Test: Consumer Behaviour: Indifference Curve Analysis - UGC NET MCQ

The budget constraint allows the consumer to spend a total of £40. In option B, buying 20 apples at £1 each costs £20, and purchasing 10 bananas at £2 each costs £20, totaling £40. This is within the budget. The other options exceed the budget, making them infeasible. Understanding budget constraints is crucial in economics, as it illustrates how consumers allocate their limited resources among various goods.

An indifference curve illustrates combinations of two goods that provide a consumer with the same level of satisfaction or utility. This means that the consumer is indifferent between these combinations, as each offers equal satisfaction. Understanding indifference curves is crucial for analyzing consumer preferences and choices in economics, enabling a deeper comprehension of how consumers allocate their resources among different goods.

- Assertion Evaluation: The assertion is true because an increase in the price of a good typically leads to a decrease in the quantity demanded, as consumers tend to reduce their consumption of that good.

- Reason Evaluation: The reason is also true as the substitution effect indeed makes substitute goods more appealing when the price of the original good rises.

- Explanation Relationship: The reason correctly explains the assertion because the increase in price leads consumers to look for alternatives, thereby reducing demand for the more expensive good.

The principle of diminishing marginal utility states that as a consumer consumes more of a particular good, the additional satisfaction (or utility) gained from each additional unit tends to decrease. This concept is fundamental in understanding consumer behavior, as it explains why individuals may choose to diversify their consumption rather than continuously consume more of a single good. It highlights the importance of balance in consumption to maintain satisfaction levels.

The convex shape of an indifference curve reflects the principle of diminishing marginal utility. As consumers increase their consumption of a good, the additional satisfaction (or utility) gained from each extra unit decreases. This concept explains why consumers are willing to give up more of one good to obtain additional units of another good when they have already satisfied their needs for the first good. An interesting fact about indifference curves is that they can never intersect; if they did, it would imply contradictory preferences, which is not possible in rational consumer behavior.

- Assertion Analysis: The assertion is true because a price increase typically results in a decrease in quantity consumed due to the basic principles of demand. The consumer responds to the higher price by purchasing less of the good.

- Reason Analysis: The reason is also true as a price increase shifts the budget line inward, which indeed indicates a decrease in purchasing power and can lead to a lower quantity consumed.

- Explanation of Relationship: However, while both statements are true, the reason provided does not correctly explain the assertion. The assertion encompasses both the substitution effect (switching to other goods) and the income effect (feeling poorer due to the price increase), while the reason only addresses the budget line shift without clarifying the role of substitution. Thus, the correct choice is Option B.

Statement 1 is correct because, for inferior goods, a decrease in income can increase demand as consumers turn to cheaper alternatives.

Statement 2 is also correct, as Giffen goods are unique cases where an increase in price results in increased demand due to the income effect outweighing the substitution effect.

Thus, both statements are accurate, making Option C the correct choice.

• The Assertion is true; consumers do aim to maximize utility within their budget constraints by selecting the optimal combination of goods.
• The Reason is also true; however, it does not necessarily imply that consumers will always make the optimal choice, as they may not be fully aware of all options or may face other constraints such as time or cognitive biases.
• Thus, while both statements are true, the Reason does not correctly explain the Assertion, making Option B the correct choice.

Statement 1 is correct. When consumers experience a decrease in effective income, they indeed move to a lower indifference curve, which typically implies a decrease in the quantity demanded for normal goods. This is due to both the income effect and substitution effect, which work together to reduce demand.

Statement 2 is incorrect. While an increase in the price of an inferior good might lead to a decrease in quantity demanded, the situation is nuanced. For inferior goods, the income effect can lead to an increase in quantity demanded, as consumers may substitute away from more expensive normal goods. Thus, the statement inaccurately suggests that the income effect solely influences the demand for inferior goods when a price increase occurs.

Therefore, the correct answer is Option A: 1 Only.

- Assertion (A) is correct because an increase in income allows the consumer to purchase more goods, thereby reaching a higher indifference curve, which represents higher utility.

- Reason (R) is also correct as the income-consumption curve indeed shows how a consumer's consumption changes with income variations.

- The reason is the correct explanation of the assertion because it directly supports the claim that higher income leads to shifts toward higher indifference curves. Therefore, the correct answer is Option A.