SOLUTION : PRACTICE PAPER 2

Q.  1.  (A) 

(1) (3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(2) (3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(3) (1) (A) is True, but (R) is False.
(4) (3) Both (A) and (R) are True and (R) is the correct explanation of (A).
(5) (2) (A) is False, but (R) is True.
Q.  1.  (B)
(1) Odd word : Mutual fund
(2) Odd word : Notebooks
(3) Odd word : Employment level
(4) Odd word : Clothes
(5) Odd word : Vegetables

Q.  1.  (C)

(1) Extra marginal utility
(2) Goods and Services Tax
(3) Money market
(4) Public monopoly
(5) Decrease in supply

Q.  1.  (D)

(1) Bill of exchange drawn on and accepted by a trader (trade acceptance) in
payment of goods – Trade bills.
(2)  Factor payment received by capital in the form of money – Interest.
(3)  An index number measuring the general changes in the labour productivity
over a period of time – Labour Productivity Index Number.
(4)  Degree of responsiveness of a change in quantity demanded of one commodity
due to change in the price of another commodity – Cross elasticity of demand.
(5)  Debt instrument issued by companies or the government as a means of
borrowing long term funds – Bonds.

Q.  2.  (A) (1) (A)  Identified concept : Possesstion utility.

(B) Explanation of concept : Utility increased/obtained from the
transfer of ownership rights of goods from one person to another, is
called possession utility.
(2) (A)  Identified concept : Total Variable Cost (TVC).
(B) Explanation of concept :  Total variable cost includes those expenses
of production which are incurred on variable factors such as labour,
raw material, power, fuel, etc. Total Variable Cost (TVC) may change
from time to time.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 1

 (3) (A)  Identified concept : Index of Agricultural Production.

(B) Explanation of concept : Index of Agricultural Production measures the

general changes in the agricultural production over a period of time. A list

of various agricultural crops like rice, wheat, sorghum, tea, coffee, ginger,
chilli, turmeric, onions, potatoes, sugar cane, bananas, etc. is prepared and
the changes in the production of these crops over a period of time is
measured by the Index of Agricultural Production.
(4) (A) Identified concept : Transfer income.

(B) Explanation of concept : If the expenditure incurred by another

person / organization is received by an individual in the form of income

without any form of productive work, then such income is called ‘transfer
income’.
(5) (A)  Identified concept : Ancillary functions of commercial banks.

(B) Explanation of concept : Commercial banks provide many customer

services to the account holder. The function of providing these services is

called ancillary functions of commercial banks.

Q.  2.  (B) (1) Special Assessment Special Levy

(1)  Meaning
The payment made by the citizens of A duty levied by the government on
a particular locality in exchange for unhealthy items with the basic
certain special facilities given to them intention of discouraging citizens
by the authorities is known as special from consuming unhealthy items is
assessment. known as special levy.
(2)  Examples
A special tax levied by local bodies on Duty levied on wine, opium and other
the residents of a particular area intoxicants are the examples of special
where extra / special facilities of levy.
roads, energy, water supply are
provided is an example of special
assessment.

2 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

(2) Relatively Elastic Demand Relatively Inelastic Demand
(1)  Meaning
When the proportionate change in When the proportionate change in
the price of a commodity brings about the price of a commodity brings about
greater than proportionate change in lesser than proportionate change in
its quantity demanded, the demand is its quantity demanded, the demand is
said to be relatively elastic. said to be relatively inelastic.
(2)  Numerical Value
In the case of relatively elastic demand, In the case of relatively inelastic
the numerical value of the elasticity of demand, the numerical value of the
demand is greater than one. elasticity of demand is lesser than one.

(3) Commercial Bank Goldsmith

(1)  Constituent
Commercial bank is a constituent in Goldsmith is a constituent of
the organised money market of India unorganised money market of India
that come under the direct control that does not come under the direct
and supervison of the Reserve Bank of control and supervision of the Reserve
India. Bank of India.
(2)  Rate of Interest
Commercial bank provides finance Goldsmith provides finance to the
to the borrowers at relatively low borrowers at relatively high interest
interest rates. rates.

(4) Average Revenue Average Cost

(1)  Meaning
Average revenue refers to revenue per Average cost refers to the per unit cost
unit of output sold. of production.
(2)  Formula
Average revenue is calculated with Average cost is calculated with the
the help of the following formula : help of the following formula :

TR TC
AR  AC   
TQ TQ
Where, AR Average Revenue, Where, AC Average Cost, TC Total
TR Total Revenue and TQ Total Cost and TQ Total Quantity of
Quantity of Output. Output.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 3

 (5) Balance of Payments Balance of Trade
(1)  Meaning
Balance of payments refers to a Balance of trade refers to the difference
systematic record of all international between the value of country’s exports
economic transactions of a particular and imports for a given period.
country for a given period.
(2)  Concept
Balance of trade gets included in Balance of trade is a part of balance of
the balance of payments. Therefore, payments. Therefore, balance of trade
balance of payments is a broader is a narrower concept.
concept.

Q.  3. (1) The historical review of microeconomics can be explained with the help of the

following points :

(1) Microeconomic approach is relatively traditional approach. Origin of this

approach can be traced back to era of classical economists.

(2) Adam Smith, ‘The Father of Economics’ in his well known book ‘Wealth of

Nations’ followed microeconomic approach.

(3) Microeconomic approach is also found in the writings of David Ricardo and

J.S. Mill.

(4) Dr. Alfred Marshall is in fact considered as the real architect of microeconomics.

He in his book ‘Principles of Economics’ used marginalism principle and

enthroned the concept of microeconomics.

(5) Prof. Pigou, J. R. Hicks, Prof. Samuelson, Mrs. Joan Robinson, Chamberlin are

the other economists who have participated in the development of

microeconomics.

(2)

(1) A desire which is backed by the ability to pay as well as the willingness to pay

for a commodity is demand.

(2)  Symbolically,

Demand = Desire + Ability to pay + Willingness to pay.

(3)  Demand is a relative concept and utility is the base of demand.

(4) Demand is that quantity of a commodity which a person is ready to buy at a

particular price and during a specific period of time. Thus, reference of price

and time is necessary for demand.

4 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) The steps in constructing value index numbers are as follows :

(1)  ∑p1q1   Adding the products of the prices and quantities of various

commodities of the current year.
(2)  ∑p0 q0 A
 dding the products of the prices and quantities of various
commodities of the base year.
∑ p1 q1
(3)       100  Multiplying the ratio of sum of the products of prices and
∑ p0 q0

quantities of various commodities of the current year and sum of the

products of prices and quantities of various commodities of the base year

by 100.
(4) The various types of deposits are as follows :

(A) Demand deposits : Demand deposits are deposits that are withdrawn on

demand. The following are the two types of demand deposits accepted by
the commercial banks :
(a) Current deposits : Current deposits are generally kept in current account

by businessmen, corporates and trusts. The account holder can deposit

money in the current deposit account any number of times and withdraw
as many times as demanded. Current deposit account holders are also
given the facility of overdraft, i.e. facility to withdraw in excess of the
balance in the account.
(b) Savings deposits : Savings deposits are held mainly by salaried class and

small traders. The account holder can deposit money in the savings deposit
account at any number of times and withdraw money as and when
required.
(B) Term deposits : Deposits held for a fixed period are called term deposits.

The following are the two types of term deposits : 

(a) Recurring deposits : Recurring deposits are regularly kept in the

recurring deposit account, especially by small savers. Recurring

deposits encourage regular savings.
(b) Fixed Deposits : Fixed deposits are kept by the saver for a fixed

period. The amount deposited by the saver can be withdrawn after the
stipulated period. Interest is paid at the highest rate on fixed deposits.
(5) The trend in India’s imports can be explained with the help of the following

points : 

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 5

 (a) Petroleum : Petroleum has been an important item in India’s import

trade even before and after the economic reforms. Petroleum imports
accounted for about 27 per cent of India’s total imports in 1990-91. At
present, petroleum imports account for about 31 per cent of India’s total
imports. India has been importing the largest amount of petroleum for
years.
(b) Gold : Gold is the second most imported commodity in India after

petroleum. Gold imports of India declined significantly in 2013-14. India’s

gold imports fell to 27.5 billion in 2013-14 from 53.3 billion in 2010-11. The
fall in international gold prices and the consequent policy of restrictions
by the government on gold imports have led to a sharp decline in gold
imports.
(c) Fertilizers : Fertilizers accounted for about 4.1 per cent of India’s total
imports in 1990-91. In 2016-17, the share declined to 1.3 per cent.
(d) Iron and Steel : In 1990-91, the share of iron and steel imports in the total

imports of India was about 4.9 per cent. At present, the share declined to
2.1 per cent.
Q.  4. (1) Yes, I agree with this statement.

Reasons : 

(1) Macroeconomics is the study of entire economy. On the other hand,

microeconomics is a study of a particular segment of an economy.
(2) Macroeconomics studies aggregate demand, aggregate supply, national
income, general price level, etc. On the other hand, microeconomics studies
individual demand, individual supply, individual income, price
determination of particular product, etc.
(3) Macroeconomics follows general equilibrium analysis. On the other hand,
microeconomics follows partial equilibrium analysis. Macroeconomics
uses lumping method. On the other hand, microeconomics uses slicing
method.
Therefore, macroeconomics is different from microeconomics.
(2) Yes, I agree with this statement.

Reasons :

(1) The Law of DMU helps consumers in deriving the maximum satisfaction

from the given income.

6 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2) The Law of DMU is helpful to the government in implementing economic

policies such as progressive tax policy, trade policy, pricing policy, etc.

(3) The Law of DMU is also helpful in explaining the paradox of value and

serves as a basis for law of demand.

Thus, Law of DMU is important in practice.

(3) No, I disagree with this statement.

Reasons : The following are some of the exceptions to the Law of Supply :

(a) Agricultural goods : Agricultural goods require suitable climatic

conditions and sufficient period of growth. Therefore, the supply of

agricultural goods cannot be increased overnight though their prices rise.

Similarly, due to favourable conditions, the supply of agricultural goods

may rise even at their constant prices. Therefore, in case of agricultural

goods the law is inapplicable. Therefore, agricultural goods are exception

to the Law of Supply.

(b) Urgent need for cash : If a seller needs cash urgently he is forced to sell

more even at less prices / below market prices. Therefore, the sale of goods

influenced by the need for cash is considered as an exception to the Law

of Supply.

(c) Perishable goods : Perishable goods like vegetables, flowers, eggs, etc.

cannot be stored for a long period of time. Seller has to bear a huge loss,

if perishable goods do not get sold. Therefore, in case of perishable goods,

the supplier would offer to sell more quantities at lower prices to avoid

losses. Therefore, the sale of perishable goods at low price is considered as

an exception to the Law of Supply.

(4) Yes, I agree with this statement.

Reasons : 

(1) A market where a large number of sellers sell homogeneous product and

for which there are a large number of buyers is known as perfect

competition. A market where a single seller sells his unique product and

for which there are a large number of buyers is known as monopoly.

(2) In perfect competition, the seller has no control over the market supply, so

he is the price taker. In monopoly, the seller has total control over the

market supply, so he is the price maker.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 7

 (3) In perfect competition, the seller cannot discriminate price. In monopoly,
a seller can discriminate the price.
Thus, perfect competition differs from monopoly.
(5) No, I disagree with this statement.

Reasons : 

(1) Index numbers measure the changes in the price level as well as changes
in stock market prices, cost of living, industrial and agricultural production,
exports and imports, etc.
(2) For example, Labour Productivity Index Number measures the general
changes in the labour productivity over a period of time.
(3) Consumer Price Index Number, Wholesale Price Index Number, Index of
Service Production, Human Development Index Number, etc. are the
special purpose index numbers measuring the changes in various economic
variables over a period of time.
Thus, index numbers do not measure changes in the price level only, but also
measure changes in many other economic variables.
Q.  5. (1)  (i)
Price of Banana Demand Supply Relation between
(per dozen) in ` (in dozen) (in dozen) DD and SS

10 500 100 DD > SS

20 400 200 DD > SS
30 300 300 DD = SS
40 200 400 DD < SS
50 100 500 DD < SS

(ii)  D S
Y
50 D<S
Price of Banana (`)

40
E
30 D=S

20

10 D>S
S D
O 100 200 300 400 500 X
Market Demand and
Market Supply of Banana

8 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (2)  (i) 
Price of Tea (in `) 200 (P2) 300 (P1) 400 (P3)
Demand for Tea (in kg) 3 (Q2) 2 (Q1) 1 (Q3)

(ii) Other factors remaining constant, a rise in demand due to a fall in the

price of a commodity is called expansion in demand. In expansion in

demand, the new equilibrium point of price and demand moves downwards

from the left to the right (i.e. from ‘A’ to ‘C’) on the same demand curve.

(3)  (i) Agrologistic system plays an important role in the supply of agricultural

goods. Strong integrated agrologistic system helps in quick

transportation of agricultural commodities at various places in a

nation.

(ii) For the quick transportation of agricultural goods, the government

has launched a mobile app called ‘Kisan Rath’. This app helps in speedy

transportation of agricultural goods from one place to another.

Q.  6. (1) (A)  Ratio method :

(1) Ratio Method of measuring elasticity of demand is developed by Dr. Alfred

Marshall. This method is also known as arithmetic method or percentage

method or proportional method of measuring elasticity of demand.

(2) In this method, the elasticity of demand is measured by dividing the percentage

change in the quantity demanded of a commodity by the percentage change in

its price.

(3) The formula used for the measurement of the elasticity of demand is as follows :

 Q   Py 
Ed =    P Where,
 Q y

(i)   Q  Change in the quantity demanded, i.e. Q1  Q. (New demand  Original

demand) (ii)  Q  Original demand (iii)   P  Change in the price, i.e. P1  Q.

(New price  Original price)  and (iv)  P  Original price.

(4) Ratio Method can be explained with the help of the following example :

Price and Demand of a Commodity Original New Change

Demand (per day in units) 10 (Q) 9 (Q1) 01(Q)  Q1  Q

Price (`) 20 (P) 25 (P1) 05 (P)  P1    P

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 9

  Q   Py 
Ed =    P
 Q y

 1  20
 Ed =    
10 5
 ED = 0.4
 Ed  <  1.
As the numerical value of the elasticity of demand is less than one, the demand
is relatively less elastic in this example.
(B)  Geometrical method :

(1) Geometric method of measuring elasticity of demand is also developed by

Dr. Alfred Marshall. This method is also known as point method of measuring
elasticity of demand. The ratio method and total outlay method are unable to
measure elasticity of demand at a given point on a demand curve. Geometric
method is therefore used to find out the elasticity of demand at any given point
on a demand curve.
(2) For measuring the elasticity of demand at a given point on the linear demand
curve, the linear demand curve can be extended to meet the Y-axis at P and
X-axis at Q as follows :
Y
PC = CB = BA = AQ = 2 cm
D
P
Perfectly Elastic
C Relatively Elastic
Price

B Unitary Elastic

A Relatively Elastic
D Perfectly Elastic
O Q X
Demand

The price elasticity of demand at a point ‘A ’ can be calculated with the help
of the following formula :
Lower segment of the demand curve below the given point 
Ed   
Upper segment of the demand curve above the given point
 AQ   2 
 Ed = =  = 0.33
  AP   6
 At point ‘A ’ the numerical value of elasticity of demand is less than one
(Ed = 0.33). Therefore at point ‘A’ the demand is relatively inelastic.

10 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) For measuring the elasticity of demand at a given point on the non-linear
demand curve, tangent from a given point touching the Y-axis and X-axis is
drawn as follows : RQ = 6 cm, RP = 2 cm
Y

P D

Price
R

A Q X
Demand

The price elasticity of demand at a point ‘R’ can be calculated with the help
of the following formula :
Lower segment of the tangent below the given point
Ed   
Upper segment of the tangent above the given point
 RQ   6 
 Ed          3
  RP   2
At point ‘R’ the numerical value of elasticity of demand is greater than one
(Ed = 3). Therefore at point ‘R’ the demand is relatively elastic.
(4) The following conclusions can be drawn with the help of the geometrical
method of measurement elasticity of demand :

Value of
A position of a given point with Type of Elasticity
Elasticity of
reference to Y-axis and X-axis of Demand
Demand
1. Given point on a Y-axis. Infinity (Ed  ) Perfectly elastic
demand

2. Given point is relatively close to Greater than one Relatively elastic

Y-axis (Ed > 1) demand

3. Given point is equally close to One (Ed  1) Unitary elastic

(equally away from) Y-axis and demand
X-axis
4. Given point is relatively close to Lesser than one Relatively inelastic
X-axis (Ed > 1) demand
5. Given point on the X-axis Zero (Ed = 0) Perfectly inelastic
demand

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 11

 (2) The national income is calculated by various methods. The output method is

one of the methods of measuring national income. In this method, the national
income is calculated either by valuing all the final goods and services, produced
during a year at their market price or by adding up all the values at each
higher stage of production until these products are turned into final products.
To avoid double counting, this method uses either the final goods approach or
the value added approach for estimation of national income. The value added
approach can be explained with the help of the following points :
(1) According to this approach, the value added at each stage of production process
is included.
(2) The difference between the value of final outputs and inputs at each stage of
production is called value added.
(3) Thus, GNP is obtained as the sum total of the values added by all different
stages of the production process, till the final output is reached in the hands of
consumers, to meet the final demand.
(4) This can be illustrated with the help of the following table :

Value of Value of Value  

Production Stage
Output (`) Input (`) Added (`)

Wheat (Farmer) 7 0 7

Flour (Flour mill) 10 7 3

Bread (Baker) 13 10 3

Retailer (Merchant) 14 13 1

Total Value 14

(5) In the above example a much simplified model of an economy, producing only
a single final product, i.e. bread is assumed. It is assumed that there are four
productive stages in the production of bread.
(6) In the given example, a farmer produces and sells wheat for ` 7 to the miller.
Miller sells flour for ` 10 to the baker. Baker sells bread for ` 13 to the retailer.
Retailer sells bread for ` 14 to the consumer.
(7) So the value added by farmer (` 7), miller (` 3), baker (` 3)  and retailer (` 1)
i.e. total of ` 14 is included in national income.

12 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)

 (3) The reasons for the growth of public expenditure are as follows : 

(1)  Increase in the activities of the Government : For the economic and social
development of the country, the modern government is continuously spending
a large amount on activities like dissemination of education, provision of
health facilities, provision of recreational services, implementation of social
welfare schemes. The government is adopting new optional functions and
performing traditional obligatory functions more efficiently. The government
has to spend a lot to carry out all these functions. As a result, public expenditure
is rising.
(2)  Rapid increase in population : As India is a developing country, population
growth in India is accelerating. According to the 2011 census, India’s population
was 121.02 crores. Public expenditure is increasing as the government has to
spend heavily to meet the various needs of the growing population.
(3)  Growing urbanization : In modern times, the pace of urbanization is
increasing in many countries of the world. In newly emerging and developed
urban areas, the government has to provide water supply, electricity supply,
transportation facilities, sanitation facilities, recreational facilities. For
providing these various facilities, the government has to incur continuous
expenditure and as a result public expenditure is increasing.
(4) Increasing defence expenditure : In modern times, unstable and hostile
international relations have increased. Many countries around the world are
increasing defence spending to cope with potential foreign aggression and war.
As a result, public expenditure is rising.
(5) Spread of democracy : Most of the countries of the world have adopted the
system of democracy. In a democratic system, the process of forming a
government is carried out by holding general elections after a certain period
of time. In a country like India, which is large in size and population, huge
expenses have to be incurred for elections. As a result, public expenditure is
rising.
(6) Inflation : Just as a person spends money on purchasing various goods and
services to meet his personal needs, so the government spends money on
purchasing various goods and services to meet the needs of the society. Prices
of most goods and services continue to rise. As a result, public expenditure is
rising.

SOLUTIONS TO NAVNEET PRACTICE PAPERS : STD XII (ECONOMICS) 13

 (7) Industrial Development : In order to achieve the objectives of increase
in production, increase in employment and overall growth in the economy,
large scale industrial development is required in the country. As a result,
in developing countries like India, a large amount of money is being spent
on industrial development schemes to boost industrial development. As a
result, public expenditure is rising.
(8) Disaster Management : The modern government is spending heavily on
managing natural disasters like floods, earthquakes, hurricanes and man-
made disasters like social unrest, riots, wars, etc. As a result, public
expenditure is rising.

14 NAVNEET PRACTICE PAPERS : STD. XII (COMMERCE)