ECONOMICS : STANDARD XII

SOLUTION : PRACTICE PAPER 1

Q.  1.  (A) 

(1) (2) 1 – b, 2 – a, 3 – d, 4 – c
(2) (1) b and c
(3) (2) 1 –d, 2 – a, 3 – b, 4 – c
(4) (3) c
(5) (4) 1 – c, 2 – d, 3 – b, 4 – a
Q.  1.  (B) 
(1) Odd word : Gold
(2) Odd word : Medicine
(3) Odd word : Fall in price
(4) Odd word : Selling cost
(5) Odd word : Credit rationing
Q.  1.  (C)
(1) Knowledge utility
(2) Mikros
(3) New issues
(4) Downward sloping
(5) Controlling recession
Q.  1.  (D)
(1) Cost incurred on advertisement hoardings, free gifts, etc. – Selling cost.
(2) A flow of factors of production from household sector to business sector and a
flow of goods and services from a business sector to household sector – Real
flow.
(3) Fall in demand due to fall in income – Decrease in demand.
(4) A branch of economics studying theory of factor pricing – Microeconomics.
(5) A utility derived by making pots from clay – Form utility.
Q.  2.  (A)
(1) (A)  Identified concept : Possession utility.
(B) Explanation of concept : Utility increased/obtained from the transfer of
ownership rights of goods from one person to another, is called possession
utility.
(2) (A)  Identified concept : Increase in demand.
(B) Explanation of concept : Price remaining constant, a rise in the supply
due to favourable changes in other factors (for example, use of modern
techniques of production) is called increase in supply.

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

 (3) (A)  Identified concept : Ancillary functions of commercial banks.
(B) Explanation of concept : Commercial banks provide many customer
services to the customers. The function of providing these services is called
ancillary functions of commercial banks.
(4) (A) Identified concept : Measure of national income by product method.
(B) Explanation of concept : Measurement of national income by summing
the economic values of all final goods and services produced in a particular
financial year is a measure of national income by product method.
(5) (A)  Identified concept : Univariate Index Numbers.
(B) Explanation of concept : Index numbers that are computed for measuring
net change in a single variable over a period of time or between two
different localities is known as Univariate Index Numbers.

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 changes in other factors other than price
called increase in demand. is 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) Revenue Expenditure Capital Expenditure

1.  Meaning

The expenditure incurred by The expenditure incurred by the

government for carrying out day-to-day government for economic growth and
functions of the government departments development of a country is called capital
and administrative services is called expenditure.
revenue expenditure.

2.  Examples

Administrative costs paid by the Huge investments by government in

government, payment of salaries, various developmental projects, loans
allowances and pension of government granted by central government to the
employees, costs incurred by government state government and government
for providing medical and public health companies, repayment of government
facilities, etc. are the examples of revenue loans, etc. are the examples of capital
expenditure. expenditure.

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(3) Total Revenue Total Cost

1.  Meaning

Total revenue is the total sales Total cost is the total expenditure
proceeds of a firm by selling a commodity incurred by the firm on the factors
at a given price. of production required for the
production of goods and services.

2.  Formula

TR  P   Q, where TR  Total Revenue, TC = TFC +TVC. where TC = Total Cost,

P = Price per unit and Q = Quantity sold. TFC = Total Fixed Cost and TVC = Total
Variable Cost.

(4) Fixed Deposits Current Deposits

1.  Meaning

Deposits that are kept by saver for a Deposits that are kept by businessmen /
fixed period of time and are withdrawn corporations in current account and are
after the stipulated period are called withdrawn as many times as required
fixed deposits. are called current deposits.

2.  Rate of interest

The rate of interest is the highest for the The rate of interest is the lowest/zero
fixed deposits. for the current deposits.

(5) Trends in Imports of Foreign

Trends in Exports of Foreign Trade
Trade

1.  Meaning

The import trend of foreign trade is the The export trend of foreign trade is the
tendency of a country to reflect goods tendency of a country to reflect goods sold
purchased from other countries, total to other countries, the total dimensions
dimensions of goods purchased from of goods sold to other countries, the total
other countries, total value to be paid for value derived from goods sold to other
goods purchased from other countries, countries, etc.
etc.

2.  Types

Trends in imports of foreign trade Trends in exports of foreign trade of

of India include the commodities India include the commodities like
like petroleum, gold, fertilizers, iron engineering goods, petroleum products,
and steel, sophisticated machinery, chemical products, gems and jewellery,
chemicals, etc. textiles and readymade garments, etc.

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

Q.  3. (1)
Price in 2005 (`) Price in 2010 (`)
Commodity
(Base Year) P0 (Current Year) P1
A 6 8

B 16 18

C 24 28

D 4 6

Total ` P0  50 ` P1  60

 P1
Price Index Number P01 = × 100
 P0

60
 P01 × 100
50

 P01120
 Price Index Number = 120

(2) (1) Prior to 1947, India was a British colony. Therefore, India’s foreign trade
was colonial.
(2) Before independence, India mainly exported raw materials to England and
imported finished goods from England. Prior to independence, India relied
heavily on trade with England for industrial goods.
(3) In the pre-independence period. England started selling large quantities of
finished goods made in factories in England to India.
(4) As a result, many people in India started buying goods from England and
this reduced the demand for indigenous goods. As a result, many small and
medium enterprises in India closed down.
Thus, during British rule, indigenous handicrafts suffered a severe blow.
(3) The development of financial institutions in the organized sector of money
market of India can be explained with the help of the following points :
(1) Development of financial institutions provide medium and long term
financial assistance to agriculture, industry and other major sectors. The
Industrial Finance Corporation of India (IFCI) is the first development
financial institution in India established in 1948.
(2) Due to the liberalization and globalization policy adopted by India, the
financial needs of the development finance sector (corporate sector) have
increased significantly. Many foreign companies have entered into
agreements with Indian companies. As a result, development of financial
institutions in India have diversified their operations.

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 (3) Development of financial institutions in India have set up affiliates to
provide a wide range of new products and services such as commercial
banking, consumer finance, broking, venture capital finance, infrastructural
financing, e-commerce, etc.
(4) The successful development of financial institutions in India are in the
process of transforming themselves into commercial banks for which they
have been given guidelines by the Reserve Bank of India. For example,
ICICI (Industrial Credit and Investment Corporation of India), has become
a leading commercial bank by the reverse merger with its subsidiary ICICI
Bank.
(4) The scope of microeconomics is mainly confined to price theory and resource
allocation. Microeconomics seeks to obtain solutions to the basic economic
questions such as what goods are to be produced, how many goods are to be
produced, who should produce the goods, how the goods are to be produced,
how the produced goods are to be distributed, how the resources are to be
efficiently allocated to production and consumption, etc. Thus, the scope of
microeconomics can be explained as follows :
(A) Price Theory : The scope of microeconomics is confined to price theory.
It includes the following price theories : 
(1)  Product pricing : Microeconomics explains how the prices of variety of
goods and services are determined. The prices of various goods and services
get determined by the equilibrium of their demand and supply forces. Thus,
theories of demand, supply, cost and production functions are within the
scope of microeconomics.
(2) Factor pricing : Microeconomics also explain how the prices of factors of
production, viz., land, labour, capital and entrepreneur are determined.
The prices of factors of production also get determined by equilibrium of
their demand and supply forces. Thus, theories of rent, wages, interest and
profit lie within the scope of microeconomics.

(B) Theory of welfare : Theory of welfare also lies within the scope of

microeconomics. Theory of welfare basically deals with efficiency in the
allocation of resources. Efficiency in allocation of resources is attained
when it results in the maximum satisfaction of people in an economy.
Therefore, microeconomics studies the following three efficiencies :
(1) Efficiency in production : Efficiency in production means. to produce
maximum possible amount of goods from the given amount of resources.
Microeconomics analyses how efficiency in production can be obtained.
(2) Efficiency in consumption : Efficiency in consumption means distribution
of produced goods and services among the people for consumption in such

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

 a way as to maximize total satisfaction of society. Microeconomics analyses
how efficiency in consumption can be obtained.
(3)  Overall economic efficiency : Overall economic efficiency means.
producing those goods which are most desired by people in society.
Microeconomics analyses how overall economic efficiency can be obtained.
From these points, it can be noticed that the scope of microeconomics is mainly
concerned only with price theory and resource allocation. It does not study the
aggregates relating to whole economy. It does not study national economic
problems such as unemployment, poverty, inequality in income, etc. It does
not include study of theory of growth, monetary policy, fiscal policy, etc.
Therefore, the scope of microeconomics is comparatively limited and narrower.
(5) The types of markets on the basis of the place are as follows : 
(1)  Very Short Period : Very short period is a period in which supply is fixed
and price is determined by the demand. It is a time period of a few days to
few weeks. The supply of commodity cannot be increased in a very short
period.
(2) Short Period : Short period is a period of less than one year. In this period,
firms can only make adjustments in inputs like labour to increase the
supply of goods and services. In short period, supply can be increased to
some extent.
(3)  Long Period : Long period is a period of time in which all factors of
production and costs are variable. In the long run firms can adjust all types
of costs. It is a period of few years, generally up to five years. In long period,
supply can be increased to a measurable extent.
(4) Very Long Period : Very long period is a period of time in which firms
can vary all inputs fully. It is a period of more than five years. In very long
period, supply can be increased fully.
Q.  4. (1) Yes, I agree with this statement.
Reasons : 
(1) Microeconomics studies the individual economic units such as particular
consumer, individual demand, particular seller, individual supply, price
determination of particular good. etc.
(2) Microeconomics studies individual economic units and deals with how a
particular consumer attain maximum satisfaction and how a particular
producer attain maximum profit.
(3) For studying individual economic units, microeconomics uses slicing
method and splits the economy into small parts.
  Thus, microeconomics studies individual economic units.

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 (2) No, I disagree with this statement.
Reasons : 
(1) Substitute goods such as tea and coffee have positive cross elasticity of
demand.
(2) Tea and petrol are not substitute to each other. They are unrelated goods.
(3) In case of unrelated goods like tea and petrol, there is no relation between
the demand of one good and price of other goods. Thus, unrelated goods
have zero cross elasticity of demand.
 Thus, tea and petrol do not have positive cross elasticity of demand, they have
zero cross elasticity of demand.
(3) Yes, I agree with this statement.
Reasons : 
(1) An index number is a statistical tool to measure changes in an economic
variable over a period of time.
(2) Index numbers were originally developed to measure changes in the price
level. However, in present context, index numbers measure changes in
various economic variables.
(3) In present context, index numbers measure changes in various economic
variables such as stock market prices, cost of living, agricultural production,
industrial production, labour productivity, exports, imports, etc.
(4) Yes, I agree with this statement.
Reasons : 
The following are some of the factors influencing the elasticity of demand :
(1) Nature of Commodities : Nature of commodities is one of the important
factors influencing the elasticity of demand. We can classify commodities
as necessaries, 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.

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

 (5) Yes, I agree with this statement.
Reasons : 
The following are some of the types of monopoly :
(1) Private monopoly : Private monopoly refers to sole ownership of the
supply of goods or services by the private firm or individual. The main
objective of private monopoly is earning the maximum profit. For example,
Tata Group.
(2)  Public monopoly : Public monopoly refers to sole ownership of the supply
of goods or services by the government. The main objective of public
monopoly is not to earn the profit but to provide the maximum welfare to
the society. For example, Indian Railways.
(3) Legal monopoly : The monopoly that emerges on account of legal
provisions like patents, trademark, copy rights, etc. is called legal monopoly.
In a legal monopoly, the law forbids the potential competitors to imitate the
design, form or shape of a product which is registered with a particular
trademark. If any firm violates the rights of the trademark, legal action is
taken against them. For example, Amul’s products. 
Q.  5. (1)  (1) The total quantities of a commodity supplied by a particular seller at
different prices during a given period of time is individual supply.
(2) The Law of Supply can be explained with the help of the following diagram
of the individual supply curve :
Y
S
5
e

4 d
Price

3 c

2 b

1 a
S
O 10 20 30 40 50 X
Supply
(2) (1)  False.
Reason : 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)  True.
Reason : 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.

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 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.
(3) (1) Daily needs, weather conditions, price, holiday season, etc. are the factors
affecting consumer demand.
(2) Utility derived/increased by changing the time of utilization of a commodity
or service is called time utility.
(3) Production, storage, speedy transportation, attractive advertisements, etc.
are the factors affecting time utility.
Q.  6. (1) The determinants of demand are as follows :
(1) Price : Price is one of the most important factors that affect market demand.
Usually, larger quantity is demanded at a lower price and vice versa.
(2) Income : Income is yet another important factor that affects market
demand. Income affects the purchasing power of a consumer. Income and
demand are directly related to each other. Normally, demand rises with
increasing income and vice versa.
(3) Prices of Substitute Goods : Market demand also gets influenced by the
prices of substitutes. If a substitute is available at a lower price, people
demand the substitute goods in greater quantities than the commodity in
question. For example, if the price of tea falls, demand for coffee tends to
fall.
(4) Prices of Complementary Goods : Market demand also gets affected by
the prices of complementary goods. If the price of a complementary good
rises, the demand of the commodity in question tends to fall. For example,
if the price of petrol rises, demand for cars tends to fall.
(5) Nature of products : If a commodity is a necessity and its use is
unavailable, then its demand will continue to be the same irrespective of
change in its price. For example, demand for salt, medicines, etc. Thus,
nature of commodity determines the demand.
(6) Size of Population : Demand for various goods and services gets affected
by the size as well as the composition of population. An increase in
population leads to an increase in demand for a variety of goods and
services. On the other hand, decrease in population leads to decrease in
demand for a variety of goods and services.
(7) Expectations about future prices : Expectations about future prices also
determines the demand. For example, if consumers expect fall in the price
of a particular commodity in the near future, they will demand less
quantities of such commodity though its present price is comparatively less
and vice versa.

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   (8)  Advertisements : Nowadays, the demand for goods and services gets
highly influenced by advertisements and other promotional activities.
Attractive advertisements, sales promotion schemes and effective
salesmanship lead to increase in demand for various goods and services.
For example, demand for toothbrush, cosmetics, etc.
 (9)  Tastes, Habits and Fashions : Some factors such as taste, habit of
consumers, etc. also determine the demand. For example, an increased
liking for cold drinks, ice creams, etc. increases their demand. Similarly,
commodities in fashion have more demand and the commodities out of
fashion have less demand.
(10)  Level of Taxation : Government’s taxation policy also affects demand.
For example, a rise in tax level reduces the consumer’s disposable income
and it in turn decreases the demand for different goods and services and
vice versa.
(11)  Other Factors : Climatic conditions (Flood, Drought, Earthquake), change
in technology, government policies, customs and traditions, etc. Other
factors also affect demand for various goods and services.
(Note : Any eight points are expected in answer.) 
(2) Theoretical difficulties in measuring national income are also known as
conceptual difficulties. The theoretical difficulties in measuring national
income are as follows :
(1) Transfer payments : Individuals retired from services get pension.
Unemployed people get unemployment allowance, etc. Though pension,
unemployment allowances, etc. is considered as an individual’s income, it
is not an earned income. Individual receives this income from government’s
expenditure. Therefore it becomes difficult to decide whether or not to
include such income in national income. Generally, transfer payments are
ignored while estimating national income.
(2)  Illegal income : Illegal incomes received by selling goods and services by
following illegal activities like gambling, black marketing, theft, smuggling,
etc. is not included in national income. But these goods and services do
have the value and meet the needs of the consumers. Thus, excluding
income from illegal activities leads to underestimation of national income.
(3) Unpaid services : National income is always measured in money, but
there are a number of goods and services which are difficult to be assessed
in terms of money. For example, painting as a hobby by an individual, the
bringing up of children by mother; these services are not included in
national income as remuneration is not given to them. Also services of
housewives and the services provided out of love, affection, mercy, sympathy
and charity are not included in national income as they are not paid for. By
excluding all such services, the national income is underestimated.

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 (4) Production for self-consumption : Goods produced for self-consumption
such as food grains, vegetables and other farm produce do not enter the
market. Therefore, it becomes difficult to find out their exact market value.
Therefore, the value of such goods is estimated at the rate of market price
of the goods that have been marketed. Thus, the approximate values of the
goods produced for self-consumption are added in the national income.
(5)  Income of foreign firms : According to International Monetary Fund’s
viewpoint, income of a foreign firm should be included in national income
of a country, where the firm actually undertakes production work. However,
profits earned by foreign firms are credited to their home country. Therefore,
it becomes difficult to decide whether or not to include the income of foreign
firms in the national income.
(6) Valuation of Government Services : Government provides a number of
public services such as law and order, defence, public administration,
education, health services, etc. Measuring the exact market value of such
government services is quite difficult, as the real value of these services is
not known. Therefore, these services are considered as final consumption
and their approximate values are added in the national income.
(7) Changing price level : Difficulties in calculating national income also
arise due to changes in price levels. For example, when the price level rises,
the national income may show an increase even though the production may
have decreased. Also, when the price level falls, the national income may
show a decrease even though there may be an increase in production. Thus,
it becomes difficult to estimate national income exactly due to changing
price level.
(3) Internal debt and external debt can be differentiated with the help of the
following points : 
(1)  Meaning : Debt raised by the government from borrowings from economic
sources within the economy is called internal debt. On the other hand, debt
raised by the government from borrowings from economic sources outside
the economy is called external debt.
(2)  Examples : Debt raised by the government from borrowings from its
citizens, domestic banks, central bank, domestic financial institutions,
domestic business houses, etc. are the examples of internal debt. On the
other hand, debt raised by the government from borrowings from foreign
governments, foreign banks or foreign institutions, international
organisations like International Monetary Fund, World Bank, etc. are the
examples of external debt.

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 (3)  Nature : Internal debt may be voluntary as well as involuntary (i.e.
compulsory) in nature. On the other hand, external debt is voluntary, i.e.
optional in nature.
(4)  Use of currency : Internal debt is received and repaid using domestic
currency. On the other hand, external debt is received and repaid using
foreign currency.
(5) Management : The management of internal debt is comparatively less
complex. On the other hand, management of external debt is comparatively
more complex.
________

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