BLS LLB 5 Years Sem 1 Economics 2018-19 Question Paper with Solutions

Adam Smith defined economics as "the science of wealth" in An Inquiry into the Nature and Causes of the Wealth of Nations (1776), making the production, distribution and consumption of wealth the whole subject.

Two drawbacks:

1. It gives wealth too much importance and man too little. Wealth is treated as the end and human beings as the means of producing it, when in truth wealth is only a means to human welfare. Thomas Carlyle and John Ruskin attacked it on this ground, calling economics a "dismal science" and a "bread and butter science", and Ruskin answered it with the phrase "there is no wealth but life".
2. Its meaning of wealth is too narrow. Smith counted only material goods as wealth, so services, which produce no material object, were excluded. On that view a doctor, a teacher, a lawyer and a judge produce nothing, which is plainly wrong and is fatal in a modern economy where services are more than half of national income.

A science is a systematic body of knowledge that establishes cause and effect, is capable of measurement, permits experiment and prediction, and holds universally.

Two arguments against economics being a science:

1. Economics cannot conduct controlled experiments. A chemist can hold every condition constant and vary one; an economist cannot. Economic events happen once, in the real world, with everything changing at once, so the assumption of "other things remaining equal" can be stated but never actually secured.
2. Its predictions are unreliable, because it deals with human behaviour. People act from habit, emotion, fear and custom, not only from calculation, and they change their behaviour when a prediction is made public. Economic "laws" are therefore statements of tendency, true on the average and in the long run, rather than universal and exact like the law of gravitation.

Two further arguments: its subject matter is not fully measurable, since satisfaction and welfare cannot be measured directly; and economists disagree among themselves on questions a science would have settled.

Social cost is the total cost of an economic activity to society as a whole. It is the sum of the private cost borne by the producer and the external cost imposed on others who are not party to the transaction.

Social cost = Private cost + External cost

Private cost is what the firm itself pays: wages, rent, raw materials, interest. External cost, or the negative externality, is the cost thrown on to third parties, for which the firm pays nothing.

Example: a factory discharging effluent into a river bears the private cost of its labour and materials, while the villagers downstream bear the cost of polluted water, lost fishing and illness. That damage is the external cost, and adding it to the firm's own cost gives the social cost.

Density of population is the average number of persons living per square kilometre of area in a given region.

Density = Total population ÷ Total land area (in sq. km)

In India, density was 382 persons per sq. km at the Census of 2011, against 325 in 2001. Among the States, Bihar was the most densely populated at 1,106, and Arunachal Pradesh the least at 17.

Two further causes: a low rate of capital formation, since low incomes give low savings, which give low investment, which keeps incomes low, Ragnar Nurkse's vicious circle of poverty; and unemployment and underemployment, particularly disguised unemployment in agriculture, so a large part of the labour force adds almost nothing to output.

A direct tax is a tax whose impact and incidence fall on the same person: the person who pays it to the government is the person who bears it, and it cannot be shifted.

An indirect tax is a tax whose impact and incidence fall on different persons: it is paid to the government by the seller but the burden is shifted to the buyer through the price.

2. The short period (short term market)

Supply can be varied only within the limits of existing plant, by using the variable factors more or less intensively, more labour, more raw material, longer shifts. The plant itself, the fixed factor, cannot be changed and no new firms can enter.

The supply curve is upward sloping but relatively inelastic, so both demand and supply influence price, with demand still the stronger.

In this period a firm can earn supernormal profit, and it will continue producing at a loss so long as price covers average variable cost, because the fixed cost is already sunk.

Example: a factory meeting a festival rush by running extra shifts.

3. The long period (long term market)

Supply can be fully adjusted: plant can be expanded or reduced, and new firms can enter and existing ones leave. There are no fixed factors, since everything is variable given enough time.

Meaning

The marginal productivity theory of wages holds that the wage of labour tends to equal the value of the marginal product of labour. It is the standard neo-classical theory of factor pricing, developed by J. B. Clark, and it applies to every factor, not only to labour.

The marginal product of labour (MPL) is the addition made to total output by employing one more unit of labour, the other factors remaining unchanged. Its money value is the Marginal Revenue Product (MRP = MPL × marginal revenue).

Wage = Marginal Revenue Product of Labour

The reasoning

A rational employer goes on hiring so long as an extra worker adds more to revenue than to cost.

• If MRP > wage, the worker adds more than they cost, so hiring more raises profit.

1. The assumptions are unreal. Perfect competition, perfect mobility and full employment do not exist; involuntary unemployment does.
2. Labour is not homogeneous. Workers differ in skill, training and effort.
3. Marginal product cannot be measured separately. Production is a joint effort of all factors, so which part of the output one worker produced cannot be said.
4. It ignores the supply side. It explains the demand for labour and treats supply as given, so it is one-sided. Wages are determined by demand and supply.
5. It ignores collective bargaining, trade unions, minimum wage law and the awards of industrial tribunals.
6. It is static, assuming fixed technique and fixed other factors.
7. Monopsony. Where there is a single large employer the wage settles below the marginal product, which the theory cannot explain.

Conclusion

The theory is best read as an explanation of the demand for labour, not of the wage itself. It states the maximum an employer will pay; what the worker actually receives, between that ceiling and the minimum they will accept, is settled by bargaining, law and institutions.

4. The monopolist is a price maker, but cannot fix price and quantity independently: it may set either the price and let the market decide the quantity, or the quantity and let the market decide the price.

5. A downward sloping demand curve, with marginal revenue below average revenue. To sell more, the price must be lowered on all units, so MR falls faster than AR. Equilibrium is where MC = MR.

6. Supernormal profit persists in the long run, because entry is blocked and nothing competes it away.

7. Price discrimination is possible where markets can be separated and their elasticities differ. Railway fare classes and separate tariffs for domestic and industrial electricity are examples.

8. No supply curve, since price and quantity are decided together from the demand curve.

Examples

Indian Railways in long-distance rail transport; a patented medicine during the life of the patent; municipal water supply.

3. Change in the composition of exports

From primary commodities, tea, jute, cotton, spices, the pattern of a colonial economy, to manufactured and high-value goods: engineering goods, refined petroleum products, gems and jewellery, pharmaceuticals, chemicals and textiles, and above all services, chiefly software. India now imports crude oil and exports refined petroleum, and is the world's largest supplier of generic medicines by volume.

4. Change in the composition of imports

From food grains, imported under the American PL-480 programme in the 1960s, to capital goods, machinery, crude oil, gold and electronics. The shift matters: importing machinery indicates investment in productive capacity, whereas importing food indicated dependence. India now exports rice.

5. Change in the direction of trade

From the United Kingdom and the erstwhile USSR and Eastern bloc, which dominated after independence, to the United States, the United Arab Emirates, China and the European Union, with rapid growth in East and South East Asia under the Look East, later Act East, policy.

Meaning

The Balance of Payments (BoP) is a systematic record of all economic transactions between the residents of a country and the rest of the world during a given period, usually a year. It is prepared on the double-entry principle, so in the accounting sense it always balances.

It is broader than the balance of trade, which records only visible merchandise and is one part of it.

Structure

A. Current Account

1. Visible trade: exports and imports of goods, whose balance is the balance of trade.
2. Invisible trade: services, software, business services, travel, transport, insurance.
3. Income: interest, profit and dividends received from and paid abroad.
4. Unilateral transfers: remittances, gifts and grants. India is the world's largest recipient of remittances.

B. Capital and Financial Account

Measures to correct it

Monetary: deflation, devaluation, exchange control. Trade: export promotion and import substitution. Structural: raising productivity and quality, which is the only lasting cure.

India's experience

The 1991 crisis is the classic case: reserves fell to roughly two weeks of imports and India pledged gold abroad. Today reserves exceed 700 billion US dollars, and the services surplus and remittances keep the current account deficit modest.

4. Reviewing trade policies under the Trade Policy Review Mechanism.
5. Technical assistance to developing members.
6. Cooperating with the IMF and the World Bank.

Principles

Most Favoured Nation, a concession to one member must be given to all; National Treatment, imported goods treated no less favourably than domestic once inside the market; transparency; binding tariff commitments; and special and differential treatment for developing countries.

India and the WTO

India has used the WTO to challenge protectionism against its exports and to defend its public stockholding of food grain at minimum support prices, protected by the peace clause agreed at the Bali Ministerial Conference in 2013. TRIPS obliged India to recognise product patents, done through the Patents (Amendment) Act, 2005.

Criticism

That it favours developed countries; that TRIPS raises the price of medicines and technology; that agricultural subsidies in rich countries remain very large; and that the Doha Round, begun in 2001, has never concluded.

The context

Poverty in India is measured against a poverty line, the minimum expenditure needed for a socially acceptable standard of living. On the multidimensional measure, poverty fell from 24.85% in 2015-16 to 14.96% in 2019-21, but the absolute numbers remain very large, and the programmes below are the State's response.

Programmes by category

A. Employment generation

1. Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 2005. The most important of all, because it is an Act, not a scheme: it creates a legally enforceable right to 100 days of unskilled manual work in a financial year to every rural household whose adult members volunteer for it, with an unemployment allowance if work is not provided within 15 days. It is the world's largest work guarantee programme and acts as a self-targeting safety net.
2. Deendayal Antyodaya Yojana, National Rural Livelihoods Mission, organising rural women into self-help groups.

2. Ayushman Bharat, health cover of ₹5 lakh per family per year.
3. Atal Pension Yojana, PM Jeevan Jyoti and PM Suraksha Bima.
4. PM-KISAN, income support to farmer households.

Comment: what has worked

Hunger deaths have effectively ended, school enrolment and immunisation have risen, and Aadhaar-linked Direct Benefit Transfer has cut leakage substantially by removing intermediaries. The move from scheme to statutory right under MGNREGA and the NFSA changed the citizen's position entirely.

Comment: what has not

Leakage and corruption persist; exclusion errors leave out the genuinely poor who lack documents; the assets created are often of poor quality; there is overlap between too many schemes; and the emphasis remains on relief rather than on productive employment, which alone ends poverty permanently.

4. Marketing reform, through e-NAM, the electronic national market, and reform of the APMC system, so a larger share of the consumer's rupee reaches the farmer.
5. Institutional credit through Kisan Credit Cards, cooperatives and priority sector lending, to displace the moneylender.

B. Technical measures

1. Irrigation, the single most effective measure, under the Pradhan Mantri Krishi Sinchayee Yojana, with micro-irrigation, drip and sprinkler, which raises yield and saves water together.
2. High-yielding and climate-resilient seed, with quality control over what is sold.
3. Balanced fertiliser use guided by soil health cards, correcting the distortion caused by subsidising urea alone.
4. Mechanisation, made accessible to small farmers through custom hiring centres rather than individual ownership.
5. Research and extension, through the ICAR system, so that laboratory results reach the field.

C. Economic measures

What the dash in the first cell means

The paper prints a dash against the first unit of output instead of a figure. Nothing has to be assumed: the dash means nil, so the marginal cost of the first unit is zero and variable cost begins to accumulate from the second unit.

The companion paper of this course for 2022-23 sets the same sum the other way round, giving total cost instead of marginal cost, and there TC at one unit equals TFC exactly, which means TVC and MC at the first unit are both zero. The same convention, stated twice.

Formulae used

1. AC = AFC + AVC at every row. Verify one or two in the answer book.
2. MC equals the difference between consecutive TC figures: 250 − 200 = 50, 330 − 250 = 80, 430 − 330 = 100, 530 − 430 = 100, 610 − 530 = 80. ✓
3. The MC column adds to TVC: 0 + 50 + 80 + 100 + 100 + 80 = 410, which is TVC at 6 units. ✓
4. AFC falls continuously from ₹200 to ₹33.33 and never reaches zero.
5. AC falls throughout the range (200, 125, 110, 107.50, 106, 101.67), and it must, because MC stays below AC at every output: even at the sixth unit MC is ₹80 against an average of ₹101.67.

This question has two parts and both carry marks. Answer them under separate headings.

Part 1: Features of Law

Law may be defined as a body of rules of conduct, recognised or made by the State, which regulates the external behaviour of persons within its territory and is enforced by the authority of the State.

1. It is a body of rules of conduct. Law consists of general rules, not commands addressed to one person, and it prescribes what may, must and must not be done.

2. It regulates external human conduct. Law is concerned with what a person does, not with what they think. Motive matters only where the law makes it relevant, as in mens rea.

3. It is made or recognised by the State. Law comes from a determinate authority: legislation by Parliament and the legislatures, precedent by the courts, and custom where the State recognises it.

10. It has a purpose: justice, order, the protection of rights, the resolution of disputes and the promotion of social welfare, which in India the Preamble and the Directive Principles state expressly.

Part 2: Relevance of Economics to Law

Law and economics are concerned with the same underlying fact: resources are scarce, so rules are needed to decide who gets what. Economics explains how scarce resources are allocated and how people respond to incentives; law creates and enforces the rights that make an allocation binding.

1. Property, contract and succession are allocation rules. The law of property decides who owns a scarce resource, contract governs its voluntary transfer, succession its transfer on death.

2. Economic legislation cannot be applied without economics. The Competition Act, 2002 turns on "relevant market" and "dominant position", which require cross elasticity of demand; the Insolvency and Bankruptcy Code, 2016 on solvency and going-concern value; the Consumer Protection Act, 2019 on information asymmetry.

8. Regulation answers market failure: information asymmetry, natural monopoly, public goods and externalities, which is why SEBI, TRAI, the RBI and the electricity commissions exist.

9. Labour and welfare law rests on theories of wage determination; the Code on Wages, 2019 provides a statutory floor wage.

10. Any law that ignores incentives will be evaded. Rent control below the market reduces the supply of rental housing; licensing creates a scarcity value and therefore corruption.

Conclusion

Law supplies the sanction and economics the reasoning. A rule that ignores incentives will not be obeyed, and a market without enforceable rights cannot function at all.

An infinitesimally small change in price causes an infinitely large change in quantity demanded. At the ruling price the seller can sell any amount; at a price even slightly higher, nothing.

• Demand curve: a horizontal straight line parallel to the X axis.
• Reality: a theoretical limiting case, approached by an individual seller under perfect competition.

2. Perfectly inelastic demand (Ep = 0)

A change in price causes no change at all in quantity demanded.

• Demand curve: a vertical straight line parallel to the Y axis.
• Reality: also a limiting case, approached by an absolute necessity such as a life-saving drug, or salt.

3. Unitary elastic demand (Ep = 1)

The percentage change in quantity demanded is exactly equal to the percentage change in price.

• Demand curve: a rectangular hyperbola, on which total expenditure is the same at every point.

Methods of measurement

1. Percentage or proportionate method, the formula above.
2. Total outlay method (Marshall). If total expenditure moves in the opposite direction to price, demand is elastic; in the same direction, inelastic; unchanged, unity.
3. Point method, elasticity at a point, the lower segment divided by the upper segment.
4. Arc method, elasticity between two points, using the averages of the two prices and quantities.

This question has two parts and both carry marks. Answer them under separate headings.

Part 1: Factors determining real wages

Money wages are the wages received in terms of money. Real wages are the goods and services that money wage will buy, together with all the other advantages and disadvantages of the employment. Real wages measure what a worker actually gets out of the job.

1. Purchasing power of money. The most important factor. If prices rise faster than money wages, real wages fall even though money wages have risen. This is why wages are linked to a dearness allowance based on the consumer price index.

2. Subsidiary or additional earnings. Where a job permits extra income, overtime, private practice, tips, real wages are higher than the money wage suggests.

9. Social prestige of the occupation. A respected occupation attracts workers at a lower money wage; a socially looked-down-upon one must pay more.

10. Working conditions and job satisfaction, including safety, dignity and the security of tenure now protected by the labour codes.

Part 2: Why entrepreneurs earn profit, and the theories of profit

Profit is the reward of the entrepreneur, the fourth factor of production. It differs from rent, wages and interest in three ways: it is a residual, what is left after every other factor has been paid; it is uncertain, and may be negative; and it is not contracted for in advance.

Entrepreneurs earn profit because they perform functions no other factor performs: they organise the other factors, they innovate, and above all they bear the risk and uncertainty that the contracted factors refuse to bear.

The theories:

5. Uncertainty-bearing theory (Frank H. Knight). The most satisfactory of them. Knight distinguished risk, which is measurable and therefore insurable, from uncertainty, which is unmeasurable and uninsurable. Insurable risk is a cost like any other, since a premium can be paid. Profit is the reward for bearing uncertainty, and that is why it cannot be contracted for in advance.

6. Marginal productivity theory. Profit is the value of the entrepreneur's marginal product, as with any other factor. Criticism: the entrepreneur's marginal product cannot be separated from the joint product.

7. Monopoly theory. Where entry is blocked, profit is not a reward for anything but a surplus extracted by market power, which is why competition law exists.

Conclusion

Real wages, not money wages, measure what a worker actually receives, and they depend on prices, perquisites, security and conditions as much as on the pay slip. Profit is the residual reward for uncertainty-bearing and innovation, and Knight's distinction between insurable risk and uninsurable uncertainty explains best why the entrepreneur alone is paid last and paid in an amount nobody promised.

Its causes on the side of a falling death rate: control of epidemics, smallpox eradicated in India in 1977; better medical facilities and immunisation; a fall in infant mortality; the end of famine after the Green Revolution; better sanitation and safe water; and rising life expectancy.

Its consequences: pressure on land, so holdings fragment to about 1.08 hectares on average; disguised unemployment; pressure on food, housing, water, schools and hospitals; urban congestion and slums; environmental strain; and a lower rate of capital formation.

Part 2: Measures to control population growth

A. Economic measures

1. Raising the standard of living, since fertility falls as income rises: a family that does not need children as insurance has fewer.
2. Employment generation, particularly for women, since paid work raises the opportunity cost of another child.
3. Urbanisation, where the cost of raising a child is higher and family size is smaller.
4. Social security and old-age pension, which removes the strongest economic reason for a large family.

B. Social measures

3. Maternal and child health services, since a lower infant mortality rate itself lowers the birth rate.
4. The Medical Termination of Pregnancy Act, 1971, as amended in 2021, which protects maternal health and gives women effective control over childbearing.

D. Incentives and legal measures

1. Incentives and disincentives: cash incentives for sterilisation and for small families, and two-child norms adopted by several States as a qualification for contesting local body elections or receiving certain benefits.
2. Constitutional competence. Entry 20A of the Concurrent List, inserted by the 42nd Amendment, 1976, expressly covers "population control and family planning", so both Parliament and the States may legislate.

⚠️ The limit of compulsion

There is no central law compelling any citizen to limit family size, and that is deliberate. Coercive sterilisation during the Emergency (1975 to 1977) produced a lasting public backlash and set the programme back by years. India's approach since has rested on education, incentive and voluntary choice.

Background

Between 1956 and 1991 Indian industry was governed by the Industrial Policy Resolution, 1956 and the Industries (Development and Regulation) Act, 1951. Every unit needed a licence to be set up, to expand, to change its product or its location. Seventeen industries were reserved for the State, large houses were restrained by the MRTP Act, 1969, and foreign investment was restricted by FERA, 1973. The system came to be called the "licence-permit-quota raj".

By 1991 it had produced low growth, poor quality, technological backwardness and loss-making public enterprises, and the balance of payments crisis of that year, with reserves down to about two weeks of imports, forced a change.

The New Industrial Policy was announced on 24 July 1991 by the government of P. V. Narasimha Rao, with Dr Manmohan Singh as Finance Minister.

7. Abolition of the MRTP asset limit, so large houses no longer needed prior approval to expand. The MRTP Act was eventually replaced by the Competition Act, 2002.

8. Relaxation of locational policy, removing prior clearance for location outside large cities except in specified cases.

9. Support for small scale industry, with the investment limit raised and equity participation by other undertakings permitted.

Comment: achievements

Industrial licensing effectively ended, and with it a major source of delay and corruption. Foreign investment and technology flowed in. Competition raised the quality and variety of goods dramatically, and the consumer gained. The services sector grew rapidly, exports and reserves rose, growth accelerated from the "Hindu rate" of about 3.5% to a much higher trajectory, and Indian firms became internationally competitive in software, pharmaceuticals, automobiles and refining.

Constitutional framework

Taxation in India rests on Article 265: "no tax shall be levied or collected except by authority of law." Taxing powers are divided between the Union and the States by the Seventh Schedule, the residuary power lies with the Union under Article 248, and since 2017 the GST Council under Article 279A decides the rates of goods and services tax jointly.

The structure

A. Direct taxes, where impact and incidence fall on the same person: income tax under the Income Tax Act, 1961, corporation tax, and capital gains tax. Wealth tax was abolished in 2015. Administered by the Central Board of Direct Taxes.

B. Indirect taxes, where the burden is shifted to the consumer: GST, which subsumes most of them; customs duty; and excise duty, retained on petroleum products and alcohol, which remain outside GST. Administered by the Central Board of Indirect Taxes and Customs.

6. State-level VAT from 2005, replacing sales tax and removing cascading within each State.

7. Goods and Services Tax, 1 July 2017. The largest indirect tax reform since independence, introduced by the Constitution (One Hundred and First Amendment) Act, 2016. It subsumed central excise, service tax, State VAT, octroi, entry tax and luxury tax; created a common national market; allowed input tax credit across the whole chain; and established the GST Council.

8. Administrative reform. PAN and its linkage with Aadhaar; expansion of TDS and TCS; e-filing and e-payment; faceless assessment and faceless appeals (2020).

9. Anti-avoidance. GAAR effective from 2017, transfer pricing provisions, and the Black Money Act, 2015.

10. Dispute resolution, notably the Vivad se Vishwas scheme.

11. The new personal income tax regime under Section 115BAC, introduced in 2020 and made the default from 2023-24, offering lower rates without exemptions.

Evaluation: what the reforms achieved

1. Rates came down and compliance improved. The move from punitive rates to moderate ones raised revenue rather than reducing it, vindicating the Chelliah approach.

5. Litigation is enormous, locking up large sums for years.
6. Agricultural income remains exempt from central income tax.
7. GST compensation to the States ended in June 2022, leaving several with a structural revenue gap.

Conclusion

The reforms since 1990 changed Indian taxation from a high-rate, narrow-base, evasion-ridden system into a moderate-rate, technology-driven one, and GST was a genuine structural achievement. The unfinished agenda is equity: widening the direct tax base so the system relies less on regressive indirect taxation, simplifying GST, and resolving the friction between the Union and the States.