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Published on: 24/07/2019
Theory of Consumer Behaviour
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1.
Explain the causes of a leftward shift in the demand curve of a commodity.
2.
Distinguish between
(i) Individual demand and market demand
(ii) 'Change in demand' and 'Change in quantity demanded'
3.
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, identify those, which cost her exactly Rs.40.
4.
Explain the indifference map.
5.
Describe the assumptions of indifference curve.
6.
Describe the properties of indifference curve.
7.
Suppose your friend is indifferent to the bundles (5,6), and (6,6). are the preferences of your friend monotonic?
8.
Suppose a consumer's preferences are monotonic. What can you say about her preference ranking over the bundles(10,10), (10,9), and (9,9)?
9.
If a consumer has monotonic preferences, can she be indifferent between the bundles (10,8) and (8,6)?
10.
What do you mean by 'monotonic preferences'?
11.
Write the formula to measure price elasticity on a given demand curve.
12.
What happens to TU when MU is negative?
13.
State the shape of Marginal Utility curve?
14.
How is Marginal Utility derived from Total Utility?
15.
How are TU and MU related to each other?
16.
What is Total Utility?
17.
Explain the conditions of consumer's equilibrium under utility analysis.
18.
Explain the meaning of diminishing Marginal Rate of Substitution with the help of a numerical example.
19.
Utility is ___________________.
20.
Utility is ____________.
21.
Total Utility is maximum when Marginal Utility is _______________.
22.
Want satisfying power of a good is called __________________.
23.
Utility depends upon intensity of wants.
24.
Utility is objective.
25.
Budget line is also called income line.
26.
MU may never be positive.
27.
MU may never be negative.
28.
Price elasticity of demand is 0.5 and the percentage change in price is 4. What will be the percentage change in quantity demanded?
6
2
8
4
29.
With the increase in price, total expenditure increases and with the fall in price, total expenditure also falls.What will be the elasticity of demand?
Unitary
More than one
Less than one
Zero
30.
What is the slope of indifference curve?
\({ P }_{ X }-{ P }_{ Y }\)
\({ MRS }_{ XY }\)
\({ MRS }_{ XY }-{ P }_{ X }\)
\(\frac { { P }_{ X } }{ { P }_{ Y } } \)
31.
Slope of budget line is:
\(\frac { { P }_{ X } }{ { P }_{ Y } } \)
\({ P }_{ X }-{ P }_{ Y }\)
\({ P }_{ X }+{ P }_{ Y }\)
\({ MRS }_{ XY }\)
32.
Getting maximum satisfaction by consumer with his given income is known as_______.
Consumer behaviour
Consumer's equilibrium
Exchange of goods and services
None of these
1.
Following are the causes of a leftward shift in the demand curve:
(i) Decrease in the Prices of Substitute Goods: Substitute goods are those goods which can be used in place of one another, such as tea and coffee, or ballpoint pen and ink pen. If X and Y are substitutes then a decrease in the price ofY will decrease the demand for the X as latter is relatively expensive now. The consumer will substitute Y for X, and the demand curve for X shifts to the left.
(ii) Increase in the Prices of Complementary Goods: Complementary goods are those goods which are always consumed together to satisfy a particular need or wartt. If goods X and Yare complements, an increase in the price ofY contracts its demand, and thus, decreases, the demand for X. The demand curve for X shifts to the left.
(iii) Fall in Income: With a fall in income, the consumer is capable of buying less. Thus, a fall in income decreases the demand for normal goods at a given price, and the demand curve shifts to the left.
(iv) Negative Change in Hobbies: Tastes and preferences of consumer also affect the demand for a good. With the negative changes in hobbies, the consumer's demand for a good decreases, which shifts the demand curve towards the left.
2.
(i) Individual demand is the quantity of a good that a consumer is willing and able to purchase at any given price during a specified period of time. Market demand, on the other hand, is the total deman for a good in the market at a given price. Market demand is obtained by summing the quantities demanded by all the individuals in the market at a given price.
(ii) Change in demand takes place due to changes in factors other than price such as income of the consumer, price of related goods, consumer's income, taste, etc. Change in demand due to other factors is represented by a rightward or leftward shift of the demand curve. The quantity demanded of a good depends upon its own price. The change in quantity demanded is shown by an upward or downward movement along a given demand curve.
3.
(i) The bundles that are available to the consumer are as under:
(a) (0, 0), (0, 1), (0, 2), (0, 3), (0, 4)
(b) (1, 0), (1, 1), (1, 2), (1, 3)
(c) (2, 0), (2, 1), (2, 2)
(d) (3,0), (3, 1)
(e) (4,0)
(ii) Following bundles cost exactly Rs.40 to the consumer:
(a) (0\(\times\)10) + (4\(\times\)10) = Rs.40
(b) (1\(\times\)10) + (3\(\times\)10) = Rs.40
(c) (2\(\times\)10) + (2\(\times\)10) = Rs.40
(d) (3\(\times\)10) + (1\(\times\)10) = Rs.40
(e) (4\(\times\)10) + (0\(\times\)10) = Rs.40
4.
The indifference map is graph which represents a group of indifference curves, each of them representing a given level of satisfaction.
5.
Following are the main assumptions of indifference curve analysis:
(i) The consumer is rational as he wants to maximize his satisfaction with his limited income.
(ii) The consumer consumes only two commodities.
(iii) There is ordinal measurement of utility, that is, utility is expressed in ranks.
(iv) There is diminishing Marginal Rate of Substitution.
(v) There is non-satiety of the consumer.
(vi) The consumer is consistent and transitive in selection.
6.
Following are the properties of indifference curve:
(i) Indifference curve slopes downwards from the left to right
(ii) Indifference curve is convex to the origin.
(iii) Two indifference curves never intersect each other.
(iv) Higher indifference curve represents a higher level of satisfaction.
(v) Indifference curves need not be parallel to each other.
7.
Consumer preferences are said to be monotonic if he or she chooses a bundle, which gives more of either both the goods or at least one good without reducing the quantity of the other.Since the individual is indifferent to the bundles (5,6) and (6,6), his preferences are not monotonic.As a monotonic consumer, he should prefer (6,6) to (5,6).
8.
A consumer with monotonic preferences would rank the bundles as under:
| Bundle | Rank |
| (10,10) | I |
| (10,9) | II |
| (9,9) | III |
As the consumer’s preferences are monotonic, more is better and he/she will prefer bundle I over the rest of the bundles. This means that bundle I will be assigned a higher utility number i.e., three (rank = three) out of the available three bundles.
9.
No, he/she cannot be indifferent towards these two bundles as bundle I consists of more of both goods as compared to bundle II. He/she will prefer bundle I over bundle II as it contains 10 units of good 1 and 8 units of good 2 as compared to 8 units and 6 units of good 1 and good 2 respectively in bundle II.
10.
It means that the consumer prefers a particular bundle over the other bundle if the former consists of at least more of one good and no less of the other good.
Example:
If bundle A(3, 5) and bundle B(3, 2) are available to the consumer, then he/she will prefer bundle A over bundle B as bundle A consists of more units of good 2 than bundle B.
11.
( )
The formula to measure price elasticity on a given demand curve is:
\({ E }_{ D }=\frac { Lower \ Segment \ of \ the \ DemandCurve }{ Upper \ Segment \ of \ the \ DemandCurve }\)
12.
( )
TU starts falling when MU is negative.
13.
( )
Marginal utility curve slopes downwards from left to right.
14.
( )
Marginal Utility can be derived from Total Utility as:
\(M{ U }_{ n }=TU_{ n }-TU_{ n-1 }\)
15.
( )
The relationship between TU and MU is as below:
(i) Total Utility is the summation of Marginal Utility derived from each unit, that is, \(TU=\Sigma MU\)
(ii) TU increases so long as MU is positive.
(iii) When MU is zero, TU is maximum.
(iv) When MU is negative, TU starts decreasing.
16.
( )
Total Utility is the total psychological satisfaction derived by a consumer from the consumption of total units of a good. \(T{ U }_{ n }=M{ U }_{ 1 }+M{ U }_{ 2 }+M{ U }_{ 3 }+.....{ MU }_{ n }=\Sigma MU\)
17.
The consumer is in equilibrium when he or she maximises his or her satisfaction given the income and the market prices.
Conditions of Consumer's Equilibrium:
(i) The single commodity equilibrium condition states that a consumer is in,equilibrium and derives maximum satisfaction when Marginal Utility of a commodity is equal to its price. This condition of consumer equilibrium can ~e represented with the help of the following equation:
MUX = PX
(ii) When a consumer consumes two commodities (X and Y), his or her equilibrium is determined in accordance with the law of equi-Marginal Utility. The law states that a consumer ismaximising his or her satisfaction from goods X and Y when a rupee worth of Marginal Utility is the same for each good. According to the law, the consumer's equilibrium condition will be:
\(\frac { { MU }_{ X } }{ { P }_{ X } } =\frac { { MU }_{ Y } }{ { P }_{ Y } } ={ \quad MU }_{ M }\)
18.
The Marginal Rate of Substitution (MRS) measures the rate at which the consumer is just willing to substitute one good for the other, maintaining the same level of satisfaction. It is the slope of the indifference curve. When a consumer gets an additional unit of one good and gives up some units of the other goods, his or her satisfaction remains the same. In this case,the utility gained is equal to the utility lost. As the amount consumed of good I increases, the Marginal Rate of Substitution between good I and good 2 diminishes. This is the law of Diminishing Marginal Rate of Substitution. According to Prof. Bilas,"The Marginal Rate of Substitution of X for Y (MRSxy) is defined as the amount of Y, the consumer is just willing to give up to get one more unit of X and maintains the, same level of satisfaction."The Marginal Rate of Substitution can be explained with the help of the following schedule:
| Bundles | Apples | Bananas | Marginal Rate of Substitution |
| A | 1 | 8 | - |
| B | 2 | 5 | 1 : 3 |
| C | 3 | 3 | 1 : 2 |
| D | 4 | 2 | 1 : 2 |
The schedule indicates that the consumer gives up 3 bananas for getting the 2nd apple, 2 bananas for getting the 3rd apple and I banana for getting the 4th apple. This shows that the Marginal Rate of Substitution of apples for bananas goes on diminishing as more and more apples are substituted for bananas.
19.
( )
relative
20.
( )
subjective
21.
( )
zero
22.
( )
utility
23.
(a)
24.
(b)
25.
(a)
26.
(b)
27.
(b)
28.
(b)
2
29.
(c)
Less than one
30.
(b)
\({ MRS }_{ XY }\)
31.
(a)
\(\frac { { P }_{ X } }{ { P }_{ Y } } \)
32.
(b)
Consumer's equilibrium
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