Test: Theory Of Consumer Behaviour- 1 - CA Foundation MCQ

The marginal rate of substitution between perfect substitutes is likewise constant. An example of a utility function that is associated with indifference curves like these would be . If two goods are perfect complements then the indifference curves will be L-shaped.

Total utility is maximum when marginal utility is zero.

It is based in the law of diminishing marginal utility which says 'as more and more units of a good are consumed, MU i.e level of satisfaction derived from each successive unit goes on falling because desire for that commodity tend to fall.

A budget line is defined as the purchasable combinations of two goods, given the prices of each good and consumer's income. Thus the budget constraint describes the different amount of two commodities that a consumer can afford.

The Cardinal Utility approach is propounded by neo-classical economists, who believe that utility is measurable, and the customer can express his satisfaction in cardinal or quantitative numbers, such as 1,2,3, and so on. In the given options the equal marginal utility is the only one in which the utility can be measured so it follows Cardinal utility approach while in the case of the other options it is ordinal approach

An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent. Along the curve, the consumer has no preference for either combination of goods because both goods provide the same level of utility.

Consumer surplus is an economic measure of consumer benefit. It is calculated by analyzing the difference between what consumers are willing and able to pay for a good or service relative to its market price, or what they actually do spend on the good or service. A consumer surplus occurs when the consumer is willing to pay more for a given product than the current market price.

Slope of i c curve is downward. this is because when a consumer consumes more of a commodity X then he has sacrifice with good Y.

Because consumer surplus = satisfaction derived - satisfaction amt paid = 320 - 180 = 140

Cardinal utility is the utility wherein the satisfaction derived by the consumers from the consumption of good or service can be measured numerically. ... Cardinal utility, is based on marginal utility analysis. As against this, the concept of ordinal utility is based on indifference curve analysis.

If you assume that the law of diminishing marginal utility operates and the Marginal utility at the last unit of consumption(i.e., 3rd unit) is 1, then for three units the total utility is 5(given)

Under the cardinal utility approach MU=P=1 ( assuming marginal utility of money is 1),then consumer surplus = TU - TC for the three units consumed.

Thus, CS=5–3=2.

However, if you assume constant marginal utility, then the TU function cannot be 5. Thus, there seems some issue with the way the question is framed. If we ignore the total utility function and stick to only the Marginal utility function then,

CS = total utility for three units - total cost=3–3=0

In all likelihood, the first solution will do for this question.

Indifference Curves are Convex to the Origin: This is an important property of indifference curves. They are convex to the origin. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve.

The negative slope of the indifference curve reflects the assumption of the monotonicity of consumer's preferences, which generates monotonically increasing utility functions, and the assumption of non-satiation (marginal utility for all goods is always positive); an upward sloping indifference curve would imply that a Convex to the origin.

Explanation:
The slope of an indifference curve represents the rate at which a consumer is willing to trade one good for another while keeping the level of satisfaction constant. At equilibrium, the consumer is maximizing their utility subject to their budget constraint.
The slope of the budget line represents the rate at which the consumer can trade one good for another given the prices and their income.
To determine the slope of the indifference curve at equilibrium, we need to compare it to the slope of the budget line.
If the slope of the indifference curve is equal to the slope of the budget line, it means that the consumer is willing to trade goods at the same rate as they can afford to trade them. This indicates that the consumer has achieved the highest level of satisfaction given their budget constraint, which is the condition for equilibrium.
Therefore, the correct answer is A: Equal to the slope of the budget line.

An indifference curve is the curve at every point of which the utility would remain same. The indifference curve of perfect complementary goods is 'L' shaped. ... This is because the utility of Left shoe would be zero without a Right shoe and vice versa.

Marginal Utility Approach: Alfred Marshall
The marginal utility approach, also known as the marginal utility theory, was given by Alfred Marshall, an eminent British economist. Marshall is considered one of the pioneers of modern economics and made significant contributions to the field.
Explanation:
The marginal utility approach is a concept in economics that focuses on the incremental satisfaction or utility derived from consuming an additional unit of a good or service. Here is a detailed explanation of the marginal utility approach:
1. Definition: The marginal utility approach states that the value or utility of a good or service decreases as more units are consumed. In other words, the satisfaction obtained from each additional unit diminishes.
2. Marginal Utility: Marginal utility refers to the additional utility gained from consuming one more unit of a good or service. It is the change in total utility resulting from the consumption of an extra unit.
3. Law of Diminishing Marginal Utility: Marshall formulated the law of diminishing marginal utility, which states that as more units of a good or service are consumed, the marginal utility derived from each additional unit decreases.
4. Consumer Decision-making: The marginal utility approach is essential in understanding consumer behavior and decision-making. Consumers aim to maximize their total utility by allocating their limited resources to goods or services that provide the highest marginal utility per unit of cost.
5. Price Determination: Marshall's marginal utility approach also influenced price determination. According to his theory, the price of a good or service is influenced by its marginal utility. If the marginal utility of a good is high, consumers are willing to pay a higher price for it.
In conclusion, Alfred Marshall is credited with the development of the marginal utility approach, which revolutionized the understanding of consumer behavior and influenced price determination in economics. His contributions laid the foundation for modern microeconomic theory.

When marginal utility is zero, then total utility is maximum because any further consumption of that commodity will lead to negative marginal utility and therefore total utility will tend to decrease

Indifference maps between income and leisure is have all the usual properties o/indifference curves. They slope downward to the right, are convex to the origin and do not intersect. They are positively sloped straight lines. Each indifference curve represents various alternative combinations of income and leisure which provide equal level of satisfaction to the individual and the farther away an indifference curve is from the origin, the higher the level of satisfaction it represents for the individual.

 

The slope of the indifference curve measuring marginal rate of substitution between leisure and income (MRSLM) shows the tradeoff between income and leisure. This trade-off means how much income the individual is willing to accept for one hour sacrifice of leisure time.

MRS is increasing means MU is increasing and price is decreasing. If we draw this on graph we will get the shape as concave. 

Some economists are of the opinion that utility can be measured in cardinal units. For exam­ple, Sir Alfred Marshall (1842-1924), the noted neoclassical economist, said that utility can be measured cardinally in terms of money. Money is the measuring rod of utility.

Total utility is maximum when Marginal utility is zero. It is based in the law of diminishing marginal utility which says 'as more and more units of a good are consumed, MU i.e level of satisfaction derived from each successive unit goes on falling because desire for that commodity tend to fall.

 

As the slope of indifference curve. ... As one moves down a (standardly convex) indifference curve, the marginal rate of substitution decreases (as measured by the absolute value of the slope of the indifference curve, which decreases). This is known as the law of diminishing marginal rate of substitution.

Because consumer surplus is the difference between what consumer is ready to pay and what he actually pays

The law of equi-marginal utility states that the consumer will distribute his money income between the goods in such a way that the utility derived from the last rupee spend on each good is equal. In other words, consumer is in equilibrium position when marginal utility of money expenditure on each goods is the same.

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.

As the marginal utility of a consumer increases he demands more of a commodity. Therefore, the marginal utility curve derives its shape from demand curve.

Marshall's cardinal utility analysis is based upon the hypothesis of independent utilities. This means that the utility which the consumer derives from any commodity is a function of the quantity of that commodity and of that commodity alone.

Because consumer surplus is the difference between what consumer is ready to pay and what he actually pays

They are convex to the origin. As the consumer substitutes commodity X for commodity Y, the marginal rate of substitution diminishes as X for Y along an indifference curve. 

Explanation:
When total utility increases at a diminishing rate, it means that each additional unit of a good or service provides less satisfaction or utility than the previous unit. In other words, the marginal utility decreases as more units of the good or service are consumed.
To understand why marginal utility diminishes, consider the following points:
1. Total Utility: Total utility refers to the overall satisfaction or benefit derived from consuming a certain quantity of a good or service. It increases as more units of the good or service are consumed, but at a decreasing rate.
2. Marginal Utility: Marginal utility refers to the additional satisfaction or benefit gained from consuming one additional unit of a good or service. It is the change in total utility divided by the change in the quantity consumed.
3. Law of Diminishing Marginal Utility: According to the law of diminishing marginal utility, as more units of a good or service are consumed, the additional satisfaction derived from each additional unit decreases. This is because people tend to satisfy their most urgent needs first, so the incremental value of each additional unit decreases.
4. Relationship between Total Utility and Marginal Utility: When total utility increases at a diminishing rate, it means that the marginal utility is decreasing. This is because the additional satisfaction gained from each additional unit is becoming smaller and smaller.
Therefore, the correct answer is B: Diminishing.

Book: "The Nature and significance of Economic Science"
Author: Lionel Robbins
Explanation:
- The book "The Nature and significance of Economic Science" is written by Lionel Robbins.
- Lionel Robbins was a renowned British economist and professor at the London School of Economics.
- In this book, Robbins discusses the fundamental principles and nature of economics as a science.
- The book explores the role of economics in understanding human behavior, resource allocation, and the functioning of markets.
- Robbins emphasizes the importance of economic analysis in making rational decisions and understanding the complexities of economic systems.
- The book is considered a classic work in the field of economics and has been influential in shaping economic thought.
- It provides a comprehensive overview of economic science and its significance in the modern world.
Conclusion:
The book "The Nature and significance of Economic Science" is written by Lionel Robbins, a prominent economist known for his contributions to the field of economics.