SPECIMEN PAPER 3 (With 8olutlon

[Time: 3 Hours]
Maximum Marke
Note
(1) All questions are compulsory
(2) Drau tables/diagrams wherever necessary
(3) Figures to the right indicate full marks.
(4) Write answers to all question on neuw pages.
Q.1 (A) Choose the correct option.
(1) Concepts studied under Micro economics. (09
(a) National income (b) General price level
(c) Factor pricing (d) Product pricing
Options: i) b and c ii) b, cand d fii) a, b and c (iv) c and d.
(2) Statements indicating consumer equilibrium:
(a) MU is greater than price (b) MU is equal to pice
(c) MU is less than price (d) Price is less than one.
Options: (i) a(il) a, b, c and d (tii)
and b a, b and c fiv) only b.
(3) A rightward shift in supply curve shows
(b) decrease in supply
(a) contraction of supply
(d) increase in supply.
(c) expansion of supply
(ii) d ftii) c fiv) b
Options: )a
feature of this market.
(4) Homogeneous product is a
(b) Monopolistic competition
(a) Monopoly
(c) Perfect competition (d) Oligopoly
Options: () cand d ii) a, b and c iti) a, c and d iv) onlyc
to X axis, in case of:
(5) Demand curve is parallel
(a) perfectly elastic demand (b) perfectly inelastic demand
(d) relatively inelastic demand
(c) relatively elastic demand
(üi) c iv) d
Options: (i) a b
(3) (i)(d) (4) (iv)(c) (5) )(a)
Ans. (1) (iv) c and d. (2) (iv) (b)
answer
| Marking Scheme: 1 mark for each correct
(05)
Q.1 (B) Assertion and Reasoning type questions. due to change
demanded of one commodity a
(1) Assertion (A) : A change in quantity cross elasticity.
in the price of other commodity is
c o n s u m e r s income leads to
a change in the quantity
Reasoning (R): Changes in
demanded.

Options: (1) (A) is True, but (R) is False

True
(2) (A) is False, but (R) is
are True and (R) is the
correct explanation of (A)
(3) Both (A) and (R)
and (R) is not the correct explanation ofA)
(4) Both (A) and (R) a r e True
the demand for the output o
Assertion (A) Perfect competition prevails when
(2) elastic.
each producer is perfectly
 Specm

asoning (R): Asingle uniform price prevails under perfect competition which is
R e a s

determined by the interaction of demand and

options: () (A)
is but
True, (R) is False supply
(2) (A) is False, but (R) is Thue
3) Both (A) and (R) are True and (R) is the correct
explanation
(4) Both (A) and (R) are rue and (R) is not the correct of of A)
explanation
(A)

(3) Assertion (A) Simple index number are assumed base year.
asoning (R}: very commodity is given equal importance.
Options: (1) (A) True,
is but (R) is False
(2) (A) is False, but (R) is True
3) Both (A) and (R) are True and (R) is the correct explanation of (A)
(14) Both (A) and (R) are True and (R) is not the correct explanation of (A)
4 Assertion (A) 1Total utility increases at a diminishing rate.

Reasoning (R): Then marginal utility goes on diminishing.

Options: (1) (A) is True, but (R) is False
(2) (A) is False, but (R) is True
(3) Both (A) and (R) are True and (R) is the correct explanation of (A)
(4) Both (A) and (R) are True and (R) is not the correct explanation of (A)
51 Assertion (A) Money market economizes use of cash.
Reasoning (R): Money market deals with financial instruments that are close
substitutes of money.
Options: (1) (A) is True, but (R) is False
(2) (A) is False, but (R) is True
(3) Both (A) and (R) are True and (R) is the correct explanation of (A)
(4) Both (A) and (R) are Tnue and (R) is not the correct explanation of (A)
Ans.| (1) (3) Both (A) and (R) are True and (R) is the correctexplanation of (A).
(2) 13) Both (A) and (R) are True and (R) is the correct explanation of (A).
(3) -(3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(4) - (3) Both (A) and (R) are True and (R) is the correct explanation of (A).

(5) -(3) Both (A) and (R) are True and (R)is thecorrect explanation of (A).
Marking Scheme:1 markforeachcorrectanswer
Q.1 (C) GHve economic terms. (05)
(1) A desire which is backed by willingness to purchase and ability to pay.
(2) Achieved when all goods and factors of production in an economy are distributed or
allocated to their most valuable uses and waste is eliminated or minimized.
13) When the utility one derives from it depends on the number of users or individuals
using it. This concept is used in public finance.
(4) The point where demand and supply curve intersect.
(5) It is a monetary policy tool used by RBI which allows commercial banks to borrow
money through repurchase agreements.
An (1) Demand (2) Economic efficiency (3) Indivisible goods
4) Equilibrium point (5) Liquidity Adjustment facility (LA
Marking Scheme:1mark foreach correct answer
 9.1 (D) Complete the following statements.
(1) When percentage change in quantity demanded is more than the percentage ch
in price, the demand curve is hange
(a) flatter (b) steeper (c) rectangular (d) horizontal
(2) Development financial institutions were established to.
(a) provide short term funds
(b) develop industry, agriculture and other key sectors.
(c) regulate the money market
(d) regulate the capital market.
) While estimating national income, we include only value of final goods and serio
in order to ices
(a) make computation easier
(b) avoid double counting
c) maximize national welfare of the people
(d) evaluate the total economic performance of a nation
(4) Statements that apply to weighted index numbers
(a) Add the price of the different commodities of the base year e Po
(0) Add the price of the diferent commodities of the current year e Pr
c) Every commodity is given equal importance
(a) Laaspeyre's and Paasche's method is used in the calculation of weighted inder
numbers.
(5) Under Perfect competition, sellers are.
(a) Price makers (b) Price takers c) Price discriminators(d) None of these
Ans. (1) (a) flatter
(2) (b) develop industry, agriculture and other key sectors
(3) (b) avoid double counting
(4) (d) Laaspeyre's and Paasche's method is used in the calculation of weighted index
numbers,
(5) (b) Price takers

Marking Scheme:1 mark for each correct answer

Q.2 (4) Identify and explain the concepts (Any three). (06)
(1) Lalita satisfied her want of writing on essay by using pen and notebook.
Ans. Utility.
Utility refers to the capacity ofa commodity to satisfy a human want.
(2) Rajendra has a total stock of 500 gel pens in his shop which includes the 200
gel pens produced in the previous financial year.
Ans. Inventories.
Raw materials, intermediate goods, semi-finished and finished products in the
stock of the producers are known as inventories.
(3) Karan sold 1500 kg of cotton in the market.
Ans. Individual Supply.
A supply schedule is a tabular representation of the functional relational between
price and quantity supplied of a particular commodity.
 ing 2012
A s s u m i as the base year, the r a s h t r a Axed the
4 ) a l u e foor 2016.
Govern ment of Maharsshtra nR*"

Price Index Number.

1 t compares
A n s .

the level of
price between two different time
he
perind
Arm Maruti Susiki decided to lease the four wheeler ona contraet
(5)
Ans. Monopoly Mark basis.
Monopoly is a market in which there is only one seller who controls rhr entir
arket supply for a product which has no close
Marking Scheme: 1 mark to identify the correct substitute.
1 mark for explanation of correct concept. Total 2concept and
- marks each

1 (B) Distingulsh between (Any three). (06)

Organized sector and Unorganized sector of money market.
Ans.
Organized sector Unorganized sector of money market
(d The organised sector of the money
(i)|The uorganized sector of theRBI money

market is controlingto RBI.

( i i Reserve Bank of India,commercial market is no controlling to
etc

(ii)| Chit funds. Nidhi. loan companies

banks co-operative banks, regulated
financial intermediaries.
(2) Contraction of Supply and Decrease in Supply.
Ans. Contraction of Supply Decrease in Supply
(4)A fall in supply caused by fall in price fall in supply caused by unfavourable
(4)|A
while other factors remaining constant changes in other factors than price
is

is called contraction of supply. called decrease in supply.

(ii The new equilibrium point of price and (ii)| In decrease in supply ,the and
new

supply moves downwards from the equilibrium point of price supply

left on the new
right to the left on the same supply shifts from the right to

curve. supply curve.

Decrease in supply
(iii)| Contraction of supply (iii)
S

P1 P
S

S S
X
Q 1 Q
Quantity Supplied Quantity Supplied

(3) Micro Economics and Macro Economics.

Ans. Micro Econonmics Macro Economics
i)Micromeans a small part of a thing. (i)|Macro economics is the branch of
econonmics which analyses the entire

economy._
Micro economics thus deals with a (ii) | Macro economics is the
(ii) |
smallpart of the national economy. study of aggregates.
(iii) | It deals with the total employment,
(iii) It studies the economic actions andd
behavior of individual units such as national income, national output, total

an individual consumer, individual investment, total consumption, total

savings, general price level interest
producer o r a firm, the price of a
factor etc. rates, inflation, trade cycles, business
particular commodity or a

Auctuations etc
 ( Laaspeyre's Index and Paasohe's Inde Paasche's ndea
Solution
Ans. Lanapeyre's Imden
( Laaspeyre's Index base year' quantities Paasche's Index quantities of the
are considered as welghts. current year'are considered as
ulatedeighta
wei.
(4) Paasche's price index is calculat
(Laaspeyre's price index is calculated as

Po a x 100 P.,P9, 100

(11) A distinctive feature of Laaspeyre's A distinctive feature of Paasche'
Index number is that it uses a group Index number is that it uses a gT
of commodities purchased in the base commodities purchased in the
current
year period as the basis ofcomparison. year period as the basi of comparison,
(5) Balance of payments and Balanceoftrade
Ans. Balance of payment Balance of trede
(4) The Balance of payments of a ()Balance of trade is the difference
country is asystematic record of all between the value of a country's
international economic transactions exports and imports for a given period
of that country during a given period, Balance of trade is also referred to as
usually a year. the international trade balance.
() The value of exchange of goods (11) Balance of trade includes the value of
and services among the citizens, imports and exports of visible goods
businessmen, firms, government etc. is and invisible goods.
included in balance of payments.
Marking Scheme:1 mark each for point. Any two points needed. Total=2 marks each
Q.3 Answer the following (Any three).
(1) Explain the functions of commercial bank.
(12)
Ans. Commercial banks act as intermediaries in the country's financial
system to bring
the savers and investors together. Scheduled commercial banks are those
in the second schedule of the Reserve Bank of India Act, 1934. In terms
included
and function, commercial banks in India can be classified into four
of ownership
categories:
Public sector banks Private sector banks
Regional rural banks Foreign banks
Definitions of Commercial Bank:
(a) Banking Regulation Act of 1949: "Banking means the accepting, for the purpose of
lending or investment, of deposits of money from the public, repayable on demand
and demand draft, order or otheruise".
otheruise, wthdrawable by cheque,
(6) Prof. Cairncross: "A bank is afinancial
intermediary, a dealer in loans and debts
Functions of Commercial Banks:
) Acceptance of deposits: Deposits constitute the main source of funds for
commercial banks. Savings lead to the creation of deposits. Deposits are categorized
as (a) Demand deposits and (b) Time deposits.
laemand Deposits: Deposits that are withdrawable on demand are known as
demand deposits. They are in the form of Current account and Savings account
deposits. Current account is usually opened by businessmen, corporations,
industrial houses, trusts etc. They are provided with overdraft facility. Overdralt
means
withdrawal in excess of the
balance in the account. Savings account
are operated by a large number of people, particularly the salaried class, smal
traders etc. who wish to save a part of their income with the bank.
 Specimeh

Time deposits: Deposits that are repayable after a certain period of time are
(b) te
known as time deposits. They are in the form of recurring dep0sits and
deposits
fxed amount
Recurring aeposit refers to a deposit wherein a customer deposits a

at regular intervals for a specified period of time.

Fixed deposits refer to a lumpsum amount deposited by a customer for a specined
of time. Compared toall other deposits, fixed deposits carry a high rate or
period
interest.
lend these
Provlding loans and advances: Commercial banks mobilize savings and
Gil funds to institutions and individuals for various purposes. Based on the tenure,
loans include call loans, short term, medium term and long term loans. Longer tne
banks also
duration of the loans, greater will be the rate of interest. Besides this,
provide cash credit, overdraft facility as well as discount bills exchangge. services
of
functions: Commercial banks also provide a range of ancillary
ii) Ancilary on
such as transfer of funds, collection of money, making periodica payments
behalf of the customer, merchant banking, foreign exchange, safe deposItlockets
internet mobile banking
D-mat facility, banking, erc
of commercial banks.
(iv) Credit Creation: Credit creation is an important function the
Commercial banks are creators of credit. Demand and
time deposits constitute
the net
requirements out of
primary deposit of banks. After meeting the reserve used for
demand and time liabilities, the balance amount is
giving loans. Thus,
or derivative deposits' are
created out of the loans given by
secondary deposits customer, the loan
the banks. For instance, when the bank provides loan to its
that receives
amount is credited into the bank account of
the customer. The bank
form of reserves.
the loan amount as a deposit, keeps
aside a certain portion in the
amount.
the bank lends the remaining
After meeting the reserve requirements, to
This procedure is followed by the entire banking
system in the country, leading
out of the loans given
commercial banks create deposits
creation of credit. In short,
thereby leading to crediton.
point. Any four points. Total =4 markks
Marking Scheme: 1 mark each for correct
of trade and its types.
(2) Explain the concept foreign the different countries of the world. It is called as
between
Ans. Foreign Trade is trade Trade.
International Trade or External
and Hultman, "International Trade consists of
Definition: According to Wasserman
transaction between residents of dijferent countries"
into the following three types.
of foreign trade: Foreign trade is divided
Types
i) Import Trade (i) Export Trade (ii) Entrepot Trade
trade refers to purchase of goods
and services by one country
(i) Import Trade: Import to home
another or inflow of goods and services from foreign country
from country Saudi Arabia, etc.
For example, India imports petroleum from Iraq, Kuwait,
country. one country to
another
Trade: Export trade refers to the sale of goods by
(i) Export For example, India
or outflow of goods from one country to foreign country.
country
exports tea, rice, jute to China, Hong Kong,
Singapore etc.
services from one
refers to purchase of goods and
(1) Entrepot Trade: Entrepot trade operations.
to another country after some processing
country and then selling them like,
to make electronic goods
For example, Japan imports raw material required France etc. and
machine, television etc. from England, Germany,
radio, washing them.
processing
sells them to various countries in the world after
marks for types. Total= 4 marks
Marking Scheme: 1 mark for definition and 3
 S Bplain the Monopolistie competition with ite features.
Ane.
Monopolistie competition is verv realistic in nature. In this market there are.
3ome
teatures of perfect competition and some features of monopoly actingtogeth
together
Prof. E. H. Chamberlin coined this concept in his
bookTheory of Monopolis
Competition" which was published in 1933. According to Chamberlin, "Monopoli
mpetition refers to competition among a large number of sellers producing ol
but not
close
perfect substitutes.
Folowing are the main features of monopolistic competition:
() Fairly large number of sellere: In monopolistic competition, the number of seller.
is large but comparatively it is less than that of perfect competition. Due to
reason sellers' behaviour is like
this
monopoly.
(1) Fairly large number of buyers: In this market there are fairly large number af
buyers. Consequently, no single buyer can infuence the price of the product by
changing his individual demand.
by
i ) Product differentiation: Product differentiation is the main feature of monopolistic
competition. In this market, there are many firms producing a particular product.
but the product of each firm is in some way differentiated from the productof
every other firm in the market. This is known as product differentiation. Product
diferentiation may take the form of brand names, trade marks, peculiarityy of
package or container, shape, quality, cover, design, colour etc. This means that the
product of a firm may find close substitutes and its cross elasticity of demand is
very high. For example, mobile handsets, cold drinks etc.
(1) Pree entry and exit: Under monopolistic competition there is freedom of entry and
exit, that is new frms are free to enter the market if there is profit. Similarly, they
can leave the market, if they find it dificult to survive.
() Selling Cost: Selling cost are peculiar to monopolistic competition only. It refers
to the cost incurred by the firm to create more demand for its product and thus
increase the volume of sales. It includes expenditure on advertisements,
and television broadcasts, hoardings, exhibitions, window display, free gifts, free
samples etc.
(vi) Close substitutes: In monopolistic competition, goods have close substitutes to
each other. For example, different brands of soaps, toothpastes etc.
(vii) Concept of group: Under monopolistic competition, Chamberlin introduced
the concept of 'Group' in place of industry.
Industry means the number of firms
producing identical products. A Group' means a number of firms
differentiated products which are closely related. For example, groupproducing
of firms
producing medicines, automobiles etc.
Marking Scheme: 1 mark for definition, 3 marks for features Any 6 points. Total =4 marks
-

(4) Explain features of utility.

Ans. Following are the features of utility:
i) Relative concept: Utility is related to time and place. It varies from time to time
and place to place. For
example, (a) woollen clothes have a greater utility in the
Winter. (b) sand has greater
utility at the construction site than at the sea shore.
i1) Subjective concept: It is a psychological concept. Utility differs from person to0
person. This is due to differences in taste, preferences, likes, dislikes, nature, habits,
profession etc. For example, stethoscope has utility
to a doctor but not to a layman.
(i) Ethically neutral concept: The concept of utility has ethical
no
It is a morally colourless concept. The commodity should satisfy any want of a consideration.
person without consideration of what is good or bad, desirable or undesirable.
 For example, a knife has utility to cut fruits and vegetables as well as it can be used
to harm someone. Both wants are of different nature but are satisfied by the same
commodity. Thus, utility is ethically neutral.
Utilty differs from usefulness: Utility is the capacity of a commodity to satisty
(iv
human wants, whereas usefulness indicates value in use of the commodity. For
example, milk has both utility as well as usefulness to a consumer, while liquor has
e

utility only to an addict, but has no usefulness.

v Utility differs from pleasure: A commodity may possess utility but it may not
give any pleasure to the consumer. For example, injection for a patient has utility
because it cures the ailment but it hardly gives any enjoyment or pleasure to him.
vi) Utility difers from satisfaction: Utility is a cause of consumption, satisfaction
is the end result of consumption. They are interrelated but still different concepts.
For example, a thirsty person drinks a glass of water since water has the capacity
to satisfy thirst. Utility of water is the cause of consumption and the satisfaction
derived is the end result of consumption.
vii) Measurement of utility is hypothetical: Utility is an abstract concept. Cardina
or numerical measurement of utility is not possible. For example, a thirsty person
after drinking water, may derive higher or lower level of utility. Thus, utility can only
be experienced and found either positive, zero or negative. Negative utiity is called

disutility.
(vii) Utility is multi-purpose: A commodity can satisfy the want of more than one
person, it can also be put to several uses. For example, electricity can be used to
serve many purposes and for many peopleat some point of time.
the intensity of a
ix) Utility depends on the intensity of want: Utility depends on
want. More intense the want, greater will be the utility. As and when the urgency of
want declines, utility diminishes. For example, a hungry person finds more utility
in food, than a person who is not hungry.
(Utility is the basis of demand: A person will demand a ocommodity only if it gives
to him. For example, a sick person has utility in medicines hence, he demands
utility
medicines.
Marking Scheme:%mark each for correct point.Any eight points. Total=4 marks
(5) Explain the law of supply.
Ans. Introduction: The law of supply is also a fundamental principle ofeconomic theory
like law of demand. It was introduced by Prof. Alfred Marshall in his book, Principles
of Economics' which was published in 1890. The law explains the functional
relationship between price and quantity supplied.
Statement of the Law:
Prof. Alfred Marshall, "Other things being constant, higher the price of a commodity,
more is the quantity supplied and lower the price of a commodity less is the quantity
supplied"
In simple words, "other factors remaining constant, a rise in price results in a
rise in the quantity supplied and vice-versa. Thus, there is a direct relationship
between price and quantity supplied.
Symbolically, Sx f P ,
where S Supply of a commodity, x = Commodity,

f Function, Px Price of a commodity

 Law of supply is explained with the help of the following schedule and diagra
agram
Supply Schedule
Bupply debedule
'*" (a
rloe of eommodity '* (la t) Quantdty eupBed ef eommodity
10
100
20
200
30
300
40
400
50
500
of commodi
direct relationship between price and quantity
The table explains the
740 and 50, the supply also risea
When price rises from ?10toR20, 730,
supplied. when price rises
units respectively. It means,
from 100 to 200, 300, 400 and 500
falls supply also talls.
supply also rises and when price
between price and quantity supplied which is
Thus, there is direct relationship
shown in following Supply Curve:

Supply Curve S
X-axis represents quantity supplied
500 and Y-axis represents the price ofthe
commodity. Supply curve 'SS slopes
400 upwards from left to right which has
a positive slope. It indicates a direct
300 relationship between price and
quantity supplied.
200

100-
S
X
10 20 30 40 50

Quantity Supplied (in kgs.)

Marking Scheme: 2 marks for statement of law, 2 marks for schedule and diagram.
Total = 4 marks

0.4 State ith reasons whether you agree or disagree with the following
statements (Any three). (12)
(1) Macro economics deals with the study of individual behaviour.
Ans. No, I disagree with the statement.
Reasons: (i) Macro economics does not study the individual economic unit such as
particular consumer, individual demand, particular seller, individual supply, etc.
i) Macro economics studies the economic behavior of aggregates, their functional
relationship.
Thus, macro economics does not deal with the study of individual behavior,
rather than deal with the study of behavior of
aggregates.
 aDemand curve slopes downward from left to riht.
statement.
Aps.
YES, Iagree with
Reasons: (i) According to Prof. Alfred Marshall, "Other things being equal, higher
the price of a commodity, smaller is the
quantity demanded and lower the price of a
commodity, larger is the quantity demanded."

The law of demand is explained with the help of -Demand Curve

the adjacent diagram.
X-axis represents the demand for the commodity
and Y-axis represents the price of commodity x.
DD is the demand curve which slopes
downward from left to right due to
an inverse relationship between price X
and quantity demanded. 1
horizontal Hne to X9antity
Demanded
(3) Perfectly elastic demand curve is
Ans. YES, I agree with statement.
Reasons
) When slight or zero
a
about an infinite
in the
change
change in the
price YPerfectiy elaste demandJ
brings
quantity demanded of that commodity,
it is called perfectly elastic demand.

PD E =c D
(ii) Perfectly elastic demand curve:

(ii) The demand curve is a horizontal line parallel to

the X axis indicating perfectly elastic demand.
X
Quantity Demanded

diffculties in the measurement of national income.

(4) There are many theoretical
Ans. YES, I agree with statement.
Reasons: There are various difficulties in the measurement of national income:
allowance etc. but
() Transfer payments: Individuals get pension, unemployment
should be included in national income or not, is
a
whether these transfer payments
part of individual income and on the other
major problem. On one hand they
are a

hand, they are part of Government expenditure.

transfer payments are not included in national income.
Hence, these
like income from gambling, black marketing, theft,
(i) Tlegal income: Illegal incomes
in national incomme.
smuggling etc. are not included
services: For the purpose of calculating national income, only paid
goods
(ii) Unpaid
number of unpaid services which
and services are considered. However, there are a
are not accounted for in the
calculation of national income. For example, services
of housewives and the services provided out of love, affection, mercy, sympathy,
charity etc. are not included in national income.

iv) Production for self consumption: The products kept for self consumption by
it is not
the farmers and other allied producers do not enter the market. Hence,
accounted for in the national Income.
 (v) Income of forein fArma: According to IMF, income of a 1oreign hrm, should
included in the national income of the country, where the firm actually underta
the production work. hdertakes
(vi)Valuation of Government Servioes: Government provides a number of puhis
services such as law and order, defence, public administration, education, healt
services etc. The calculation of these services at market price is difficult, as the
value of these services is not known.
Therefore, it is difficult to calculate national Income
(vii) Changing prlce level: Dificulties in calculating national income also arise due
to
changes in price levels. For example, when the price level rises, the national inco
may show an increase even though the production may have decreased. Also. come
wh
the price level falls, the national income may show a decrease even though ther
when
ere
may be an increase in production.
(5) Obligatory function is the only function of the Government
Ans. No, I disagree with statement.
Reasons: Public finance is one of the old branches of economics which highlighta
the role and functions of the government in an economy. Government is a formal
or informal institution created by the people in a speciic region to perform various
functions such as protection from external attacks, protection of private
property
the people, generation of employment, maintaining internal law and order, provision
of
of social needs like education, health, etc.
These functions of the government can be classified as
) Obligatory functions: Protection from external attacks, maintaining internal law
and order etc. are obligatory functions of the government.
( Optionalfunctions : Provision of education and health services, provision of social
security like pensions and other welfare measures etc. are optional functions of the
government.
Marking Scheme: 1 mark for writing correct agree or disagree;
L3 marks for giving anythreecorrectreasons Total=4 marks each
Q.5 Study the following and answer the questions given below it (Any two). (08)
(A) Read the given passage and answer the questions.
The conventional notion
ofsocial
security is that the government would make periodie
payments to look after people in their old age, ill-health, disability and poverty. This idea
shoulditself change from writing a chequefor the beneficiary to institutional arrangements
to care for beneficiaries, including by enabling them to look after themselves, to a large
extent. The write-a-cheque model of social security is a legacy from the rich world at the
optimal phase of its demographic transition, when the working population was numerals
enough and earning enough to generate the taxes to pay for the care of those not working.
This model is ill-suited for less, well- off India with
growing life expectancy, increasing
urbanization and resultant migration. Social security under urbanization will be
diferen
from social security in a static society.
(1) State the conventional notion of social security.
Ans. The conventional notion of social security is that the
government would mak
periodic payments to look after people in their old age, ill-health, disability an
poverty.
yecmet

h a t kind of conceptunl ehange te suggested In the gven paragraph?

)What

(Thisidea should itselfchange from writing a cheque for the

arrangement to care for beneficiaries, inchuding
to
by enabling them to
beneficiary
institutional

look after
themselves.

)what lea leacy ofsoelalseurtty from the rleh world?

rhe write-a-cheque model of social
ne. The is a legacy from the rich world at the
security
Aptimal phase of its demographic transition.
4which features of India make the traditional model of social seeurityill-suited
for the economy?
a. This model is ill-suited for less, well- off India with growing life expectancy, increasing
urbanization and resultant migration. _
Marking Scheme:1markeachfor correctanswer.Total 4 marks each
(B) Observe the market supply schedule of potatoes and answer the following
questions.
Price (R) Firms Market Supply (kg)
1 20 45 100
37 30 45
40 55 155

54 50 164
(1) Complete the quantity of potato supplied by the firms to the market in the
above table.
Ans. Price ( Firms Market Supply (kg
1
35 20 45 100
2 37 30 45 112
3 40 60 55 155
4 54 50 60 164
(2) Draw the market supply curve from the schedule.
Ans.
Y
200-
S

160

120

80

40-

X
4 5
Quantity Supplied (in kgs.)

Marking Scheme:2marks each for correctanswer.Total =4 marks each

 (C) Caleulate Lanpeyres's and Paasche's index from the gven data.

Base year Current year

Commodilty
Po P1
X 8 30 12 25

10 42 20 16

Base yeaar Current year

Ans. Commodity Pao

X 30 12 25 360 240
42 20 16 672
10 420
1032 650
Steps
( Find out the product p, 4, of the different commodities.
() Find out the product p, go of the different commodities.
(i) Add all the products p, g, obtained to derive 2p, 9o
(tv) Add all the products Poo obtained to derive 2p, 4o
Apply the formula:
p ox 100
Po
1032
Po1 60 x 100 156.36
660
Thus, Laaspeyre's index Po 156.36
Marking Scheme: 4 marks for correctanswer.Total =4 marks
Q.6 Answer in detail (Any two).
(16)
(1) State and explain the law of demand with assumptions.
Ans. Introduction : The law of demand was introduced by Prof. Alfred Marshall in his
book, Principles of Economics', which was published in 1890. The law explains the
functional relationship between price and quantity demanded.
Statement of the Law:
According to Prof. Alfred Marshall, "Other things being equal, higher the price of a
commodity, smaller is the quantity demanded and lower the price ofa commodity,
larger is the quantity demanded".
In other
words, other factors remaining constant, if the price of a commodity
rnises,
demand for it falls and when price of a commodity falls demand for the commodity
rises.
Thus, there is an inverse relationship between price and quantitydemanded.
Symbolically, the functional relationship between demand and price is expressed
as: Dx fPx,
where D = Demand for a commodity, x = Commodity,

f Function, Px Price of a commodity

me'
The
demand
law of de is explained with the help of the wing demand arhedule and
diagram.

Demand ehedule
Prlee ofcommodity '*' (tn ) uAntity demanded ofeommodity '*" (in kp)
50
40
30
20
10

As
shown in the table, when price of commodity 'x' is t50, quantity demanded
is 1 kg. When price falls from R50 to ?40, quantity demanded rises from 1 kg to
2 kgs. Similarly, at price ?30, quantity demanded is 3 kgs and when price falls
from20 to ? 10, quantity demanded rises from 4 kgs to 5 kgs. Thus, as the price
of a commodity falls, quantity demanded rises and when price of commodity rises,
quantity demanded falls. This shows an inverse relationship between price and
quantity demanded.

Y
D
50
The curve shows, X-axis represents the
Demand Curve
demand for the commodity and Y-axis
40
represents the price of commodity x.
DD is the demand curve which slopes
30 downward from left to right due to an
inverse relationship between price and
20 quantity demanded.
10 D

Quantity Demanded (in kgs)

Assumptions
)Constant level of income : If the law of demand is to find true operate then,
consumers'income should remain constant. If there is a rise in income, people may
demand more at a given price.
() No change in size of population: It is assumed that the size of population remains
unchanged. Any change in the size and composition of population of
affects the total demand for the product.
ii) Prices of subetitute gooda remain constant: It is assumed that the prices of
substitutes remain unchanged. Any change in the price of the substitute will affect
the demand for the commodity.
(iv) Prices of complementary goods remain constant: It is assumed that the prices of
complementary goods remain unchanged because a change in the price of one good
will affect the demand for'the other.
(M) No expectations about future changes in prices: It is assumed that consumers
do not expect any further change in price in the near future. If consumers expect a
rise in prices in future, they may demand more in the present even at existing high
price.
 (vi) No change in tastes, habits, preferenees, fashiome ete.t t is assumea
consumers' tastes, habits, preferences, fashions etc. should remain unchh
to a change in demand.
Any change in these factors will lead
(vi) No change in tazation poliey: Taxntion policy of the government has a greati
nangen
on demand for various goods and services. mparn
Therefore, it is assumed that there is no change in the policy of taxation declar

Government.
clared t
statement of lauw, mark for scheda
Marktng Scheme: 1 mark for introduction, 2 marks for dule
mark for diagram, 3 marks for assumptions (Any 3 points); Total 8 mark
(2) Explein the practical difmeulties involved in the measurement of net

income.
Ans. Practical DiMeulties or Statistical Dimcultles: In practice, anumber ofdiffeule
anse in the collection of statistical data required for estimation of nationalinc

Some of the practical diffculties are as followe:

in calculating national inco
of double counting: The greatest difficulty
(Problem It arises from the failure
to distinguish properly. herme
1s of double counting.
a final and an intermediate product. For example, nour usea by a bakery is.
3 an
intermediate product and that by a household is final product.

(11 Existence of non-monetized sector: In India, especially in rural areas, tho

there
still being in the nature of subsisten
xists the non-monetized sector. Agriculture,
for other goods and seie
farming, a major part of production is partly exchanged vices.
counting national income.
It is excluded while
and correct data on production
(ii) Inadequate and unreliable data: Adequate and ane

cost data relating to crops, fisheries, animal husbandry, forestry, constructim

orkers, small enterprises etc., are not available ina developing country. Beside
this, data on unearned incomes, consumption and investment expenditure of rural
and urban population are also not available. This does not reveal the actual size ot
national income.
(iv) Depreciation: Depreciation refers to wear and tear of capital assets, due to their use
in the process of production. There are no uniform, common or accepted standard
rates of depreciation applicable to the various capital assets. Thus, it is difficult to
make correct deductions for depreciation.
(v) Capital gains or losses: Capital gains or capital losses, which accrue to the property
owners by increase or decrease in the market value of their capital assets or changes
in demand, are not included in the national income because these changes do not
result from current economic activities.
(vi) Iliteracy and ignorance: Due to ignorance and iliteracy, small producers do not
keep an account of their production. So they cannot give information about the
quantity or value of their output.
(vi) Diffculties in the classifcation of working population: In India, working
population is not clearly defined. For instance, farmers in India are not engaged in
agriculture round the year. Obviously, in the off season, they engage themselves in
alternative occupations. In sucha case, it is very difficult to identify theirincomes
from a particular occupation.
(vi) Valuation of inventories: Raw materials, intermediate goods, semi-finished and
finishedproducts in the stock of the producers are known as inventories. Any mistake
in measuring the value of inventory, will distort the value of the final production of
the producer. Therefore, valuation of inventories requires careful assessment.
Marking Scheme:8 marks for correct answer.
 rolain the main sources of publle revenue.
(3)
A n s . P u b l l o
revenue: Public revenue means the nggregate collection of income with the
A erTmment through various sources.
government thn
Publie reveue hoids the
study public
of fnance which is part of study of permanent poitin
positinn
in economics
the necessity of public revenue arises due to publie
The main sources of public revenue are as follows: expenditure
Sources of Publlce Revenue: A) Taxes (B) Non-tax Revenue
A) Tares:

According to Prot. Taussig, " The essence ofa tax as distinguished from other charges

hu govermment is the absence ofa direct quid pro quo between the tax payer and the
pubhc authority".
ACCording to Prof. Seligman, "A tax is a compulsory contribution from the person to
the government without reference to special benefits conferred".
A tax possesses following essential characteristics
I t is a compulsory contribution to the government and every citizen of the country
is legally bound to pay the tax imposed upon him. It is a major source of revenue
to the government. If any person does not pay a tax, he can be punished by the
government.

i Tax is paid by a taxpayer to enable government to incur expenses in the common

interests of the society.

f The payment of a tax by a person does not entitle him to receive any direct and
proportionate benefits or services from the government in return for the tax.
iv Tax is imposed on income, property or commodities and services.
Types of Taxes:
Direct Tax and (i) Indirect Tax.
There are two main types of taxes. They are: (i)
burden of
income and property. The
Direct Tax: It is paid by the taxpayer on his
cannot transfer the burden
tax is borne by the person on whom it is levied. As he
on the same person.
of the tax to others, impact and incidence of direct tax falls
For example, personal income tax, wealth tax etc.
or services. It is paid at the time
of production o
(i) Indirect Tax: It is levied on goods The burden of an indirect tax can be
sale and purchase of a commodity or a service.
and incidence
shifted by the taxpayer (producers) to other person/s. Hence, impact
Goods and Services
of tax are on different heads. For example, newly implemented
custom duty.
Tax GST| in India has replaced almost all indirect taxes,

(B) Non-Tax Revenue Sources:

administration, public enterprises, gifts
Public revenue received by the government
revenue. These sources are
different than the
and grants etc. are called as non-tax
sources are as follows
taxes. A briefinformation about these
return service whereas, fee is paid
) Fees: A tax is paid compulsorily without any
For example-
in return for certain specific
services rendered by the government.
education fee, registration fee, etc. of
Modern governments sell various types
() Prices of public goods and services: the citizens
citizens. A price is a payment made by
commodities and services to the
to the government for the goods and
services sold to them. For example- railway

fares, postal charges etc.

 mics Fapers Sohu
apers olution
(ii) Special Assessment: The payment made by the citizens of a particular .
in exchange for certain special facilities given to them by the authorities i ocality
ty
as 'special assessment.' For example, local bodies can levy a special tas
tax on the known
residents of a particular area where extra/special facilities of roads, enere
supply etc. are provided.
energy water
(iv) Fines and Penalties : The government imposes fines and penalties on tho
violate the laws of the country. The objective of the imposition of fines and Den who
is hat to earn income, but discourage the citizerns from violating the laws frames
to

by the Government. For example, fines for violating traffic rules. However
income from this source is small. the
(v) Gifts, Grants and Donations: The government may also earn some income in +the
form of gifts by the citizens and others. The government may also receive
grant
from the foreign governments and institutions for general and
specific purposes
es
Foreign aid has become an important source of development finance for a
developina
country like India. However, this source of revenue is uncertain in nature.
(vi) Special levies: This is levied on those commodities, the
consumption of which
is harmful to the health and well-being of the citizens. Like fines and
penalties.
the objective is not to earn income, but to
discourage the consumption of harmful
commodities by the citizens. For example, duties levied on wine, opium and other
intoxicants.
(vii) Borrowings: The government can borrow from the people in the form of deposits,
bonds etc. It also gets loans from foreign governments and organizations such as
IMF, World Bank etc. Loans are becoming more and more popular source of revenue
for the governments in the modern times.
Marking Scheme: 8 marks forcorrect answer.