Test: Theory Of Consumer Behaviour - 5 - Commerce MCQ

Relationship between AP and MP is stated below:
(i) AP increases when MP is greater than AP.
(ii) AP is maximum when both MP and AP are equal.
(iii) AP decreases when MP is less than AP.
(iv) AP continues to be positive even when MP is zero or negative.

An indifference curve is a graph showing combination of two goods(quantity) 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.

A consumer is said to be in equilibrium when he feels that he “cannot change his condition either by earning more or by spending more or by changing the quantities of thing he buys”.
A rational consumer will purchase a commodity up to the point where price of the commodity is equal to the marginal utility obtained from the thing.
In equilibrium, the marginal utilities of the different commodities purchased are proportional to their prices and these ratios of marginal utility to price must be equal to the common marginal utility of money.
Hence, MU of X/ Price of X = MU of Y/Price of Y

MU_X/ P_X>MU_Y/P_Y. In this case, the consumer is getting more marginal utility per rupee in case of good X as compared to Y. Therefore, he will buy more of X and less of Y. This will lead to fall in MU_X and rise in MU_Y. The consumer will continue to buy more of X till MU_X/P_X = MU_Y/P_Y

The demand function shows the relationship between the quantity demanded and the price of the product. 

At point of tangency,slope of the both IC and budget line is same,

i.e. MRS=MRE

Consumer surplus is a measure of the welfare that people gain from consuming goods and servicesConsumer surplus is defined as the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually do pay .

As per Alferd marshall ,CS can not be calculated for luxary goods, inferior goods and necessities.

With a downward-sloping demand curve, price and quantity demanded move in opposite directions, so the price elasticity of demand is always negative. A positive percentage change in price implies a negative percentage change in quantity demanded, and vice versa.

Rectangular hyperbola curve said to be unitary elastic as elasticity along the demand curve is same.

To determine the equilibrium point, consumer compares the price (or cost) of the given commodity with its utility (satisfaction or benefit). Being a rational consumer, he will be at equilibrium when marginal utility is equal to price paid for the commodity. 

ed=ed= 3

% change in quantity demanded =?

% change in price = (12−10/10)∗100=20(12−10/10)∗100=20%

by using %age method to calculate elasticity

60%

ed = % change in quantity demanded / % change in price 

 % change in quantity demanded [= 50

ed = 2

% change in price = X

by using above formula

50 / X = 2

X = 25

25% of 8 is 2.

 new price 8-2 = 6.

Price elasticity of demand is a measure of the change in the quantity demanded or purchased of a product in relation to its price change.
Price Elasticity of Demand = % Change in Quantity Demanded / % Change in Price
% Change in Quantity = 50/400 x 100 = 12.5
% Change in Price = 10
12.5/10 = 1.25

ed = (ΔQ/ ΔP) * (P/Q)

ΔQ = 5

ΔP = 5

P = ?

Q= 100

ed = 1.2

 by using above formula 

1.2 = (5/5)*(P/100)

P = 120

As per geomeric method for calculating price elasticity,we can say it can be different.

slope remains constant as it is linear curve but not the elsaticity, it can be different.

An agent's preferences are said to be stronglymonotonic if, given a consumption bundle , the agent prefers all consumption bundles that have more of at least one good, and not less in any other good.

MU & TU relationship  ;

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

A consumer's preferences are said to be stronglymonotonic if, given a consumption bundle , the consumer prefers all consumption bundles that have more of at least one good, and not less in any other good.

As per total outlay method

(i) If with a fall in price (demand increases) the total expenditure increases or with a rise in price (demand falls), the total expenditure falls, in that case the elasticity of demand is greater than one i.e. ED > 1.

(ii) If with a rise or fall in the price (demand falls or rises respectively), the total expenditure remains the same, the demand will be unitary elastic or ED = 1.

(iii) If with a fall in price (Demand rises), the total expenditure also falls, and with a rise in price (Demand falls) the total expenditure also rises, the demand is said to be less classic or elasticity of demand is less than one (ED < 1).

ed = % change in quantity demanded / % change in price

% change in quantity = (100-50) / 50 ) * 100 = 100%

% change in price = 25% 

by using above formula ;

100/25 = 4

If elasticity of demand is equal to 1.

then,

% change in price = % change in quantity

there is 50% fall in quantity from 40 to 20 kg.

hence there should be 50% increase in price 

new price = 1.5

Other things remaining the same when a person takes successive units of a commodity, the marginal utility diminishes constantly

A relatively elastic demand curve has a steeper slope.A relatively elastic demand has a flatter curve because the percentage change in quantity demanded is greater than a percentage change in price.