NEB Class 12 · Past paper
The complete NEB Class 12 2075 exam paper for Economics, all 26 questions with solved model answers.
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Explain the law of diminishing marginal utility. What are its exceptions? [7+3]
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 derivation of short-run total cost curves.
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 Ricardian theory of rent with criticism. [7+3]
Rent is the reward paid for the use of land. According to David Ricardo, rent is the payment made for the use of the original and indestructible powers of the soil.
Ricardo explained rent as arising from differences in the fertility and situation of land. As population grows, the most fertile land (grade A) is cultivated first; when its produce is not enough, less fertile land (grades B, C) is brought under cultivation. The surplus that superior land yields over the least fertile or marginal land determines rent.
| Grade of land | Produce (quintals) | Rent (over marginal land) |
|---|---|---|
| A (best) | 30 | 20 |
| B | 20 | 10 |
| C (marginal) | 10 | 0 |
The marginal land (grade C) just covers its cost and pays no rent (it is no-rent land), while superior lands earn rent equal to their surplus over the marginal land. Rent thus arises because of the scarcity and differential fertility of land, and it is price-determined, not price-determining.
Criticism: land has no special powers that are original and indestructible, since fertility can be created and destroyed; rent is not peculiar to land but is earned by every factor in short supply (modern economic rent); and no-rent land is difficult to find in practice.
Define price elasticity of demand with its types.
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 increasing returns to scale.
The law of increasing returns to scale is a long-run situation in which an increase in all the factors of production in a given proportion leads to a more than proportionate increase in output. For example, if all inputs are doubled and ...
Explain the derivation of AR and MR from TR under monopoly market.
Under monopoly (and other imperfect markets) the firm faces a downward sloping demand curve, so it can sell more only by lowering the price. As a result the average revenue (AR) curve slopes downward from left to right, and the marginal ...
How are price and output determined under perfect competition? Explain.
Under perfect competition there are a very large number of buyers and sellers dealing in a homogeneous product, with free entry and exit and perfect knowledge, so no single firm can influence the price. Each firm is a price taker. The pr...
Explain the wage fund theory of wage.
The wage fund theory of wages, associated with J.S. Mill, holds that wages are paid out of a fixed fund of capital (the wage fund) set aside by employers for the payment of labour. The wage rate is determined by dividing this fund by the number of workers seeking employment.
$$\text{Wage rate} = \frac{\text{Wage fund}}{\text{Number of workers}}$$
Wages can rise only if the wage fund increases or the number of workers falls. Criticism: the wage fund is not a fixed, pre-determined amount; wages are actually paid out of current production, not a rigid fund; and the theory is used wrongly to oppose trade unions.
What is income elasticity of demand?
Income elasticity of demand measures the responsiveness of the quantity demanded of a commodity to a change in the income of the consumer, and is measured as the percentage change in quantity demanded divided by the percentage change in income. It is positive for normal goods and negative for inferior goods.
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 production?
Production is the process of creating or adding utility to goods and services in order to satisfy human wants. It means transforming inputs (factors of production such as land, labour, capital and enterprise) into output that has the pow...
Write any four features of perfect competitive market.
The main features of a perfectly competitive market are: a very large number of buyers and sellers, so that no single one can influence the price; a homogeneous (identical) product, so a single uniform price rules; free entry and exit of...
What is meant by firm equilibrium?
A firm is in equilibrium when it produces the level of output that gives it maximum profit and has no tendency to change its output. Two conditions must be satisfied: marginal cost must equal marginal revenue ($MC = MR$), and the MC curv...
What is central bank? Explain its functions. [2+8]
A central bank is the apex financial institution that leads, regulates and controls the entire banking and financial system of a country. In Nepal, Nepal Rastra Bank (established in 1956) is the central bank.
Main functions:
Unlike a commercial bank, the central bank does not aim at profit but works in the national interest.
Define direct tax with its merits and demerits.
A direct tax is a tax whose money burden and real burden fall on the same person, so it cannot be shifted to another; examples are income tax, property tax and interest tax. Merits (features/advantages): - Equity: direct taxes are usuall...
Explain the comparative cost theory of international trade. [10]
The theory of comparative cost (comparative advantage) was given by David Ricardo. It states that a country should specialise in producing and exporting those goods in which it has a comparative advantage (a lower opportunity cost) and import goods in which it has a comparative disadvantage. Trade is beneficial even when one country is more efficient in producing all goods, so long as the degree of superiority differs between goods.
| Country | Cloth (labour units) | Wine (labour units) |
|---|---|---|
| Country A | 10 | 12 |
| Country B | 20 | 15 |
Country A is more efficient in both goods, but its advantage is comparatively greater in cloth, while Country B's disadvantage is comparatively smaller in wine. Therefore Country A specialises in cloth and Country B in wine, and both gain from trade because world output rises and each obtains the other good at a lower real cost than producing it at home.
Assumptions: two countries, two goods, labour is the only factor, labour is homogeneous, constant returns, no transport cost, and free trade.
Criticism: the labour theory of value is unrealistic, factors are not perfectly mobile within a country, transport costs are ignored, and the assumption of full employment does not always hold.
Define national income with different concepts.
National income is the total money value of all final goods and services produced by the normal residents of a country during a year. It can be looked at through several related concepts. - Gross Domestic Product (GDP): the money value o...
Explain the quantity theory of money.
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...
Explain the functions of commercial bank.
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 process of budget formulation in Nepal.
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 fo...
Explain the advantages of protection trade.
Protection is a policy of restricting imports through tariffs, quotas and other barriers to safeguard domestic industry. Its main advantages (arguments in favour) are: - Protection of infant industries until they grow strong enough to co...
What is closed economy?
A closed economy is an economy that has no economic relations with the rest of the world, that is, it neither exports nor imports goods, services or capital and is fully self-sufficient. Its distinguishing features are the absence of for...
Write any four difficulties in measurement of national income.
The main difficulties in the measurement of national income are: the existence of a large non-monetised (subsistence) sector whose output is hard to value; self-consumption and unpaid services (such as housewives' work) that escape measu...
What is value of money?
The value of money means its purchasing power, that is, the quantity of goods and services that a unit of money can buy. The value of money varies inversely with the general price level: when prices rise the value of money falls, and when prices fall the value of money rises. It is measured with the help of price index numbers.
Write any four importance of government expenditure.
The importance of government (public) expenditure lies in the many functions it performs in a modern and developing economy: - Provision of public goods and services such as defence, administration, law and order, roads, education and he...
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.
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...
The wage fund theory of wages, associated with J.S. Mill, holds that wages are paid out of a fixed fund of capital (the wage fund) set aside by employers for the payment of labour. The wage rate is determined by dividing this fund by the number of workers seeking employment.
Wages can rise only if the wage fund increases or the number of workers falls. Criticism: the wage fund is not a fixed, pre-determined amount; wages are actually paid out of current production, not a rigid fund; and the theory is used wrongly to oppose trade unions.
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.
A firm is in equilibrium when it produces the level of output that gives it maximum profit and has no tendency to change its output. Two conditions must be satisfied: marginal cost must equal marginal revenue (), and the MC curv...