Consumer's Equilibrium and Demand

Download CBSE Class 12th Standard CBSE undefined question papers, sample papers, important questions, and previous year solved papers in PDF format. Get free study materials, NCERT solutions, and exam preparation resources for Class 12th Standard CBSE undefined

Questions:

Multiple Choice Question

5 x 1 = 5

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

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

(a)

cardinal

(b)

ordinal

(c)

both cardinal and ordinal

(d)

None of the above

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

(a)

Marginal Utility

(b)

Total Utility

(c)

Average Utility

(d)

Both (a) and (c)

Law of Diminishing Marginal Utility assumes the Marginal Utility of money to be .........

(a)

increasing

(b)

decreasing

(c)

constant

(d)

None of these

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

Generic 3

3 x 3 = 9

Explain the conditions of consumer's equilibrium under utility analysis

Calculate Total Utility from the following Marginal Utility schedule:

Units consumed	0	1	2	3	4	5	6	7
Marginal Utility	-	10	8	6	4	2	0	-2

Explain the Law of Diminishing Marginal Utility with the help of Total Utility schedule

Generic 5

2 x 5 = 10

Explain the concept of Marginal Rate of Substitution (MRS) by giving an example. What happens to MRS when consumer moves downward along the Indifference Curve?

10.

Explain the three properties of the Indifference Curves

Fill up / 1 Marks

7 x 1 = 7

11.

A good may be an inferior good for one consumer and normal for another consumer. Defend or refute.

12.

A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds that the ratio of marginal utility of price in case of X is higher than in case of Y. Explain the reaction of the consumer

13.

What happens to the budget set if both the prices as well as the income doubled?

14.

State the conditions for consumer's equilibrium given by the utility approach (in case of one and two commodities).

15.

What is meant by consumer's equilibrium?

16.

What happens to TU when MU is negative?

17.

What happens to TU when MU is positive?

Generic 4

3 x 4 = 12

18.

A consumer consumes only two goods X and Y.At a consumption level of these two goods, he finds that the ratio of marginal utility to price in case of X is higher than in case of Y. Explain the reaction of the consumer through utility analysis.

19.

A consumer consumes only two goods. Explain its equilibrium with the help of utility approach.

20.

A consumer consumes only two goods X and Y. Explain the conditions of consumer's equilibrium with the help of utility analysis.

Generic 6

4 x 6 = 24

21.

Show diaglammatically the conditions for consumer's equilibrium, in Hicksian analysis of demand.

22.

A consumer consumes only two goods X and Y whose prices are Rs.4 and Rs.5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Use utility analysis.

23.

How does a consumer reach equilibrium in case of two commodities under the cardinal utility theory?

24.

Given the market price of good, how <foes a consumer decide as to how many units of that good to buy? Explain.

Visit QB365-SLMS - https://www.qb365.in/slms/

Answers Key:

Multiple Choice Question

5 x 1 = 5

(a)
Strictly preferred bundle

(a)
Marginal Utility

(d)
When Marginal Utility becomes negative

Generic 3

3 x 3 = 9

Conditions of consumer's equilibrium using utility approach are as follows:
(i) In case of a single commodity:
\({MU_X\over P_X}=MU_M\)
or MU_X=P_X
(ii)In case of two commodities:
\({MU_X\over P_X}={MU_Y\over P_Y}=MU_M\)
or MU_X=MU_Y [When MU_M=1 P_X=P_Y=1]
Where,
MU_X=Marginal Utility of commodity X
MU_Y=Marginal Utility of Commodity Y
P_X=Price of Commodity X
P_Y=Price of Commodity Y
MU_M=Marginal Utility of money

Units consumed	0	1	2	3	4	5	6	7
Marginal Utility(MU)	-	10	8	6	4	2	0	-2
Total Utility	0	10	18	24	28	30	30	28

Law of diminishing marginal utility states that as a consumer consumes more and more of a commodity, the marginal utility obtained from an additional unit of it goes on diminishing, other things remaining the same.The following utility schedule and diagram illustrates the law:

Units consumed	Marginal Utility (Utils)
1	10
2	8
3	6
4	4
5	2

The schedule and diagram show that as the consumer consumes more and more units of a commodity, the marginal utility derived goes on diminishing.

Generic 5

2 x 5 = 10

Marginal Rate of Substitution: MRS of X for Y refers to the number of units of good Y that the consumer is willing to forego for an additional unit of good X, so as to maintain the same level of satisfaction
\(MRS={\Delta Y\over \Delta X}\)
The concept of MRS can be understood with the help of following table:

Combinations	Units X (Shirts)	Units of Y (Trousers)	MRS_XY
A	1	20	-
B	2	16	4Y:1X
C	3	13	3Y:X
D	4	11	2Y:1X
E	5	10	1Y:1X

At combination A, consumer has 1unit of shirt and 20 trousers which represents that MUof shirts is higher than that of trousers due to which consumer becomes willing to sacrifice 4 trousers in order to gain one shirt when he moves from A to B. Assoon as consumer sacrifices trousers to gain shirt, his MU for trousers increases and hence he becomes ready to sacrifice lesser trousers (3) in order to gain one more shirt when he moves from combination B to combination C.
Hence with changes in relative MU for shirts and trousers, MRS keeps on falling with every increase in quality of shirts.

10.

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.

Fill up / 1 Marks

7 x 1 = 7

11.

Yes it is right. A good may be inferior for a higher income person and the same good may be a superior good for a low income person

12.

()
The consumer will increase the consumption of good-X and will decrease the consumption of good-Y

13.

()
The budget set remains same.

14.

()
The conditions for consumer's equilibrium given by the utility approach are:
(i) In case ofa single commodity, MU_x= P_x' MU,↓, with increase in quantity.
(ii) In case of two commodities,
MU_x _ MU_y
(a) \({MU_x\over P_x}={MU_Y\over P_y}\)
(b) MU of a good falls as more of it is consumed.

15.

()
Consumer's equilibrium may be defined as a situation under which a consumer gets maximum level of satisfaction, within his given money income and given market prices of commodities and has no desire to change from that situation.

16.

()
TU starts falling when MU is negative.

17.

TU is maximum and constant when MU is zero

Generic 4

3 x 4 = 12

18.

A consumer will be in equilibrium when ratio of marginal utility of a commodity (x) to its price becomes equal to the ratio of marginal utility of the other commodity (y) to its price.
Condition for consumer equilibrium is \({MU_X\over P_x}={MU_X\over P_Y}\)
If price of x falls then \({MU_X\over P_x}\)becomes greater \({MU_Y\over P_Y}i.e, {MU_X\over P}>{MU_Y\over PY}\)consumer will buy more of quantity X because X becomes cheaper in relation to Y.He will continue substituting X for Y. The Consumption of X rises while that of Y falls. As a result MU_x falls and MU_y rises. This will continue. till the point \(MU_X\over P_X\) becomes equal to \(MU_Y\over P_Y\)

19.

Consumer's equilibrium in case of two commodities x and y is attained when the ratio pf the marginal utilities of two goods and their prices is equal,
\(i.e., ={MU_X\over P_X}={MU_Y\over P_Y}\)
To attain consumer's equilibrium, two essential conditions to be met with:
(i) Marginal Utility of the last rupee of expenditure on each of the good is the same.
(ii) Marginal Utility of a good falls as more of it consumed.
The consumer's equilibrium condition on the basis of the above two conditions to be met with is:
\(i.e., ={MU_X\over P_X}={MU_Y\over P_Y}=MU\) of last rupee spent on each good.

20.

Generic 6

4 x 6 = 24

21.

As per the Hicksian analysis, the given consumer attains equilibrium when the two conditions are fulfilled.
(i) MRS = MRE = P_X/P_Y
Slope of Indifference curve = Slope of the Budget line
(ii) MRSfallsas more is consumed of one good at the cost of another.
Showing the condition of equilibrium diagrammatically.
The given budget line AB is tangential to the indifference curve I₂ at point X in the given diagram.This is the consumers equilibrium.The utility maximizing combination of the two goods is OQ of good

22.

Given that the Px = Rs.4, Py = Rs.5 and MUx = 5, MUy = 4.
The given consumer will be in equilibrium
when, \({MU_X\over P_X}={MU_Y\over P_Y}\)
Now substituting the given values, we find
that \({MU_X\over P_X}>{MU_Y\over P_Y}\ or\ {5\over4}>{4\over5}\)
Since per rupee MUx is higher than per rupee MUy, the consumer is not in equilibrium.The given consumer will buy more of X and less of Y. As a result, MU_x will fall and MU_y will rise. The reaction will continue till \({MU_X\over P_X}\) and \({MU_Y\over P_Y}\)are equal and the given consumer will be in equilibrium again.

23.

Under the utility approach, a consumer attains equilibrium in case of two commodities when the consumer spends his income in such a way that the ratio of the marginal utility of a commodity to its price is equal to the ratio of the marginal utility of the other commodity to its price. Mathematically, the condition is expressed as:
(i)\({MU_X\over P_X}={MU_Y\over P_Y}\)
(ii)MU should decrease with increase in consumption.
Example: Suppose a consumer's income is Rs.30 which he wants to spend on two goods X and Y. The price of each unit of X and Y is Rs.4 and Rs.2. Marginal utility schedule of X and Y is given as

		Where P_X=Rs.4given	where P_Y=Rs.2 given
Units	MU_X	MU_X/P_X	MU_Y	MU_Y/P_Y
1	80	80/4=20	40	40/2=20
2	72	72/4=18	38	38/2=19
3	64	64/4=16	36	36/2=18
4	56	56/4=14	34	34/2=17
5	48	48/4=12	32	32/2=16
6	40	40/4=10	30	30/2=15
7	32	32/4=8	28	28/2=14
8	24	24/4=6	26	26/2=13
9	16	16/4=4	24	24=/2=12
10	8	8/4=2	22	22/2=11

Note: (Schedule given is for understanding purpose only.)
It is evident from the table that in order to have maximum utility, consumer will purchase 4 units of X and 7 units of Y because this combination of goods satisfies the following two conditions:
At 4 units of \(X={MU_X\over P_X}={56\over4}=14\)
At 7 units of \(Y={MU_Y\over P_Y}={28\over 2}=14\)
\({MU_X\over P_X}={MU_Y\over P_Y}\)
Further, Expenditure on X + Expenditure on Y = TotalIncome
P_x . Q_x + P_y.Q_y = M
4 X 4 + 2 X 7 = ~ 30

24.

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.