Test: Theory Of Consumer Behaviour- 2

# Test: Theory Of Consumer Behaviour- 2

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## 30 Questions MCQ Test Business Economics for CA Foundation | Test: Theory Of Consumer Behaviour- 2

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Test: Theory Of Consumer Behaviour- 2 - Question 1

### Total utility derived form the consumption of a commodity is equal to Rs. 5. Marginal utility is equal to 1 and consumer has bought 3 units. What will be his consumer surplus?

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 1 To calculate the consumer surplus, we need to first find the total expenditure on the commodity and then subtract it from the total utility derived from the consumption of the commodity. Let's break this down step by step: 1. Total utility: Given as Rs. 5. 2. Marginal utility: Given as 1. 3. Number of units consumed: Given as 3. 4. Total expenditure: Since the marginal utility is constant, we can calculate the total expenditure by multiplying the marginal utility by the number of units consumed. - Total expenditure = Marginal utility × Number of units consumed - Total expenditure = 1 × 3 - Total expenditure = Rs. 3 5. Consumer surplus: We can now calculate the consumer surplus by subtracting the total expenditure from the total utility. - Consumer surplus = Total utility - Total expenditure - Consumer surplus = Rs. 5 - Rs. 3 - Consumer surplus = Rs. 2 So, the consumer surplus is Rs. 2 (Option A).
Test: Theory Of Consumer Behaviour- 2 - Question 2

### A higher indifference curve shows

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 2

A higher level of satisfaction

Explanation:

• An indifference curve is a graphical representation of different combinations of goods or services that provide the consumer with the same level of satisfaction or utility.
• Higher indifference curves represent higher levels of satisfaction or utility for the consumer.
• As we move along the indifference curve, the consumer is willing to trade-off between the goods or services without any change in the overall level of satisfaction.
• A higher indifference curve means that the consumer prefers the combinations of goods or services on this curve over those on lower indifference curves.
Test: Theory Of Consumer Behaviour- 2 - Question 3

### The price line or budget line of a consumer is

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 3

Answer: C (Straight line joining the two axes)

Explanation:

The budget line, also known as the price line or consumer budget constraint, is a straight line that represents the different combinations of two goods that a consumer can purchase while fully utilizing their income. The budget line is determined by the following factors:

- The prices of the two goods
- The consumer's income

The budget line can be represented by the following equation:

Income = (Price of Good X × Quantity of Good X) + (Price of Good Y × Quantity of Good Y)

The budget line has the following characteristics:

1. Straight line: As the equation suggests, the budget line is a linear function, meaning it is a straight line joining the two axes on a graph.

2. Intercepts: The budget line intersects both the x-axis and the y-axis. The intercepts represent the maximum quantities of the two goods the consumer can purchase if they spend their entire income on one good.

3. Slope: The slope of the budget line represents the relative prices of the two goods. It is calculated as the ratio of the price of Good Y to the price of Good X. The slope is negative, indicating that the consumer has to give up some units of Good Y to purchase additional units of Good X, and vice versa.

4. Shifts: Changes in the consumer's income or the prices of the goods can cause the budget line to shift. An increase in income will shift the budget line outward (away from the origin), while a decrease will shift it inward. Changes in the prices of the goods will cause the slope of the budget line to change, reflecting the new relative prices.

Test: Theory Of Consumer Behaviour- 2 - Question 4

Marginal utility is a ______ Concept

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 4 Marginal Utility: A Cardinal Concept

Marginal utility is a cardinal concept for the following reasons:

• Quantifiable Measurement: Marginal utility can be measured in numerical terms. It deals with the change in satisfaction derived from consuming an additional unit of a good or service, which can be expressed in cardinal or absolute numbers.
• Diminishing Marginal Utility: According to the law of diminishing marginal utility, the additional satisfaction derived from consuming successive units of a good or service decreases. This decrease can be measured and compared using cardinal numbers.
• Consumer Decision Making: Marginal utility is a crucial concept in understanding consumer behavior and decision making. Consumers are assumed to maximize their utility by allocating their resources to the goods and services that provide the highest marginal utility per unit cost. This decision-making process is based on cardinal utility measurements.

In summary, marginal utility is a cardinal concept because it involves a quantifiable measurement of satisfaction that can be expressed in numerical terms, which is essential in understanding and analyzing consumer behavior and decision making.

Test: Theory Of Consumer Behaviour- 2 - Question 5

On which approach, indifference curve analysis is based?

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 5 Indifference curve analysis is based on the ordinal approach. Ordinal approach: - The ordinal approach assumes that consumers can rank their preferences for different goods and services. - It does not require the measurement of utility in numerical terms but focuses on the order of preferences. - Indifference curve analysis is a graphical representation of the ordinal approach. - In this analysis, consumers are assumed to have a set of preferences, and they can choose between different combinations of goods to maximize their satisfaction level. Indifference curves: - An indifference curve represents all the combinations of two goods that provide the same level of satisfaction to a consumer. - The consumer is indifferent between any two points on the same indifference curve because they provide the same level of satisfaction. - Indifference curves are usually downward sloping, convex to the origin, and cannot intersect each other. Key features of indifference curve analysis: - Indifference curve analysis is based on the ordinal approach, which focuses on the ranking of preferences rather than assigning numerical values to the utility derived from consuming goods or services. - It is a powerful analytical tool for understanding consumer behavior and the choices they make in maximizing their satisfaction. - Indifference curve analysis can be used to study the effects of changes in prices, income, and other factors on consumer preferences and their consumption patterns.
Test: Theory Of Consumer Behaviour- 2 - Question 6

The law of equi marginal utility is one of the laws within whose parameters Marginal Utility Analysis is framed. The other one is:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 6

Law of Diminishing Marginal Utility

• The Law of Diminishing Marginal Utility states that as a consumer consumes additional units of a good or service, the satisfaction (utility) gained from each additional unit decreases.
• It is based on the concept that the total utility increases at a decreasing rate with the consumption of more units of a commodity, eventually reaching a maximum point.
• This law plays an essential role in understanding consumer behavior and helps determine the equilibrium point for a consumer in deciding the quantity to be consumed.
• It also helps to explain the downward-sloping demand curve, as the marginal utility of a good decreases as its quantity increases, leading to a decline in the consumer's willingness to pay for additional units.

In summary, the Law of Equi Marginal Utility and the Law of Diminishing Marginal Utility are two fundamental principles within the Marginal Utility Analysis framework, which helps explain consumer behavior and decision-making processes related to the consumption of goods and services.

Test: Theory Of Consumer Behaviour- 2 - Question 7

A consumer buys two commodities X and Y, he should be in equilibrium when:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 7 Answer: A A consumer will be in equilibrium when: 1. Marginal Rate of Substitution (MRS) is equal to the price ratio of the two commodities: - MRS is the rate at which a consumer is willing to exchange one good for another without changing their level of satisfaction. - When the MRS between two goods X and Y is equal to the ratio of their prices (Px/Py), the consumer maximizes their satisfaction given their budget constraint. 2. The consumer's budget line is tangent to their indifference curve: - An indifference curve represents all the combinations of two goods that provide the same level of satisfaction to the consumer. - A budget line represents all the combinations of two goods that the consumer can afford given their income and the prices of the goods. - When the budget line is tangent to an indifference curve, it means the consumer cannot achieve a higher level of satisfaction within their budget constraint. 3. The consumer's income is fully utilized in purchasing the two commodities: - In equilibrium, the consumer spends their entire income on the combination of goods X and Y that maximizes their satisfaction. - If the consumer's income is not fully utilized, it means they could potentially purchase more of one or both goods to increase their level of satisfaction. In summary, a consumer is in equilibrium when their MRS between the two commodities is equal to the price ratio of the commodities, their budget line is tangent to their indifference curve, and their income is fully utilized in purchasing the two commodities.
Test: Theory Of Consumer Behaviour- 2 - Question 8

In the case of complimentary goods the shape of indifference curve will be

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 8

Explanation:

• Complementary goods are those goods which are consumed together, in fixed proportions, to satisfy a particular want or need. For example, left and right shoes, or a car and its tires.

• Indifference curves represent different combinations of two goods that provide the same level of satisfaction or utility to a consumer.

• In the case of complementary goods, the consumer does not derive any additional satisfaction from consuming more of one good without consuming more of the other good. This means that the consumer is indifferent between different combinations of the two goods only when they are in fixed proportions.

• As a result, the indifference curve for complementary goods takes an L-shape. This is because the consumer will only be willing to trade off one good for the other good at a fixed ratio, and the indifference curve will have a sharp corner (the "L" shape) at that point.

• Convex indifference curves (option A) represent substitutes, where the consumer is willing to trade off one good for the other in varying proportions. Straight-line indifference curves (option B) represent perfect substitutes, where the consumer is willing to trade off one good for the other at a constant rate. Circular indifference curves (option D) are not a realistic representation of consumer preferences, as they would imply infinite satisfaction levels at certain points.
Test: Theory Of Consumer Behaviour- 2 - Question 9

Total utility derived from then consumption of a commodity is equal to Rs. 5, marginal utility is equal to 1 and consumer has bought 3 units. What will be his consumer surplus?

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 9 Consumer Surplus Calculation: - Total Utility (TU): Rs. 5 - Marginal Utility (MU): 1 - Units purchased: 3 Steps to calculate consumer surplus: 1. Calculate the total expenditure: Multiply the marginal utility (MU) by the number of units purchased. - Total Expenditure = MU * Units purchased - Total Expenditure = 1 * 3 - Total Expenditure = Rs. 3 2. Calculate the consumer surplus: Subtract the total expenditure from the total utility (TU). - Consumer Surplus = TU - Total Expenditure - Consumer Surplus = 5 - 3 - Consumer Surplus = Rs. 2 The consumer surplus is Rs. 2.
Test: Theory Of Consumer Behaviour- 2 - Question 10

When two goods are perfect complementary, the indifference curve is:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 10 Indifference Curve for Perfect Complementary Goods: - Answer: C. L-shaped Explanation: - Perfect complementary goods are goods that are consumed together in fixed proportions, meaning that the consumer will only derive satisfaction from consuming both goods together. - Examples of perfect complementary goods include left and right shoes, or a pen and ink. - In the case of perfect complementary goods, the consumer's satisfaction (utility) remains constant as long as the fixed proportion is maintained. - An indifference curve represents different combinations of two goods that give the same level of satisfaction or utility to the consumer. - For perfect complementary goods, the indifference curve is L-shaped because: - The consumer derives no additional satisfaction from consuming more of one good without consuming more of the other good in the fixed proportion. - Thus, the consumer is indifferent between any combination of the two goods that maintain the fixed proportion, resulting in an L-shaped curve. - The L-shape of the indifference curve for perfect complementary goods indicates that the consumer will only consume more of one good if the other good is also consumed in the fixed proportion, reflecting the nature of perfect complementary goods.
Test: Theory Of Consumer Behaviour- 2 - Question 11

Total utility starts decreasing when ______.

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 11 Answer: B. Marginal utility becomes negative. Total utility starts decreasing when marginal utility becomes negative. To understand this, let's break it down: - Utility: Utility is a measure of the satisfaction or happiness a consumer derives from consuming a good or service. - Total Utility: Total utility is the total amount of satisfaction derived from the consumption of all units of a good or service. - Marginal Utility: Marginal utility is the additional satisfaction derived from consuming one more unit of a good or service. Now, let's discuss the relationship between total utility and marginal utility: 1. When marginal utility is positive: - The consumption of an additional unit of the good or service provides the consumer with additional satisfaction. - Total utility increases as the number of consumed units increases. 2. When marginal utility becomes zero: - The consumption of an additional unit of the good or service provides no additional satisfaction to the consumer. - Total utility remains constant, as the additional unit does not contribute to the overall satisfaction. 3. When marginal utility becomes negative: - The consumption of an additional unit of the good or service reduces the consumer's overall satisfaction. - Total utility starts decreasing, as the additional unit detracts from the overall satisfaction. In conclusion, total utility starts decreasing when marginal utility becomes negative, as consuming more units of the good or service results in a reduction of overall satisfaction.
Test: Theory Of Consumer Behaviour- 2 - Question 12

The substitution effect of fall in the price of the commodity will lead to:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 12 Explanation: The substitution effect of a fall in the price of a commodity refers to the change in the consumption pattern of a consumer due to the relative price change of the commodity, keeping the level of satisfaction or utility constant. When the price of a commodity falls, the following effects occur: 1. Substitution effect: The consumer substitutes the cheaper commodity for the relatively more expensive commodity. 2. Income effect: The consumer's purchasing power increases due to the fall in price, which may lead to an increase in the consumption of both goods. As a result of these effects, the consumer's consumption pattern changes, and they move to a higher indifference curve (IC), which represents a higher level of satisfaction or utility. Therefore, the correct answer is: C: Movement from lower IC to a higher one.
Test: Theory Of Consumer Behaviour- 2 - Question 13

A budget constraints line is a result of:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 13 Explanation: The budget constraint line is a result of all of the factors mentioned in the options. Let's break down each component and how it contributes to the formation of the budget constraint line: Market price of commodity X:
• The price of commodity X determines how much of it a consumer can purchase given their income and the price of other goods.
• If the price of commodity X increases, the consumer will be able to purchase less of it, and the budget constraint line will shift inwards.
• If the price of commodity X decreases, the consumer will be able to purchase more of it, and the budget constraint line will shift outwards.
Market price of commodity Y:
• Similarly, the price of commodity Y affects how much of it a consumer can purchase given their income and the price of other goods.
• If the price of commodity Y increases, the consumer will be able to purchase less of it, and the budget constraint line will shift inwards.
• If the price of commodity Y decreases, the consumer will be able to purchase more of it, and the budget constraint line will shift outwards.
Income of the consumer:
• Income is the amount of money a consumer has available to spend on goods and services.
• If the consumer's income increases, they will be able to purchase more of both commodities, and the budget constraint line will shift outwards.
• If the consumer's income decreases, they will be able to purchase less of both commodities, and the budget constraint line will shift inwards.
In summary, the budget constraint line is a result of the market prices of commodities X and Y, as well as the consumer's income. All of these factors affect the consumer's ability to purchase different combinations of the two commodities, which is represented by the budget constraint line.
Test: Theory Of Consumer Behaviour- 2 - Question 14

Indifference curve  analysis is based on:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 14 Indifference curve analysis is based on: B: Ordinal analysis Explanation: Indifference curve analysis is a crucial concept in microeconomics, particularly in understanding consumer choice and preferences. It is based on ordinal analysis, and here's why: - Ordinal utility: Indifference curve analysis is built on the notion of ordinal utility, which means that consumers can rank their preferences for goods and services in order (1st, 2nd, 3rd, etc.), but cannot measure the utility they derive from them in absolute terms (like 10 units, 20 units, etc.). This is different from cardinal analysis, which assumes that consumers can measure their utility in absolute terms. - Indifference curves: An indifference curve is a graphical representation of a consumer's preferences, showing all the combinations of two goods that provide the same level of satisfaction or utility to the consumer. The consumer is indifferent between any two points on the curve, as they provide the same level of utility. This concept relies on ordinal utility, as the consumer is only ranking their preferences and not assigning a specific value to the utility derived from each combination. - Marginal rate of substitution (MRS): Indifference curve analysis also considers the marginal rate of substitution, which is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of satisfaction. This concept is based on the ordinal measurement of utility, as it only requires the consumer to rank their preferences for different combinations of goods and not to assign specific utility values to them. In conclusion, indifference curve analysis is based on ordinal analysis, as it revolves around ordinal utility, indifference curves, and the marginal rate of substitution, all of which rely on the consumer's ability to rank their preferences rather than measuring utility in absolute terms.
Test: Theory Of Consumer Behaviour- 2 - Question 15

The convexity of indifference curve is due to:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 15 Answer: A. Declining marginal rate of substitution Explanation: The convexity of indifference curves is due to the declining marginal rate of substitution (MRS). This can be further explained through the following points: - Marginal Rate of Substitution (MRS): MRS is the rate at which a consumer is willing to give up one good in exchange for another good, while maintaining the same level of satisfaction or utility. In other words, it shows the trade-off between two goods that a consumer is willing to make. - Diminishing MRS: As a consumer consumes more of one good, the marginal utility of that good decreases, while the marginal utility of the other good increases. This is known as the law of diminishing marginal utility. Due to this, the consumer is willing to give up less of the second good to obtain more of the first good, resulting in a declining MRS. - Convexity of Indifference Curves: Indifference curves are convex to the origin because of the declining MRS. As a consumer moves along an indifference curve, they are willing to give up fewer units of the second good to obtain more of the first good, resulting in the curve's convex shape. In conclusion, the convexity of indifference curves is a result of the declining marginal rate of substitution, which is due to the law of diminishing marginal utility. This reflects the consumer's willingness to make trade-offs between two goods while maintaining the same level of satisfaction or utility.
Test: Theory Of Consumer Behaviour- 2 - Question 16

Indifference curves are

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 16

Indifference Curves: Convex to the Origin

• Indifference curves are graphical representations of a consumer's preferences over different combinations of goods.
• An indifference curve shows all the combinations of goods that provide the same level of satisfaction or utility to the consumer.
• Indifference curves are convex to the origin because of the principle of diminishing marginal rate of substitution (MRS).
• The MRS is the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility.
• As a consumer consumes more of one good and less of another, the marginal utility of the good being consumed decreases, while the marginal utility of the other good increases, leading to a decreasing MRS.
• Therefore, as the consumer moves along an indifference curve, they are willing to give up smaller and smaller amounts of the other good to gain additional units of the good being consumed, resulting in a convex shape to the origin.
Test: Theory Of Consumer Behaviour- 2 - Question 17

A book “The Nature and significance of Economic Science” is written by:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 17 Answer: B. Lionel Robbins Explanation:
• Lionel Robbins was a British economist and a prominent member of the London School of Economics.
• He wrote the book "The Nature and Significance of Economic Science" in 1932.
• This book is considered one of the most important works in the history of economic thought, as it provided a clear and precise definition of economics and its purpose.
• In the book, Robbins defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."
• This definition helped to distinguish economics from other social sciences and formed the basis for much of modern economic theory.
Test: Theory Of Consumer Behaviour- 2 - Question 18

Indifference curves never intersect each other due to:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 18

Indifference curves cannot intersect each other as it would break down the indifference curve analysis. This is because the consumer would have more than one point on the indifference curve giving him a different level of satisfaction.

Test: Theory Of Consumer Behaviour- 2 - Question 19

If total utility of a commodity is 5 and marginal utility is 1, a person consumes 3 units. What is the consumer surplus?

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 19 Explanation:
• Total utility (TU) is the overall satisfaction a consumer gets from consuming a certain number of units of a commodity.
• Marginal utility (MU) is the additional satisfaction a consumer gets from consuming one more unit of a commodity.
• Consumer surplus (CS) is the difference between the total utility and the actual amount a consumer spends on a commodity.
Calculating Consumer Surplus:
• Given total utility (TU) = 5
• Given marginal utility (MU) = 1
• Given quantity consumed = 3 units
• Total amount spent on the commodity = MU * Quantity consumed = 1 * 3 = 3
• Consumer surplus (CS) = TU - Total amount spent = 5 - 3 = 2
Hence, the consumer surplus is 2 (Option D).
Test: Theory Of Consumer Behaviour- 2 - Question 20

The law of equi marginal utility considers price of money as:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 20

Explanation of the Law of Equi-Marginal Utility:

• The law of equi-marginal utility is an economic concept that states that consumers allocate their income in such a way that the last unit of money spent on each good or service provides the same level of marginal utility.
• This law helps consumers maximize their satisfaction by allocating their income among different goods and services in the most efficient way.
• The key idea behind this law is that consumers should equate the marginal utility per unit of money spent on each good or service.

Price of Money in the Law of Equi-Marginal Utility:

• In the context of the law of equi-marginal utility, the price of money is considered to be one.
• This is because money is the medium of exchange and the unit of account for measuring the value of goods and services in an economy.
• When the price of money is one, it means that the marginal utility of money is constant, allowing consumers to allocate their income efficiently among different goods and services.
• As a result, the consumer can equate the marginal utility per unit of money spent on each good or service, maximizing their overall satisfaction.

In conclusion, the law of equi-marginal utility considers the price of money as one, allowing consumers to efficiently allocate their income among different goods and services to maximize their satisfaction.

Test: Theory Of Consumer Behaviour- 2 - Question 21

At equilibrium, the slope of the indifference curve is:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 21

At equilibrium, the consumer achieves the maximum possible satisfaction given their income and the prices of goods. In this situation, the following conditions are met: - The consumer's budget line represents the different combinations of goods they can afford given their income and the prices of goods. - The consumer's indifference curve represents the different combinations of goods that give them the same level of satisfaction.

At equilibrium:

- The slope of the indifference curve is equal to the slope of the budget line. This is because, at the point of equilibrium, the consumer has optimally allocated their income between the goods to maximize their satisfaction. Any change in the allocation would lead to a lower level of satisfaction. The slope of the indifference curve represents the marginal rate of substitution (MRS) between the goods, which is the rate at which the consumer is willing to trade one good for another to maintain the same level of satisfaction. The slope of the budget line represents the relative prices of the goods. When these slopes are equal, the consumer is optimally allocating their income between the goods to achieve maximum satisfaction. Therefore, the correct answer is: A: Equal to the slope of the budget line
Test: Theory Of Consumer Behaviour- 2 - Question 22

When two goods are perfect complementary, the indifference curve is:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 22 Explanation of the answer: Perfect complements are two goods that are consumed together in fixed proportions. An example of perfect complements is left and right shoes. The indifference curve for perfect complements is: L-shaped - The indifference curve for perfect complements has a right angle, forming an L shape. - This is because the consumer is only willing to consume these goods in fixed proportions. - Any increase in one good without an equal increase in the other would not lead to an increase in utility. - As a result, the consumer's utility remains constant along the L-shaped indifference curve.
Test: Theory Of Consumer Behaviour- 2 - Question 23

A consumer buys two commodities X and Y, he should be in equilibrium when:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 23

Explanation:

A consumer is said to be in equilibrium when they allocate their income in such a way that the utility derived from consuming different goods and services is maximized. To achieve this, the consumer should follow the principle of equi-marginal utility, which states that the ratio of the marginal utility (MU) of a good to its price (P) should be equal for all goods.

A: \$frac{MU_{x}}{P_{x}} = frac{MU_{y}}{P_{y}}\$

This condition implies that:

• The consumer is allocating their income in an optimal way, such that they are getting the maximum possible satisfaction from their purchases.
• Any further reallocation of income between goods X and Y would lead to a decrease in total utility.
• If the condition is not met, it means that the consumer can increase their total utility by reallocating their income between goods X and Y.

In summary, a consumer is in equilibrium when the ratio of marginal utility to price is equal for all goods they consume, ensuring that they maximize their total utility.

Test: Theory Of Consumer Behaviour- 2 - Question 24

Cardinal approach is related to:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 24 Cardinal Approach:

The cardinal approach, also known as the utility approach or the classical approach, is a method in economics that quantifies the satisfaction derived by consumers from consuming goods and services. This approach is based on the assumption that consumers can measure their preferences numerically in terms of "utils," a unit of measurement that represents the satisfaction gained from consuming a good or service.

Relation to the given options:

• Indifference curve: An indifference curve represents different combinations of goods that provide the same level of satisfaction to the consumer. The cardinal approach and indifference curve are related in the sense that both are used to analyze consumer preferences, but they are based on different assumptions. The cardinal approach assumes that utility can be measured numerically, while the indifference curve (ordinal approach) assumes that consumers can only rank their preferences.
• Equi-marginal utility: The equi-marginal utility principle states that consumers maximize their satisfaction by allocating their income in such a way that the last unit of money spent on each good yields the same marginal utility. This principle is directly related to the cardinal approach, as it is based on the idea of measurable utility and involves the comparison of marginal utilities to make consumption decisions.
• Law of diminishing returns: The law of diminishing returns states that as more units of a variable input are added to a fixed input, the marginal product of the variable input eventually decreases. While this concept is related to the overall idea of diminishing utility, it is not directly related to the cardinal approach, as it mainly deals with production and not consumer satisfaction.
• None of these: This option is incorrect, as the cardinal approach is directly related to the equi-marginal utility principle.

B:

Equi-marginal utility

Test: Theory Of Consumer Behaviour- 2 - Question 25

Total utility derived from then consumption of a commodity is equal to Rs. 5, marginal utility is equal to 1 and consumer has bought 3 units. What will be his consumer surplus?

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 25 Explanation: To calculate the consumer surplus, we need to find out the total value of the commodity to the consumer and then subtract the total expenditure on the commodity. Let's break it down step by step: 1. Total Utility (TU): Given in the question as Rs. 5. 2. Marginal Utility (MU): Given in the question as 1. This means that the consumer derives an additional utility of 1 for each additional unit consumed. 3. Units Consumed: Given in the question as 3 units. 4. Total Expenditure: Since MU is the additional utility derived from each additional unit, and it is constant at 1, we can assume that the price of each unit is Rs. 1 (as the consumer is willing to pay Rs. 1 for each additional unit). Therefore, the total expenditure on 3 units would be Rs. 3 (3 units * Rs. 1 per unit). 5. Consumer Surplus (CS): The consumer surplus is the difference between the total utility derived from the consumption of the commodity and the total expenditure on the commodity. In this case, the consumer surplus is: CS = TU - Total Expenditure CS = Rs. 5 - Rs. 3 CS = Rs. 2 So, the consumer surplus in this case is Rs. 2 (Option A).
Test: Theory Of Consumer Behaviour- 2 - Question 26

Incase of a right angled indifference curve the goods are:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 26 Answer: A. Perfect complements Explanation: - Right-angled indifference curve: It is a type of indifference curve that forms a right angle or L-shape. This indicates that the consumer prefers consuming goods in fixed proportions, meaning the consumer will not substitute one good for another. - Perfect complements: These are goods that are consumed together in fixed proportions. The utility derived from one good directly depends on the consumption of the other good. Examples include left and right shoes, or a pen and ink. - Reason for the answer: In the case of a right-angled indifference curve, since the goods are consumed together in fixed proportions, they exhibit the characteristics of perfect complements. Other types of goods mentioned in the options: - Perfect substitutes: These are goods that can be completely substituted for each other without affecting the utility derived by the consumer. In this case, the indifference curve would be a straight line with a constant slope. - Inferior goods: These are goods for which demand decreases as a consumer's income increases. This has no direct relation to the shape of the indifference curve. - Giffen goods: These are a specific type of inferior goods, where demand increases as the price of the good increases. This is a rare phenomenon and also has no direct relation to the shape of the indifference curve.
Test: Theory Of Consumer Behaviour- 2 - Question 27

The substitution effect of fall in the price of the commodity will lead to:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 27

Explanation:

The substitution effect of a fall in the price of a commodity leads to a movement from a lower indifference curve (IC) to a higher one because:

• Change in relative prices: When the price of a commodity falls, its relative price (price ratio) compared to other goods also changes. Consumers now find it cheaper to consume the good in question, and they tend to substitute it for other relatively more expensive goods.

• Change in consumption pattern: As consumers substitute the cheaper good for other goods, their consumption pattern changes. They consume more of the good with the lower price and less of the other goods. This change in consumption results in a new equilibrium at a higher indifference curve, as the consumer can now achieve a higher level of satisfaction with the same level of income.

• Movement along the budget line: Due to the change in the consumption pattern, consumers move along the budget line to reach a new equilibrium point. This new point corresponds to a higher indifference curve, indicating an increased level of satisfaction and utility derived from the new consumption bundle.

In conclusion, the substitution effect of a fall in the price of a commodity leads to a movement from a lower IC to a higher one, as consumers adjust their consumption pattern to maximize their utility given the new price levels.

Test: Theory Of Consumer Behaviour- 2 - Question 28

The price line or budget line of a consumer is

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 28 Answer: C. Straight line joining the two axes Explanation: The budget line (also known as the price line) represents the combinations of two goods that a consumer can afford given their income and the prices of the goods. The budget line has the following characteristics: - It is a straight line because the relative prices of the two goods are assumed to be constant. - It has a negative slope, which indicates that the consumer must give up some of one good to gain more of the other good, due to their limited income. - The budget line intersects both axes, representing the maximum amount of each good the consumer can afford if they spend their entire income on only that good. Some key points about the budget line: 1. Intercepts: The points where the budget line intersects the axes represent the maximum quantity of each good the consumer can afford if they spend their entire income on one good. 2. Slope: The slope of the budget line is equal to the negative of the relative price of the goods (the ratio of the price of one good to the price of the other). This means that the slope represents the opportunity cost of consuming one good instead of the other. 3. Shifts: Changes in income or the prices of the goods will cause the budget line to shift. An increase in income will shift the budget line outward, while a decrease in income will shift it inward. Changes in the prices of the goods will cause the slope of the budget line to change, reflecting the new opportunity cost of consuming one good instead of the other. In conclusion, the budget line is a straight line joining the two axes, which represents the various combinations of two goods that a consumer can afford given their income and the prices of the goods.
Test: Theory Of Consumer Behaviour- 2 - Question 29

A higher indifference curve shows

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 29

A higher indifference curve shows

A higher level of satisfaction

An indifference curve represents a combination of goods or services that a consumer considers equally desirable or satisfying. A higher indifference curve indicates that the consumer has reached a higher level of satisfaction with their chosen combination of goods or services. This can be explained through the following points:
• Preference: Indifference curves are used to illustrate a consumer's preferences. A higher indifference curve implies that the consumer prefers the combination of goods or services on that curve over those on a lower curve.
• Utility: Utility is a measure of the satisfaction a consumer derives from consuming goods or services. A higher indifference curve corresponds to a higher level of utility, indicating that the consumer is more satisfied with the goods or services on that curve.
• Non-satiation: The principle of non-satiation assumes that consumers always prefer more of a good or service to less, assuming all else remains constant. Therefore, a higher indifference curve represents a higher level of overall satisfaction, as the consumer has more of one or both goods or services.
• Marginal rate of substitution: The slope of an indifference curve represents the marginal rate of substitution (MRS) between two goods or services. A higher indifference curve suggests that the consumer is willing to give up less of one good or service to obtain more of the other, indicating a higher level of satisfaction.
It is important to note that a higher indifference curve does not necessarily imply a higher level of production or income, as these factors may be unrelated to the consumer's preferences and satisfaction levels.
Test: Theory Of Consumer Behaviour- 2 - Question 30

Total utility is maximum when:

Detailed Solution for Test: Theory Of Consumer Behaviour- 2 - Question 30 Total utility is maximum when:
• Marginal utility is Zero
Explanation:
• Total utility refers to the total satisfaction or benefit derived from consuming a good or service.
• Marginal utility is the additional satisfaction or benefit gained from consuming one more unit of a good or service.
• As a consumer consumes more units of a good, the marginal utility of that good eventually decreases.
• This concept is known as the Law of Diminishing Marginal Utility.
• When the marginal utility of a good becomes zero, it means that consuming one more unit of the good will not provide any additional satisfaction or benefit to the consumer.
• At this point, the total utility derived from the good is at its maximum, as consuming more units will not increase the consumer's satisfaction.

## Business Economics for CA Foundation

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## Business Economics for CA Foundation

66 videos|108 docs|67 tests