Test: Theory Of Consumer Behaviour - 4

MU is addition to TU when an MU becomes -ive TU falls.

First rises till MU is positive, then reaches its maximum when MU=0,then starts falling when MU becomes negitive.

TU,   First rises till MU is positive, then reaches its maximum when MU=0,then starts falling when MU becomes negitive.

slope of price line is given by ratio of the prices of two goods, i.e. Px/Py, which is constant.

Which of the following is not true?

Indifference curves cannot intersect each other

Two indifference curve can be tangent to each other

Indifference curves are convex to the origin

Indifference curves slopes downward to the right

Explanation:

The indifference curves cannot intersect each other. It is because at the point of tangency, the higher curve will give as much as of the two commodities as is given by the lower indifference curve. This is absurd and impossible.

Approch is for an individual consumer, market has nothing to do with it.

The theory of consumer's surplus is based on the law of diminishing marginal utility. The law of diminishing marginal utility claims that as you consumer more of a commodity, the marginal utility derived from it decreases eventually.a

The correct option is D.

Total utility refers to the total satisfaction obtained from the consumption of all  possible units of a commodity. Marginal utility is the additional utility derived from the consumption of one more unit of the given commodity. MU=TUn-TUn-1.So when TU is increasing at an increases this means utility derived from each unit is increasing. This means marginal utility is increasing. 

Saturation Point: The point where the desire to consume the same product anymore becomes zero.

hence additional consumption will not give any satisfaction to consumer,MU = 0

MU is the rate of change of TU.

When the MU decreases, TU increases at decreasing rate.

When MU becomes zero, TU is maximum. It is a saturation point.

When MU becomes negative, TU declines

The ordinal utility theory or the indifference curve analysis is based on four main assumptions.

Rational behavior of the consumer.

Utility is ordinal.

Diminishing marginal rate of substitution.

Consistency in choice. 

At point of tagency MRE=MRS.

Consumer substitutes one good for other along IC in order to keep satisfaction level constant.

The law of diminishing marginal utility states that marginal utility declines as consumption increases. Because demand price depends on the marginal utilityobtained from a good, price also declines as consumption increases, meaning price and quantity demanded are inversely related, which is the law of demand.

An indifference curve is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an indifference curveindicates that a consumer is indifferent between the two and all points give him the same utility.

flatter the curve more the elasticity,steeper the curve less the elasticity.

No. elasticity of demand will me more on a flatter curve than on the steeper curve because since price elasticity of demand = %change in /% change in price and hence in the flatter demand curve the change in price will be lesser which will mean that the change in Quantity will be divided by a smaller number.

Demand for medicine is in-elastic as it falls in category of a necessity good.

price elasticity of demand = % change in quantity demanded / % change in price,

which tends to infinity in case of horizontal demand curve

It is only option of non-necessity/mandatory good among given options.

The slope of a demand curve is ∆P/∆Q. If the price falls, we write -∆P/∆Q or if price rises demand falls, we write ∆P/∆Q.

An inferior good is a type of good for which demand declines as the level of income increases.

Substitute goods are those goods that can satisfy the same necessity, they can be used for the same end.

A leftward shift in the demand curve indicates a decrease in demand because consumers are purchasing fewer products for the same price.

Movements along a demand curve happen only when the price of the good changes.