MORE QUESTIONS SOLVED

What do you mean by the budget set of a consumer?
Or
Define Budget Set. [CBSE 2011, 13] [1 Mark]
Answer: Budget set is the collection of all bundles of goods that a consumer can buy with his income at the prevailing market prices.

I. Very Short Answer Type Questions (1 Mark)
Question 1. Define utility. [CBSE 2005C, 06C, AI 06]
Answer: Utility is the power or capacity of a commodity to satisfy human wants.
Question 2. Define total utility.
Answer: Total utility is the sum of all the utilities derived from consumption of all the units of a particular commodity.
Question 3. How much is total utility at zero level of consumption?
Answer: Zero.
Question 4. How is total utility deriveds from marginal utility?
Answer: TU = MU1 + MU2 + MU3 +————- +
Question 5. Define marginal utility. [AI 2006, Foreign 2006]
Answer: Marginal utility is the additional utility derived from consumption of an additional unit of a commodity.
Question 6. What is consumer’s equilibrium? [Foreign 2006, CBSE 2009C, AI 2013C]
Answer: Consumer’s equilibrium refers to a situation where a consumer gets the maximum satisfaction out of his given money income and given market price.
Question 7. What is meant by MU of one rupee?
Answer: MU of one rupee refers to the utility obtained from purchase of commodities with one rupee.
Question 8. Define indifference curve. [AI 2013, 2014, 2015]
Answer: Indifference curve refers to the graphical representation of various combinations of the two goods that provide the same level of satisfaction to a consumer.
Question 9. Define indifference map? [CBSE 2013C, AI 2015]
Answer: A set of indifference curves is called indifference map.
Question 10. Define marginal rate of substitution.
Answer: MRS is the rate at which a consumer is willing to give up one commodity for an extra unit of other commodity without affecting his total satisfaction.
Question 11. Why are indifference curves always convex to the origin?
Answer: Indifference curves are always convex to the origin because of the diminishing marginal rate of substitution.
Question 12. Why does an indifference curve slope downwards?
Answer: An Indifference curve slopes downwards because increase in units of one good requires decrease in the number of units of the other good to maintain the same level of satisfaction.
Question 13. Give equation of Budget Line. [CBSE 2015]
Answer: P1X1 + P2X2 = M.
Question 14. Give equation of Budget Set. [CBSE 2015]
Answer: P1X1 + P2X2 < />
Question 15. Define Budget Set. [CBSE 2015]
Answer: It is the collection of all bundles of pieces of goods that a consumer can buy with his income at the prevailing market prices.
Question 16. Define Budget Line. [AI 2015]
Answer: Budget line is a graphical representation which shows all the possible combinations of the two goods that a consumer can buy with the given income and prices of commodities.
II. Multiple Choice Questions (1 Mark)
Question 1. Total utility is maximum when
(a) Marginal utility is zero.
(b) Marginal utility is at its highest point.
(c) Marginal utility is equal to average utility.
(d) Average utility is maximum.
Answer: (a)
Question 2. Which of the shaded area in the diagrams below represent total utility? [CBSE Sample Paper 2014]

Answer: (c)
Question 3. What does the area under the marginal utility curve depict? [CBSE Sample Paper 2014]
(a) Average Utility
(b) Total Utility
(c) Indifference Curve
(d) Consumer Equilibrium
Answer: (b)
Question 4. Which one of the following is not an assumption of the theory of demand based on analysis of indifference curve?
(a) Given scale of preferences as between different combinations of two goods.
(b) Diminishing marginal rate of substitution.
(c) Constant marginal utility of money.
(d) Consumers would always prefer more of a particular piece of goods to less of it, other things remaining the same.
Answer: (c)
Question 5. The consumer is in equilibrium at a point where the budget line—
(a) Is above an indifference curve.
(b) Is below an indifference curve.
(c) Is tangent to an indifference curve.
(d) Cuts an indifference curve.
Answer: (c)
Question 6. An indifference curve slopes down towards right since more of one commodity and less of another result in—
(a) Same satisfaction.
(b) Greater satisfaction.
(c) Maximum satisfaction.
(d) Decreasing expenditure.
Answer: (a)
Question 7. The second glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of
(a) Law of demand.
(b) Law of diminishing returns.
(c) Law of diminishing utility.
(d) Law of supply.
Answer: (c)
Question 8. The consumer is in equilibrium when the following condition is satisfied:
(a)
(b)
(c)
(d)None of these.
Answer: (c)
Question 9. Which of the following options is a property of an indifference curve?
(a) It is convex to the origin.
(b) The marginal rate of substitution is constant as you move along an indifference curve.
(c) Marginal utility is constant as you move along an indifference curve.
(d) Total utility is the greatest where the 45 degrees line cuts the indifference curve.
Answer: (a)
Question 10. When economists speak of the utility of a certain good, they are referring to-
(a) The demand for the good.
(b) The usefulness of the good in consumption.
(c) The satisfaction gained from consuming the good.
(d) The rate at which consumers are willing to exchange one unit of good for an other one.
Answer: (c)
Question 11. Budget set is—
(a) Right angled triangle formed by the budget line with the axes.
(b) All points on the budget line.
(c) Points inside the budget line.
(d) Points on Y-axis from where budget line starts and the point on X-axis where budget line ends.
Answer: (a)
Question 12. If indifference curve is straight line downward sloping,
(a) MRS is increasing
(b) MRS is decreasing
(c) MRS is constant
(d) MRS is zero
Answer: (c)
Question 13. If X and Y are two commodities, indifference curve shows—
(a) X and Y are equally preferred
(b) Y is preferred to X
(c) X is preferred to Y
(d) None of these.
Answer: (a)
Question 14. If Marginal Rate of Substitution is constant throughout, the Indifference curve will be: [CBSE 2015]
(a) Parallel to the x-axis.
(b) Downward sloping concave.
(c) Downward sloping convex.
(d) Downward sloping straight line.
Answer: (d)
Question 15. If Marginal Rate of Substitution
is increasing throughout, the Indifference curve will be: [AI 2015]
(a) Downward sloping convex.
(b) Downward’ sloping concave.
(c) Downward sloping straight line.
(d) Upward sloping convex.
Answer:(b)
Question 16. Which of the can be referred to as ‘point of satiety’?
(a) Marginal Utility is negative
(b) Marginal utility is zero
(c) Total Utility is rising
(d) Total Utility is falling
[CBSE Sample Paper 2016]
Answer: (b)
III. Short Answer Type Questions (3-4 Marks)
Note: Questions 1, 2 and 3 have same figure.
Question 1. Explain with diagram, the relationship between TU and MU. [CBSE Foreign 2011]
Answer:
When MU decreases, TU increases at a diminishing rate. (As shown in figure till consumption level OQ).
When MU is zero, TU is constant and maximum at P.
When MU is negative, TU starts diminishing.
Question 2. How many chocolates will a consumer have, if they are available free of cost?
Answer: In case of free chocolates, consumer will carry on the consumption till his total utility is maximum. It means,till the additional chocolates gives positive satisfaction, consumer will keep on having chocolates. Let us understand this with the help of the figure shown in Question 1. Consumer will stop the consumption at the point of satiety (Point ‘Q’), i.e., where marginal utility is equal to zero.
Question 3. “Total Utility remains the same, whether Marginal Utility is positive or negative”. Defend or refute.
Answer: The given statement is refuted. When Marginal Utility is positive till point Q as shown in figure of Question 1, then total Utility increases at a diminishing rate and when Marginal Utility is negative after point Q, total Utility decreases.
Question 4. State with reasons if the following statements are true or false:
At a grand family get-together party you go on eating and eating since you have not to pay.
As we consume more units of a commodity, our total utility from its consumption keeps falling.
Answer:
False: For free goods, a consumer will limit his consumption of a commodity to a point where the point of full satisfaction is reached. Consumption beyond this point will only generate disutility.
False: As we consume more units of a commodity, it’s marginal utility keeps on diminishing. Total utility keeps on rising, but at a diminishing rate till marginal utility becomes zero.
Question 5. Explain the law of diminishing marginal utility with the help of a total utility schedule. [CBSE 2005C, 06C, 10, IOC, AI 2006, CBSE 13]
Answer: The law states that marginal utility derived from the consumption of a commodity declines as more units of that commodity are consumed.

It can be seen from the above schedule that total utility increases at a diminishing rate, which leads to fall in marginal utility.
Question 6. Derive MU Schedule from TU Schedule.

Answer:
Question 7. A person’s marginal utility schedule is given below. Derive their total utility schedule.


Answer:

As we know total utility is the sum total of marginal utilities as shown below.
Question 8. Calculate:

Answer:
Question 9. Derive the inverse relation between price of the good and its demand from single commodity equilibrium condition “marginal utility = price”. [CBSE Foreign 2011]
Answer: As we know a consumer purchases a good up to the point where marginal utility of the good becomes equal to the price of that good.
MU = Price
Figure B is derived from Figure A.
In figure A, initially, consumer equilibrium is attained at point E, where let MU (10) = Price (10). Corresponding to point E, we derive point E1 in figure B.
Due to fall in price (suppose from 10 to 8), MU > Price at the given quantity. So, we can say that benefit is greater than cost and the consumer increases the quantity till MU = Price condition is attained at F. Corresponding to point F, we derive the point F1; in figure B. So, by joining point E1 and F1 together, we derive the demand curve.
Question 10. 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 that in case of Y. Explain the reaction of the consumer. [AI 2011]
Or
A consumer consumes only two goods X and Y and is in equilibrium.
Price of X falls. Explain the reaction of the consumer through the Utility Analysis. Or [AI 2012]
A consumer consumes only two goods X and Y and is in equilibrium. Price of good X falls. Show that it will lead to rise in demand for good X. Or [CBSE 2013C]
By spending his entire income only on two goods X and Y a consumer

Answer: As, we know condition for consumer equilibrium is,
Necessary Condition
Marginal utility of last rupee spent on each commodity is same.
Suppose there are two commodities, X and Y respectively.
So, for commodity X, the condition is, Marginal Utility of Money = Price of X

But as given in the question that the ratio of marginal utility to price in case of X is higher than that in case of Y,i.e….

It means marginal utility from the last rupee spent on commodity X is more than marginal utility from the last rupee spent on commodity Y. So, to attain the equilibrium consumer must increase the quantity of X, which decreases the MUx and decreases the quantity of Y, which will increase the MUy. Increase in quantity of X and decrease in quantity of Y till
Question 11. A consumer consumes only two goods X and Y. At a certain consumption level of these goods, he finds that the ratio of marginal utility to price in case of X is lower than that in case of Y. Explain the reaction of the consumer. Or [AI2011]
By spending his entire income only on two goods X and Y a consumer finds that, Explain how will the consumed react.
Or
[CBSE Foreign 2013]
A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good X rises, the consumer buys less of good X. Use utility analysis. [AI 2014]
Answer: As, we know condition for consumer equilibrium is, Necessary Condition
Marginal utility of last rupee spend on each commodity is same.
Suppose there are two commodities, X and Y respectively.
So, for commodity X, the condition is, Marginal Utility of Money = Price of X


But as given in the question that the ratio of marginal utility to price in case of X is lower than that in case of Y, i.e.,
It means, marginal utility from the last rupee spent on commodity X is less than the marginal utility from the last rupee spent on commodity Y. So, to attain the equilibrium the consumer must decrease the quantity of X which will increase the MUx and increase the quantity of Y, which will decrease the MU . Decrease in quantity of X and increase in quantity of Y continue till
Question 12. Explain the meaning of diminishing marginal rate of substitution with the help of a numerical example. [AI 2013]
Answer: MRS is the rate at which a consumer is willing to sacrifice one commodity for an extra unit of another commodity without affecting his total satisfaction.



It can be seen from the above schedule that the consumer substitute X1 for X2 but continues to get the same satisfaction. But for every increase of 1 unit of X1; the consumer gives up lesser and lesser quantity of X2.
Therefore, this is called the law of diminishing marginal rate of substitution.
Question 13. Why is an Indifference curve generally , convex to the origin? [CBSE 2011, CBSE Sample Paper 2009, 13, 14]
Answer:
As, we know quantity of one commodity increases, its marginal rate of substitution falls because of law of diminishing marginal utility. Marginal rate of substitution is a slope of Indifference curve and whenever slope [MRS] decreases it makes the curve convex to the point of origin.
In the above diagram, units of y are measured on vertical axis and units of x on horizontal axis. When the consumer moves from combination A (1 x + 25y) to B (2x + 20y), he acquires one additional unit of x and forgoes (sacrifice) 5 units of y, if he wants to get the same level of satisfaction. The consumer has to reduce the consumption of y when he increases the consumption of x. The number of units of good y that the consumer is willing to sacrifice for an additional unit of good x, so as to maintain the same level of satisfaction is technically called the marginal rate of substitution of x for y and is denoted by MRSxy .
So, the MRSxy when the consumer move from combination A to B is 5 : 1, further as the consumer move from combination B to C, he acquires one more units of x, but the consumer forgoes a smaller number of y, i.e., MRSxy at this stage is 4 : 1. It may be observed now that MRS diminishes as the consumer moves from combination A to B, B to C, C to D, D to E. The consumer forgoes less and less units of y as he acquires additional unit of x.
Question 14. Explain why an Indifference curve has a negative slope (i.e. IC slope down-wards to the right). [CBSE 2011]
Answer: Every IC is based on the assumption that various combinations of two commodities gives equal satisfaction to a consumer. In order to remain at the same level of satisfaction, the consumer will have to reduce the consumption of one commodity if he wants to increase the consumption of another commodity.
Question 15. Why do Indifference curves not intersect each other?
Answer:
Two IC’s cannot intersect each other. This property is proved by Contradict Method. First we assume that they intersect each other and then show that this assumption leads to an absurd conclusion. Let us assume that IC1 intersects IC2 at point E shown in the figure given here.
Let point A be a point on IC, and point B on IC2. Since A and E lie on IC,, the consumer will be indifferent between points E and A (A = E). Similarly, B and E lie on IC2, the consumer will be indifferent between points E and B (B = E).
Based on the assumption of transitivity as A = E and B = E, then the consumer must be indifferent between A and B (A = B) but this is not possible as A and B lie on two different ICs and represent different levels of satisfaction. Therefore, IC cannot intersect each other.

What happens to the budget set if both the prices as well as the income double? [ 1 Mark]
Answer: There will be no change in the budget line. Let us understand this with the help of an example: Suppose,the price of goods 1 rises from Rs 4 to Rs 8 and that of goods 2 rises from Rs 5 to Rs 10. Income also rises from Rs 20 to Rs 40. With double increase in prices and income, intercepts on both X-axis and Y-axis will remain unchanged at 5 units (goods 1) and 4 units (goods 2) respectively. Slope of budget line will also remain the same. Therefore, there will be no change in the budget set and the budget line.
Question 8. Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8 respectively. How much is the consumer’s income? [1 Mark]
Answer: Budget equation is given as: Px.X + Py .Y = M
Let good 1 be X and good 2 be Y Putting the values, we get,
(6).(6) + (8).(8) = 36 + 64 = Rs 100

Thank You.

Extra Questions on Consumer Equilibrium

Consumer equilibrium is a critical concept in microeconomics that explains how a rational consumer allocates their income among different goods and services to satisfy their unlimited wants and needs. Here are some extra questions and answers about consumer equilibrium notes in chapter 2, microeconomics, class 12:

What is consumer equilibrium?

Consumer equilibrium refers to the point where a consumer maximizes their satisfaction or utility subject to their budget constraint. It occurs when the marginal utility per rupee spent on each good is equalized. In other words, it is the point where the consumer gets the most satisfaction from their limited income.

How is consumer equilibrium determined?

Consumer equilibrium is determined by the equality of the marginal utility per rupee spent on all goods and services. This can be expressed as:

MUa/Pa = MUb/Pb = MUc/Pc

where MU = marginal utility and P = price of the good.

What is marginal utility?

Marginal utility is the additional satisfaction or utility a consumer derives from consuming one more unit of a good or service. It is the change in total utility due to the consumption of an additional unit of a good or service.

What is the law of diminishing marginal utility?

The law of diminishing marginal utility states that as a consumer consumes more and more units of a good or service, the marginal utility derived from each additional unit decreases. In other words, the more you consume of a good or service, the less satisfaction or utility you get from each additional unit.

What is the budget constraint?

The budget constraint is the limit on a consumer's spending due to their limited income and the prices of goods and services. It is the line that shows all the combinations of two goods that a consumer can purchase with their income at given prices.

In conclusion, consumer equilibrium is a crucial concept in microeconomics that explains how consumers allocate their limited income among different goods and services to maximize their satisfaction or utility. It is determined by the equality of marginal utility per rupee spent on all goods and services, subject to the budget constraint.