Answer Key

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Answer key
1. Distinguish between GDP and GNP?
Gross National Product (GNP)
The total value at market prices of final goods and services produced withinthe territorial boundaries of
an economy, irrespective of whether it belongs to the inhabitantsof that nation or not in a specified period.
Such an income is known as Gross Domestic Product (GDP) and found as:
GDP = GNP - Net factor income from abroad
Net factor income from abroad = Factor income received from abroad - Factor income
GDP includes following types of final goods and services.
Consumer goods and services, Gross private domestic investment in capital goods, Government
expenditure, Export and imports

Gross National Product
GNP is defined as the value of all final goods and services produced during a specific period, usually one
year, plus incomes earned abroad by the nationals minus incomes earned locally by the foreigners.
GNP=GDP+NFIA (Net Factor Income from Abroad)

1. Define Delphi technique.
Extension of simple opinion poll method Structured communication technique, originally
developed as a systematic, interactive forecasting method which relies on a panel of experts.
The Delphi method conceals the identity of the individuals Participating in the forecasting.
Everyone has the same weight. Procedurally, moderate creates a questionnaire and distributes
it to participants. Their response are summed and given back to the entire group along with
new set of questions. The experts answer questionnaires in two or more rounds. After each
round, a facilitator provides an anonymous summary of the experts’ forecasts from the
previous round as well as the reasons they provided for their judgments. Thus, experts are
encouraged to revise their earlier answers in light of the replies of other members of their
3. What are the characteristics of recession?
A business cycle passes through certain well defined phases. Generally, a business cycle is
divided into 4 well-defined and interconnected recurring phases as follows: Boom,Recession,
Depression,Recovery.Once the economy reaches the peak, the course changes. A downward
tendency in demand is observed. The supply now exceeds the demand and producers are

compelled to give up future investment plans. Business failures increase, unemployment
leads to fall in income, expenditure, prices, profits. Some firms are forced into bankruptcy.
The failure of one firm affects other firms with whom it has business connections. This phase
of the business cycle is known as the crisis.
4. What degree of price discrimination is KSEB practicing?
The policy of price discrimination refers to the practice of a seller to charge different prices
for different customers for the same commodity, produced under a single control without
corresponding differences in cost. When a monopoly firm adopts this policy, it will become a
discriminatory monopoly. According to Mrs. Joan Robbinson “The act of selling the same
article produced under a single control at different prices to different customers is known as
price discrimination.” Under Second Degree Discrimination differential prices are charged
for different amounts of goods and services. The second degree price discrimination is
mostly applicable to the goods and services whose consumption is metered like electricity
KSEB. In Fig. 10.7 (b) for output less than Qo, price Po is charged. Medium price P1 is
charged for quantities purchased between Qo and Q1, and a low price P2 for purchases
beyond Q1.

5. Define natural monopoly?
An industry is a natural monopoly when one firm can supply a good or service
to an entire market at a smaller cost than could two or more firms. Example:
delivery of electricity, phone service, tap water, etc. The production of a good
may exhibit decreasing marginal and average costs over a wide range of output

levels in this situation, relatively large-scale firms are low-cost producers.
Firms may find it profitable to drive others out of the industry by cutting prices
this situation is known as natural monopoly. Once the monopoly is established,
entry of new firms will be difficult.
6. Distinguish between CRR and SLR
Cash Reserve Ratio (CRR): Each bank has to keep a certain percentage of its total deposits with
RBI as cash reserves. Statutory Liquidity Ratio (SLR): Amount of liquid assets such as precious
metals(Gold) or other approved se This is because theses are financial instruments in the hands
of apex bank of India, the RBI (Reserve Bank of India), to control liquidity available to
commercial banks. Thus, despite having similarity in nature and purpose, there are many
differences between CRR and CRR stands for Cash Reserve Ratio, and specifies in percentage
the money commercial banks need to keep with themselves in the form of cash. In reality, banks
deposit this amount with RBI instead of keeping this money with them. This ratio is calculated
by RBI, and it is in the jurisdiction of the apex bank to keep it high or low depending upon the
cash flow in the economy. RBI makes judicious use of this amazing tool to either drain excess
liquidity from the economy or pump in money if so required. When RBI lowers CRR, it allows
banks to have surplus money that they can lend to invest anywhere they want. On the other hand,
a higher CRR means banks have lesser amount of money at their disposal to distribute. This
serves as a measure to control inflationary forces in economy. Present rate of CRR is 5%.

7. What is the different techniques price discrimination?
Price discrimination is the practice of charging a different price for the same good or service.
There are three types of price discrimination – first-degree, second-degree, and third-degree price
discrimination. BASIS OF PRICE DISCRIMINATION Personal differences - Social and or
professional status of the buyer- Different uses of the same commodity- Place- Different uses of
the same commodity Geographical area - Discrimination on the basis of income and wealthExplain….. Refer Note

8 “The monopolistic competition is a special case of imperfect competition” .
Monopolistic Competition
Perfect competition and monopoly are the two extreme forms of market situations, rarely to be
found in the real world. Generally, markets are imperfect. A number of attempts have been made
by different economists like Piero Shraffa, Hotelling, Zeuthen and others in the early 1920’s, Mrs
Joan Robinson and Prof Chamberlin in 1930’s to explain the behavior of imperfect competition.
Prof. Chamberlin is the main architect of the theory of Monopolistic Competition. This market
exhibits the characteristics of both competition and monopoly. Since modern markets are
combined and integrated with monopoly power and competitive forces they are called as
Monopolistic Competition. It is a market structure in which a large number of small sellers
sell differentiated products which are close, but not perfect substitutes for one another.

Under this market, the products produced and sold are different, but they are close substitutes for
one another. This leads to competition among different sellers. Thus, in this market situation
every producer is a sort of monopolist and between such “mini-monopolists” there exists
competition. It is one of most popular and realistic market situation to be found in the present
day world. A number of examples may be given for this kind of market. Tooth paste, blades,
motor cycles and bicycles, cigarettes, cosmetics, biscuits, soaps and detergents, shoes, ice –
creams etc- explain the features-Refer note

9. What are the different types of plan models?
Planning models have been increasingly used in LDCs for the drawing up of plans for
economic development. A model expresses relationships among economic variables which
explains and predict past future events under a set of simplifying assumptions. A planning model
is a series of mathematical equations, help in the drawing up of a plan for economic
development.planning models are of three types, aggregative or macroeconomics models,
sectoral models and comprehensive inter-industry models-Refer notes

10. What is a kinked demand curve?
The kinked demand curve was first employed by Prof. Paul M. Sweezy to explainprice rigidity
under oligopoly. In an oligopoly market, the firm knows that if it increases price, other firms will
not follow; but if price is reduced, other firms will follow the price reduction. In some respect,
the price output analysis in oligopoly is simple. Since each seller wants to avoid uncertainty,
every oligopolistic firm will adhere to the point of kink, where itis safe and where it can
anticipate the reaction of its rivals. However, the firm will neither increase nor decrease
priceThis is an important consequence of the existence of the kink in the demand curve of the
firm. Because, of the vertical section in MR, i.e. uncertainty range, without affecting the price or
level of output. Under these circumstances, equality between MC and MR will notdetermine the
point of equilibrium. The profits will, however, be determined as in any othermarket, by the
difference between AR and AC. With a given marginal cost of production, OP is more likely to
be the profit-maximising price. The length of the discontinuity portion in the MR depends on the
relative elasticity of demand at point E of AR. The greater the elasticity of demand of the portion
of AR above point E and the lower the elasticity of demand of the portion of AR below point
discontinuity portion of MR, the bigger will be the discontinuity portion of MR. Figure 5.16
shows that the price is fixed at OP and output is OM- Draw the fig

11. What are the different methods of measuring national income?
The national income of a country can be measured by three alternative methods: (i) Product
Method (ii) Income Method, and (iii) Expenditure Method. Explain each method.
12. Find out the price, output and profit of a monopolists firm which has a cost

equation of C= Q2-28Q+2 and demand equation of Q=20-P

C= Q2-28Q+2
In equilibrium MC=MR
Q= 12
Price=P=20-Q----So P=20-12=8
Profit=TR-TC= 20Q- Q2-(Q2-28Q+2)
13. Distinguish between Couront’s and Chamberlin’s duopoly model.
The Cournot model of oligopoly assumes that rival firms produce a homogenous product, and each
attempts to maximize profits by choosing how much to produce. All firms choose output (quantity)
simultaneously. The basic Cournot assumption is that each firm chooses its quantity, taking as given the
quantity of its rivals. The resulting equilibrium is a Nash equilibrium in quantities, called a Cournot (Nash)
equilibrium. as the number of firms increases, the equilibrium approaches what it would be under perfect
competition. . As concentration rises, industry performance deviates more from the norm of perfect
competition. Stable equilibrium- Closed model-

Chamberlin developed his own model of oligopoly assuming interdependence between the
competitors. He suggested that each seller seeking to maximize his profit reflects well and looks
in to consequences of his move. Assuming that there are two firms A&B let A enter in to the
market as a monopolist. A will produce OQ and charge monopoly price OP2 .When B enters ,it
considers that PM is its demand curve. Under cournots assumption, firm B will sell output
Qnprice OP1.As a result, market price fall from OP2 TO OP1.Chamberlin assumes that firm A
recognizes the interdependence between them. Here A decides to compromise with the
existence of firm B, and decided to reduce its output to OK which is half of the monopoly output
OQ.According to Chamberlin, by recognizing their interdependence, the firm reach an
equilibrium which is the same as monopoly. Draw fig-

14. Explain the stages of business cycle and contra cyclical policies in economic

Cyclical fluctuations have become a regular feature of a capitalist system. A capitalist economy
is guided by competition and profit motive. There is freedom of private enterprise, private
ownership of property and free play of market forces of supply and demand. Businessmen in
their anxiety to earn more and amass wealth, produce much in excess of the absorption capacity
of the economy causing imbalances in the supply and demand conditions. Thus, the smooth
functioning of the economy is disturbed and subject to many ups and downs. Such ups and
downs have been termed as business cycles.

Explain each phase

Explain each phase
Measures to Control Business Cycles
Control of business cycles has become an important objective of all most all economies at
present. Broadly speaking, the remedial measures can be classified under three heads, viz.,
monetary, fiscal and miscellaneous measures.
1. Monetary measures:
According to Hawtrey, Hicks and many others expansion and contraction of supply of money is
the major cause for the operation of business cycles.
Monetary policy and the expansionary phase: when the economy is moving fast in the upward
direction, the monetary measures should aim at (i) restricting the issue of legal tender money (ii)
putting restrictions to the expansion of bank credit by adopting both quantitative and qualitative

techniques of credit control. As expansionary phase is mainly supported by bank credit, adoption
of a dear money policy can put an effective check on further expansion. A rise in the Bank Rate,
by raising the lending rates of the commercial banks, making credit costly will have a
discouraging effect on more borrowings. A check can be imposed on the liquidity position of the
commercial banks by raising the Cash Reserve Ratio and Statutory Liquidity Ratio. Open market
sale of securities can also be conducted to make bank rate more effective. Selective techniques,
like raising of margin requirements, rationing of credit, moral suasion, direct action, publicity
etc., can also be used efficiently to tighten the credit situation in the economy.
Apart from these direct measures indirect measures like wage control, price control etc., can also
be adopted to put a check on the inflationary trend in the economy. Such monetary measures are
found fairly successful in controlling unwieldy expansion of the economy. Many countries like
U.K., U.S.A., France, Germany and India have used monetary measures to control inflation.
Monetary Policy and the Phase of Depression:
During the period of depression, to enlarge employment opportunities and raise the level of
income all out measures are to be adopted to increase the level of investment. To encourage
investment activity the central bank has to follow a cheap money policy. The bank rate and the
lending rates of the commercial banks should be reduced; money should be made available freely
by reducing the CRR and SLR. Through open market sale of securities, Cash reserves with the
banks should be increased to enable them to lend money easily for various investment activities.
Various qualitative techniques of credit control like reducing the margin requirements, moral
suasion etc., may be adopted to encourage businessmen to borrow and invest.
Cheap money policy, to induce businessmen to borrow and invest is not very effective as
investment is more guided by the marginal efficiency of capital than the rate of interest. Because
of low level of income and low prices and the low profit margins entrepreneurs do not come
forward to borrow and invest in spite of the low rates of interest. One can take a horse to the
water but cannot force to have it; a plethora of money cannot induce the public horse to have it.
Thus monetary policy as a remedy to solve depression has its own limitations.
2. Fiscal policy:
During the period of inflation or uptrend in the economy, when the private enterprise is over
enthusiastic and there is over expansion and over production government can use taxation and
licensing policy as very effective instruments to check such unwieldy growth. Price control
measures can be adopted. Government should adopt surplus budget, reduce public expenditure
and resort to public borrowing. The cumulative result of these measures would reduce the supply
of money in circulation, purchasing power and demand. On the contrary,during the period of
depression government should adopt deficit budget, Increase the volume of public expenditure,

redeem public debt and resort to external borrowings, indulge in a moderate dose of deficit
financing, reduce tax rates, grant subsidies, development rebates, tax-concessions, tax-relief’s
and freight concessions etc. As a result of these measures, supply of money in circulation will
increase. This in its turn would raise the purchasing power, demand for goods and services,
production and employment etc. J.M. Keynes recommended a number of public works
programmes to be launched by the government to cure depression. The New Deal policy of
President Roosevelt in the U.S.A. and Blum experiment in France were based on this very belief.
3. Physical controls:
During the period of inflation, a price control policy has to be adopted where as during
depression a price-support policy has to be followed. During the period of contraction
unemployment insurance schemes, Proper management of savings, investments, production,
distribution, expansion of income and employment etc., are needed depending upon the nature of
economic fluctuations.
4. Miscellaneous Measures:
(i) Introduction of automatic stabilizers:
An automatic stabilizer (or built in stabilizer) is an economic shock absorber that helps to
smoothen the cyclical business fluctuations of its own accord, without requiring deliberate action
on the part of the government e.g., progressive taxation policy, unemployment Insurance scheme
adopted in The U.S.A.
(ii) Price support policy followed in the U.S.A. during the post war period to fight the prospects
of depression.
(iii) The policy of stabilization of the prices of agricultural products in India through
procurement and building up of buffer stocks aim at economic stability.
(iv) Foreign aid is also used for influencing the aggregate demand and supply of goods in a
(v) Granting of aid might help in recovering from slump.

In addition to these, some of the measures can be adopted at international level to mitigate the
adverse effects of business cycles and promote stability in the world economic growth like
control of private investment, control and distribution of essential goods, regulation of
international investments in developing nations, creation of international buffer stocks etc.

15. Explain the cyclical process using Kaldor’s theory
• Professor Kaldor in his model of Economic Growth- follows the Harrodian
dynamic approach and the Keynesian techniques of analysis. The other
neoclassical models treat the causation of technical progress as completely
exogenous, but Kaldor attempts "to provide a framework for relating the
genesis of technical progress to capital accumulation." explanation of the
model. Six observable facts of these model have been
explained in terms of three components
saving –investment equality can be expressed as
S=Sw+ Sp
Investment being given and assuming simple proportional saving function
Sw=SwW and Sp= SpP we obtain the equation
S=Sp (P)+SwW
S= I=Sp (P)+Sw(Y-P) since W=Y-P
When the ratio of investment to national income

And from the above ratio P/Y can be derived as
(Sp-Sw)P/Y= I/Y – Sw
P/y=1/ Sp-Sw x I/Y- Sw/ Sp-Sw

Exlain the process using equation and fig

16. Analyse the following markets for its market structure and characteristics.
a. Butter- Monopolistic competition

c. Automobiles—Oligopoly
17. Assume that a factory can produce a maximum of 20,000 units of output per
month. These 20,000 units can be sold at a price of Rs 100 per unit. Variable costs
are Rs 20 per unit and the total fixed costs are Rs 2, 00,000.
You are required to calculate
1. Break-even point--------- 2500
2. Break even sales revenue ---------25000
3. Sales required to earn a profit of Rs50000-------¿ cost+target profit

Target sales volume= profit volume ratio =

=31250 units

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