2nd PUC Economics Question Bank Chapter 2 Theory of Consumer Behaviour

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Karnataka 2nd PUC Economics Question Bank Chapter 2 Theory of Consumer Behaviour

2nd PUC Economics Theory of Consumer Behaviour One Mark Questions and Answers

Question 1.
What is Utility?
Answer:
Utility refers to the want-satisfying power of a commodity or a service.

Question 2.
Who introduced the Law of Diminishing Marginal Utility?
Answer:
The German Economist Prof. Gossen introduced the Law of DMU and Prof. Alfred Marshall popularized it.

Question 3.
Define an indifference curve.
Answer:
Indifference curve shows the different combinations of two products from which the consumer gets equal satisfaction.

Question 4.
Define Budget set.
Answer:
It is collection of all bundles of products available to a consumer at the existing market price . at a given level of income.

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Question 5.
Define Budget Line.
Answer:
It is locus of different combinations of the two goods which the consumer consumes and whose price exactly equals his income.

Question 6.
What do you mean by monotonic preferences? .
Answer:
When a rational consumer always prefers more of the product which gives him higher level of satisfaction, it is called Monotonic Preferences.

Question 7.
What is MRS?
Answer:
MRS means that as the amount of a commodity with the consumer goes on increasing he is prepared to exchange the other commodity for equal units of the commodity whose amount increasing.

Question 8.
What is an Indifference map?
Answer:
It is a group of Indifference curves for two commodities showing different levels of satisfaction.

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Question 9.
Why is MRS always diminishing?
Answer:
If the consumer wants to get additional unit of one product, he has to give up another product to be in same level of satisfaction. Here, when the consumer sacrifices lesser and lesser units of other commodity, the substitution between two goods will be decreasing and hence the MRS diminishes. 4 .

Question 10.
What is Price Ratio?
Answer:
Price ratio refers to the price of the product on the X axis divided by the price of the product on Y axis. PR = Px/Py.

Question 11.
What is Initial Utility? .
Answer:
It refers to.the utility that, is derived by consuming the first unit of a commodity.

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2nd PUC Economics Theory of Consumer Behaviour Two Marks Questions and Answers

Question 1.
Differentiate “total utility’ and ‘marginal utility’.
Answer:

Total Utility Marginal Utility
(i)It is the aggregate utility derived by the consumer by consuming all the units. (i)It is the additional utility derived by the consumer by consuming an additional unit
(ii)It represents utility of all the units consumed. (ii)It represents the utility of single unit.
(iii)It may be symbolically written as TU=U1+U2+U3+U4………..Un. (iii)It may be written as MU=TUn – TUn-1

Question 2.
What is the difference between Utility and satisfaction?
Answer:

Utility Satisfaction
(i)Utility is measured before consumption. (i)It is measured after consumption of a product.
(ii)It is the expected satisfaction. (ii)It is the realized satisfaction.
(iii)It is the want satisfying power of a product. (iii)It is the psychological feeling from the consumption of a product.

Question 3.
What is ‘Cardinal method’ of utility analysis?
Answer:
When the utility is measured in meters, liters, kilograms, temperature etc., it is called cardinal method of measuring
utility. According to this, utility is measured in terms of numbers like 1,2,3,4,5…… and soon.

Question 4.
Mention any four features of utility.
Answer:

  1. Utility is different from satisfaction.
  2. Utility is not usefulness always.
  3. Utility does not speak about moral principles.
  4. Utility is subjective.

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Question 5.
What are the properties of a budget line?
Answer:

  1. The Budget line slopes downwards from left to right
  2. The bundle of goods whose price is equal to consumer’s income lie on the budget line.
  3. The bundle of goods whose price is less than consumer’s income lie below budget line.
  4. The bundle of goods whose price is more than consumer’s income lie above the budget line.

Question 6.
Write any two limitations of the law of Diminishing Marginal Utility.
Answer:

  1. The Law of DMU is not applicable to money.
  2. It does not apply to rare collections like ancient coins, stamps, etc.
  3. If the consumer is irrational, the law of DMU does not apply.

Question 7.
Can an indifference curve be concave to the origin? Why? .
Answer:
An Indifference Curve cannot be concave to the origin. If an IC is concave, the Marginal Rate of Substitution will be increasing. This is unrealistic. The MRS must always diminish. Such a situation is achieved only when the IC is convex to the origin and not concave.

Question 8.
Find two differences between Budget Line and Budget Set.
Answer:

Budget Line Budget Set
1. It is a locus of different combinations of the two goods which the consumer consumes and whose price is equal to his income. 1. It is a collection of all bundles available to a consumer at the existing price at a given level of income.
2. It is also known as Price line. 2. It is also known as opportunity set

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Question 9.
Why is an IC downward sloping from left to right?
Answer:
IC is negatively sloped. This is because for the consumer to get the same level of satisfaction, the quantity of one
product must decrease when the other is increased.

Question 10.
What does it mean if an IC has a bulge?
Answer:
The bulge in IC shows that the Marginal rate of substitution is not diminishing consistently. Here the consumer is irrational and behaving erratically.

Question 11.
When does a consumer attain equilibrium in IC analysis?
Answer:
The consumer attains equilibrium in IC analysis when the Budget Line is tangent to the Indifference Curve. At the tangential point, the Budget line and the Indifference curve have exactly the same slope. Here, the MRS of Product X and Y are equal to the price ratio of two goods.

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Question 12.
Graphically represent the Equilibrium of consumer through IC analysis.
Answer:
2nd PUC Economics Question Bank Chapter 2 Theory of Consumer Behaviour - 1

2nd PUC Economics Introduction to Micro Economics Five Marks Questions and Answers

Question 1.
What are the differences between cardinal and ordinal approaches to utility analysis?
Answer:

Cardinal Approach Ordinal Approach
1. According to this approach utility can be measured and compared 1. According to this approach, utility is cannot be measured but can be compared.
2. This approach was developed by Alfred Marshall. 2. This approach was developed by JR Hicks, RGD Allen.
3. It measures the utility like liters, meters, kgs., temperatures etc. 3. It provides rankings to the utility obtained by the consumer.
4. It is a traditional approach. 4. It is a modem approach
5. The satisfaction is expressed in ‘utils’ 5. It only indicates preference of the consumer

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Question 2.
Distinguish between Total Utility and Marginal Utility with the help of an example.
Answer:

Total Utility

Marginal Utility

1. It is the aggregate utility derived by the consumer by consuming all the units. 1. It is the additional utility derived by the consumer by consuming one additional unit.
2. It represents utility of all the units consumed. 2. It represents the utility of a single unit.
3. For example if a consumer consumes 4 mangoes, his total utility will be TU=U1+U2+U3+U4. 3. If a consumer get 15 utils from 3 mangoes and 20 from 4 mangoes, his MU will be 20 -15=5 utils
4. The total utility does not decrease. 4. It diminishes with increase in consumption of products.
5. It does not become negative. 5. Marginal Utility may become negative.
6. The initial total utility is low. 6. The initial Marginal utility is high.
7. It can be expressed as TUx= MUx 7. It can be expressed as MUn=TUn-TUn

Question 3.
Explain the concepts of ‘budget line’ and ‘budget set’ with an example.
Answer:
Budget Set: Budget set is the collection of products that the consumer can buy with his income at the prevailing market prices. It is also known as opportunity set. It includes all the bundles (all possible combinations of two goods) which the consumer can purchase with his given level of income.

Budget Line: Budget line is the graphical representation of all possible combinations Of two goods which cost exactly equal to the income of consumer. It is a locus of different combinations of two goods which the consumer consumes and whose price exactly equals consumer’s income.

The concepts of Budget Set and Budget Line can be explained with this illustration. Suppose a consumer has Rs.40. He spends this on two commodities Mango and Banana. The possible options of spending Rs.40 are given in the form of table as follows. Let us assume that the Price of Mango is Rs.8 each and Banana is Rs.4 each.

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In the above diagram, Mangoes are measured along X axis, and Bananas are measured along Y axis. At Point A, the consumer is spending his entire income on Mangoes and at Point F he buys on ly bananas: Between A and F, there are other options like B, C, D, E. By joining these points we get a straight line AF which represents the consumer’s possible purchasing options in spending his entire income of Rs.40 on these two goods at the given prices.

Features or properties of Budget Line:

  • The Budget line PQ slopes downwards from left to right indicating that more one product is purchased by reducing the other product.
  • The combination of products which are equal to consumer’s income lie on Budget line.
  • The combination whose price is less than consumer’s income lie below the Budget line. They show under spending.
  • The combination of goods whose price is more, lie above the Budget line. These options are not affordable prices to the consumer.

Slope of Budget Line: The slope of a curve is calculated as a change in the variable on the vertical or Y axis divided by change in the variable on the horizontal or X axis.

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Question 4.
Explain any five properties of indifference curves.
Answer:
1. Higher Indifference Curves represent higher levels of satisfaction:
In the diagram, the indifference curve IC2 lies above and to the right of the Indifference curve IC1. Since IC2 is the higher indifference Curve, it shows higher satisfaction. Like wise IC3 lies above IC2.

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2. ICs must slope from left downward to the right:

Indifference curves must slope down from left to the right, ie., they must have a negative slope. Our assumption that the consumer would like to have more of both goods helps in proving this. As we move from left to the right on an IC, it means more of the commodity represented on the X axis. With every increase in the amount of one commodity, the consumer becomes better off.

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3. Indifference curves do not intersect:

The indifference curves can never meet or intersect so that only one indifference curve can pass through any one point in the indifference map. In Other words, one combination of goods can lie only on one IC. In the diagram given below, two indifference curves IC, and IC2 intersect each other at E. Since points C and E lie on the same indifference curve IC„ the consumer is indifferent between them. But both are giving him different levels of satisfaction which is not possible if he is in same difference curve.

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If the two ICs intersect, the same IC show different level of satisfaction.In the above
diagram ‘A’ and ‘B’ are representing two levels of satisfaction which is absurd, similarly incase of IC2 also.

4. Indifference Curves are convex to the origin:

The MRS between two goods diminishes as we move from left down to the right along the IC as shown below. Points P and Q lie on indifference curve IC. As we move from P to Q, there is an increase of commodity A but a corresponding lessening of commodity B. That means MRS goes on diminishing along the IC. So IC should be convex to the origin.

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5. The IC cannot be a vertical or a horizontal line:

If IC is vertical or horizontal, it means that the consumer consumes by changing only one commodity without altering the consumption of other commodity. This cannot be true as the consumer is changing consumption of both the commodities to get maximum satisfaction.

If it is vertical, product x remains the same and if it is horizontal, product y remains the same. But this cannot lead to substitution.

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2nd PUC Economics Theory of Consumer Behaviour Ten Marks Questions and Answers

Question 1.
Explain the law of diminishing marginal utility with a schedule and diagram. ‘
Answer:
One of the most important propositions of the cardinal utility approach to demand was the Law of Diminishing Marginal Utility. German Economist Gossen was the first to explain it. Therefore, it is called Gossen’s First Law.

Definition:
According to Alfred Marshall, “The additional benefit which a person derives from a given increase of a stock of a thing diminishes, other things being equal, with every increase in the stock that he already has”.
This law simply tells us that, we obtain less and less utility from the successive units of a * commodity as we consume more and more of it.

Assumptions of the Law of DMU :

  • Uniform quality and size of the commodity: The Successive units of the commodity should not differ in any way either in quality or size.
  • Suitable quantity of consumption: The commodity units should not be very small; e.g. Milk should be in glasses and not in spoons.
  • Consumption within the same time: Consumption must be continuous. There should not be too much time difference between the consumption of successive units.
  • No change in the mental condition of the consumer during consumption: The consumer should not feel any change in his mental condition due to the consumption of the commodity.
  • No change in fashion or taste: The law applies only When consumer’s taste for it remains the same.
  • No change in the price of the commodity or its substitutes: The law is based on the assumption that the commodity’s price does not change for successive units. The price of the substitutes is also to be kept at the same level.
  • Utility can be measured in cardinal numbers i.e., 1,2, 3, 4,
  • Consumer must be rational, i.e., every consumer wants to maximize his satisfaction.

Explanation of Law of Diminishing Marginal Utility:
The basis of this law is that every want of us needs to be satisfied only upto a limit. After this limit is reached the intensity of our want becomes zero. It is called complete satisfaction of the want. Therefore, as we consume more and more units of a commodity to satisfy our need, the intensity of our want for it becomes less and less. Therefore, the utility obtained from the consumption of every additional unit of the commodity is less than that of the units consumed earlier. This can be explained with the help of the following table. TU-Total Utility ,MU-Marginal Utility.

Apples TU MU
1 30 30
2 50 20
3 65 15
4 75 10
5 80 5
6 82 2
7 82 0
8 80 -2

Suppose a man wants to consume apples and is hungry. In this condition, if he gets one apple, he has maximum utility for it. Let us say that the measurement of this utility is equal to 30 units. Having eaten the first he will not remain that hungry as before. Therefore, if he consumes the second apple he will have a lesser amount of utility from it even if it was exactly like the first one. The utility he gets from the second apple equals 20 units, the third, fourth, fifth and sixth apples give him utilities equal to 15,10, 5 and 2 units respectively.’ Now, if he is given the seventh apple he has no use for it. That means the utility of the seventh apple to the consumer is zero. It is just possible that if he is given the eighth apple for consumption,’ it may be detrimental. Here the utility Will be negative ie., -2. Therefore, we are clear that the additional utility of the successive apples to the consumer goes on diminishing as he consumes more and more of it.

The Law of Diminishing Marginal Utility can be explained with the help of the following diagram.

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In the diagram the horizontal axis shows the units of apples and the vertical axis measures the MU and TU obtained from the apple units. The total utility Curve will be increasing in the beginning and later falls. The Marginal Utility curve is falling from left down to the right clearly tells us that the satisfaction derived from the successive consumption of apples is falling.

The Marginal Utility of the first apple is known as initial utility. It is 30 utils. The Marginal utility of the seventh apple is Zero. Therefore, this point is called the satiety point. The Marginal Utility of the eighth apple is -2. So, it is called Negative utility and lies below the X axis.

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Question 2.
Explain the indifference curve and indifference map with the help of schedule and diagrams.
Answer:
An Indifference Curve is the locus of all those points representing various combinations of two goods giving the same satisfaction to the Consumer.

According A.L.Meyers, “An Indifference curve is a schedule of various combinations of goods which will be equally satisfactory to the consumer concerned.”

Indifference Schedule:
An Indifference Schedule is a table representing the various combinations of goods which give equal satisfaction to the consumer. The following table shows the indifference schedule of combinations of Biscuits and cups of Tea for a consumer

Combinations Cups of Tea Biscuits
A 1 12
B 2 8
C 3 5
D 4 3
E 5 2

In the above table it is assumed that consumer is purchasing combination of cups of tea and biscuits. He is indifferent between the five combinations given above. Combination A shows that the consumer has one cup of tea and 50 biscuits, while combination B shows that the consumer gets two cups of tea and 8 biscuits. The consumer is indifferent between these combinations since they give him the same level of satisfaction. Similar is the case with the other combinations i.e., C, D and E.
Indifference curve : It shows the different commodities in which consumers get equal satisfaction.

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In the above diagram, IC is an Indifference curve. The different points on it show the various combinations of Tea and Biscuits. The consumer likes all of them equally. He is indifferent about his choice. By joining these points we obtain the IC. Although in the successive combinations the amount of biscuits goes on diminishing as we move from the left side of the IC to the right, the increase in the quantity of cups of tea is sufficient to compensate him for the loss of biscuits so that the consumer is indifferent about them.

Indifference curve shows the different combinations of two commodities in which consumers get equal satisfaction, indifference Map: It refers to a set of indifference curves for two commodities showing different levels of satisfaction. The higher indifference curves show higher level of satisfaction and lower IC. represents lower satisfaction. A rational consumer always chooses more of that product that offers him a higher satisfaction and represent in higher IC. It is also called ‘Monotonic preferences’.

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In the above diagram IC4 gives higher level of satisfaction and the IC1 gives lowest level of satisfaction.

Question 3.
Explain the consumer’s equilibrium through indifference curve analysis.
Answer:
A consumer tries to achieve maximum satisfaction with his limited Budget. Now to know his equilibrium i.e., maximum satisfaction, we have to combine ICs with the Budget line. Assumptions of Consumer Equilibrium:

  •  Income of consumer remains constant.
  • Consumer behaves rationally and he tries to get maximum satisfaction from his limited income.
  • Prices of commodities remain constant.
  • Consumer is aware of the indifference map.
  • All goods are homogeneous and divisible.
  • The condition of transitivity is satisfied i.e., if combination A >B, and B>C, then A>C.
  • The condition of non-satiety holds good. The consumer either prefers one of the products or both the products equally.

The consumer is said to be in equilibrium when his budget line is tangent to the Indifference curve. This can be explained with the help of the following diagram.

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In the above diagram, PQ is budget line. IC1, IC2, and IC3 are Indifference curves. At point ‘E’, the budget line is tangent to Indifference curve IC2,.

The consumer has attained his optimal choice at point E where he buys OM quantity of product x and ON quantity of product y within his budget to get maximum satisfaction. If he selects point below E, he is wasting his money income and the combinations above this are point are not possible as his income is not sufficient. At Point E, the Budget line and IC2 tangent. This can be expressed as follows:

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That means the willingness to substitute is equivalent to the ability to pay. So, a consumer is said to be in equilibrium if his budget line is tangent to IC or when the MRS is equal to the price ratio of the-two goods, PQ is the budget line.

The points other than E are not equilibrium points. For instance, Points A and D are not equilibrium points of consumer as they lie above the budget line. The points B and C lie in IC1, which gives him lower satisfaction for the same budget. Hence, the consumer attains equilibrium only at point E.

Question 4.
Explain the properties of indifference curve.
Answer:
1. Higher Indifference Curves represent higher levels of satisfaction:
In the diagram, the indifference curve IC2 lies above and to the right of the Indifference curve IC1. Since IC2 is the higher indifference Curve, it shows higher satisfaction. Like wise IC3 lies above IC2.

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2. ICs must slope from left downward to the right:
Indifference curves must slope down from left to the right, ie., they must have a negative slope. Our assumption that the consumer would like to have more of both goods helps in proving this. As we move from left to the right on an IC, it means more of the commodity represented on the X axis. With every increase in the amount of one commodity, the . consumer becomes better off.

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3. Indifference curves do not intersect: The indifference curves can never meet or intersect so that only one indifference curve can pass through any one point in the indifference map. In other words, one combination of goods can lie only on one IC. In the diagram given below, two indifference curves IC1, and IC2, intersect each other at E. Since points C and E lie on the same indifference curve IC2, the consumer is indifferent between them. But both are giving him different levels of satisfaction which is not possible if he is in same indifference curve.

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If the two ICs intersect, the same IC show different level of satisfaction. In the above diagram ‘A’ and ‘B’ are representing two levels of satisfaction which is absurd, similarly incase of IC2, also.

4. Indifference Curves are convex to the origin: The MRS between two goods diminishes as we move from left down to the right along the IC as shown below. Points P and Q lie on indifference curve IC. As we move from P to Q, there is an increase of commodity A but a corresponding lessening of commodity B. That means MRS goes on diminishing along the IC. So IC should be convex to the origin.

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5. The IC cannot be a vertical or a horizontal line: If IC is vertical or horizontal, it means that the consumer consumes by changing only one commodity without altering the consumption of other commodity. This cannot be true as the consumer is changing consumption of both the commodities to get maximum satisfaction.

If it is vertical, product x remains the same and if it is horizontal, product y remains the same. But this cannot lead to substitution.

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6. IC cannot be a downward sloping straight line: A straight line IC shows perfect substitutes on the X and Y axis; therefore, the MRS remains the same in spite of the fact that the stock of one good continues to increase and that of the other diminishes.

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7. An IC cannot be concave to the origin: An IC cannot be concave. If it is concave, it shows increasing marginal rate of substitution which is not possible in case of IC analysis.

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8. IC cannot be positively sloped: If IC slopes upwards -positively, it means that the consumer prefers more units of both the commodities, which is not possible.

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9. If the IC, are parallel, the marginal rate of substitution diminishes at the same rate. Bay, this is not true.

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10. The ICs do not touch the horizontal or the Vertical axes: Indifference curves have the basic assumption that the consumer purchases combinations of different commodities. Therefore, he is not supposed to purchase only one commodity because in that case the IC will touch one axis. Purchasing only one commodity means monomania i.e., consumer’s lack of interest in the other commodity.

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11. An IC cannot have a bulge: The bulge in IC shows that the Marginal rate of substitution is
not diminishing consistently. Here the consumer is irrational and behaving erratically.

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