NEB Class 12 · Past paper
The complete NEB Class 12 2076 exam paper for Economics, all 26 questions with solved model answers.
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Define price elasticity of demand. Explain the 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 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.
Define monopoly. How are price and output determined under it? [3+7]
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 diminishing marginal utility.
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 ...
Explain the law of 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 ...
Show the relationship between total cost (TC), total fixed cost (TFC) and total variable cost (TVC) in short-run.
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 wages fund theory of wages.
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...
Define elasticity of supply.
Elasticity of supply measures the degree of responsiveness of the quantity supplied of a commodity to a change in its price, and is measured as the percentage change in quantity supplied divided by the percentage change in price. $E_s = \dfrac{%\ \text{change in quantity supplied}}{%\ \text{change in price}}$. It is positive because price and supply move in the same direction.
What is variable cost?
Variable cost is the cost that changes directly with the level of output. It is incurred on the variable factors of production such as raw materials, wages of casual labour, fuel and power. Variable cost is zero when output is zero and r...
Define short-run production functions.
A short-run production function is the technical relationship between inputs and output in a period in which at least one factor of production is fixed while others are variable, so output can be changed only by varying the variable fact...
Define perfect competition.
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 economic rent?
Economic rent is the surplus earned by any factor of production over and above its supply price, that is, over the minimum payment necessary to keep it in its present use. It arises whenever the supply of a factor is scarce or inelastic;...
Define national income. Explain the difficulties in national income measurement. [3+7]
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.
Difficulties in the measurement of national income: non-monetised subsistence output and self-consumption are hard to value; the unorganised sector and unrecorded transactions are large; there is a danger of double counting; adequate and reliable data are lacking; the value of housewives' services and other non-market work is excluded; illiteracy and the black economy cause under-reporting; and price changes make comparison over time difficult. These problems are especially serious in a developing country like Nepal.
Define direct and indirect tax. Explain the features of good tax system. [4+6]
A direct tax is a tax whose money burden and real burden fall on the same person and cannot be shifted, such as income tax and property tax. An indirect tax is a tax whose burden can be shifted from the person who pays it to another, suc...
Explain the Ricardian 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 i...
Describe about the importance of money.
Money is important in a modern economy for the following reasons: it serves as a convenient medium of exchange and removes the difficulties of barter; it acts as a common measure and store of value; it makes it possible to save and to le...
Describe the main functions of central bank.
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: - Monopoly o...
Write the process of government budget formulation.
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:
Give an argument 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 importance of banking system.
The banking system contributes to economic development in the following ways: - Mobilisation of savings: banks collect scattered small savings of the people through deposits and make them available for investment. - Capital formation: by...
Define macro economics.
Macroeconomics is the branch of economics that studies the economy as a whole rather than individual units. It deals with aggregates and averages such as national income, total output, general price level, aggregate demand and supply, to...
What is 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 inflation) or a rise in the cost of production (cost-push inflation). Mild inflation may encourage production, but high inflation reduces the real income of fixed-income groups, discourages saving and worsens the distribution of income.
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.
Define 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 include...
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.
Elasticity of supply measures the degree of responsiveness of the quantity supplied of a commodity to a change in its price, and is measured as the percentage change in quantity supplied divided by the percentage change in price. . It is positive because price and supply move in the same direction.