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 Sample Question Paper for Class XII
Economics
Time-3 Hrs. Max. Marks – 80

General Instructions:
i. All questions in both sections are compulsory.
ii. Marks for questions are indicated against each question.
iii. Question No.1-4 and 13-16 are very short answer questions carrying 1 mark each. They are
required to be answered in one sentence.
iv. Question No.5-6 and 17-18 are short answer questions carrying 3 marks each. Answers to
them should not normally exceed 60 words each.
v. Question No.7-9 and 19-21 are also short answer questions carrying 4 marks each. Answers
to them should not normally exceed 70 words each.
vi. Question No.10-12 and 22-24 are long answer questions carrying 6 marks each. Answers to
them should not normally exceed 100 words each
vii. Answers should be brief and to the point and the above word limit be adhered to as far as
possible.

SECTION A – MICROECONOMICS
1. If it is given that the total variable cost for producing 15 units of output is 3000 and for 16
units is 3,500. Find the value of Marginal Cost. (1)
Answer:
MCn = TVCn –TVCn-1
MC16 = TVC16 –TVC15
= 3,500 – 3,000
= 500

2. When is a consumer said to be rational? (1)

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 Study Materials
NCERT Solutions for Class 6 to 12 (Math & Science)
Revision Notes for Class 6 to 12 (Math & Science)
RD Sharma Solutions for Class 6 to 12 Mathematics
RS Aggarwal Solutions for Class 6, 7 & 10 Mathematics
Important Questions for Class 6 to 12 (Math & Science)
CBSE Sample Papers for Class 9, 10 & 12 (Math &
Science)
Important Formula for Class 6 to 12 Math
CBSE Syllabus for Class 6 to 12
Lakhmir Singh Solutions for Class 9 & 10
Previous Year Question Paper
CBSE Class 12 Previous Year Question Paper
CBSE Class 10 Previous Year Question Paper
JEE Main & Advanced Question Paper
NEET Previous Year Question Paper

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Answer: A consumer is said to be ‘rational’ when he aims at maximizing his utility from the
consumption of the given commodity, within his money income

3. State any one assumption for the construction of the curve that shows the possibilities of
potential production of two goods in an economy. (1)
Answer: Increasing marginal opportunity cost or any other valid assumption

4. Which of the following is an assumption of Production Possibility Frontier? (1)

i) Resources are not fully employed.
ii) Resources are not equally efficient for production of the two goods.
iii) Resources are not efficiently employed.
iv) Resources available are not fixed.
Answer:
ii) Resources are not equally efficient for the production of the two goods.

5. Why do central problems arise? Discuss briefly. (3)

Answer: Central problems are economic problems faced by each and every economy. They
arise due to:
i) Scarcity of resources:- Human wants are unlimited and available resources in relation to same
are scarce and limited.
ii) Alternate uses of resources:- Available resources can be put to multiple uses, hence, the
economy has to make a choice amongst alternative uses of available resources

6. ‘Supply curve is the rising portion of marginal cost curve over and above the minimum of
Average Variable cost curve’. Do you agree? Support your answer with valid reason. (3)
Answer: Yes, we do agree with the given statement that the supply curve is the rising portion
of marginal cost curve over and above the minimum of Average Variable cost curve. Since no
rational producer/seller would like to supply his output to the market if he is unable to recover
his per unit variable cost as it would lead to losses between the range of minimum of marginal
cost and minimum of average variable cost.

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7. Discuss the primary reason for ‘indeterminateness of demand curve’ under the oligopoly
form of market. (4)
Answer: Indeterminateness of Demand Curve: In an Oligopoly form of market, no single firm
can predict its prospective sales with perfection. This is because any given change in the
price/output decision by a rival firm would initiate a series of actions, reactions and counter
actions by others. Therefore, there is no certain nature and position of demand curve under
this form of market for a firm.

8. Identify which of the following is not true for the Indifference Curves. Give valid reasons
for choice of your answer:
a. Lower indifference curve represents lower level of satisfaction.
b. Two regular convex to origin indifference curves can intersect each other.
c. Indifference curve must be convex to origin at the point of tangency with the budget line at
the consumer’s equilibrium.
d. Indifference curves are drawn under the ordinal approach to consumer equilibrium. (4)

Answer:
Out of the given options, (B) is incorrect. Indifference Curves have a property that two ICs
cannot intersect.
Suppose, there are any two ICs intersecting each other. As per the figure
A =C ( on IC1)
D= E (on IC2)
But if we see the peculiarity of point B (the point of intersection), this would result into absurd
situation of A=C=B & D=C=B, which is not possible, as they are violating the basic definition of
the Indifference Curves.

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9. Comment upon the degree of elasticity of demand for Good X, in the following given
situations, if the price of the commodity rises from Rs. 5 per unit to Rs. 7 per unit and the
quantity demanded falls from 20 units to 16 units :
i) Using the total household expenditure method,
ii) Using proportionate method. (4)

i) P x Q = TE
5 x 20 = 100
7 x 16 = 112
Since the price & total expenditure carry positive relation Ed<1, relatively inelastic demand.
ii) Ed = Change in Quantity Demanded x Original Price
Change in Price Original Quantity Quantity
(Absolute values taken)
= (4/2) x (5/20)
= 0.5 (Ed<1, relatively inelastic demand.)

10. a) Explain with the help of a hypothetical numerical example the assumption n of
diminishing marginal rate of substitution under the ordinal approach of theory of consumer’s
behaviour. (4)
b) Why should marginal rate of substitution diminish for a stable consumer’s equilibrium (2)
Answer:
a) The assumption of diminishing marginal rate of substitution states that the consumer will be
willing to sacrifice lesser units of GoodY , so as to gain additional unit of the Good X.
This is an extension of law of diminishing marginal utility. Diminishing marginal rate of
substitution is the reason behind convexity of Indifference Curve to the origin.
The following table shows, bundles of Good X and Y which provide same level of satisfaction to
the consumer:-

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The above schedule shows that for each additional unit of Good X, consumer is willing to
sacrifice lesser and lesser units of Good Y.
b) Marginal rate of substitution (MRS) is the rate at which consumer is willing to trade-off one
good for the other. It depends on the quantity of the two goods she/he is consuming. A rational
consumer will sacrifice lesser units of Good Y so as to acquire additional units of Good X, due to
the application of law of diminishing marginal utility.
MRS should be diminishing as additional consumption of Commodity X, symbolizes fall in
marginal utility due to which the consumer will not further increase its consumption. If it does
not fall, she/he will keep on increasing the consumption of Commodity-X and will not reach a
stable equilibrium.

11. a) What is meant by price rigidity, under oligopoly. (2)

b) Elaborate the implication of the conditions of equilibrium of a firm. (4)

Answer:
(a). Price rigidity is the price of the product fixed after deliberations and negotiations by the
oligopolistic firms, to which they generally stick with a view to avoid any sort of price war.

(b). Firm’s equilibrium is that level of output where its profits are maximized Conditions of
Firm’s Equilibrium:
i) Marginal Revenue must be equal to Marginal Cost.
ii) Marginal Cost must be rising.
The conditions implies that the slope of rising Marginal Cost Curve is equal to the slope of
Marginal Revenue curve.

MR
MC

Quantity in units

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Implication of the conditions lies in the fact that beyond the equilibrium point MC would
become greater than MR, i.e. for each additional unit sold beyond output OQ the cost of
producing that unit will be more than the revenue generated by the unit.

12. Suppose the demand and supply curves of a Commodity-X is given by the following two
equations simultaneously:
Qd = 200 – p Qs = 50 + 2p
i) Find the equilibrium price and equilibrium quantity.
ii) Suppose that the price of a factor of production producing the commodity has
changed, resulting in the new supply curve given by the equation
Qs’ = 80 +2p
Analyse the new equilibrium price and new equilibrium quantity as against the original
equilibrium price and equilibrium quantity. (3+3)

Answer:
i) We know that the equilibrium price and quantity are achieved at;
Qd = Qs
200- p =50 + 2p
(-) 3p = (-) 150
Therefore, Equilibrium Price p = 50
And, Equilibrium Quantity q = 200 – 50 = 150 units

ii) If the price of factor of production has changed, then under the new conditions;
Qd = Qs
200- p = 80 + 2p
(-) 3p = (-) 120
Therefore, Equilibrium Price p = 40
And, Equilibrium Quantity q = 200 – 40 = 160 units
Thus as the equilibrium price is decreasing the equilibrium quantity is increased.

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 Section B: Macroeconomics
13. If an economy is to control recession like most of the Euro-Zone nations, which of the
following can be appropriate: (1)
i) Reducing Repo Rate
ii) Reducing CRR
iii) Both (i) and (ii)
iv) None of (i) and (ii)

Answer: (iii) Both (i)and (ii)

14. Define nominal flow. (1)

Answer: Nominal Flow/Money Flow is the flow of factor payments and payments for goods and
services between households & firms.

15. The government budget of a hypothetical economy presents the following information,
which of the following value represents Budgetary Deficit. (All fig. in crores) (1)
A. Revenue Expenditure = 25,000
B. Capital Receipts = 30,000
C. Capital Expenditure = 35,000
D. Revenue Receipts = 20,000
E. Interest Payments = 10,000
F. Borrowings = 20,000
i) 12,000
ii) 10,000
iii) 20,000
iv) None of the above.
Answer:
(iv) None of the above.

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Budgetary Deficit = Revenue expenditure + Capital Expenditure-(Revenue
receipts+ Capital receipts)
= 25000+ 35000-(20000+3000)
= 50,000 crores

16. Calculate the value of money multiplier if the legal reserve requirements are 20%. (1)
Answer: Money Multiplier = 1/LRR = 1/20% = 5

17. In an economy C= 200+ 0.5 Y is the consumption function where C is the consumption
expenditure and Y is the national income. Investment expenditure is 400 crores. Is the
economy in equilibrium at an income level 1500 crores? Justify your answer. (3)
Answer:
No, the Economy is not in a state of equilibrium at Rs. 1500 crores
Given Consumption function, C = 200+0.5Y
Investment expenditure (I) = Rs.400 crore
At the equilibrium level
Y= C+I
Substituting the values from the question:
Y= {200+0.5Y}+ 400
Y - 0.5Y= 600
0.5Y = 600
Y = 600/0.5
= 1200
The equilibrium level of income is Rs.1200 crores. The given income Rs. 1500 crore is greater
than equilibrium level of income. Therefore, the economy is not in equilibrium.

18. ‘Devaluation and Depreciation of currency are one and the same thing’. Do you agree?
How do they affect the exports of a country? (3)

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Answer:
*Devaluation is the fall in the value of domestic currency in relation to foreign currency as
planned by the government in a situation when exchange rate is not determined by the forces
of demand & supply but is fixed by the government of different countries
whereas
Depreciation is the fall in the value of domestic currency in relation to foreign currency in a
situation when exchange rate is determined by the forces of demand & supply in the
international money market. As a general phenomena, any depreciation/devaluation of
currency may result into increase in exports of the goods and services from the country since it
would increase the global competiveness of the goods.

19. Elaborate ‘economic growth’ as objective of government budget. (4)

Answer:
Economic Growth implies a sustainable increase in real GDP of an economy, i.e. an increase in
volume of goods and services produced in an economy. Budget can be an effective tool to
ensure the economic growth in a country.
i) If the government provides tax rebates and other incentives for productive ventures and
projects, it can stimulate savings and Investments in an economy.
ii) Spending on infrastructure of an economy enhances the production activity in different
sectors of an economy. Government expenditure is a major factor that generates demand for
different types of goods and services in an economy, which induces growth in private sector
too.
However, before planning such expenditure, rebates and subsidies government should check
the rate of inflation and tax rates. Also there may be the risk of debt trap if loans are too high to
finance the expenditure.

20. What is meant by problem of double counting? How this problem can be avoided? (4)
Answer: The problem of double counting arises when the value of certain goods and services
are counted more than once while estimating National Income by Value Added Method. This
happens when the value of intermediate goods is counted in the estimation of National Income
along with the final value of goods and services.
Two methods to avoid the problem of double counting:
i. To consider only the final value of output produced.

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ii. To consider only the value added of the output produced.

21. `GDP as an index of welfare may understate or overstate welfare.`

Explain the statement using examples of a positive and a negative externality (4)
Answer: GDP doesn’t account for externalities
Positive Externality: eg: saving commuting time due to construction of a fly-over , increases
welfare, GDP as an index understates welfare
Negative Externalities: eg: Pollution from factories, decreases welfare, GDP overstates welfare

22. a) What is meant by Repo Rate? How does the Central Bank use this measure to control
inflationary conditions in an economy?
b) What is meant by Margin Requirement? How does the Central Bank use this measure to
control deflationary conditions in an economy? (3+3)
Answer:
Repo rate is the rate of interest at central bank lends money to commercial banks for a short
term. The central bank fixes the Repo Rate and it plays the role of an indicator of lending rate
and deposit rate fixation by the banks. Under inflationary conditions, central bank increases the
Repo Rate.
Marginal requirement refers to the difference between market value of the security offered for
loans and the amount of loans offered by the commercial banks. The central bank fixes the
margin requirements and under deflationary conditions, central bank reduces the margin
requirements.

23. Compute (a) Domestic Income and (b) Net National Disposable Income. (6)

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Answer:
Domestic Income = xi + ii + iv – vi + vii – x – viii
= 2200 + 2500 + 1190 – 100 – 420 – 145 – 470
= 4755 (in Rs. crores)
Net National Disposable Income = National Income + Net Indirect Taxes + Net Current Transfers
from ROW
=Domestic Income - v + viii+ ix
= 4755 -125+470+350
= 5450 (in Rs. crores)

24. State whether the following statements are true or false. Give valid reasons for your
answers.
(i) Unplanned inventories accumulate when planned investment is less than planned saving.
(ii) Deflationary gap exists when aggregate demand is greater than aggregate supply at full
employment level.
(iii) Average propensity to save can never be negative. (6)

Answer:
i) True, as planned savings are more causing the Marginal Propensity to Consume to reduce
thus Aggregate Demand will fall and producers will have accumulation of inventory.
ii) False, Inflationary Gap exists when actual Aggregate Demand is more than Aggregate Supply
corresponding to full employment level of output in the economy.
iii) False, at income levels which are lower than break-even point, Average propensity to save
can be negative as there will be dissaving in the economy.

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