(1) Gross National Product Gross Domestic Product

1. Meaning
Gross National Product is the total measure Gross Domestic Product is the gross
of flow of all final goods and services at market value of all final goods and services
market value resulting from current produced within the domestic territory of a
production during a financial year in a country during a financial year.
country, including net income from abroad.
2. Formula
GNP = C + I + G + (X − M) + (R − P) GDP = C + I + G + (X − M)

(2) Simple Index Number Weighted Index Number

1. Meaning
Index numbers measured by giving equal Index numbers measured by giving suitable
importance (weight) to every commodity importance (weight) to every commodity
are known as simple index numbers. on the basis of their quantity are known as
weighted index number.
2. Nature
The measurement of simple index number The measurement of weighted index
is comparatively simple. number is comparatively complex.

(3) Special Assessment Special Levy

1. Meaning
The payment made by the citizens of a A duty levied by the government on
particular locality in exchange for certain unhealthy items with the basic intention of
special facilities given to them by the discouraging citizens from consuming
authorities is known as special assessment. unhealthy items is known as special levy.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 2. Examples
A special charge levied by local bodies on Duty levied on wine, opium and other
the residents of a particular area where intoxicants are the examples of special
extra / special facilities of roads, energy, levy.
water supply are provided is an example
of special assessment.

(4) Natural Monopoly Legal Monopoly

1. Meaning
The monopoly that emerges due to The monopoly that emerges due to legal
availability of natural resources as well as provisions of the government is known as
some natural conditions is known as legal monopoly.
natural monopoly.
2. Creation
Natural monopoly is created by the tactful Legal monopoly is created by use of
utilisation of the available natural resources patents, copyrights, trademarks, etc.
or natural climatic conditions.

(5) Desire Demand

1. Meaning
Desire refers to a mere wish of a person to Demand refers to a desire backed by the
have a particular commodity. ability to pay and the willingness to pay
for a particular commodity.
2. Relation with price, place and time
Desire has no relation with price, place Demand has relation with price, place and
and time. time.

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

(1) Direct Demand : Commodities and services satisfying the human wants
directly are said to have direct demand. Direct demand is also called
conventional demand. For example, demand for clothes.
(2) Indirect Demand : Commodities and services satisfying human wants
indirectly are said to have indirect demand. Indirect demand is also called
derived demand. For example, demand for the factors of production.
(3) Joint demand : Two or more commodities that are demanded together to
satisfy a single want are said to have joint demand. Complementary commodities
have joint demand. For example, demand for needle and thread.
(4) Composite Demand : Commodities that are used to satisfy several wants are
said to have composite demand. For example, demand for electricity.
SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 3
 (5) Competitive Demand : Commodities that are substitutes for each other are
said to have competitive demand. For example, demand for tea and coffee.
(Note : Write any four points in the answer.)

(2) The principles (canons) of taxation propounded by Adam Smith are as follows :
(1) Canon of equity or equality : Adam Smith suggested that every person will
pay the taxes to the government in proportion to his / her ‘ability to pay’. It
means rich people should pay more tax compared to the poor.
(2) Canon of certainty : According to Adam Smith, the taxpayer should know in
advance how much tax he / she has to pay, at what time he / she has to pay the
tax and in what form the tax is to be paid to the government.
(3) Canon of convenience : According to this canon, every tax should be levied
in such a manner and at such a time that its payment becomes convenient to
the tax payer.
(4) Canon of economy : According to this canon, the cost of tax collection should
be the minimum. If a major portion of the tax proceeds is spent on the tax
collection itself, then such a tax cannot be considered as a good tax.
(3) The Law of DMU can be explained with the help of the following points :
(1) The Law of DMU was first proposed by Mr. Gossen. However, this law was
further explained by Dr. Alfred Marshall in his famous book, ‘Principles of
Economics’ in 1890.
(2) Statement of the Law : According to Dr. Alfred Marshall, “Other things
being equal, the additional benefit which a person derives from the increase
in the stock of a thing diminishes with every increase in the stock that he
already has”.
(3) The Law of DMU can be explained with the help of the following schedule :

Unit of a Commodity MU

1 08

2 06

3 04

4 02

5 00

6 − 02

(4) From the schedule, it can be seen that as the stock of commodity increases
from 1 to 6, the marginal utility diminishes from 8 to − 02.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (5) The Law of DMU can be explained with the help of the following diagram :

(6) In the diagram, the Y-axis represents the marginal utility and the X-axis
represents the units of consumption. It can be seen that, the consumer derives
the maximum utility from the first unit of the consumption. As consumer keeps
consuming the further units, the marginal utility keeps falling.
(7) On the consumption of the 5th unit, the marginal utility becomes zero. Therefore
on the consumption of 5th unit, the marginal utility curve touches the X-axis.
At this point the total utility is maximum. Therefore, this point is called the
point of satiety.
(8) On the consumption of the 6th unit, the marginal utility becomes negative. As
its effect, the total utility also starts diminishing.
From beginning to end, the marginal utility curve slopes downwards from the
left to the right.
(4) The following are the features of microeconomics :
(1) Study of individual units : Microeconomics is concerned with the study of
economic behaviour of small individual economic units of an economy. For
example, microeconomics studies the economic behaviour of particular
household, particular firm, price of a particular product, etc.
(2) Price theory : Microeconomics is primarily concerned with price determination
of goods and services as well as factors of production, viz., land, labour, capital
and entrepreneur. Therefore, microeconomics is also known as Price Theory.
(3) Partial equilibrium : Microeconomics isolates individual economic units
from the other forces of economy. It analyses the equilibrium positions of
individual economic units such as individual consumer, individual firm
separately. Therefore, microeconomic analysis is a partial equilibrium analysis.
Partial equilibrium analysis is based on the assumption of ‘Ceteris Paribus’,
i.e. other things remaining the same. Thus, partial equilibrium neglects the
interdependence between economic variables of an economy.

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

 (4) Based on certain assumptions : Microeconomics is based on certain
assumptions such as full employment, pure capitalism, laissez-faire policy,
perfect competition, etc. prevailing in an economy. But in reality, an economy
with such conditions does not exist. Most of the theories of microeconomics
are based on the ‘Ceteris Paribus’ assumption, i.e. other things remaining the
same.
(5) Slicing method : Microeconomics splits the economy into small individual
units. Then it studies the economic behaviour of each individual unit separately
in detail. Thus, microeconomics uses slicing method for its analysis.
(6) Use of marginalism principle : Consumers as well as producers take all
important microeconomic decisions at the margin. Therefore, microeconomics
uses marginalism principle as a tool of analysis.
(7) Analysis of market structures : Microeconomics studies market structures
such as perfect competition, monopoly, oligopoly, monopolistic competition,
etc. It also describes how the prices of goods and services are determined in
these markets.
(8) Limited scope : Microeconomics does not deal with national economic
problems such as poverty, unemployment, inflation, depression, deficit in
balance of payments, etc. Therefore, microeconomics has limited scope.
(Note : Write any four points in the answer.)

(5) The features of composition of India’s foreign trade are as follows :

(1) Increasing share of GNP : The share of India’s foreign trade in GNP is
steadily increasing. The share of India’s foreign trade in GNP was only 17.55
per cent in 1990-91. It increased to 25 per cent in 2006-07 and 48.80 per cent
in 2016-17.
(2) Increase in the volume and value of trade : Since 1990-91, the volume and
value of India’s foreign trade has been increasing. India currently exports and
imports a wide range of high value goods and services in huge volumes.
(3) Changes in the composition of exports : Before independence, India used to
export basic commodities like jute, cotton, tea, oilseeds, leather, food grains,
cashew nuts, mineral products to other countries. Since independence, India
has started exporting manufactured goods such as ready-made garments, gems
and jewellery, computer hardware and software. Thus the composition of
India’s exports has changed.
(4) Changes in the composition of imports : Before independence, India used to
import a large number of consumer goods such as medicines, cloth, motor
vehicles, electrical goods, etc. At present, India is a major importer of petrol
and petroleum, as well as capital goods such as high-tech machinery, chemicals,
fertilizers, steel, etc.
6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)
 (5) Oceanic trade : Most of India’s foreign trade is by sea. About 68% of India’s
total foreign trade is done by sea. India also has foreign trade relations with
neighbouring countries like Nepal, Afghanistan, Myanmar, Sri Lanka, etc.
(6) Development of new ports : Large scale foreign trade was carried out in
India mainly from important ports like Mumbai, Kolkata, Chennai, etc.
Therefore, these ports were overburdened. Hence, new ports like Kandla,
Cochin, Vishakhapatnam, Nhava Sheva, etc. have been developed in India to
reduce the additional burden on the existing ports.
(Note : Write any four points in the answer.)
Q. 4. (1) I disagree with this statement.
Reasons :
(1) In a perfect competition, a large number of sellers sell their homogeneous
commodity in the market.
(2) Their number is so large that a single seller cannot influence the market supply
and thereby price.
(3) The price is determined by the interaction of market demand and market supply
of a commodity.
Thus, in perfect competition, a seller is not a price maker but a price taker.

(2) I disagree with this statement.

Reasons :
(1) Based on samples : Index numbers are generally based on samples. While
constructing index numbers, we cannot include all the items. Hence, index
numbers suffer from sampling errors.
(2) Bias in the data : Index numbers are constructed on the basis of various types
of data which may be incomplete. There may be bias in the data collected. This
is bound to affect the results of the index numbers adversely.
(3) Misuse of index numbers : Index numbers can be misused. They compare a
situation in the current year with a situation in the base year. Hence, a person
may choose a base year which will be suitable for his purpose. For example,
while studying the trends in employment level, if a year of drought or recession
is selected as a base year and the level of employment in the current year is
checked with reference to employment level in the base year, we may get the
misleading results.
(4) Defects in formulae : There is no perfect formula for the construction of an
index number. It is only an average and so it has all the limitations of an average.
(5) Changes in the economy : The habits, tastes and expectations of the people
in a country always change over a period of time. However, these changes
cannot be included in the estimation of index numbers.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 7

 (6) Qualitative changes : The price or quantity index numbers may ignore the
changes in qualities of the products. A commodity in the current year may have
a higher price as well as higher quality than its low priced ordinary version in
the base year in the past. However, these changes cannot be included in the
estimation of index numbers.
(7) Arbitrary weights : While constructing the index numbers, the weights
assigned to different commodities may be arbitrary.
(8) Limited scope : An index number has limited scope. Index numbers constructed
for one purpose cannot be used for any other purpose.
(Note : Write any three points in the answer.)
(3) I agree with this statement.
Reasons :
(1) According to value added approach under output method, the value added at
each stage of production process is included. The difference between the value
of final outputs and inputs at each stage of production is called value added.
(2) Thus, GNP is obtained as the sum total of the values added by all different
stages of the production process, till the final output is reached in the hands of
consumers, to meet the final demand.
(3) This can be illustrated with the help of the following table :

Production Value of Value of Input Value Added

Stage Output (`) (`) (`)
Sugar cane
30 0 30
(Farmer)
Sugar
50 30 20
(Manufacturer)
Sugar (Retailer/
60 50 10
Merchant)
Total Value 60

In the given example, a farmer produces and sells sugar cane for ` 30 to the
sugar manufacturer. Sugar manufacturer sells sugar for ` 50 to the retailer.
Retailer sells sugar for ` 60 to the consumer. So the value added by farmer
(` 30), manufacturer (` 20), and retailer (` 10) i.e. total of ` 60 is included in
national income.
(4) I disagree with this statement.
Reasons :
(1) In modern times, modern government performs many other optional functions
in addition to the traditional obligatory functions of defence and civic
administration.
8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)
 (2) The government performs optional functions for the purpose of boosting
economic and social development in the country. The optional functions of the
government are constantly increasing.
(3) Provision of education and health services, implementation of social security
schemes, promotion of industrial development, employment generation, etc.,
optional functions are carried out by the government.
Thus, obligatory function is not the only function of government; it is one of many
functions.
(5) I agree with this statement.
Reasons :
(1) Macroeconomics is the study of entire economy. On the other hand,
microeconomics is a study of a particular segment of an economy.
(2) Macroeconomics studies aggregate demand, aggregate supply, national income,
general price level, etc. On the other hand, microeconomics studies individual
demand, individual supply, individual income, price determination of particular
product, etc.
(3) Macroeconomics follows general equilibrium analysis. On the other hand,
microeconomics follows partial equilibrium analysis. Macroeconomics uses
lumping method. On the other hand, microeconomics uses slicing method.
Therefore, macroeconomics is different from microeconomics.
Q. 5. (1)
(1) Increase in demand
(2) Decrease in demand
(3) OP
(4) Change in demand.

(2)
(1)

Price in 2005 (Base year) Price in 2009 (Current year)

Commodities
(P0) (P1)
P 20 30
Q 60 80
R 100 130
S 40 60
Total ∑P0 = 220 ∑P1 = 300

∑ p1
(2) Price Index Number P01 = × 100
∑ p0

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

 300
(3) Price Index Number = P01 = × 100 = 136.36
220
(3) (1) Utility is the ability of a product to satisfy a human desire.
(2) A consumer takes efforts to rationally select commodities in order to maximise
his utility.
(3) In my opinion, the concept of utility is really important for consumers as well
as producers as it helps them to take optimum decisions with respect to
consumption and production.

Q. 6. (1) (A) Law of Supply : The Law of Supply can be stated and explained with the
help of the following points :
(1) Law of Supply : The Law of Supply was propounded by Dr. Alfred
Marshall in his famous book, ‘Principles of Economics’. The Law of
Supply explains the direct relationship between the price and the supply.
(2) Statement of the Law : “Other things being constant, the higher the price
of a commodity, greater is the quantity supplied and lower the price of a
commodity, smaller is the quantity supplied.”
(B) Exceptions to Law of Supply :
The exceptions to the law of supply are as follows :
(1) Labour supply : In the initial stages, labour supply increases as wage rate
increases. However, at a later stage, workers would prefer leisure to work.
They prefer to earn same amount of income by working for less hours.
Therefore, in the initial stage, the labour supply curve slopes upwards
from the left to the right. However, in the later stage, the labour supply
curve bends backward. This is explained in the following schedule and
diagram :
Wage Rate (`) Hours of Work
(Per Hour) (Per Day)
100 5
200 7
300 6

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 From the schedule and diagram it can be seen that in the initial stages as
wage rate rises from ` 100 to ` 200, the supply of labour also rises from
5 hours to 7 hours. However, when the wage rate rises further from ` 200
to ` 300, the supply of labour do not rise further; rather it is reduced from
7 hours to 6 hours. Thus, after the wage level ` 200, the supply curve
slopes backwards from the point A towards Y-axis indicating that at higher
prices fewer labour hours are supplied.
(2) Agricultural goods : Agricultural goods require suitable climatic
conditions and sufficient period of growth. Therefore, the supply of
agricultural goods cannot be increased overnight though their prices rise.
Similarly, due to favourable conditions, the supply of agricultural goods
may rise even at their constant prices. Therefore, in case of agricultural
goods, the law is inapplicable. Therefore, agricultural goods, are exception
to the Law of Supply.
(3) Urgent need for cash : If a seller needs cash urgently, he is forced to sell
more even at less prices / below market prices. Therefore, the sale of goods
influenced by the need for cash is considered as an exception to the Law
of Supply.
(4) Perishable goods : Perishable goods like vegetables, flowers, eggs, etc.
cannot be stored for a long period of time. Seller has to bear a huge loss,
if perishable goods do not get sold. Therefore, in case of perishable goods,
the supplier would offer to sell more quantities at lower prices to avoid
losses. Therefore, the sale of perishable goods at low price is considered
as an exception to the Law of Supply.
(5) Rare goods : The seller shows less willingness to sell the rare and precious
articles like rare paintings, old coins, antique goods, etc. even though their
prices are high. The supply of rare articles remains unchanged though their
prices are high. Therefore, rare articles are exceptions to the Law of
Supply.

(2) (A) Meaning of Elasticity of Demand :

(1) The elasticity of demand is a technical term which describes the degree
of responsiveness of change in quantity demanded to fall or rise in its
price or the responsiveness of change in quantity demanded to change in
other factors such as change in the income of the consumer or change in
the prices of other goods.
(2) According to Alfred Marshall, “Elasticity of demand is great or small
according to the amount demanded which rises much or little for a given
fall in price and quantity demanded falls much or little for a given rise in
price”.

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

 (B) Types of Elasticity of Demand :
(1) Income Elasticity of Demand :
(a) Meaning : Income elasticity of demand can be defined as the percentage
change in the quantity demanded of a commodity in response to a
percentage change in the income of the consumer only.
ΔQ Y
(b) Formula : Ey = ×
Q ΔY

(c) Types : The types of income elasticity of demand are explained in the
following table :

Sr. No. Types Explanation Examples

1. Positive Income The change in the income of a Normal goods (For
Elasticity of Demand consumer and the change in the example, Ice cream)
demand for a commodity have
direct relation.
2. Negative Income The change in the income of a Cheap Quality (Giffen)
Elasticity of Demand consumer and the change in the Goods. (For example,
demand for a commodity have Bread, Vanaspati ghee)
inverse relation.
3. Zero Income The change in the income of a Necessities (For example,
Elasticity of Demand consumer brings no change in Medicines)
the demand for a commodity.

(2) Cross Elasticity of Demand :

(a) Meaning : Cross elasticity of demand can be defined as the percentage
change in the quantity demanded of one commodity (say ‘x’) in response
to the change in the price of another commodity (say ‘y’).
Δ Q x Py
(b) Formula : Ec = ×
Qx Δ P y
(c) Types : The types of cross elasticity of demand are explained in the
following table :
Sr. No. Types Explanation Examples
1. Positive Cross Elasticity Direct relation between the Substitute Goods
of Demand demand for one good and (Tea-Coffee)
price of another good.
2. Negative Cross Elasticity Inverse relation between the Complementary Goods
of Demand demand for one good and (Petrol and Two Wheeler)
price of another good.

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 3. Zero Cross Elasticity of No relation between the Unrelated Goods
Demand demand for one good and (Tea and Petrol)
price of another good.

(3) Price Elasticity of Demand :

(a) Meaning : Price elasticity of demand can be defined as the percentage
change in the quantity demanded of a commodity in response to a
percentage change in the price of a commodity only.
ΔQ P
(b) Formula : Ed = ×
Q ΔP
(c) Types : The types of price elasticity of demand are explained in the
following table :

Degree of
Sr. No. Elasticity of Types Description
Demand
Percentage change in price does
1. Ed = 0 Perfectly Inelastic Demand
not affect demand at all.
Percentage change in demand is
2. Ed = 1 Unitary Elastic Demand equal to percentage change in
price.
Percentage change in demand is
3. Ed > 1 Relatively Elastic Demand greater than percentage change
in price.
Percentage change in demand is
4. Ed < 1 Relatively Inelastic Demand lesser than percentage change in
price.
Slight percentage change in price
5. Ed = ∝ Perfectly Elastic Demand
brings infinite change in demand.

(3) The functions of RBI are as follows :

(1) Issue of currency notes : The Reserve Bank of India has a monopoly on
printing of all rupee notes (except one rupee note) and all coins. According to
the Minimum Reserve Policy of 1957, the Reserve Bank of India has to reserve
at least ` 200 crore. Of this, ` 115 crore should be kept in terms of gold and
` 85 crore should be kept in terms of foreign currency and government
securities.
(2) Acting as a banker to the government : The Reserve Bank of India acts as
a banker to the government. The Reserve Bank of India accepts deposits from
the Central and State Governments and makes payments on their behalf as a

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 representative of the Government. The Reserve Bank of India assists the
government in managing public debt and provides advice on a number of
financial issues.
(3) Acting as a banker to banks : The Reserve Bank of India has statutory
control over all commercial banks in India. All Scheduled Banks in India are
required to reserve minimum cash with the Reserve Bank of India as per their
demand and term liabilities. The Reserve Bank of India provides financial
assistance to banks by discounting of eligible bills, providing advances against
approved securities.
(4) Acting as a custodian of foreign exchange reserves : The Reserve Bank of
India acts as the custodian of foreign exchange reserves. The Reserve Bank of
India conducts the buying and selling of currencies of all member countries of
the International Monetary Fund. The Reserve Bank of India helps in
maintaining the official rate of exchange of rupee as well as ensuring its
stability.
(5) Controlling credit : As the Supreme bank in the country, the Reserve Bank
of India controls the credit creation process of commercial banks. The Reserve
Bank of India uses quantitative techniques to control the volume of credit, such
as bank rates, open market operations, Cash Reserve Ratio (CRR) and Statutory
Liquidity Ratio (SLR). The Reserve Bank of India uses qualitative tools to
regulate the use of credit, such as fixing margin requirements, credit rationing,
moral suasion, etc.
(6) Collection and publication of data : The Reserve Bank of India collects and
publishes statistical information related to banking and other financial sectors
of the economy.
(7) Carrying out promotional and developmental functions : The Reserve
Bank of India carries out promotional and developmental functions such as
extending banking services in semi-urban and rural areas of India, providing
financial security to depositors, providing agricultural credit to farmers,
providing industrial credit to boost industries.
(8) Performing other functions : The Reserve Bank of India acts as a clearing
house for settling the accounts between its member banks. The Reserve Bank
of India acts as the lender of last resort to all banks in India and provides
liquidity to banks experiencing financial difficulties.
________

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