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Published on: 31/08/2019
Consumer Equilibrium
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1.
Why is budget line negatively sloped?
2.
Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
3.
Suppose a consumer's preferences are monotonic. What can you say about her preference-ranking over the bundles (10, 10), (10, 9), (9, 9).
4.
If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?
5.
What are monotonic preferences?
6.
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 quantity of good 1 can the consumer consume if she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?
What happens to the budget set if both the prices as well as the income double?
7.
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 quantity of good 1 can the consumer consume if she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?
How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer's income remain unchanged?
8.
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 quantity of good 1 can the consumer consume if she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?
How does the budget line change if the consumer's income increases to Rs.40 but the prices remain unchanged?
9.
Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire income. The prices of the two goods are Rs.6 and Rs.8 respectively. How much is the consumer's income?
10.
Explain why budget line is downward sloping?
11.
What is Budget Line?
12.
What do you mean by the budget set of a consumer?
13.
Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally priced at Rs.10 and the consumer's income is Rs.40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer's. Identify those which cost her exactly 40.
14.
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 quantity of good 1 can the consumer consume if she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?
1.
( )
Budget line is downward sloping because if a consumer wants to buy more of one commodity, he has to buy less of other goods, given money income.
2.
( )
No, the preferences of my friend are not monotonic since bundle (6, 6) should be monotonically preferred to bundle (5, 6).
3.
( )
If a consumer has monotonic preferences then,
(i) Bundle (10, 10) is monotonically preferred to bundle (10, 9) and bundle (9, 9).
(ii) Bundle (10, 9) is monotonically preferred to bundle (9, 9).
4.
( )
No, if a consumer has monotonic preferences, bundle (10, 8) is preferred to bundle (8, 6) as bundle (10, 8) has more units of both the goods
5.
( )
Consumer's preferences are assumed to be such that between any two bundles (x1,x1 ) and (y1,y2), if (x1 ,x2) has more of at least one of the good and no less of the other good as compared to (y1,y2), the consumer prefers(x1,x2) to (y1,y2)· Preferences of this kind are called monotonic preferences.
6.
( )
There will be no change in the budget line. Let us understand this with the price of goods 1 rises from Rs.4 to Rs.8 and that of goods 2 rises from Rs.5 to Rs.10. Income also rises from Rs.20 to Rs.40. With double increase in prices and income, intercepts on both X-axis and Y-axis will remain unchanged at 5 units (goods 1) and 4 units (goods 2) respectively. Slope of budget line will also remain the same. Therefore, there will be no change in the budget set and the budget line.
7.
( )
If price of good 2 (shown on y-axis) decreases, consumer can buy more pieces/quantity of good 2. The budget line AB will pivot at B and rotate upwards to A1B.
8.
( )
If consumer's income increases to Rs.40, the consumer can buy more pieces/quantities of both the goods X and Y. There will be parallel rightward shift in the budget line AB to A1 to B1.
9.
( )
Budget equation is given as: Px-X + Py.Y = M y
Let good 1 be X and good 2 be Y Putting the values, we get,
(6).(6) + (8).(8) = 36 + 64 = Rs.100
10.
( )
Budget line is downward sloping because if a consumer wants to buy more of one commodity, he has to buy less of other goods, given money income.
11.
( )
Budget line is a graphical representation which shows all the possible combinations of the two goods that a consumer can buy with the given income and prices of commodities. It is also called consumption possibility line.
12.
( )
Budget set is the collection of all bundles of' goods that a consumer can buy with his income at the prevailing market prices.
13.
Let Px = Py = Rs.10
Money Income = 40
(i) Bundles available to consumer are: (0,0), (0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4, 0).
(ii) (0,4), (1,3), (2,2), (3,1) and (4,0) cost exactly Rs.40. All the other bundles cost less than Rs.40.
14.
(i) Let the two quantities of goods be X and Y. We are given Px = Rs 4, Py = Rs.5, Consumer's income (M) = Rs.20.
Budget line equation is,
Px .X + Py .Y= M or = 4X + 5Y= 20
(ii) If quantity consumed of good Y = 0, Budget equation becomes,
Px.X + zero = M = 4.X = 20 = X = 20/4 = 5 units
(iii) If quantity consumed of good X = 0, Budget equation becomes,
Zero + Py .Y = M
or = 5Y = 20 = Y = 20/5 = 4 units.
(iv) Slope of budget line = Px/Py
=4/5 = 0.8
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