FYUG EVEN SEMESTER EXAM, 2024 ECONOMICS (2nd Semester) Course No.: ECODSM-151T (Elementary Economics)

Time: 3 Hours | Full Marks: 70 | Pass Marks: 28

SECTION-A

Answer any ten of the following questions: 2 x 10 = 20

1. Distinguish between microeconomics and macroeconomics. [2]

Microeconomics studies the behavior of individual economic units like households and firms. Macroeconomics deals with the economy as a whole, focusing on aggregates like national income and total employment.

2. What is meant by an economic problem? What are its causes? [2]

An economic problem is essentially a problem of choice involving the allocation of scarce resources. Its causes include unlimited human wants, limited (scarce) resources, and resources having alternative uses.

3. Distinguish between positive economics and normative economics. [2]

Positive economics describes "what is" based on objective facts and cause-effect relationships. Normative economics deals with "what ought to be," involving value judgments and opinions.

4. What are Cardinal utility and Ordinal utility? [2]

Cardinal utility assumes utility can be measured in numerical units (utils). Ordinal utility suggests utility cannot be measured numerically but can be ranked in order of preference.

5. What is consumer surplus? Give an example. [2]

Consumer surplus is the difference between what a consumer is willing to pay for a commodity and what they actually pay. Example: If a consumer is willing to pay 50 for a book but buys it for 30, the surplus is 20.

6. What is price-consumption curve? [2]

The price-consumption curve (PCC) traces the equilibrium combinations of two goods as the price of one good changes, while income and the price of the other good remain constant.

7. Why does MC curve cut AC curve at its minimum point? [2]

When Marginal Cost (MC) is less than Average Cost (AC), AC falls; when MC is greater than AC, AC rises. Therefore, they must be equal at the point where AC stops falling and starts rising, which is its minimum point.

8. Distinguish between returns to scale and returns to a factor. [2]

Returns to scale refer to the long-run situation where all inputs are varied in the same proportion. Returns to a factor refer to the short-run situation where one input is varied while others are kept constant.

9. What is iso-quant? Write one property of IQ curve. [1+1=2]

An iso-quant (IQ) is a curve representing all combinations of two inputs that yield the same level of total output. Property: An IQ curve is generally convex to the origin due to the diminishing marginal rate of technical substitution.

10. Define macroeconomics. Write the names of any two macroeconomic variables. [2]

Macroeconomics is the study of the structure, behavior, and decision-making of an entire economy. Examples of variables include Gross Domestic Product (GDP) and Inflation Rate.

11. Define stock and flow concept in macroeconomics with suitable example. [2]

Stock is a quantity measured at a particular point in time (e.g., total wealth on Dec 31st). Flow is a quantity measured over a period of time (e.g., monthly salary or annual income).

12. Define the concept of macro statics and macro dynamics. [2]

Macro statics analyzes the relationship between macroeconomic variables at a specific point in time or in a state of equilibrium. Macro dynamics studies the process of change and the path an economy takes from one equilibrium state to another over time.

13. Distinguish between nominal and real income. [2]

Nominal income is income measured in current market prices. Real income is nominal income adjusted for inflation, representing the actual purchasing power of the money.

14. What is national income deflator? [2]

The national income deflator is a measure of the level of prices of all new, domestically produced, final goods and services in an economy; it is calculated as the ratio of Nominal GDP to Real GDP multiplied by 100.

15. Distinguish between personal income and private income. [2]

Private income is the total income from all sources (productive and transfer) earned by the private sector. Personal income is the part of private income actually received by individuals/households after subtracting corporate taxes and undistributed profits.

SECTION-B

Answer any five questions: 10 x 5 = 50

16. Nature and Scope of Microeconomics & Limitations. [8+2=10]

Nature: Microeconomics is analytical and focuses on the study of individual units. It explores price determination in various markets and the efficiency of resource allocation.

Scope: It includes the theory of consumer behavior, theory of production/cost, and the theory of distribution (wages, rent, interest, profit).

Limitations: It often assumes "full employment" which is unrealistic and ignores the aggregate effect of individual actions on the entire economy.

17. Production Possibility Curve (PPC). [8+2=10]

The PPC (or Transformation Curve) shows the maximum possible combinations of two goods an economy can produce with given resources and technology. It is typically concave to the origin due to increasing marginal opportunity costs.

Rightward Shift Factors: 1. Improvement in technology. 2. Discovery of new natural resources.

18. Consumer's Equilibrium using Indifference Curves. [2+8=10]

Consumer's Equilibrium is a state where a consumer maximizes total satisfaction given their income and market prices.

Conditions:

The Indifference Curve (IC) must be tangent to the Budget Line.

The slope of the IC (MRS) must equal the slope of the budget line (Price Ratio).

The IC must be convex to the origin at the point of equilibrium.

19. Shifts in Budget Line. [5+5=10]

(a) Change in Income: An increase in income causes a parallel outward (rightward) shift of the budget line, allowing more of both goods to be purchased.

(b) Change in Price: If the price of one good falls, the budget line rotates outward from the axis of the other good, indicating increased purchasing power for that specific commodity.

20. Law of Variable Proportion. [10]

This short-run law states that as more units of a variable factor (labor) are added to fixed factors (land), the marginal product initially rises but eventually declines.

Three Stages:

Increasing Returns: Total Product (TP) rises at an increasing rate.

Diminishing Returns: TP rises at a decreasing rate; MP starts falling.

Negative Returns: TP starts falling and MP becomes negative.

22. Nature and Scope of Macroeconomics. [8+2=10]

Nature/Scope: It examines national income, inflation, unemployment, and economic growth. It is concerned with policy formulation to manage the aggregate economy.

Need for Separate Study: The "Fallacy of Composition" suggests that what is true for an individual may not be true for the whole. For example, individual saving is a virtue, but aggregate saving might lead to reduced demand and recession.

23. Circular Flow of Income (Two-Sector). [10]

In a two-sector model (Households and Firms), households provide factor services to firms and receive factor payments. Firms produce goods and services and sell them to households.

Leakages: Savings, Taxes, and Imports.

25. National Income Estimation by Income Method. [6+4=10]

This method sums up all factor payments: Compensation of Employees + Operating Surplus (Rent, Interest, Profit) + Mixed Income.

Precautions:

Exclude transfer payments (like pensions or scholarships).

Exclude income from illegal activities.

Exclude windfall gains (like lotteries).

Exclude income from the sale of second-hand goods.

Exam Focus Enhancements

Important Macro Identities

GDP = GNP - NFIA.

Real Income = (Nominal Income / Price Index) x 100.

Exam Tips

For Indifference Curve questions, always mention the three conditions of equilibrium for full marks.

In PPC shifts, differentiate clearly between technology improvement (shift) and resource discovery (shift).

When using the Income Method, remember that only "Factor Incomes" are included, not "Transfer Incomes".