ANSWER SCHEME

PU – II – COMMERCE – Mid-term - 2024

Subject : Economics (22) Max Marks: 80

Part A

I. Choose the correct answer from the following options. 5 X1 =5m

1. The scarce resources of an Economy have

a) Competing usages b) Unlimited usages c) Single usages d) Limited
usages
2. The Shape of an Indifference curve is normally
a) Convex to the Origin b) Concave to the Origin c) Horizontal d) Vertical
3. When the supply curve is vertical the elasticity of supply is
a) es = 1 b) es > 1 c) d)
4. The consumption bundles that are available to the consumer depend
a) Color & Shape b) Price & Income c) Income & Quality d) None of the
above
5. The Cobb-Douglas production function is ___
a) q = ( x, x) b) q= ( ) c) q = ( ) d) q = ( O )

II. Fill in the Blanks by choosing correct answer from the bracket . 5 x 1 = 5m

( Market economics, perfect competition , rightward, opposite, Mixed economics, The production unit )
6. Reality all economics are _ Mixed economics.
7. As income increases, the demand curve for normal goods shifts towards _rightward.
8. The demand for a good move in _ opposite direction of its Price.
9. Price taking behaviour is the single most distinguishing characteristic of perfect competition
market.
10. The production unit will be called as firms.

III. Match the following. 5 x 1 = 5m

11.

A B
 a) Linear demand curve - ii) d (p) = a – bpb)

b) Demand curve - i) Downward sloping

c) TFC + TVC - iv) TC

d) Л = - v) TR - TC

e) Normal Profit - iii) zero profit

-
IV. Answer the below questions in a
sentence.
5 x 1 = 5m

12. Expand MRS.

Ans. Marginal Rate of Substitution.
13. What is Demand ?
Ans. The concept „demand‟ refers to the quantity of a good or service that a consumer is willing
and able
to purchase at various prices, during a period of time

14. Write the formula to Calculate Average Revenue.

Ans. We calculate Average Revenue, by dividing Total revenue by the quantity sold. The
following formula is used:
AR = TR/q

15. What is Price Ceiling?

Ans. The Government imposed upper limit on the price of a good or service is called price ceiling.
Example, price ceiling on necessary items like selected medicines, kerosene, wheat etc.

16. Define Wage Rate .

Ans. Sale and Purchase of Labour Services at a Price is called the Wage rate.

Part – B
V. Answer any of the following questions in 4 sentence each. 6x2
= 12m

17. Distinguish between Positive & Normative Economics

Positive Economics Normative Economics

Here we study how the different Here we try to understand whether the
 mechanisms function different mechanisms are desirable or not
It deals with the scientific explanation of It explains about „ what should be and
the working of the economy. should not be done‟ .

18. State the Law of Demand.

Ans. Law of Demand states that other things being equal, there is a negative relation between
demand
for a commodity and its price. In other words, when price of the commodity increases, demand
for it
falls and when price of the commodity decreases, demand for it rises, other factors remaining the
constant.

19. Mention two different approaches which explain consumer behavior.

Ans:
a) Cardinal Utility Analysis – Law of Diminishing Marginal Utility
b) Ordinal Utility Analysis – Indifference Curve analysis

20. What do you mean by inferior goods ? Give example.

Ans: The inferior goods are those goods for which the demand falls with the increase in income
of consumer. Here demand for such goods move in the opposite direction of the income of the consumer.
That is, there will be a negative relationship between income of consumer and demand for inferior goods.
Example: Low quality goods.

21. What are long run Costs?

Ans. There are two long run costs namely, (a) Long run Average Cost (b) Long run Marginal Cost

22. Give the meaning of Shutdown point.

Ans: In the short run, the shut down point is that point of minimum Average Variable Cost where Short run
Marginal Cost curve cuts the Average Variable Cost curve. In the long run, the shut down point is the
minimum of Long Run Average Cost Curve.

23. Define equilibrium price & quantity.

Ans: A market equilibrium is a situation where the plans of all consumers and firms in the market
match and
the market clears. Here Quantity demanded is equal to Quantity supplied.

24. Distinguish between excess demand and excess supply

It is situation where market demand It is a situation where the market supply

exceeds the market supply. exceeds the market demand.
Here the price of the product increases. Here the price of the product decreases.
Qd > Qs Qd < Qs
25. Who are the macroeconomic decision makers ?

Ans. Economic agents are those individuals or institutions which take economic decisions. They can be
consumers, producers, Government, Corporation, Banks etc.

26. Name and write the meaning of two kinds of trade in external sector
Ans. The two kinds of Trade in external sector are exports and imports.
A country may sell goods to the rest of the world – Exports.
A country may buy goods from other countries – Imports

Part - C
VI. Answer any of the following: 5x 4= 20m
27. Briefly explain the central problems of an economy.
Ans: An economic system or economy is a mechanism where the scarce resources are channelized on
priority to produce goods and services. These goods and services produced by all the sectors of the
economy determine the national income.
Generally, human wants are unlimited and resources to satisfy them are limited. If there was a
perfect match between human wants and availability of resources there would have been no
scarcity, no problem of choice and no economic problems at all. So, one has to select the
most essential want to be satisfied with limited resources. In economics, this problem is
called „ Problem of Choice‟ .
The problem of choice arising out of limited resources and unlimited wants is called
economic problem. Every economy whether developed or underdeveloped, Capitalistic or
socialistic or mixed economy, there will be three basic economic problems viz., What to
produce, How to produce and For whom to produce. Let us discuss in detail.
a) What to Produce i.e., what is to be produced and in what quantities:: Every country has to
decide which goods are to be produced and in what quantities. Whether more guns should be
produced or more foodgrains should be grown or whether more capital goods like machines,
tools, etc., should be produced or more consumer goods (electrical goods, daily usable
products
etc.) will be produced. What goods to be produced and in what quantity depends on the
economic system of the country. In socialistic economy, the Government decides and in
Capitalistic economy market forces decide and in mixed economy both the Government and
market forces provide solutions to this problem.
b) How to Produce i.e., how are goods produced?: There are various alternative techniques
of producing a product. For example, cotton cloth can be produced with either handloom or
power looms. Production of cloth with handloom requires more labour and production with
power loom use of more machines. It involves selection of technology to produce goods and
services.
There are two types of techniques of production viz., (a) Labour intensive technology and (b)
capital intensive technology.
The firm has to decide whether production be based on labour intensive or capital intensive
techniques. Obviously, the choice of technology would depend on the availability of different
factors of production (land, labour, capital) and their relative prices (rent, wages, interest).
c) For whom to produce i.e., for whom are the goods to be produced: Another important
decision which an economy has to take is for whom to produce. The economy cannot satisfy
all wants of all the people. Therefore, it has to decide who should get how much of the total
output of goods and services. The society has to decide about the shares of different groups
of people- poor, middle class and the rich, in the national output.

Thus, every economy faces the problem of allocating the scarce resources to the production of
different possible goods and services and of distributing the produced goods and services among the
individuals within the economy. The allocation of scarce resources and the distribution of the final
goods and services are the central problems of any economy.

28. Write a short note on a centrally planned economy.

Ans: A planned economy also called as socialistic economy is that economy where the
economic activities are controlled by the central Government. Here, the Government takes
decisions about the allocation of resources in accordance with objectives to attain economic
and social welfare. Example, Russia, China, North Korea etc.
In a centrally planned economy, the basic economic problems are solved as follows:
In centrally planned economy, the Government takes decisions about the allocation of
resources in accordance with the predetermined goals and objectives to attain maximum
social welfare. Government decides what to produce, how to produce and what prices are to
be fixed.
Regarding what to produce, the Government may produce those goods and services
which are most useful for its society.
Regarding how to produce, the most suitable technique in production is adopted whether
labour intensive or capital intensive in accordance with the situation in the economy.
Regarding whom to produce, the goods and services are produced to those people who
are suffering from hunger though there is a loss.
It gives importance to the quality of life rather than quantity of production.
It focuses the resources on rapid economic development.

29. Briefly explain the budget st with the help of a diagram

Ans. The budget set is the collection of products that the consumer can buy with his
income at the prevailing market prices. The Budget set is also known as opportunity set. It
includes all the bundles (all possible combination of two goods) which the consumer can
purchase with his given level of income.
The budget equation can be written as follows: P1X1 + P2 X2 ≤ M.
Consider, for example, a consumer who has Rs.20 and suppose, both the goods are priced at
Rs.5 and are available only in integral units. The bundles that this consumer can afford to buy
are; (0,0), (0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4,0).
 Among these bundles, (0,4), (1,3), (2,0), (2,2), (3,1) and (4,0) cost exactly Rs.20 and all the
other bundles cost less than Rs.20.
If both the goods are perfectly divisible, the consumer‟ s budget set would cosist of all
bundles (x1,x2) such that x1 and x2 are any numbers greater than or equal to 0 and P1X1 + P2
X2 ≤ M.
The budget set can be represented in a diagram as follows.

Quantity of bananas is measured along the horizontal axis and quantity of mangoes is measured along
the vertical axis. Any point in the diagram represents a bundle of the two goods. The budget set consists of
all points on or below the straight line having the equation P1X1 + P2 X2 =M.

30. Explain the indifference map with the diagram.

Ans: A family of indifference curves is called as indifference map. It refers to a set of
indifference curves for two commodities showing different levels of satisfaction. The higher
indifference curves show higher level of satisfaction and lower Indifference Curve represent
lower satisfaction. A rational consumer always chooses more of that product that offers him
a higher level of satisfaction which is represented in higher Indifference Curve. It is also
called „ Monotonic preferences‟ .
The consumer‟s preferences over all the bundles can be represented by a family of indifference
curves as shown in the following diagram.

In the above diagram, we see the group of three indifference curves showing different levels of
satisfaction to the consumer. The arrow indicates that bundles on higher indifference curves are preferred
by the consumer to the bundles on lower indifference curves.
 31. Write a note of Price Floor
Ans. The Government imposed lower limit on the price that may be charged for a
particular good or service is called price floor. For certain goods and services, fall in price
below a particular level is not desirable and hence the Government sets minimum prices for
these goods and services.
Example, agricultural price support programmes and the minimum wage legislation. The
Government may impose a lower limit on the purchase price for some of the agricultural
goods and the floor is normally set at a level higher than the market determined price for
these goods. Similarly, through the minimum wage legislation, the Government ensures that
the wage rate of the labourers does not fall below a particular level and here again the
minimum wage rate is set above the equilibrium wage rate.
The Price floor can be explained with the help of following diagram

In the above diagram DD is market demand curve and SS is market supply curve. P* is the equilibrium
price and q* is the equilibrium quantity. When government imposes price floor at Pf which is higher than
equilibrium price, there will be excess supply of qf1 qf. In order to support producers the government needs
to buy this excess supply and should take steps to find alternative markets.

32. Explain the long run Costs.

In the above diagram, we see the group of three indifference curves showing different levels
of satisfaction to the consumer. The arrow indicates that bundles on higher indifference
curves are preferred by the consumer to the bundles on lower indifference curves. 33.
Explain A planned economy also called as socialistic economy is that economy where the
economic activities are controlled by the central Government. Here, the Government takes
decisions about the allocation of resources in accordance with objectives to attain economic
and social welfare. Example, Russia, China, North Korea etc.
In a centrally planned economy, the basic economic problems are solved as follows:
In centrally planned economy, the Government takes decisions about the allocation of
resources in accordance with the predetermined goals and objectives to attain maximum
social welfare. Government decides what to produce, how to produce and what prices are to
be fixed.
Regarding what to produce, the Government may produce those goods and services
which are most useful for its society.
Regarding how to produce, the most suitable technique in production is adopted whether
labour intensive or capital intensive in accordance with the situation in the economy.
 Regarding whom to produce, the goods and services are produced to those people who
are suffering from hunger though there is a loss.
It gives importance to the quality of life rather than quantity of production.
It focuses the resources on rapid economic development.
the features of perfect competition.

34. Write a table to show the impact of simultaneous shifts on equilibrium.

Shift in Demand Shift in Supply Quantity Price

Leftward Leftward Decreases May increase,

decrease or remain
constant
Rightward Rightward Increases May increase,
decrease or remain

Leftward Rightward May increase, Decreases

decrease or remain
constant
Rightward Leftward May increase, Increases
decrease or remain
constant

35. Briefly explain in what way macroeconomics is different from microeconomics.

Ans: The micro and macro economics are distinguished on the following grounds:
Scope:
• • Micro Economics study in individual units so its scope is narrow.
• • Macro Economics study in aggregates, so its scope is wider.

Method of study:
• • The Micro Economics follows slicing method as it studies individual unit.
• • The Macro Economics follows lumping method as it studies in aggregates.

Economic Agents:
• • In Micro Economics, each individual economic agent thinks about its own interest
and welfare.
• • In Macro Economics, economic agents are different among individual
economic agents and their goal is to get maximum welfare of a country.
Equilibrium:
• • Micro economics studies the partial equilibrium in the country.
• • Macro Economics studies the general equilibrium in the economy.

Domain:
• • Micro economics consists of theories like consumer’ s behaviour, production and
cost, Rent, Wages, Interest, etc.
• • Macro economics comprises of theory of income, output and employment,
Consumption Function, Investment function, Inflation, etc.

Part - D
VIII. Answer any of the following: 3 X 6 =18m

36. Briefly explain the Market demand with the help of the diagram.

Ans: The market demand for a good at a particular price is the total demand for all
consumers taken together. The market demand for a good can be derived from the individual
demand curves. Suppose there are two consumers in the market. The market demand curve
can be explained in with the help of following diagrams:

In the above diagrams, D1 is demand curve of consumer 1 and D2 is the demand curve of
Consumer 2. Suppose at price P the demand of consumer 1 is „ q1‟ and that of consumer 2
is „ q2‟ then the market demand of the good at P is q1+q2. Suppose at price P1, the demand
of consumer is 1 is q1‟ and that of consumer 2 is q2‟ . Then the market demand at P1 will
be q1‟ + q2‟ . So the market demand curve can be derived as a horizontal summation of the
individual demand curves. Thus, the market demand for the good at each price can be
derived by adding up the demands of the two consumers at that price. If there are more than
two consumers in the market for a good, the market demand can be derived similarly.
37. Explain the law of diminishing marginal utility with the help of a schedule and diagram
( follow the Steps Practiced in Classroom. )
 Introduction: One of the most important propositions of the cardinal utility approach
to demand was the Law of Diminishing Marginal Utility. German Economist Gossen was the
first to explain it. Therefore, it is called Gossen‟ s First Law. But it was popularized by
Prof.Alfred Marshall.
Definition:
According to Alfred Marshall, “ The additional benefit which a person derives from a given
increase of a stock of a thing diminishes, other things being equal, with every increase in the
stock that he already has” .
This law simply tells us that, we obtain less and less utility from the successive units of a
commodity as we consume more and more of it.
This law has few assumptions like, size of the commodity should be uniform, consumption
should be continuous, no change in price, consumer behaves rationally, no change in tastes
and preferences of consumer and the utility is measured in cardinal numbers.
Explanation:
The basis of this law is that every want needs to be satisfied only upto a limit. After this limit is
reached the intensity of our want becomes zero. It is called complete satisfaction of the want.
Therefore, as we consume more and more units of a commodity to satisfy our need, the intensity
of our want for it becomes less and less. Therefore, the utility obtained from the consumption of
every unit of the commodity is less than that of the units consumed earlier. This can be explained
with the help of the following table. TU- Total Utility, U- Marginal Utility.
Units of TU MU
Apples

1 40 40
2 70 30
3 90 20
4 100 10
5 100 0
6 90 -10

Suppose a man wants to consume apples and is hungry. In this condition, if he gets one apple, he
has very utility for it. Let us say that the measurement of this utility is equal to 40 utils. Having eaten
the first he will not remain so hungry as before. Therefore, if he consumes the second apple he will
have a lesser amount of utility from the second apple even if it was exactly like first one. The utility
he got from the second apple equals 30 units, the third and fourth apples give him utility equal to 20
and 10 respectively. Now, if he is given the 5th apple he has no use for it. That means the utility of
the 5th apple to the consumer is zero. It is just possible that if he is given the 6th apple for
consumption, it may harm him. Here the utility will be negative ie., -10. Therefore, we are clear that
the additional utility of the successive apples to the consumer goes on diminishing as he consumes
more and more of it.
 The Law of Diminishing Marginal Utility can be explained with the help of the following diagram.

In the diagram the horizontal axis shows the units of apples and the vertical axis measures
the MU and TU obtained from the apple units. The total utility Curve will be increasing in the
beginning and later falls. The Marginal Utility curve is falling from left down to the right clearly
tells us that the satisfaction derived from the successive consumption of apples is falling.
The Marginal Utility of the first apple is known as initial utility. It is 40 utils. The Marginal utility of the
5th apple is Zero. Therefore, this point is called the satiety point. The Marginal Utility of the 6th apple
is -10. So, it is called Negative utility and lies below the X axis.

38. Explain the Total Revenue and Average revenue of a firm under perfect competition with
the help of the diagrams.
Ans: The TP – total product, MP- marginal product and AP – Average Product
Total Product:
Total product is the relationship between a variable input and output when all other inputs are
held constant. Suppose we vary a single input and keep all other inputs constant. Then for
different levels of that input, we get different levels of output. This relationship between the
variable input and output, keeping all other inputs constant, is often referred to as Total
Product of the variable input.
Average product Average Product is defined as the output per unit of variable input. We
calculate it as APL=TPL/L, where APL is the Average Product of Labour, TPL is the Total
product of labour and L is the amount of labour input used.
Marginal Product
Marginal Product of an input is defined as the change in output per unit of change in the input
when all other inputs are held constant. It is the additional unit of output per additional unit of
variable input. It is calculated by dividing the change in output by change in input labour.
MPL = ΔTPL/ΔL.
The concepts of TP, AP and MP can be explained with the help of following table:
The above table shows the total product of labour, Marginal product of labour and Average
product of labour. The total product is also sometimes called as total return to or total physical
product of the variable input labour. The third column gives us a numerical example of Marginal
product of labour. The values in this column are obtained by dividing change in TP by change in
Labour. The last column gives us a numerical example of average product of labour. The values in
their column are obtained by dividing TP by Labour.

39. Explain the law of variable proportion with the help of the diagram & table.

The law of variable proportions say that the Marginal product of a factor input initially
rises with the employment level. But after reaching a certain level of employment, it starts
falling.

The above table shows the total product of labour, Marginal product of labour and Average
product of labour. The total product is also sometimes called as total return to or total
physical product of the variable input labour. The third column gives us a numerical example
of Marginal product of labour. The values in this column are obtained by dividing change in
TP by change in Labour. The last column gives us a numerical example of average product of
labour. The values in their column are obtained by dividing TP by Labour.
If we plot the above table in graph, placing labor on X axis and output on Y axis, we get the curves
shown in the diagram below:

The TP increases as labour input increases. But the rate at which it increases is not constant.
An increase in labour from 1 to 2 increases TP by 10 units. An increase in labour from 2 to 3
increases TP by 12 units. The rate at which TP increases is shown by the MP. The MP first
increases (till 3 units of labour) and then begins to fall. This tendency of the MP to first
increase and then fall is called the law of variable proportions.
 The law of variable proportions is also known as law of diminishing marginal product. It
occurs because of change in factor proportions. Factor proportions represent the ratio in
which the two inputs are combined to produce output. As we hold one factor fixed and keep
the other increasing, the factor proportions change. Initially, as we increase the amount of the
variable input, the factor proportions become more and more suitable for the production and
marginal product increases. But after a certain level of employment, the production process
becomes too crowded with the variable input.
In the above diagram, TP is Total Product curve which is increasing in different proportions due the
change in labour input. The AP and MP curv

40. Explain the simultaneous shifts of demand & supply curve in perfect competition with the
help
of diagrams.
It is important to note that the amount of a good that the consumer chooses
depends on the price of the good, the prices of other goods, income of the consumer and her
tastes and preferences. The demand function is a relation between the amount of the good
and its price when other things remain constant.
Movements along the Demand Curve: The demand curve is a graphical representation of the
demand function. At higher prices, the demand is less and at lower prices, the demand is
more. Thus, any change in the price leads to movements along the demand curve. This can
be shown in diagram as follows:

In the above diagram (a) initially, the equilibrium is at E where the demand curve DD0 and
supply curve SS0 intersect. Here, both supply and demand curves shift rightward where the
price remains constant at P but the equilibrium quantity moves from q to q1.
Similarly, in diagram (b), the supply curve shifts rightward and demand curve shifts leftward
where the equilibrium quantity remains same but the equilibrium price decreases from P to P1.
Therefore, the rightward shifts in both demand and supply curves leads to increase in the equilibrium
quantity and equilibrium price remaining constant. The equilibrium quantity remains same and the
price decreases if there is leftward shift in demand curve and a rightward shift in supply curve.

Part – E
IX. Answer any two of the following( Project Oriented question ) 2 X 5 = 10m
41. A consumer wants to consume two goods. The Price of Good ‘ X’ , is Rs.20 and priceof
Good Y is Rs.40. The consumer income is Rs.200.
a) How much Good ‘ X’ can he consume if he spends his entire income on that good?
10
 b) How much Good ‘ Y’ can he consume if he spends his entire income on that good?
5
c) Is the slope of budget line downward or upward? DOWNWARD SLOPE
d) Are the bundles on the budget line equal to the consumer’ s income or not? YES
e) If you want to have more of Good ‘ X’ you have to give up Good ‘ Y’ . Is it true?
YES

42. Find the missing products in the following table.

Factor L TP = ∑ MP MP = TPn – TPn- AP = TP/L

0 0 0 0

1 3 3 3

2 8 5 4

3 15 7 5

4 20 5 5

5 23 3 4.6

6 24 1 4

43. Compute the Total Revenue , Marginal Revenue and Average revenue schedules from the
following table when market price of each unit of good is Rs. 30.
Qty Sold ( q) TR MR AR

0 0 0 0

1 30 30 30

2 60 30 30

3 90 30 30

4 120 30 30

5 150 30 30