CBSE Class 12 Economics Solved Practice Paper for 2018 Board Exam
Solved paper for Class 12 Economics is available here. This paper contains important solved questions for Class 12 Economics board exam 2018. The format of this solved paper is almost similar to latest Class 12 Economics Sample Paper issued by CBSE.
The format of CBSE Class 12 Economics board exam 2018 is completely changed and students can learn more about the new pattern (or blueprint) from the link given below.
All the questions in this paper are extremely important and are expected to be asked in CBSE Class 12 Economics board exam 2018.
Fully solved CBSE Class 12 Economics practice paper
Question 1: Define Marginal Physical Product.
Marginal Physical Product is the change in output produced by employing one additional unit of the variable input. It can be calculated as:
MPPn = (Δ TPP)/(Δ Units of variable input) or MPPn = TPPn ‒ TPPn-1
Question 2: Define indifference curve.
Indifference curve is a diagrammatic representation that shows different combinations of two goods where each offers equal level of satisfaction to the consumer. Since the various combinations provide the same utility, the consumer is indifferent to them; hence, the term - Indifference Curve.
Question 3: When is a consumer said to be rational?
Rational consumers are those who make logical choices while buying products. They don’t just purchase based on price. For example, if a product is discounted but does not offer much value, then the rational consumer will not buy it.
Question 4: State any one assumption for the construction of the curve that shows the possibilities of potential production of two goods in an economy.
Increasing marginal opportunity cost or any other valid assumption.
Question 5: Discuss the primary reason for ‘indeterminateness of demand curve’ under the oligopoly form of market.
Indeterminateness of Demand Curve: In an Oligopoly form of market no single firm can predict its prospective sales with perfection. This is because any given change in the price/output decision by a rival firm would initiate a series of actions, reactions and counter actions by others. Therefore there is no certain nature and position of demand curve under this form of market for a firm.
Question 6: Difference between substitute goods and complementary goods
Substitute goods may be used in place of each other
Complementary goods are used together
If the price of one commodity increases quantity demanded of its substitute will increase and vice versa
If the price of a commodity increases the demand for its complementary will decrease and vice versa.
Tea and coffee, coke and Pepsi are some of the best examples of substitute goods
Car and petrol, sugar and milk are some of the best examples of complementary goods
Question 7: (a) Arrange the following coefficients of price elasticity of demand in ascending order: ‒ 0.7, ‒ 0.3, ‒ 1.1, ‒ 0.8
(b) Comment upon the degree of elasticity of demand for Good X, using the total outlay method, if the price of X falls from Rs. 18 per unit to Rs. 13 per unit and its quantity demanded rises from 50 units to 100 units.
(a) Here, minus sign only represents the inverse relation between price and quantity demanded.
Ascending order: -0.3, -0.7,-0.8,-1.1.
Price (in rupees)
Quantity (in units)
Total outlay (in rupees)
Conclusion: The given data shows an inverse relation between Px and Total outlay, thus as per the total expenditure method, Ed > 1.
Question 8: How is the price of a commodity determined in a perfectly competitive market? Explain with help of a diagram.
Price of a commodity is determined by market demand and market supply of a commodity,
(i.e., industry is the price maker).
An individual producer/firm has no role in the determination of the price of the commodity
(firm is a price taker).
No individual seller or buyer can influence the price of the commodity.
DD and SS are Market demand and market supply curves intersecting at E. OQ quantity
(Equilibrium Quantity) would be offered for sale and demanded by the buyers at OP price
(Equilibrium Price) per unit. The industry is in equilibrium.
Question 8: Explain how the following factors affect the supply of the commodity (any two)
(a) Price of factor inputs (b) State of technology (c) Government taxation Policy
Supply of a commodity is affected by following factors:
(a) Price of factor Inputs: If factor input price increases, cost of production generally rises, accordingly producers are willing to supply less at the existing price as the profit probability decreases. This implies leftward shift in supply curve and vice-versa, keeping other factors constant.
(b) State of Technology: Improvement in technique of production raises productivity and generally lowers per unit cost of production, consequently the probability to earn more profit also increases and hence the producer is induced to supply more, as a result supply curve shifts towards right.
(c) Government Taxation Policy: If government increases taxes, it will affect the cost of production adversely and hence supply decreases. But if Government decreases the tax the cost of production will fall and the producer will be induced to increase the supply of the commodity, ceteris paribus.
Question 9: Identify which of the following is not true for the Indifference Curves. Give valid reasons for choice of your answer:
(a) Lower indifference curve represents lower level of satisfaction.
(b) Two regular convex to origin indifference curves can intersect each other.
(c) Indifference curve must be convex to origin at the point of tangency with the budget line at the consumer’s equilibrium.
(d) Indifference curves are drawn under the ordinal approach to consumer equilibrium
Out of the given options, (B) is incorrect. Indifference Curves have a property that two ICs cannot intersect. Suppose, there are any two ICs intersecting each other. As per the figure
A = C (on IC1)
D = E (on IC2)
But if we see the peculiarity of point B (the point of intersection), this would result into absurd situation of A=C=B & D=C=B, which is not possible, as they are violating the basic definition of the Indifference Curves.
Question 10: Suppose the value of demand and supply curves of a Commodity-X is given by the following two equations simultaneously:
Qd = 200 –10p Qs = 50 + 15p
(i) Find the equilibrium price and equilibrium quantity of commodity X.
(ii) Suppose that the price of a factor inputs used in producing the commodity has changed, resulting in the new supply curve given by the equation
Qs’ = 100 + 15p
Analyse the new equilibrium price and new equilibrium quantity
(i) We know that the equilibrium price and quantity are achieved at;
Qd = Qs
200- 10 p = 50 +15p
150 = 25p
Therefore, Equilibrium Price p = 6
And, Equilibrium Quantity q = 200 – (10) (6) = 140 units
If the price of factor of production has changed, then under the new conditions;
Qd = Qs
200 ‒ 10p = 100 + 15p
⇒ 25p = 100
Therefore, Equilibrium Price p = 4
And, Equilibrium Quantity q = 200 – (10)(4) = 160 units
Thus as the equilibrium price is decreasing the equilibrium quantity is increased.
Question 11: (a) Why is Total Variable Cost curve inverse S- shaped?
(b) What is Average Fixed Cost of a firm? Why is an Average Fixed Cost Curve a rectangular Hyperbola? Explain with help of a diagram.
(a) Total Variable Cost is zero at zero level of output. It initially increases at decreasing rate and later it increases at increasing rate. TVC is an inversely S-shaped curve due to the Law of Variable Proportion.
(b) Per unit fixed cost is known as Average Fixed Cost. As the value of Total Fixed Cost doesn’t vary at any level of output in short run and if it is divided by an incremental number the result would be diminishing with the same proportion as that of the proportion of increase of the number of units and the product will be same.
Since TFC remains same at different levels of output, AFC falls as the level of output is increased.
The AFC keeps on falling as the level of output increases. AFC can never become zero.
Question 11: (a) A consumer, Mr Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py . What will happen if ?
(b) Identify which of the following is not true for the Indifference Curves theory. Give valid reasons for choice of your answer
If (MUx/Px) > (MUy/Py), then it means that satisfaction derived from consumption of good X is greater than the satisfaction derived from consumption of Good Y.
Mr. Aman will reallocate his income by spending more on good X. Utility derived from X goes on diminishing and reverse preposition occurs for Good Y, this process will continue till (MUx/Px) = (MUy/Py).
The second statement ‘ Two regular convex to origin indifference curves can intersect each other' is not true as the intersection of two regular indifference curves indicate one such point (point of intersection) which yields the similar satisfaction of two different indifference curves which is not possible. In the figure there are two indifference curves IC1 and IC2 intersecting each other, there is clear violation of assumption of monotonic preference.
As per figure satisfaction derived at point A = satisfaction derived at point C (on IC1)
And, satisfaction derived at point D = satisfaction derived at point E (on IC2)
At intersecting point B;
Satisfaction derived by consumer at points A, C and B is equal and
A = C = B (On IC1)
D = E = B (On IC2)
Consequently A = D (which is absurd)
Thus we can say that IC’s can’t intersect each other.
Question 12: State, with valid reasons, which of the following statement are true or false:
(a) Average Revenue curve under the Perfect Competition is a downward sloping curve.
(b) AFC curve is a rectangular hyperbola curve.
(c) When MR is falling but positive, TR will also be falling and positive.
(a) False: Since the firm under Perfect Competition is a price taker, AR curve will be a straight line parallel to X-axis.
(b) True: Since TFC remains unchanged / constant.
(c) False: When MR is falling but positive, TR will be rising.
Section B: Macroeconomics
Question 13: How one can measure fiscal deficit?
By using formula:
Fiscal deficit = Total expenditure ‒ Total receipts (Excluding borrowing)
Or Fiscal deficit = Borrowing
Question 14: What is ‘aggregate demand’ in macroeconomics?
Value of final products the buyers are planning to buy during a given period at a given level of income.
Question 15: Define the capital receipts of a government
Solution 15: All money mobilised by government that either creates liability or reduces assets of the government is termed as capital receipts.
Question 16: Define nominal flow.
Nominal flow is the flow of factor payments and payments for goods and services between households & firms.
Question 17: Explain how ‘Depreciation of currency’ promotes exports of a country?
When price of foreign currency in terms of domestic currency rises in the foreign exchange market it is termed as depreciation of domestic currency.
Any depreciation of home currency results in increase in exports of the country since it increases the global competitiveness of the goods i.e., foreign countries can purchase more quantity of goods and services with the same amount of foreign currency from the domestic country. As a result exports of the domestic country rise.
Question 18: Name the broad categories of transactions recorded in the 'capital account' of the Balance of Payments Accounts.
(1) Borrowings from and to abroad
(2) Investments from and to abroad.
(3) Decreases and increases in foreign exchange reserves
Question 19: How will ‘Reverse Repo Rate’ and ‘Open Market Operations’ control excess money supply in an economy? (4)
Reverse Repo rate is the rate at which Central Bank borrows money funds commercial banks.
Increase in Reverse Repo Rate induces banks to transfer more funds to Central Bank and reduces banks’ ability to create credit.
Open Market Operations refers to buying and selling of government securities by Central Bank from/to public and commercial banks. Sale of such securities reduces the reserve of commercial banks and adversely affects bank’s ability to create credit and hence decreases the money supply in the economy.
Question 20: What is ‘deficient demand’? Explain the role of ‘Bank Rate’ in removing it.
Deficient Demand is the amount by which the aggregated demand falls short of aggregate supply at full employment level. It causes fall in price level.
Bank Rate is the rate of interest at which central bank lends to commercial banks for long term. The central bank can reduce deficient demand by lowering Bank Rate. When central bank lowers bank rate.
Commercial banks also lower their lending rates. Since borrowing becomes cheaper, people borrow more. This leads to rise in aggregate demand and thus helps in reducing deficient demand.
Question 21: How does money fulfill the short comings of Barter system?
Money occupies a unique position in a modern capitalist economy. It is the lifeline of a modern economy.
Money fulfils the short comings of the Barter system in the following ways
(i) Eliminates Double Coincidence of wants: The buyer exchanges goods for money and the seller exchanges goods for money. It facilitates exchanges of goods and services and helps in carrying on trade smoothly.
(ii) Unit of Measure: Money acts as a unit of measure for both the buyer and seller. It results in fair transaction where payment for goods is made equal to its price.
However, in Barter system, there was no consensus on price as there was no common unit of measure. (D
(iii) Store of value: Under Barter system exchange, it was not possible to store goods as they were less durable. Money can be stored easily for any period as it is highly durable.
(iv) Payment of Services: under Barter system: it was very difficult to determine the value of services. However, it can he easily measured in terms of money and pair thereof.
Question 21: Explain any two main functions of money.
Money in an economic system is used to facilitate the exchange of goods and services and help in carrying out trade smoothly.
Its two main functions are as under
(i) Medium of Exchange: Money facilitates the buying and selling of goods, i.e., it serves as the common medium of exchange. Everything is bought and sold through the help of money.
It has helped to overcome all the short comings of Barter system. By serving as a very convenient medium of exchange, money has made the present complex system of trade to function effectively.
(ii) Money as a Measure of Value: Money is the measuring rod, by which the values of other commodities and services are expressed.
Without a measure of value, there can be no pricing process. Without a pricing process, organised marketing and production is not possible.
Question 22: Explain the concept of Inflationary Gap. Explain the role of Repo Rate in reducing this gap.
The Inflationary Gap is the amount by which the aggregate demand exceeds aggregate supply at the full employment level. It is called inflationary because it leads to rise in price level.
Repo Rate is the rate of interest at which central bank lends to commercial banks for a short period. When central bank raises Repo Rate, the borrowings by the commercial banks become costly. This forces the commercial banks to raise their lending rates. People borrow less, and therefore spend less. This helps in reducing inflationary gap.
Question 22: Explain the concept of Deflationary Gap and the role of 'Open Market Operations' in reducing this gap.
Deflationary Gap is the amount by which the aggregate demand falls short of aggregate supply at the full employment level. It is called deflationary because it leads to a fall in price level.
Open Market Operations refer to buying and selling of government securities by the central bank in the open market. Central bank can reduce deflationary gap by buying securities. Those who sell receive payments by cheques from the central bank. The money flows out from Central bank into the commercial banks. This raises lending capacity of commercial banks. Banks lend more. Spending rises which reduces deflationary gap.
Question 23: Explain the role of government budget in fighting inflationary and deflationary tendencies.
Government expenditure and taxes can help in fighting price fluctuations.
Inflationary tendencies emerge due to aggregate demand being higher than aggregate supply. While reducing its own expenditure government, can bring down aggregate demand during inflation. During deflation government can increase its expenditure. To raise aggregate supply, tax concessions and subsidies can also be used.
Question 24: Giving reason explain how the following should be treated in estimation of national income:
(i) Payment of interest by a firm to a bank
(ii) Payment of interest by a bank to an individual
(iii) Payment of interest by an individual to a bank
(i) Payment of interest by a firm to bank is treated as a factor payment by the firm because the firm borrows money for carrying out production and therefore included in national income.
(ii) Payment of interest by bank to an individual is a factor payment because bank borrows for carrying out banking services and therefore included in national income.
(iii) Payment of interest by an individual to bank is not included in national income because the individual borrows for consumption and not for production.