Based on the Consumer's Equilibrium and Demand, some of the important questions are covered in this question paper. The questions are prepared from the book back and the creative questions

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Questions:

Total utility derived from consumption of commodity will begin to fall ..............

(a)

With every additional unit consumed

(b)

When Total Utility curve becomes flat

(c)

when Marginal Utility starts falling

(d)

When Marginal Utility becomes negative

........... curve is a downward sloping curve cutting the X-axis

(a)

Marginal Utility

(b)

Total Utility

(c)

Average Utility

(d)

Both (a) and (c)

Utility approach is ...........

(a)

cardinal

(b)

ordinal

(c)

both cardinal and ordinal

(d)

None of the above

Identify the law in the statement below:
A consumer with a given income allocates his expenditure among commodities, so that last rupee spent on each brings equal Marginal Utility.

(a)

Law of Diminishing Marginal Utility

(b)

Law of Equi-marginal utility

(c)

Law of diminishing MRS

(d)

None of the above

A rational consumer prefers A(10,6) over B(8,4) which kind of preference is this?

(a)

Strictly preferred bundle

(b)

Weakly preferred bundle

(c)

Indifferent bundle

(d)

None of the above

Law of Demand is a ...........

(a)

quantitative statement

(b)

qualitative statement

(c)

Both (a) and (b)

(d)

hypothetical

The demand of which type of goods do not decrease with increase in their price?

(a)

Comforts

(b)

Conspicuous goods

(c)

Necessities

(d)

Bothe (b) and (c)

Giffen paradox is an exception of ........

(a)

Law of Demand

(b)

Law of Supply

(c)

Law of production

(d)

Law of Utility

Starting from an initial situation of consumer's equilibrium, suppose MU of rupee increases, will it increase or decrease the quantity demanded of the product?

10.

The cost of an ice-cream is Rs.20. Akanksha who likes ice-cream has already consumed 4 ice-creams. Her Marginal Utility is 4 of one rupee. Should she consume more ice-cream or should she stop the consumption?

11.

How does the budget line change, if the price of good 2 decrease by a rupee but the price of good 1 and consumer income remain unchanged?

12.

How many units of commodity should a consumer buy to get maximum utility? Explain with the help of a numerical example.

13.

A consumer consumes goods X. Explain the effects of fall in prices of related goods on the demand of X.

14.

Explain the difference between an inferior good and a normal good.

15.

Explain the relationship between Price Elasticity of Demand and Total Expenditure.

16.

Explain any two factors that affect Price Elasticity of Demand.

17.

A consumer buys 10 units of a commodity at a price of Rs.10 per unit. He incurs an expenditure of Rs.200 on buying 20 units. Calculate Price Elasticity of Demand by percentage method. Comment on the shape of demand curve based on this information.

18.

Give the reason behind a convex Indifference Curve.

19.

Why two Indifference Curves cannot intersect each other?

20.

Explain the three properties of the Indifference Curves

21.

A consumer wants to consume two goods. The prices of the two goods are Rs.4 and Rs.5 respectively. The consumer's income is Rs.20.
(i)Write down the equation of the budget line.
(ii)How much of good X can the consumer consume, if she spends her entire income on that good?
(iii)How much of good Y can she consume, if she spends her entire income on that good?
(iv)What is the slope of the budget line?

22.

How is total utility derived from marginal utility?

23.

What happens to TU when MU is positive?

24.

State two conditions of consumer's equilibrium attained through Indifference Curve approach.

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Answers Key:

(d)
When Marginal Utility becomes negative

(a)
Marginal Utility

(b)
Law of Equi-marginal utility

(a)
Strictly preferred bundle

(b)
qualitative statement

(d)
Bothe (b) and (c)

(a)
Law of Demand

In the given case, quantity demanded will decrease, because corresponding to higher MU of money, MU of the commodity should also be higher which is possible only when consumption decreases/

10.

A consumer attains equilibrium, when \({MU_X\over MU_M}=P_X\)
Substituting the given values, we get \(MU_X\over 4\)=20 implying that, in a state of equilibrium, Akanksha's MU_X must be equal to 80 units. If having consumed 4 ice-creams, Akanksha's MU_X=80 utils, then she must stop consuming more.
However, if MU_X>80 she should have consumed more ice-creams till MU_X reduces to 80 and in terms of its money, worth is equal to P_x (where P_X=20)

11.

If the price of good 2 decreases by a rupee but the price of good 1 and consumer's income remains unchanged, this shifts the Y axis end of the budget line along the Y axis upwards.
When the price of good 2 decreases, the budget line changes from AB to A₁ B.

12.

Consumer's equilibrium with respect to purchase of one good is attained when
(i) the marginal utility of the good is equal to its of the good price.
(ii) MU should decrease with increase in consumption.
Example: Suppose a consumer is buying oranges and the price of each unit of orange is Rs.4. Hypothetical marginal utility schedule of orange is given as:

Units of Orange Consumed (X)	Marginal Utility (in Rs) (MU_X)	Price (P_X) (Rs)
1	10	4
2	8	4
3	6	4
4	4	4
5	2	4

P_x=MU_x
It is evident from the schedule that the consumer will purchase 4 unts of oranges and reaches an equilibrium position. In this situation, the condition of consumer's equilibrium MU_x (in Rs) = P is satisfied. At this level of consumption, the marginal utility is equal to the price of orange, i.e., 4 = 4.

13.

The effect of fall in price of related goods on demand of X is stated below:

S. No	Fall in the price of related goods	Change in demand of X
(i)	Price of substitute good decreases.	Demand of good X also decreases.
(ii)	Price of complementary good decreases.	Demand of good X also increases.

14.

Distinguish between normal goods and Inferior goods.

Basis	Normal goods	Inferior goods
Income effect	Normal goods have positive income effect.	Inferior goods have negative income effect.
Movement	The demand curve for normal goods shifts to the right or left with the rise or fall in income respectively.	The demand curve for Inferior goods shifts to the left or right with the rise or fall in income respectively.
Example	Full cream milk	Toned milk

15.

Relationship between Price Elasticity of Demand and Total Expenditure is stated in following points:
(i) If Total Expenditure remains unchanged with increase or decrease in price, then it is unitary elastic demand.
(ii) If direction of change in Total Expenditure is opposite to the direction of change in price, i.e, with rise in price, TE falls and vice-versa. then it is greater than unitary elastic demand.
(iii) If direction of change in Total Expenditure is the same as the direction of change in price, i.e. with rise in price, TE rises and vice-versa, then it is less than unitary elastic demand.

16.

Two factors that affect the Price Elasticity of Demand are as follows:
(i) Availability of substitutes The demand for commodities having close substitutes is very elastic because if there is an increase in the price of a commodity, people will start using substitute commodities.
(ii) Proportion of income spent on the goods Items such as thread, needle will have an inelastic demand as consumers spend a small proportion of their income on such items.
On the other hand, goods on which the consumers spend a large proportion of their income (clothes, fodd items, etc) tend to have elastic demand.

17.

E_d = \(\infty\) (Elasticity of demand is perfectly elastic. Therefore, demand curve is a straight line parallel to X-axis).

18.

(a)
An Indifference Curve is convex to the origin due to diminishing Marginal Rate of substitution.

19.

(a)
Two Indifference Curves cannot intersect each other because the same combination of two goods cannot give two different levels of satisfaction.

20.

Indifference curve is defined as the curve which represents all combinations of two commodities which give same level of satisfaction to the consumer so that the consumer becomes indifferent towards these combinations.Following are the main properties of Indifference Curve:
(a) An Indifference Curve is always downward sloping:The indifference curve is negatively sloped or downward sloping from left to right which represents that in order to increase the consumption of commodity X, the consumer has to sacrifice commodity Y in order to remain at the same scale of preference or same level of satisfaction represented by the Indifference curve.
(b) An Indifference Curve is convex to origin: The nature and shape of indifference curve is based on the concept of diminishing marginal rate of substitution. According to which the rate of sacrifice in terms of commodity Y in order to increase the consumption of commodity X decreases with every increase in unit of commodity X due to which an indifference curve is always made convex to origin . The marginal rate of substitution depends on relative marginal utilities derived from X and Y. When the consumer consumes more of X after sacrificing Y, when it leads to decrease in MU for X and increase in MU for Y due to which the consumer becomes willing to sacrifice lesser units of Y with every increase in consumption of X due to which MRS decreases and IC is convex to origin .
(c) Higher Indifference Curve represents higher scale of preference: Indifference curve analysis is based on the assumption of monotonic preferences which represents that higher consumption of a commodity gives higher level of satisfaction to the consumer. A higher indifference curve represents that the consumer is able to consume more units of the commodity and hence represents higher scale of preference to the consumer.

21.

The equation of the budget line is:
(i) P_x.X + P_y.Y = M, where P_x and P_y are the respective prices of the two goods X and Y.
∴ 4 x 5Y = 20
(ii) If the given consumer spends her entire income (Rs.20) on' the good 1, whose price is Rs.4 per unit, It means that she can buy buy 5 units i..e. \(20\over 4\)= 5 units of good 1
iii) If she spends her entire income on the good 2, whose price is Rs.5 per unit, it means that she can buy 4 units i.e.\(20\over 50\)4 units of good 2.
iv) The slope of the budget line\(={\Delta Y\over \Delta X}\)
or \(=-{P_x\over P_Y}=-{4\over 5}\)

22.

()
Total utility is the sum total of marginal utilities of various units of commodity,
i.e., TU_n = MU1 + MU₂ + MU₃ + ... + MU_n·

23.

TU is maximum and constant when MU is zero

24.

()
(i) The Budget Line must be tangential to the Indifference Curve i.e.,
MRS_xy = P_X/P_Y
(ii) Indifference curve must be convex to the origin, i.e., MRS_xy must be diminishing at the point of tangency.