NEB Class 12 · Past paper
The complete NEB Class 12 2072 exam paper for Economics, all 25 questions with solved model answers.
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Define the law of demand. Why does demand curve slope downwards to the right? [6+4]
The law of demand states that other things remaining the same, the quantity demanded of a commodity varies inversely with its price. When price falls demand rises, and when price rises demand falls. The demand curve therefore slopes down...
What is price elasticity of demand? Explain the different types of price elasticity of demand. [3+7]
Price elasticity of demand measures the degree of responsiveness of the quantity demanded of a commodity to a change in its own price. It is measured as the ratio of the percentage change in quantity demanded to the percentage change in ...
Explain the law of diminishing marginal utility. What are its exceptions? [6+4]
The law of diminishing marginal utility states that as a consumer goes on consuming more and more units of a commodity, the marginal utility (the additional satisfaction from each successive unit) derived from every additional unit goes on falling, other things remaining the same. It reflects the fact that wants are satiable.
If a thirsty person drinks glasses of water, the following schedule shows the behaviour of utility.
| Units of water | Total utility | Marginal utility |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 18 | 8 |
| 3 | 24 | 6 |
| 4 | 28 | 4 |
| 5 | 30 | 2 |
| 6 | 30 | 0 |
| 7 | 28 | -2 |
Marginal utility falls with each extra unit, becomes zero at the point of maximum total utility (the point of satiety), and turns negative thereafter. The MU curve therefore slopes downward from left to right.
Assumptions and exceptions (limitations): the law holds only when the units are homogeneous and of suitable size, consumed continuously, tastes and income remain constant, and price is unchanged. It does not apply to hobbies such as collecting rare coins or stamps, to misers who value money, to intoxicants like alcohol where the desire may rise for a while, or where the consumer is irrational. These are treated as exceptions to the law.
Explain the law of variable proportions. [10]
The law of variable proportions, also called the law of returns to a variable factor, states that as more and more units of a variable factor are combined with a fixed factor, the total product first increases at an increasing rate, then at a diminishing rate, and finally falls. It operates in the short run when at least one factor is fixed.
| Units of labour | Total product | Marginal product |
|---|---|---|
| 1 | 10 | 10 |
| 2 | 24 | 14 |
| 3 | 36 | 12 |
| 4 | 44 | 8 |
| 5 | 48 | 4 |
| 6 | 48 | 0 |
| 7 | 44 | -4 |
Three stages:
The law operates because factors are imperfect substitutes and the fixed factor cannot be increased in the short run.
What is monopoly? How are price and output determined under it? [3+7] (Or of Q4)
Monopoly is a market situation in which there is a single seller of a commodity that has no close substitutes, entry of new firms is blocked, and the firm is itself the industry, so it is a price maker.
Because the monopolist faces the downward sloping market demand (AR) curve, it can sell more only by lowering the price, and its marginal revenue (MR) lies below AR. Like every firm, it maximises profit where marginal cost equals marginal revenue.
$$MC = MR$$
The monopolist selects the output $OQ$ at which MC equals MR, and then charges the price $OP$ read off the demand (AR) curve for that output. Since AR is greater than MR at that output, the price is greater than marginal cost, and the monopolist can earn supernormal profit when price (AR) exceeds average cost. Because entry is barred, this supernormal profit is not competed away even in the long run. Thus under monopoly output is smaller and price higher than under perfect competition.
Explain the law of supply.
The law of supply states that, other things remaining the same, the quantity supplied of a commodity varies directly with its price; when price rises supply rises, and when price falls supply falls. Hence the supply curve slopes upward f...
Explain the Malthusian Theory of population.
The Malthusian theory of population was put forward by Thomas Robert Malthus in his Essay on the Principle of Population (1798). Its main propositions are: - Population, when unchecked, tends to grow in a geometric progression (1, 2, 4, ...
Show the relationship between Total Fixed Cost (TFC), Total Variable Cost (TVC) and Total Cost (TC) in short term.
In the short run the total cost of a firm is made up of total fixed cost and total variable cost. $$TC = TFC + TVC$$ Total fixed cost (TFC) does not change with output (rent, interest, salaries of permanent staff); it remains constant ev...
Explain the classical theory of interest.
Interest is the reward paid for the use of capital, or the price paid for the use of borrowed money, usually expressed as a percentage per annum.
The classical theory of interest, associated with economists such as Marshall and Pigou, holds that the rate of interest is determined by the demand for and the supply of capital (savings), and it is fixed where the two are equal.
The equilibrium rate of interest is determined at the point where the demand for capital (investment) equals the supply of capital (saving).
$$\text{Saving} = \text{Investment}$$
Criticism: the theory assumes full employment and that saving depends mainly on the rate of interest, whereas Keynes showed that saving depends chiefly on the level of income, so the theory is regarded as indeterminate.
Explain the characteristics of land.
Land in economics means all the free gifts of nature such as soil, water, minerals, forests and climate. Its main characteristics (features) are that it is a free gift of nature, its supply is fixed and cannot be increased or decreased b...
What is joint stock company?
A joint stock company is a voluntary association of persons formed to carry on business, with capital divided into transferable shares held by a large number of shareholders, a separate legal existence of its own, limited liability of me...
What is market economy?
A market economy (capitalist economy) is an economic system in which the central problems of what, how and for whom to produce are solved by the free play of the market forces of demand and supply through the price mechanism, with private ownership of the means of production and freedom of enterprise, and the government playing only a limited role.
Define economic and contract rent.
Economic rent is the surplus earned by a factor of production over and above its supply price (the minimum payment needed to keep it in its present use); in the case of land it is the payment for the use of the original and indestructibl...
What is consumer's surplus?
Consumer's surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price he actually pays. It measures the extra satisfaction a consumer enjoys because the market price is lower than what he was prepared to pay.
$$\text{Consumer's surplus} = \text{Total utility (what a buyer is willing to pay)} - \text{Total amount actually paid}$$
For example, if a person is willing to pay Rs 50 for a book but buys it for Rs 30, the consumer's surplus is Rs 20.
What is Total Revenue (TR) and Marginal Revenue (MR)?
Total revenue (TR) is the total amount of money a firm receives from the sale of its output, and is equal to price multiplied by the quantity sold ($TR = P \times Q$). Marginal revenue (MR) is the addition made to total revenue by sellin...
Explain the Fisher's Quantity theory of Money. [10]
The quantity theory of money explains the relationship between the quantity of money and the general price level. According to Irving Fisher's cash transactions version, the general price level varies directly and proportionately with th...
Describe the major functions of commercial banks. [10] (Or of Q7)
A commercial bank is a bank that accepts deposits from the public and lends to trade, industry and commerce with the object of earning profit. Its functions are grouped into primary and secondary functions. Primary functions: - Accepting...
Explain the characteristics of good tax system.
A good tax system is judged by the canons of taxation, most of which were laid down by Adam Smith: - Canon of equality (equity): people should pay taxes according to their ability, so that the burden falls fairly and higher incomes pay a...
Give arguments in favour of free trade.
Free trade is a policy under which goods move between countries without restrictions such as tariffs and quotas. The main arguments in favour of free trade are: - International specialisation: each country specialises in goods in which i...
Explain the process of formulation of government budget.
A government budget is the annual financial statement of the estimated receipts and expenditure of the government for a coming fiscal year (in Nepal, mid-July to mid-July).
The process of budget formulation in Nepal passes through the following stages:
What is capital market?
The capital market is the market for long-term funds, where funds are borrowed and lent for periods of more than one year. Long-term instruments such as shares, debentures and government bonds are traded in it, and its institutions include the stock exchange (in Nepal, NEPSE), development banks and specialised finance companies. It provides long-term finance for investment and industrialisation.
What are the sources of government borrowing?
The main sources of government borrowing (public debt) are:
Borrowing may be voluntary or compulsory, and short-term or long-term. Governments borrow to finance development, meet emergencies and cover budget deficits.
Write short note on inflation.
Inflation is a situation of a sustained rise in the general price level of goods and services over a period of time, accompanied by a fall in the value (purchasing power) of money. It arises mainly from excess demand (demand-pull inflati...
What is progressive tax?
A progressive tax is a tax in which the rate of tax increases as the income (or the base) of the taxpayer increases, so that higher incomes pay not only a larger amount but also a larger proportion of their income in tax. It is based on the ability-to-pay principle, helps to reduce inequality of income, and income tax with rising slab rates is a common example.
What is balance of payment?
The balance of payments is a systematic record of all economic transactions, both visible and invisible, between the residents of a country and the rest of the world during a year. It is wider than the balance of trade because it includes goods, services, transfers such as remittances and grants, and capital movements. It has a current account and a capital account, and in the accounting sense it always balances, though the current account may show a surplus or a deficit.
Monopoly is a market situation in which there is a single seller of a commodity that has no close substitutes, entry of new firms is blocked, and the firm is itself the industry, so it is a price maker.
Because the monopolist faces the downward sloping market demand (AR) curve, it can sell more only by lowering the price, and its marginal revenue (MR) lies below AR. Like every firm, it maximises profit where marginal cost equals marginal revenue.
The monopolist selects the output at which MC equals MR, and then charges the price read off the demand (AR) curve for that output. Since AR is greater than MR at that output, the price is greater than marginal cost, and the monopolist can earn supernormal profit when price (AR) exceeds average cost. Because entry is barred, this supernormal profit is not competed away even in the long run. Thus under monopoly output is smaller and price higher than under perfect competition.
In the short run the total cost of a firm is made up of total fixed cost and total variable cost. Total fixed cost (TFC) does not change with output (rent, interest, salaries of permanent staff); it remains constant ev...
Interest is the reward paid for the use of capital, or the price paid for the use of borrowed money, usually expressed as a percentage per annum.
The classical theory of interest, associated with economists such as Marshall and Pigou, holds that the rate of interest is determined by the demand for and the supply of capital (savings), and it is fixed where the two are equal.
The equilibrium rate of interest is determined at the point where the demand for capital (investment) equals the supply of capital (saving).
Criticism: the theory assumes full employment and that saving depends mainly on the rate of interest, whereas Keynes showed that saving depends chiefly on the level of income, so the theory is regarded as indeterminate.
Consumer's surplus is the difference between the maximum price a consumer is willing to pay for a commodity and the price he actually pays. It measures the extra satisfaction a consumer enjoys because the market price is lower than what he was prepared to pay.
For example, if a person is willing to pay Rs 50 for a book but buys it for Rs 30, the consumer's surplus is Rs 20.
Total revenue (TR) is the total amount of money a firm receives from the sale of its output, and is equal to price multiplied by the quantity sold (). Marginal revenue (MR) is the addition made to total revenue by sellin...