ISC 2015 ECONOMICS - Guide For · PDF fileexplained as a micro concept i.e. consumption expenditure of a consumer which is incorrect. It ... the kinked demand curve as a reason for

ECONOMICS

ISC 2015

Md. Zeeshan Akhtar

PART I (20 Marks)Answer all questions.

Question 1

Answer briefly each of the following questions (i) to (x): [10 2]

(i) Define marginal utility. When can it be negative?

(ii) What is meant by production function?

(iii) Name the market where average revenue is equal to marginal revenue. Give areason for your answer.

(iv) Give one difference between accounting cost and opportunity cost.

(v) What is the reason for an indeterminate demand curve under Oligopoly?

(vi) What is meant by propensity to consume?

(vii) Explain discounting bills of exchange as one of the functions of the banks.

(viii) Differentiate between revaluation of currency and appreciation of currency.

(ix) How can gross domestic product at factor cost be obtained from gross nationalproduct at market price?

(x) What is meant by revenue deficit? Explain its implication.

Comments of Examiners

(i) Instead of change in utility, candidates wrotechange in commodity which as a concept wasincorrect. Some candidates wrote that marginalutility becomes negative when total utility ismaximum, which is incorrect.

(ii) Many candidates did not use the words ‘bestproduction technique’ or ‘functional’ in definingproduction function. They expressed it merely asa relationship between output and input.

(iii) Identification of perfect competition was correctin most cases. However, several candidates werenot able to give the reason for equality betweenAR and MR.

Suggestions for teachersTeach relationships between TUand MU with the help of graphs andschedule.Stress upon the use of key wordsand their importance in definitions.Help students identify differentforms of market on the basis ofimportant characteristics.Every term should be clarified withthe help of examples. In opportunitycost, the emphasis should be on‘next best alternative’ and that italso covers economic cost.

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GFS( ) gg pp ypp

(v)v) What is the reason for an indeterminate demandWhat is the reason for an indeterminate demand curve under Oligopoly?curve under Oligopoly?

((vvi)i) What is meant byWhat is meant by propensity to consume?propensity to consume?

(vii)(vii) ExplainExpla discounting bills of exchangechange as one of the functions of the banksas one of the functions of the banks..

(viii)(viii) Differentiate betweenDifferentiate between revaluation of currencyrevaluation of currency andand appappreciationreciation of currencyof currency..

(ix)(ix) How canHow can ggrossross ddomesticomesticddd product at factor cduct at factor costost be obtained frombe obtained from gross nationalgross nationalproduct at market pproduct at market pricerice??FS(x)(x) What is meant byWhat is meant by revenue deficit?revenue deficit? Explain its implication.Explain i

Comments of ExaminersComments of ExaminersG(i) Instead of change in utility, candidates wrotestead of change in utility, candidates wrochange in commodity which as a concept wasmodity whic

FSFSor teachersS

(iv) The concept of accounting cost was not clear to anumber of candidates. The ‘next best alternative’was not mentioned by many candidates whilewriting about ‘opportunity cost’.

(v) Some candidates mentioned ‘few sellers’ instead of‘intense competition’ and ‘interdependence’ indecision making.

(vi) In some cases, ‘propensity to consume’ wasexplained as a micro concept i.e. consumptionexpenditure of a consumer which is incorrect. Itwas written as C=f(y) instead of defining it withrespect to different levels of National Income.

(vii) The time period of 90 days was not mentioned bymany candidates. Some candidates discussed itconsidering producer and consumer instead ofdebtor and creditor.

(viii)Some candidates seemed to be confused. They didnot relate ‘revaluation’ with attempt made by theGovernment and ‘appreciation’ with the marketforces of demand and supply.

(ix) Some candidate could not answer this partcorrectly. They only subtracted NIT and not NFIAfrom GNPmp.

(x) A number of candidates explained revenue deficitas the difference between Expenditure and Incomeor the difference between Revenue income andRevenue expenditure. The explanation forimplication was also poor in many cases.

Concepts of National income shouldbe made clear to students.The implication of each feature ofthe market must be emphasized.Students should have a clear idea ofthe kinked demand curve as areason for price rigidity inoligopoly.Clarify the meaning of all termsassociated with a topic. Studentsshould be made to realize how useof different terms changes themeaning, e.g. ‘macro / micro’.The meaning of propensity shouldbe explained with reference toconsumption expenditure atdifferent levels of national income.The time period, i.e. 90 days isimportant to mention whenexplaining its discounting.The terms Revaluation andAppreciation should be discussedseparately. Revaluation is done bythe Government / Monetaryauthorities as fixed exchange rateand Appreciation by demand andsupply forces as flexible exchangerate.Students should be taught therelevance of using excess ofRevenue expenditure over Revenueincome of the Government.


GFconsidering producer and consumer insteproducer and consumer instead ofad ofdebtor and creditor.ebtor and creditor.

(viii)viii)Some candidates seemed to be confused. They didSome candidates seemed to be confused. They didnot relate ‘revaluation’ with attempt made by thenot relate ‘revaluation’ with attempt made by theGovernment and ‘appreciation’ with the marketGovernment and ‘appreciation’ with the maforces of demand and supply.forces of demand and supply

(ix)(ix) Some candidate could not answer this partSome candidate could not answer this partcorrectly. Thcorrectly. They only subtracted NIT and not NFIAey only subtracted NIT and not NFIAfrom GNPmp.from G

(x)(x) A number of candidates explained revenue deficitA number of candidates explained revenue deas the difference between Expenditure and Incomeas the difference between Expenditure and Incor the difference between Revenue income andor the difference between Revenue income Revenue expenditure. The explanation forRevenue expenditure. The explanation implication was also pooon was also poor in many cases.r in many cases.FSF

different levels of national income.The time period, i.e. 90 days isimportant to mention whenexplaining its discounting.

terms Revaluation eciation should

separately. Revaluation is the Government / Monetaryauthorities as fixed exchange rate

ppreciation by demand andxible exchange

ts should be taught thence of using excess oue expenditure over Rev

of the Governm

MARKING SCHEMEQuestion 1

(i) Marginal UtilityUtility derived from every additional unit to the consumer is Marginal Utility. At one pointconsumer’s total utility becomes maximum and then his total utility falls. This is the pointwhen marginal utility becomes negative.

(Diagram or explanation)(ii) Production function

It is a functional relationship or interdependence between output and some factors ofproduction which are needed to produce that output. (Maximum quantity of a commoditywhich can be produced per unit of time with the given amount of inputs when the bestproduction technique is used.)Q = f(x1, x2…), where Q is output, x1, x2 are factors of production.

(iii) Market is perfect competitionAR = MR as the price is same or uniform

ORPerfect competitive firm is price taker

(iv) Difference between Accounting Cost and Opportunity Cost.Explicit cost or accounting cost is the money payment for hiring or buying inputs or factorsof product. Example, wages paid or money paid to buy raw materials.Opportunity cost is the cost of next best alternative which is sacrificed.If producers use their own resources, they are losing out on income or cost. There areimplicit costs.

(v) Indeterminate Demand Curve under Oligopoly:Oligopolist has intense competition, cannot ignore the reaction of rival firms as there isinterdependence

(vi) Propensity to consume refers to different possible amounts of consumption expenditurewhich the consumers desire to spend at different levels of national income.

(vii) Discounting Bills of Exchange as one of the functions of the banks.A bill of exchange is drawn by a creditor on the debtor specifying the amount of debt andalso the date, normally for 90 days. The creditor can get it discounted from a commercialbank. By discounting, bank pays the money to the creditor and allows the debtor to paywhen the bill is due.

ORExplained with numerical example

(viii) Difference between revaluation of currency and appreciation of currency:Revaluation – attempt made by the government or monetary authorities to increase the valueof home currency with respect to foreign currency.Appreciation – increase in the value of home currencies done by forces of demand andsupply.


GFSAR = MR as the price is same or uniformAR = MR as the price is same or uniform

ORORPerfect competitive firm is price takerPerfect competitive firm is price taker

G(iv)(iv) Difference betweenDifferenc Accounting Costg Cost andand OpportunityOp Cost.Explicit cost or accounting cost is the money payment for hiring or buying inputs or factorsExplicit cost or accounting cost is the money payment for hiring or buying of product. Example, wages paid or money paid to buy raw materials.of product. Example, wages paid or money paid to buy raw materials.Opportunity cost is the cost of nextOpportunity cost is the cost of next best alternative which is sacrificed.best alternative which is sacrificed.If producers use their own resources, they are losing out on income or cost. There areIf producers use their own resources, they are losing out on income or cost. There areimplicit costs.implicit costs.G(v)(v) Indeterminate Demand Curve under Oligopoly:Indeterminate Demand Curve under OligopOligopolist has intense competition, cannot ignore the reactionOligopolist has intense competition, cannot ignore the reaction of rival firms as there isof rival firms as thereinterdependenceinterdependenceGG

(ix) Domestic Product at Factor Cost to be obtained from Gross National Product at MarketPrice.GDPFC from GNPMP

GNPMP – net indirect tax - net factor income earned from abroad =GDPFC

Net indirect tax = indirect tax – subsidyNet factor income earned = factor income received – factor income given.

(x) Revenue deficit and its implication.Revenue Deficit: When the revenue expenditure of the government is more than the revenuereceiptsImplication: to cover this deficit, government has to borrow, which will increase the capitalexpenditure of the government.

PART II (60 Marks)Answer any five questions.

Question 2

(a) Discuss the relationship between income of the consumer and demand for acommodity with respect to normal goods, inferior goods and necessities.

[3]

(b) Differentiate between extension of demand and increase in demand, using diagrams. [3]

(c) Explain with the help of a diagram the consumer’s equilibrium through utilityapproach.

[6]


(a) Some candidate defined normal/inferior goodsrelating with price, though in the question ‘income’was clearly mentioned. In some cases, ‘price’ wasmeasured along the vertical axis to draw the relevantcurves of these three types of goods.

(b) A large number of candidates answered this partwell but some did not show the movement and shiftwith the help of arrows.

(c) A number of errors were observed in this question:Some candidates used law of equi-marginalutility to explain Consumer’s equilibrium;A few candidates explained this equilibriumusing ordinal utility/ indifference curveapproach.The explanations given by many candidates weredevoid of unstable situations like effects ofMUx>Px and MUx<Px. Some candidates did notshow it with MUx=Px.

Suggestions for teachersHelp students understand theconcepts of normal, inferior,necessities and Giffen goods throughthe concepts of income demand andprice demand.Give more practice to students forunderstanding the concepts ofextension of demand and increase indemand. The diagrams should beproperly labelled and arrows shouldbe used to show movement/shift.Teach the application of the differentutility approaches. Explain clearlythe differences between cardinal andordinal approach of utility.Students should be taught thatequilibrium means stableequilibrium. Therefore ‘how theconsumer attains the stable situationfor unstable’, is a must in theexplanation.


GFSPART II (60 Marks)ART II (60 Marks)

AnswerAnswer anyany fivefive questions.questions.Question 2Question 2

(a)(a) Discuss the relationship between income of the consumer and demand for aDiscuss the relationship between income of the consumer and demand for acommodity with respect tocomm normal goodsmal goods,, inferior goodsinf and necessitiesecessities..

[3[3

(b)(b) Differentiate betweenDifferentiate between eextension ofxtension of ddemandemand andand increase in demandincrease in demand, using diagrams., using diagrams. [3

(c)(c) Explain with the help of a diagram the consumer’s equilibrium throughExplain with the help of a diagram the consumer’s equilibrium through utilityutilityapproachapp .

[6[6

Comments of ExaminersComments of ExaminersG(a)(a) Some candidate defined normal/inferior goodsSome candidate defined normal/inferior grelating with price, though in the question ‘income’relating with price, though in the question ‘incwas clearly mentioned. In some cases, ‘as clearly mentioned. In some cases, ‘pprice’rice’ wasmeasured along the vertical axis to draw the relevantthe vertical a

FSFSns for teachersFSstudents understand tts of normal, inties and Giffen

MARKING SCHEME

Question 2(a) Income increases, demand for normal good increases, positive relation or direct

Income increases, demand for inferior good reduces, inverse or negative relationIncome increases, demand for necessities remains sameOR

Only diagrams given and properly labelled

(b) Extension of demand due to fall inprice (own price)

Increase of demand due to other factorslike income increase, favourable tastes,etc.

Extension of Demand due to fall inprice (Own price)

Increase of demand due to other factorslike income increase, favourable tastes,etc.

(Explanation, diagram).

(c) Equilibrium through utility approach:

Definition of Consumer’s equilibriumCondition MUx =Px

Numerical example:

Price of shirt Rs.600

Schedule:

Qty MUx

1 700

2 650

3 600 - Equilibrium

4 500

(Diagram & explanation with example)

Consumer in equilibrium when he buys 3 shirts asMUx =Px

When he buys 2 shirts MUx>Px, so he buys more.When he buys 4 shirts, MUx<Px.

At E1, MUx>Px, consumer buysmore.E2, MUx<Px, buys less

AP

BP1

Price

D

Q1QO Quantity

D1D

QuantityQ Q1O

PriceP

800 E1MUandprice

600• E

400 •E2

200MU

30

Units consumed21


GFSGGGFFFFSSS(Explanation, diagram)(Explanation, diagram)G(c)(c) Equilibrium throughEquilibrium through utility approachutility approach::

Definition of Consumer’s equilibriumDefinition of Consumer’s equilibriumConditionCondition MUMUxxUUU =P=PxxPP

Numerical example:Numerical example:

Price of shirt Rs.600Price of shirt Rs.600

Schedule:

GGAAPP

GBPP11

PricePrice

GGGGGDGGGGQQ11QQOOGQuantitytityGF DD11DD

QuantityQuantityQ yQQ QQ11OOFSPricePrice

PP

FFSFSFSSFSFF

Question 3

(a) Discuss any two properties of indifference curve. [3]

(b) Draw diagrams to show the elasticity of demand when it is: [3]

(i) Greater than one

(ii) Less than one

(iii) Unity

(c) Explain the geometric method of calculating elasticity of supply. [6]


(a) In case of convexity of IC the role of DMRS wasnot recognized properly by some candidates. Theexplanation for two indifference curves neverintersecting was not properly explained by a fewcandidates.

(b) In several cases, the demand curve drawn wassteeper instead of it being flatter. Proportionatechange in price and demand was not showncorrectly. Some candidates did not draw arectangular hyperbola to show unity. The threediagrams drawn did not show proper variations.In some cases, Ep>1, Ep<1 and Ep=1 wereshown on the same demand curve.

(c) Some candidates just drew the curves but did notgive any explanation to justify the position ofsupply curves. The perpendicular from the pointon the curve was not drawn on the x-axis. The ratio to calculate elasticity of supply was notshown correctly (line extended to x-axis and distance between perpendicular to origin).

MARKING SCHEME

Question 3

(a) Properties of indifference curve:

(1) Downward sloping due to marginal rate of substitution OR in order to increaseadditional units of one, other commodity has to be substituted.

(2) It is convex to origin – showing decreasing MRS – consumer is ready to substitute orsacrifice less has he increases the consumption of one commodity.

(3) Higher indifference curve gives higher level of satisfaction – as he consumes more orboth the commodities

(4) Two indifference curves never intersect. Point on intersection cannot be explained asthe point cannot have two levels of satisfaction.

(any two)

Suggestions for teachersExplain properties of IC curve withthe help of diagrams. Give thereasons behind each property.Teach degrees of elasticity ofdemand properly. Proper diagramshowing Ep>1, Ep<1 and Ep=1should be taught.Teach students how to drawperpendicular on x-axis and lineextended upto x-axis. The ratio tocalculate elasticity of supply shouldbe correctly taught. Es>1, Es<1 andEs=1 should be mentioned.


GFScandidates..

(b) In several cases, theIn several cases, the demand curve drawn wasdemand curve drawn wassteeper instead of it being flatter. Proportionatesteeper instead of it being flatter. Proportionatechange in price and demand was not shownchange in price and demand was not showncorrectly. Some candidates did not draw acorrectly. Some candidates did not draw rectangular hyperbola to show unity. The threerectangular hyperbola to show unity. The thrediagrams drawn did not show proper variations.diagrams drawn did not show proper variations.In some cases, Ep>1, Ep<1 and Ep=1 wereIn some cases, Ep>1, Ep<1 and Ep=1 wereshown on the same demand curve.shown on the same demand c

(c)(c) Some candidates just drew the curves but did notSome candidates just drew the curves but did nogive any explanation to justify thegive any explanation to justify the position ofposition osupply curves. The perpendicular from the pointsupply curves. The perpendicular from the poinon the curve was not drawn on the xon the curve was not drawn on the x--axis. The ratio to calculate elasticity of supply was notaxis. The ratio to calculate elasticity of supply was notshown correctly (line extended to xshown correctly (line extended to x--axis and distance between perpendicular to origin).axis and distance between perpendicular to origin).

MARKING SCHEMEE

GG SSGFSFSFSTeach degrees of elasticity ofdemand properly. Proper diagramshowing Ep>1, Ep<1 and Ep=1

taught.tudents how

perpendicular on x-axis exten upto x-axis. The ratio tocalculate elasticity of supply shouldbe correctly taught. Es>1, Es<1 and

d.

(b) Elasticity of demand:

Y

Price

X

Q

(c) Explain the geometric method of calculating elasticity of supply:

OR BC> OB OR BC<OB BC=OB

e>1 e<1 e=1

OR one diagram (3 curves)

q q1>P P1

PPrice

P1

e>1

O

es> 1A

es< 1es> 1

Price es = 1PricePrice

CO

OQtyBc

q q1<P P1

A

q q1 =P P1

e <1

B

e =1

P

P1

Qty

P

OB

P1

q

C

q1

Qty

Qty O q q1 Qty O q q1 Qty

Price Price


GFSG S(c) Explain the geometric method of calculatingExplain the geometric method of calculating elasticity of supply:elasticity of su

GOR BC> OBOR BC> OBFOR BCOR BC<OBSBC=OBBC=OB

e>1e>1 e<1 e<1 e=1e=1

OR one diagram (3 curves)agram (3 cur

G Seess> 1> 1 FAAGeess< 1< 1ees> 1

FSFG SSG Price eess = 1= 1PriciceePricPr e SFCC

OOGG SFOOQtyQtyBBcc

AAA

BB QtyOB CC

QtyQty

Question 4

(a) Show with the help of diagrams, the effect on equilibrium price and quantity when: [3]

(i) There is fall in price of substitute goods.

(ii) There is a rise in prices of inputs.

(b) The cost function of a firm is given below:

Output 0 1 2 3 4

Total cost 100 250 370 550 740

Calculate:

[3]

(i) AFC

(ii) AVC

(iii) MC

(c) Explain the law of variable proportions with the help of a diagram. [6]


(a) (i) Some candidates depicted shift in both demandand supply curves whereas only demand curveshould have shifted to the left.(ii) In several cases, the demand curve was shiftedwhich was incorrect. In some cases, both demandand supply curves were shifted.

(b) Some candidates were confused with ‘0’ andinfinite. However, a large number of candidateswere able to attempt this part correctly.

(c) A number of candidates drew TP, AP and MPcurves without mentioning their relationship indifferent stages. At times, the diagrams did notshow point of inflexion and stages. Somecandidates explained the relationship between TPand MP which was not required.

Suggestions for teachersTeach students to draw properlylabelled diagrams for equilibriumpositions.It should be explained that TFC=TCat zero level of output.Teach the law of variableproportions with assumptions.Thorough practice should be givenin making diagrams. It must beshown where MP will cut AP andMP will become 0. Students must beclear about when a particular stagecomes to an end. Stage wiseexplanation of TP, AP and MP mustbe given.


GFS(c) Explain the law of variable proportions with the help of a diagram.aw of variable proportions with the help of a d [6

Comments of ExaminersComments of Examiners

G(a)(a) (i) Some candidates depicted shift in both demand(i) Some candidates depicted shift in both demand supply curvesand supp whereas only demand curvey demand cushould have shifted to the left.should have shifted to the lef(ii) In several cases, the d(ii) In several cases, the demand curve was shiftedemand curve was shiftedwhich was incorrect. In some cases, both demandwhich was incorrect. In some cases, both demandand supply curves were shiftedand supply curves were shift .

(b)(b) Some candidates were confused with ‘0’ andSome candidates were confused with ‘0’ infinite. However, a large number of candidatesinfinite. However, a large number of candidwere able to attempt this part correctly.were able to attempt this part correctly.

(c)(c) A number of candidA number of candidates drew TP, AP and MPates drew TP, AP and curves without mentioning their relationship inurves without mentioning their relationshipdifferent stages. At times, the diagrams did notAt times, FSFSns for teachersFSstudents to d

labelled diagrams for equilibriumpositions.It should be explained that TFC=TC

of variableons with assumptions.

gh practice should be givening diagrams. It muwhere MP w

MARKING SCHEME

Question 4

(a) Show with the help of diagrams, the effect on equilibrium price and quantity when:

(i) There is fall in price of substitute goods.

Fall in price of substitute will shift demand curve to the left.

Equilibrium shifts E to E1.

E.g. price from P to P1 and Eq quantity q and q1

(ii) Rise in prices of inputs.

Rise in price of inputs will shift the supply curve to the left.

The equilibrium shifts from E to E1

E.g. Quantity from q and q1

e.g. Price from P to P1

OR Self-explanatory diagram

(b) Output 0 1 2 3 4

TC 100 250 370 550 740

TFC 100 100 100 100 100

TVC 0 150 270 450 640

AVC - 150 135 150 160

AFC 100 50 33.33 25

MC - 150 120 180 190

S

P

E1

Qty

EPrice

•P1

D

qq1OD1

S1

SE1P1

P E

D xQtyqq1O


GFSE.g. price from P to PE.g. price from 1 and Eq quantityand Eq quantity q and qq and q11

G S(ii)(ii) Rise in prices of inputs.Rise in prices of inputs.

Rise in price of inputs will shift the supply curve to the left.Rise in price of inputs will shift the supply curve to the left.

The equilibrium shifts from E to EThe equilibrium shifts from E to E11

E.g. Quantity from q and qE.g. Quantity from q and q11

e.g. Price from P to Pice from P to 1

G SSS11G SSGFEEE1GFGGFPP11

PP EGGG DD xxQtyQtyqqq11OOGF

(c) Law of Variable Proportion:

Statement

Assumptions – (two assumptions)

Diagram

Stages [1st, 2nd, 3rd] Behaviour of AP, MP and TP curves in each stage.

Question 5

(a) Discuss two features of monopoly. [3]

(b) Show with the help of a diagram, how a perfectly competitive firm earns normalprofit in short run equilibrium.

[3]

(c) Explain how a producer can maximise profit by using MR and MC curves. [6]


(a) The features of Monopoly were explained correctlyby many candidates but in some cases, the quality ofthe answers was very poor. Some of the candidatesmisunderstood and wrote about monopolisticcompetition.

(b) The conditions like MC=MR and MC cuts MR frombelow were not mentioned by a number ofcandidates. Also P = AC for normal profit was notmentioned in several cases. Instead of AC curveAVC curve was considered by some. In a few cases,TR and TC approach was used to show break-evenpoint which was not asked.

(c) A few candidates made mistakes in this question. Insome cases, the explanation was not satisfactory.The point at which the consumer will be inequilibrium was not shown clearly in the diagram by some.

MARKING SCHEME

Question 5

(a) Features of monopoly.

Monopoly: One seller, price discrimination, no close substitute of the product, AR drawn(downward)

No entry in the industry.

(any two of the above with proper explanation)

Suggestions for teachersExplain the features of variousmarkets with reasons. Highlight keywords in the answer.Explain all conditions of equilibriumin short run earning normal profit.More practice should be given indrawing diagrams.Explain the MC/ MR curves tostudents with the help of welllabelled diagrams. The condition thatMC should cut MR from belowshould be explained.


GF(a) The features of Monopoly were explained correctlyatures of Monopoly were explained correctly

by manby many cany candidates but in some cases, thedidates but in some cases, the quality ofquality ofthe answers was very poor. Some of the candidatesthe answers was very poor. Some of the candidatesmisunderstood and wrote about monopolisticmisunderstood and wrote about monopolisticcompetition.competiti

(b)(b) The conditions like MC=MR andThe conditions like MC=MR MC cuts MR fromMC cuts MR frombelow were not mentioned by a number ofbelow were not mentioned by a number ofcandidates. Alsocandidates. Also P = AC for normal profit was notP = AC for normal profit was notmentioned in several cases. Instead of AC curvementioned in several cases. Instead of AC curvAVC curve was considered by some. In a few cases,AVC curve was considered by some. In a few cTR and TC approach was used to show breakTR and TC approach was used to show break--evenpoint which was not asked.point which was not asked.

(c)) A few candidates made mistakes in this question.A few candidates made mistakes in this questio Insome cases, the explanation was not satisfactory. explanation was not satisFSFS

Suggestions for teachers

FSExplain the features of varioumarkets with reasons. Highlight ke

in the answer.in all condition

in short run earning normal profit.More practice should be given in

ng diagrams.MR curves to

h the help of weld diagrams. The condition thahould cut MR from belbe explained.

(b) Give condition MC = MR and AC = price (normal profit)

And MC cuts MR from below.

(c) Maximise profit – only necessary condition and sufficient condition.

O to Q the MC > MR. firm suffers loss

E → break-even point normal profit MC = MR

Q to Qm – super normal profit MR > MC

Qm – profit max

Qm to Q1 → MC = MR (normal profit)

Beyond E1 → loss

Firms maximizes profit at E1 because it has earned all supernormal profits

MC = MR (necessary condition)

E and E1 → MC = MR

E1 → sufficient condition MC cuts MR from below or beyond ∆Q1 only loss.

(Diagram, explanation and conditions)

MCACPrice

AR = MR= priceP

OOutputQ

MC

AR = MR = PE1ECost andrevenue

OutputO Qm Q1Q


O to Q the MC > MR. firm suffersO to Q the MC > MR. firm suffers lossloss

EE → break→ break--even point normal profit MC = MReven point normal profit MC = M

Q to QQ to Qmm –– super normal profit MR > MCsuper normal profit MR > MC

Qm – profit maxmaxGGGFFGFGGF

MCMC

AR = MR = PAR = MR = PEE11ECost andCost andrevenue

OutputOutputOO Qm QQ11QQGF

Question 6

(a) Find the value of additional investment made by the government, when MPC = 0·5and increase in income (∆Y) = 1000.

[3]

(b) What is meant by autonomous consumption? Explain with the help of a diagram. [3]

(c) Explain the concept of deficient demand with the help of aggregate demand andaggregate supply curves. Discuss one physical and one monetary measure tocorrect it.

[6]


(a) Many candidates attempted the numericalcorrectly. In some cases the formula used wasincorrect. A few candidates solved only till themultiplier and left the value of additionalinvestment.

(b) In some cases, consumption function wasdrawn as a horizontal straight line instead ofpositively sloped curve. Candidates could notrelate income with consumption.

(c) The term ‘at full employment’ was missing inthe definition given by many candidates. Fullemployment level of income was not shownclearly in the diagram. Some candidatesseemed to be confused between ‘physical’ and‘fiscal’ measures.

MARKING SCHEME

Question 6

(a) K ∆I = ∆Y. K = multiplier. ∆Y = 1000 ∆I =? K=∆Y/∆I

K = K = = 2.

∆I = ∆I = 500/-

Suggestions for teachersExplain investment multipliermechanism clearly.Explain to students that autonomousconsumption is a part of aggregateconsumption expenditure while theother part of it is a function ofnational income. Students should betold that consumption is independentof income.Terms like ‘excess demand’,‘deficient demand’ must beexplained to students in the contextof full employment level. Morepractice must be given in drawingcorrectly labelled diagrams.


GFS(b) In some cases, consumption function wassome cases, consumption function was

drawn as a horizontal straight line instead ofdrawn as a horizontal straight line instead ofpositively sloped curve. Candidates could notpositively sloped curve. Candidates could notrelate income with consumption.relate income with c

(c)(c) The term ‘at full employment’ was missing inThe term ‘at full employment’ was missing inthe definition given by many candidates. Fullthe definition given by many candidates. Fullemployment level of income was not shownemployment level of income was not shownclearly in the diagram. Some candidatesclearly in the diagram. Some candidatesseemed to be confused between ‘physical’ andseemed to be confused between ‘physical’ and‘fiscal’ measures.‘fiscal’ measures.

MARKING SCHEMEING SCHEME

Q ti 6

GGFSSG SFSFSconsumption expenditure while theother part of it is a function ofnational income. Students should betold that consumption is independent

Terms like ‘excess d‘deficient demand’ must befexplained to students in the contextof full employment level. More

n drawingagrams.

(b) Autonomous consumption is consumption when income is zero. It is independent ofincome.

is the autonomous consumption.

(c) Deficient demand means when aggregate demand is less than aggregate supply at fullemployment.

At the YF (full employment, aggregate demand is less than aggregate supply. There isdeficient demand of ab. This is also called the deficiency gap.

Question 7

(a) Discuss two qualitative methods of credit control. [3]

(b) Explain any two secondary functions of money. [3]

(c) Discuss the various components of the current account of balance of payment. [6]


(a) A number of candidates were confused betweenQuantitative and Qualitative methods of creditcontrol.

(b) Some candidates were confused between ‘primary’and ‘secondary’ functions of money.

(c) Several candidates did not show the debit side or thecredit side in the table. In other cases, theexplanation was not complete. A glaring mistakemade by candidates was the incorporation of itemsof ‘capital account’, such as, transaction ofinternational loan, inflow and outflow of capital,etc., as components of current a/c.

C

C

N.Y.O

a

bEAggregate

demand

incomeYFO

Suggestions for teachersClarify the meaning and significanceof the terms ‘quantitative’ and‘qualitative’.Differentiate between primary andsecondary functions of money.Teach the importance of the terms‘debit’ and ‘credit’ in maintainingany account specially BOP.Clarification of terms ‘current’ and

‘capital’ is required.


GFSAt the YF (full employment, aggregate demand is lessAt the YF (full employment, aggregate demand is less than aggregate supply. There isaggregate supply. There isdeficient demand of ab. This is also called the deficiency gap.deficient demand of ab. This is also called tGGGGGFSSSQuestion 7Question 7

(a)(a) DiscussDiscuss ttwowo qualitative methods of credit control.qualitative methods of credit con [3

(b) Explain any twotwo secondary functions of money.secondar [3

aa

GFGFGFFbbEGFGAggregateA

demandd FincomeincomeYFOO

MARKING SCHEME

Question 7

(a) Qualitative methods of credit control:

Moral suasion, margin requirement, publicity, credit rationing.

(any two)

(b) Secondary functions of money:

Store of value, transfer of value, standard of deferred payment.

(Proper explanation of any two)

(c) Definition of Balance of current account

Balance of Trade – Credit and debit side showing exports and imports of goods(visible items). To be explained with an example.

Balance of invisible items – credit and debit side of services like insurance, etc.

Balance of incomes – factor incomes. Wages and salaries, interest (debit and credit).

Balance of transfers (payment and income) both, debit and credit.

Question 8

(a) Highlight two differences between sales tax and income tax. [3]

(b) What is meant by: [3]

(i) Union budget

(ii) State budget

(c) Explain four ways of Redemption of Public Debt. [6]


(a) A number of candidates gave more emphasis on thedefinitions of sales tax and income tax than on thedifferences between the two. Several candidatesfailed to make a mention of the impact and incidenceof taxation.

(b) Budget as ‘financial statement’ or ‘estimated incomeand expenditure’ was not mentioned by severalcandidates. Some candidates missed out the term‘annual financial statement’. Instead of writing thatthe budget is prepared by the Central or Uniongovernment, some candidates wrote ‘budget is madefor the economy or country as a whole’. While explaining ‘State budget’, a few candidateswrote that it is the budget made for the State instead of writing that it is the financialstatement made by the state government.

Suggestions for teachersEmphasise upon the impact andincidence of a tax. Shifting of taxshould be explained.For both Union budget and Statebudget, explain to students thatbudget is a financial statement ofUnion/State govt. for a particularyear.


GFSBalance of invisible itemsance of invisib – credit and debit side of services like insurance, etc.credit and debit side of services like insurance, etc.

Balance of incomesBalance of income – factor incomes. Wages and salaries, interest (debit and credit).tor incomes. Wages and salaries, interest (debit and credit).

Balance of transfers (payment and income) both, debit and credit.Balance of transfers (payment and income) both, debit and credit.GGGGGGFSSSQuestion 8Question 8

(a)(a) HighlightHighlight twotwo differences betweendifferences between sales taxsales tax andand income taxincome t . [3[

(b)(b) What is meant by:What is meant by: [3[3

(i)(i) Union budgetUnion budget

(ii)(ii) State budgetState budget

(c) ExplainExplain fourfour ways ofways of Redemption of Public DebtRedemption of Public D . [6

C f E i

(c) This part was not answered well by a large number of candidates. Some candidates wroteonly the captions. In some cases, deficit financing as a way of debt redemption wasmentioned which was incorrect. Repudiation of debt was written as a method of redemptionby several candidates - this is not a method at all in modern times.

MARKING SCHEME

Question 8

(a) Differences between sales tax and income tax.

Differences: sales tax is an indirect tax whereas income tax is a direct tax.

Sales tax – burden is passed on to other persons, incidence and impact not on thesame person.

Income tax – incidence and impact on the same person.

Examples can be given.

(Any two differences)

(b) (i) Union budget:

Central government submits a budget called Union budget (financial statement ofcentral government).

(ii) State budget:

State government submits a budget called the state budget (financial statement ofthe state government.

(c) Ways of Redemption of Public Debt:

Methods can be sinking fund approach, terminal annuity, budgetary surplus, capital, levy,export surplus, changing the rate of interest.

(Any four can be explained.)

Question 9

(a) With the help of a diagram, show the circular flow of income in a two sectormodel with Savings and Investment.

[3]

(b) The growth of Gross Domestic Product is not a real indicator of economicwelfare. Discuss two reasons to justify the given statement.

[3]


GFS(Any two differences)(Any two differences)

G S(b)(b) (i)(i) Union budget:Union budget:

Central government submits a budget called Union budget (financial statement ofCentral government submits a budget called Union budget (financial statement ofcentral government).G S(ii)(ii) State budget:tate budget:

State government submits a budget called the state budget (financial statement oftate government submits a budget called the state budget (financial statement ofthe state government.tate governmenG S(c)(c) Ways of Redemption of Public Debt:Ways of Redemption of Public Debt:

Methods can be sinking fund approach, terminal annuity, budgetary surplus, capital, levy,Methods can be sinking fund approach, terminal annuity, budgetary surplus, capital, levy,export surplus, changing the rate of interest.export surplus, changing the rate of interest.

(Any four can be explainedny four can be explai( .)GGGGG SSS

(c) From the following data, calculate GNPMP and NNPFC by Expenditure Method. [6]

in crores

(i) Mixed income of self employed 450

(ii) Compensation of employees 550

(iii) Private final consumption expenditure 1000

(iv) Net factor income from abroad (–) 20

(v) Net indirect taxes 150

(vi) Consumption of fixed capital 170

(vii) Net domestic capital formation 380

(viii) Net exports (–)30

(ix) Profits 400

(x) Rent 150

(xi) Interest 200

(xii) Government final consumption expenditure 550


(a) Following errors were observed in the answersgiven by candidates:

Directions of flows were improper.Real flow and money flow were not shownproperly.Capital market, with proper direction of flowsof saving and investment was missing.

(b) In many cases, instead of giving reasons to justifythe statement, some candidates argued why PCIor real PCI is a better indicator. A number ofcandidates were confused as to why GDP is not areal indicator of economic welfare.

(c) The ‘Net’ of ‘Net domestic capital formation wasoverlooked by a number of candidates. It wastreated as ‘gross’ instead. Hence, instead ofNDPmp candidates calculated GDPmp. In somecases, Income Method was used to calculateGNPmp and NNPfc though it was clearlymentioned in the question that the expendituremethod was to be used.

Suggestions for teachersExplain the 2, 3, 4 sector modelsclearly and emphasize on drawingarrows for real flow and moneyflow.Explain how growth of GDP is not areal indicator of economic welfare ifpeople are not living a comfortablelife – different points may bediscussed.The concepts of GDP and aggregatesof National Income should beexplained clearly.Give regular practice to students insolving similar questions.Develop logical thinking andproblem solving skills in students.


GFS(x)(x) RentRent 150150

(xi)(xi) InterestInterest 200200

(xii)(xii) Government final consumption expenditureGovernment final consumption expen 550550

Comments of ExaminersComments of ExaminersG(a)(a) Following errors were observedFollowing errors were obse in the answersin the answersgiven by candidates:given by candidates:

Directions of flows were improper.Directions of flows were improper.Real flow andReal flow and mmoney flow were not shownoney flow were not showproperly.properly.Capital market, with proper direction of flowsCapital market, with proper direction of flowof saving and investment was missing.f saving and investment was missing.

(b) In many cases instead of giving reasons to justifynstead of giv

FSFSSuggestions for teachersFSector modelsmphasize on drawing

or real flow and money

ow growth of GDP tor of

MARKING SCHEME

Question 9

(a) Circular flow of income in a Two Sector model with Savings and Investment.

(b) It is not a real indicator as it does not tell us about (i) inequality of income and wealth (ii)poverty (iii) whether present production is increased at the cost of future (iv) whethermore of defence items produced. (any two can be explained)

(c) Expenditure Method GNPMP and NNPFC

C + I + G + (X – M) = NDPMP

in crores

(C) Private final consumption expenditure = 1,000

(I) Net domestic capital formation = 380

(G) Government final consumption expenditure = 550

(x-M) Net Exports = - 30

NDPMP = 1,900

NDPMP – net indirect tax + NFIA = 1900 – 150+(-20)

NNPFC = 1,730

GNPMP = NDPMP + NFIA + depreciation = 1900 +(-20) + 170= 2,050

GENERAL COMMENTS:

(a) Topics found difficult by candidates in the Question Paper:

MR – MC approach of equilibrium of a firm

Consumer’s equilibriumGeometric method to calculate elasticity of supply

Numerical on National Income.

HHS Bank Firms

Factor incomeFactors of production

GoodsPrice of Goods

S I


GFSpoverty (iii) whether present production is increased at the cost of future (iv) whether(iii) whether present production is increased at the cost of future (iv) whethermore of defence items produced.more of defence items produced. (any two can be explained)(any two can be explaine

G S(c)(c) ExpenExpenditure Methodditure Method GNPG MPP andand NNPNNPFCFC

C + I + G + (XC + I + G – M) = NDDPPMPMPG Sin croresSGGGGGGGGFSSSSGGG SS(C)(C) Private final consumption expenditure =Private final consumption expenditure = 1,0001,000GGGGGFSSSSGGG SS(I)(I) Net domestic capital formation =Net domestic capital formation = 380380GGGGGFSSSSGGG SS(G)(G) Government final consumption expenditure =overnment final consumption ex 550550GGGGGFSSSSGGG SS((xx--M)M) Net Exports =Net Exports = -- 3030GGGGGFSSSSGGG SSNDPNDPMPMP == 1,9001,900GGGGGFSSSSGGG SSNDPMP – net indirect tax + NFIA = 1900t indirect tax + NFIA = 19 – 150+(-20)GGGGGFSSSSGG SS

(b) Concepts in which candidates got confused:

Utility approach: confusion between single commodity equilibrium, more than onecommodity (law of equi-marginal utility) and indifference curve approach.

In short run equilibrium - where the normal profit will lie.

Confusion between NDPmp and GDPmpin calculating NNPfc.

Concept of deficient demand.

Components of Balance of Payment.

(c) Suggestions for candidates:

Pay attention to each and every term used by teacher while teaching a particular topic.Ask questions in class and make sure you understand the logic.

Practice writing answers.

Study the entire syllabus.

The meaning and significance of each terminology should be clear.

Read the question paper carefully during the allotted time.

Be sure to revise the answer script after completion of the paper.


GFSThe meaning and significThe meaning and si ance of each terminology should be clear.nce of each terminology shoul

RRead the question paper caread the question paper carefully during the allotted time.efully during the allotted time

Be sure to revise the answer script after completion of the paper.Be sure to revise the answer script after completion of the paper.

Documents

ISC 2015 ECONOMICS - Guide For · PDF fileexplained as a micro concept i.e. consumption expenditure of a consumer which is incorrect. It ... the kinked demand curve as a reason for