NEB Class 12 · Past paper
The complete NEB Class 12 2078 exam paper for Economics, all 26 questions with solved model answers.
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Define price elasticity of demand. Explain its types. [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 price.
$$ \begin{aligned} E_p &= \frac{%\ \text{change in quantity demanded}}{%\ \text{change in price}} \ &= \frac{\Delta Q}{\Delta P} \times \frac{P}{Q} \end{aligned} $$
Since demand and price move in opposite directions, the value is negative, but only the numerical value is considered.
Types of price elasticity of demand:
Explain the law of diminishing marginal utility. What are its limitations? [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 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.
Explain about the derivation of TR, AR and MR curve under perfect competition.
Under perfect competition a firm is a price taker, so the price remains constant however much it sells. Total revenue is price multiplied by quantity, and it rises in a straight line from the origin. Q Price (AR) TR MR ------------ 1 5 5...
Explain the derivation of short-run average cost curves.
Average variable cost (AVC) is variable cost per unit ($AVC = TVC/Q$), average cost (AC) is total cost per unit ($AC = TC/Q = AFC + AVC$), and marginal cost (MC) is the addition to total cost from producing one more unit (
How is price and output determined under monopoly? Explain.
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 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 uncertainty bearing theory of profit.
Profit is the reward of the entrepreneur for organising production and bearing risk and uncertainty. According to Frank Knight's uncertainty-bearing theory of profit, profit arises because the entrepreneur bears uninsurable uncertainty. ...
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.
Define 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 function?
A production function is the technical relationship between the physical inputs (factors of production) used and the maximum output that can be produced from them, with a given technology. It shows how output depends on the quantities of the factors employed and is written as $Q = f(L, K, ...)$, where output $Q$ depends on labour $L$, capital $K$ and other inputs.
What is meant by equilibrium of firm?
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 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; in the case of land it is the payment made for the use of its original and indestructible powers.
What is national income? Explain the difficulties of its 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.
Explain quantity theory of money. What are its criticisms? [7+3]
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...
What is government budget? Mention its formulation process. [3+7]
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:
Describe about features of 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...
Describe the 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...
Explain the features 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...
Explain the importance of balance of payment.
The balance of payments is important for the following reasons: it shows the overall economic and financial position of a country in relation to the rest of the world; it reveals whether the country has a surplus or a deficit on the curr...
Mention the advantages of protectionism 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 macroeconomics?
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...
Define GDP deflator.
The GDP deflator is a price index that measures the change in the general price level of all final goods and services included in the gross domestic product between a base year and the current year. It is obtained by dividing nominal (cu...
Write any four 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...
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 is main objective of SAFTA?
The main objective of the South Asian Free Trade Area (SAFTA) is to promote and increase trade and economic cooperation among the SAARC member countries by reducing tariffs and other trade barriers, thereby creating a free-trade area and...
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 price.
Since demand and price move in opposite directions, the value is negative, but only the numerical value is considered.
Types of price elasticity of demand:
Average variable cost (AVC) is variable cost per unit (), average cost (AC) is total cost per unit (), and marginal cost (MC) is the addition to total cost from producing one more unit (
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.
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.
A production function is the technical relationship between the physical inputs (factors of production) used and the maximum output that can be produced from them, with a given technology. It shows how output depends on the quantities of the factors employed and is written as , where output depends on labour , capital and other inputs.
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...