Test: Theory Of Consumer Behaviour- 2 - CA Foundation MCQ

To calculate the consumer surplus, we need to first find the total expenditure on the commodity and then subtract it from the total utility derived from the consumption of the commodity. Let's break this down step by step: 1. Total utility: Given as Rs. 5. 2. Marginal utility: Given as 1. 3. Number of units consumed: Given as 3. 4. Total expenditure: Since the marginal utility is constant, we can calculate the total expenditure by multiplying the marginal utility by the number of units consumed. - Total expenditure = Marginal utility × Number of units consumed - Total expenditure = 1 × 3 - Total expenditure = Rs. 3 5. Consumer surplus: We can now calculate the consumer surplus by subtracting the total expenditure from the total utility. - Consumer surplus = Total utility - Total expenditure - Consumer surplus = Rs. 5 - Rs. 3 - Consumer surplus = Rs. 2 So, the consumer surplus is Rs. 2 (Option A).

A higher level of satisfaction

Explanation:

• An indifference curve is a graphical representation of different combinations of goods or services that provide the consumer with the same level of satisfaction or utility.
• Higher indifference curves represent higher levels of satisfaction or utility for the consumer.
• As we move along the indifference curve, the consumer is willing to trade-off between the goods or services without any change in the overall level of satisfaction.
• A higher indifference curve means that the consumer prefers the combinations of goods or services on this curve over those on lower indifference curves.

Answer: C (Straight line joining the two axes)

Explanation:

The budget line, also known as the price line or consumer budget constraint, is a straight line that represents the different combinations of two goods that a consumer can purchase while fully utilizing their income. The budget line is determined by the following factors:

- The prices of the two goods
- The consumer's income

The budget line can be represented by the following equation:

Income = (Price of Good X × Quantity of Good X) + (Price of Good Y × Quantity of Good Y)

The budget line has the following characteristics:

1. Straight line: As the equation suggests, the budget line is a linear function, meaning it is a straight line joining the two axes on a graph.

2. Intercepts: The budget line intersects both the x-axis and the y-axis. The intercepts represent the maximum quantities of the two goods the consumer can purchase if they spend their entire income on one good.

3. Slope: The slope of the budget line represents the relative prices of the two goods. It is calculated as the ratio of the price of Good Y to the price of Good X. The slope is negative, indicating that the consumer has to give up some units of Good Y to purchase additional units of Good X, and vice versa.

4. Shifts: Changes in the consumer's income or the prices of the goods can cause the budget line to shift. An increase in income will shift the budget line outward (away from the origin), while a decrease will shift it inward. Changes in the prices of the goods will cause the slope of the budget line to change, reflecting the new relative prices.

Marginal Utility: A Cardinal Concept

Marginal utility is a cardinal concept for the following reasons:

• Quantifiable Measurement: Marginal utility can be measured in numerical terms. It deals with the change in satisfaction derived from consuming an additional unit of a good or service, which can be expressed in cardinal or absolute numbers.
• Diminishing Marginal Utility: According to the law of diminishing marginal utility, the additional satisfaction derived from consuming successive units of a good or service decreases. This decrease can be measured and compared using cardinal numbers.
• Consumer Decision Making: Marginal utility is a crucial concept in understanding consumer behavior and decision making. Consumers are assumed to maximize their utility by allocating their resources to the goods and services that provide the highest marginal utility per unit cost. This decision-making process is based on cardinal utility measurements.

In summary, marginal utility is a cardinal concept because it involves a quantifiable measurement of satisfaction that can be expressed in numerical terms, which is essential in understanding and analyzing consumer behavior and decision making.

Indifference curve analysis is based on the ordinal approach. Ordinal approach: - The ordinal approach assumes that consumers can rank their preferences for different goods and services. - It does not require the measurement of utility in numerical terms but focuses on the order of preferences. - Indifference curve analysis is a graphical representation of the ordinal approach. - In this analysis, consumers are assumed to have a set of preferences, and they can choose between different combinations of goods to maximize their satisfaction level. Indifference curves: - An indifference curve represents all the combinations of two goods that provide the same level of satisfaction to a consumer. - The consumer is indifferent between any two points on the same indifference curve because they provide the same level of satisfaction. - Indifference curves are usually downward sloping, convex to the origin, and cannot intersect each other. Key features of indifference curve analysis: - Indifference curve analysis is based on the ordinal approach, which focuses on the ranking of preferences rather than assigning numerical values to the utility derived from consuming goods or services. - It is a powerful analytical tool for understanding consumer behavior and the choices they make in maximizing their satisfaction. - Indifference curve analysis can be used to study the effects of changes in prices, income, and other factors on consumer preferences and their consumption patterns.

Law of Diminishing Marginal Utility

• The Law of Diminishing Marginal Utility states that as a consumer consumes additional units of a good or service, the satisfaction (utility) gained from each additional unit decreases.
• It is based on the concept that the total utility increases at a decreasing rate with the consumption of more units of a commodity, eventually reaching a maximum point.
• This law plays an essential role in understanding consumer behavior and helps determine the equilibrium point for a consumer in deciding the quantity to be consumed.
• It also helps to explain the downward-sloping demand curve, as the marginal utility of a good decreases as its quantity increases, leading to a decline in the consumer's willingness to pay for additional units.

In summary, the Law of Equi Marginal Utility and the Law of Diminishing Marginal Utility are two fundamental principles within the Marginal Utility Analysis framework, which helps explain consumer behavior and decision-making processes related to the consumption of goods and services.

Answer: A A consumer will be in equilibrium when: 1. Marginal Rate of Substitution (MRS) is equal to the price ratio of the two commodities: - MRS is the rate at which a consumer is willing to exchange one good for another without changing their level of satisfaction. - When the MRS between two goods X and Y is equal to the ratio of their prices (Px/Py), the consumer maximizes their satisfaction given their budget constraint. 2. The consumer's budget line is tangent to their indifference curve: - An indifference curve represents all the combinations of two goods that provide the same level of satisfaction to the consumer. - A budget line represents all the combinations of two goods that the consumer can afford given their income and the prices of the goods. - When the budget line is tangent to an indifference curve, it means the consumer cannot achieve a higher level of satisfaction within their budget constraint. 3. The consumer's income is fully utilized in purchasing the two commodities: - In equilibrium, the consumer spends their entire income on the combination of goods X and Y that maximizes their satisfaction. - If the consumer's income is not fully utilized, it means they could potentially purchase more of one or both goods to increase their level of satisfaction. In summary, a consumer is in equilibrium when their MRS between the two commodities is equal to the price ratio of the commodities, their budget line is tangent to their indifference curve, and their income is fully utilized in purchasing the two commodities.

Answer: c. L-Shaped Indifference Curve

Explanation:

• Complementary goods are those goods which are consumed together, in fixed proportions, to satisfy a particular want or need. For example, left and right shoes, or a car and its tires.


• Indifference curves represent different combinations of two goods that provide the same level of satisfaction or utility to a consumer.


• In the case of complementary goods, the consumer does not derive any additional satisfaction from consuming more of one good without consuming more of the other good. This means that the consumer is indifferent between different combinations of the two goods only when they are in fixed proportions.


• As a result, the indifference curve for complementary goods takes an L-shape. This is because the consumer will only be willing to trade off one good for the other good at a fixed ratio, and the indifference curve will have a sharp corner (the "L" shape) at that point.


• Convex indifference curves (option A) represent substitutes, where the consumer is willing to trade off one good for the other in varying proportions. Straight-line indifference curves (option B) represent perfect substitutes, where the consumer is willing to trade off one good for the other at a constant rate. Circular indifference curves (option D) are not a realistic representation of consumer preferences, as they would imply infinite satisfaction levels at certain points.

The correct answer is (a) Information search. In the buyer decision process, after recognizing a need or a problem, the consumer is motivated to search for information to satisfy that need. This stage is called the information search. During this phase, consumers seek relevant information about available products or services that can potentially fulfill their needs or solve their problems.

Indifference Curve for Perfect Complementary Goods: - Answer: C. L-shaped Explanation: - Perfect complementary goods are goods that are consumed together in fixed proportions, meaning that the consumer will only derive satisfaction from consuming both goods together. - Examples of perfect complementary goods include left and right shoes, or a pen and ink. - In the case of perfect complementary goods, the consumer's satisfaction (utility) remains constant as long as the fixed proportion is maintained. - An indifference curve represents different combinations of two goods that give the same level of satisfaction or utility to the consumer. - For perfect complementary goods, the indifference curve is L-shaped because: - The consumer derives no additional satisfaction from consuming more of one good without consuming more of the other good in the fixed proportion. - Thus, the consumer is indifferent between any combination of the two goods that maintain the fixed proportion, resulting in an L-shaped curve. - The L-shape of the indifference curve for perfect complementary goods indicates that the consumer will only consume more of one good if the other good is also consumed in the fixed proportion, reflecting the nature of perfect complementary goods.

Answer: B. Marginal utility becomes negative. Total utility starts decreasing when marginal utility becomes negative. To understand this, let's break it down: - Utility: Utility is a measure of the satisfaction or happiness a consumer derives from consuming a good or service. - Total Utility: Total utility is the total amount of satisfaction derived from the consumption of all units of a good or service. - Marginal Utility: Marginal utility is the additional satisfaction derived from consuming one more unit of a good or service. Now, let's discuss the relationship between total utility and marginal utility: 1. When marginal utility is positive: - The consumption of an additional unit of the good or service provides the consumer with additional satisfaction. - Total utility increases as the number of consumed units increases. 2. When marginal utility becomes zero: - The consumption of an additional unit of the good or service provides no additional satisfaction to the consumer. - Total utility remains constant, as the additional unit does not contribute to the overall satisfaction. 3. When marginal utility becomes negative: - The consumption of an additional unit of the good or service reduces the consumer's overall satisfaction. - Total utility starts decreasing, as the additional unit detracts from the overall satisfaction. In conclusion, total utility starts decreasing when marginal utility becomes negative, as consuming more units of the good or service results in a reduction of overall satisfaction.

Explanation: The substitution effect of a fall in the price of a commodity refers to the change in the consumption pattern of a consumer due to the relative price change of the commodity, keeping the level of satisfaction or utility constant. When the price of a commodity falls, the following effects occur: 1. Substitution effect: The consumer substitutes the cheaper commodity for the relatively more expensive commodity. 2. Income effect: The consumer's purchasing power increases due to the fall in price, which may lead to an increase in the consumption of both goods. As a result of these effects, the consumer's consumption pattern changes, and they move to a higher indifference curve (IC), which represents a higher level of satisfaction or utility. Therefore, the correct answer is: C: Movement from lower IC to a higher one.

Explanation: The budget constraint line is a result of all of the factors mentioned in the options. Let's break down each component and how it contributes to the formation of the budget constraint line: Market price of commodity X:

• The price of commodity X determines how much of it a consumer can purchase given their income and the price of other goods.
• If the price of commodity X increases, the consumer will be able to purchase less of it, and the budget constraint line will shift inwards.
• If the price of commodity X decreases, the consumer will be able to purchase more of it, and the budget constraint line will shift outwards.

Market price of commodity Y:

• Similarly, the price of commodity Y affects how much of it a consumer can purchase given their income and the price of other goods.
• If the price of commodity Y increases, the consumer will be able to purchase less of it, and the budget constraint line will shift inwards.
• If the price of commodity Y decreases, the consumer will be able to purchase more of it, and the budget constraint line will shift outwards.

Income of the consumer:

• Income is the amount of money a consumer has available to spend on goods and services.
• If the consumer's income increases, they will be able to purchase more of both commodities, and the budget constraint line will shift outwards.
• If the consumer's income decreases, they will be able to purchase less of both commodities, and the budget constraint line will shift inwards.

In summary, the budget constraint line is a result of the market prices of commodities X and Y, as well as the consumer's income. All of these factors affect the consumer's ability to purchase different combinations of the two commodities, which is represented by the budget constraint line.

Indifference curve analysis is based on: B: Ordinal analysis Explanation: Indifference curve analysis is a crucial concept in microeconomics, particularly in understanding consumer choice and preferences. It is based on ordinal analysis, and here's why: - Ordinal utility: Indifference curve analysis is built on the notion of ordinal utility, which means that consumers can rank their preferences for goods and services in order (1st, 2nd, 3rd, etc.), but cannot measure the utility they derive from them in absolute terms (like 10 units, 20 units, etc.). This is different from cardinal analysis, which assumes that consumers can measure their utility in absolute terms. - Indifference curves: An indifference curve is a graphical representation of a consumer's preferences, showing all the combinations of two goods that provide the same level of satisfaction or utility to the consumer. The consumer is indifferent between any two points on the curve, as they provide the same level of utility. This concept relies on ordinal utility, as the consumer is only ranking their preferences and not assigning a specific value to the utility derived from each combination. - Marginal rate of substitution (MRS): Indifference curve analysis also considers the marginal rate of substitution, which is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of satisfaction. This concept is based on the ordinal measurement of utility, as it only requires the consumer to rank their preferences for different combinations of goods and not to assign specific utility values to them. In conclusion, indifference curve analysis is based on ordinal analysis, as it revolves around ordinal utility, indifference curves, and the marginal rate of substitution, all of which rely on the consumer's ability to rank their preferences rather than measuring utility in absolute terms.

Answer: A. Declining marginal rate of substitution Explanation: The convexity of indifference curves is due to the declining marginal rate of substitution (MRS). This can be further explained through the following points: - Marginal Rate of Substitution (MRS): MRS is the rate at which a consumer is willing to give up one good in exchange for another good, while maintaining the same level of satisfaction or utility. In other words, it shows the trade-off between two goods that a consumer is willing to make. - Diminishing MRS: As a consumer consumes more of one good, the marginal utility of that good decreases, while the marginal utility of the other good increases. This is known as the law of diminishing marginal utility. Due to this, the consumer is willing to give up less of the second good to obtain more of the first good, resulting in a declining MRS. - Convexity of Indifference Curves: Indifference curves are convex to the origin because of the declining MRS. As a consumer moves along an indifference curve, they are willing to give up fewer units of the second good to obtain more of the first good, resulting in the curve's convex shape. In conclusion, the convexity of indifference curves is a result of the declining marginal rate of substitution, which is due to the law of diminishing marginal utility. This reflects the consumer's willingness to make trade-offs between two goods while maintaining the same level of satisfaction or utility.

Indifference Curves: Convex to the Origin

• Indifference curves are graphical representations of a consumer's preferences over different combinations of goods.
• An indifference curve shows all the combinations of goods that provide the same level of satisfaction or utility to the consumer.
• Indifference curves are convex to the origin because of the principle of diminishing marginal rate of substitution (MRS).
• The MRS is the rate at which a consumer is willing to give up one good for another while maintaining the same level of utility.
• As a consumer consumes more of one good and less of another, the marginal utility of the good being consumed decreases, while the marginal utility of the other good increases, leading to a decreasing MRS.
• Therefore, as the consumer moves along an indifference curve, they are willing to give up smaller and smaller amounts of the other good to gain additional units of the good being consumed, resulting in a convex shape to the origin.

Answer: B. Lionel Robbins Explanation:

• Lionel Robbins was a British economist and a prominent member of the London School of Economics.
• He wrote the book "The Nature and Significance of Economic Science" in 1932.
• This book is considered one of the most important works in the history of economic thought, as it provided a clear and precise definition of economics and its purpose.
• In the book, Robbins defined economics as "the science which studies human behavior as a relationship between ends and scarce means which have alternative uses."
• This definition helped to distinguish economics from other social sciences and formed the basis for much of modern economic theory.

Indifference curves cannot intersect each other as it would break down the indifference curve analysis. This is because the consumer would have more than one point on the indifference curve giving him a different level of satisfaction.

The correct answer is (d) Divisibility. Divisibility refers to the degree to which an innovation can be tried on a limited basis before full adoption. Innovations that can be easily tested or adopted in small increments are more likely to be accepted by consumers. Divisibility is one of the critical characteristics that influence the rate at which an innovation is adopted in the market.

Explanation of the Law of Equi-Marginal Utility:

• The law of equi-marginal utility is an economic concept that states that consumers allocate their income in such a way that the last unit of money spent on each good or service provides the same level of marginal utility.
• This law helps consumers maximize their satisfaction by allocating their income among different goods and services in the most efficient way.
• The key idea behind this law is that consumers should equate the marginal utility per unit of money spent on each good or service.

Price of Money in the Law of Equi-Marginal Utility:

• In the context of the law of equi-marginal utility, the price of money is considered to be one.
• This is because money is the medium of exchange and the unit of account for measuring the value of goods and services in an economy.
• When the price of money is one, it means that the marginal utility of money is constant, allowing consumers to allocate their income efficiently among different goods and services.
• As a result, the consumer can equate the marginal utility per unit of money spent on each good or service, maximizing their overall satisfaction.

In conclusion, the law of equi-marginal utility considers the price of money as one, allowing consumers to efficiently allocate their income among different goods and services to maximize their satisfaction.

Explanation of the answer:

At equilibrium, the consumer achieves the maximum possible satisfaction given their income and the prices of goods. In this situation, the following conditions are met: - The consumer's budget line represents the different combinations of goods they can afford given their income and the prices of goods. - The consumer's indifference curve represents the different combinations of goods that give them the same level of satisfaction.

At equilibrium:

- The slope of the indifference curve is equal to the slope of the budget line. This is because, at the point of equilibrium, the consumer has optimally allocated their income between the goods to maximize their satisfaction. Any change in the allocation would lead to a lower level of satisfaction. The slope of the indifference curve represents the marginal rate of substitution (MRS) between the goods, which is the rate at which the consumer is willing to trade one good for another to maintain the same level of satisfaction. The slope of the budget line represents the relative prices of the goods. When these slopes are equal, the consumer is optimally allocating their income between the goods to achieve maximum satisfaction. Therefore, the correct answer is: A: Equal to the slope of the budget line

The correct answer is (c) Inelastic. The demand for necessaries, which are essential goods or basic needs, tends to be inelastic. Inelastic demand means that the quantity demanded does not significantly change in response to changes in price. Necessities are often items that consumers require regardless of price fluctuations, leading to a relatively stable demand even when prices change.

The correct answer is (a) Drive. A drive is a strong internal stimulus that compels an individual to take action to reduce a need or satisfy a desire. Drives motivate behavior and play a crucial role in the decision-making process, prompting individuals to seek solutions or engage in activities that address their underlying needs or desires.

Cardinal Approach:

The cardinal approach, also known as the utility approach or the classical approach, is a method in economics that quantifies the satisfaction derived by consumers from consuming goods and services. This approach is based on the assumption that consumers can measure their preferences numerically in terms of "utils," a unit of measurement that represents the satisfaction gained from consuming a good or service.

Relation to the given options:

• Indifference curve: An indifference curve represents different combinations of goods that provide the same level of satisfaction to the consumer. The cardinal approach and indifference curve are related in the sense that both are used to analyze consumer preferences, but they are based on different assumptions. The cardinal approach assumes that utility can be measured numerically, while the indifference curve (ordinal approach) assumes that consumers can only rank their preferences.
• Equi-marginal utility: The equi-marginal utility principle states that consumers maximize their satisfaction by allocating their income in such a way that the last unit of money spent on each good yields the same marginal utility. This principle is directly related to the cardinal approach, as it is based on the idea of measurable utility and involves the comparison of marginal utilities to make consumption decisions.
• Law of diminishing returns: The law of diminishing returns states that as more units of a variable input are added to a fixed input, the marginal product of the variable input eventually decreases. While this concept is related to the overall idea of diminishing utility, it is not directly related to the cardinal approach, as it mainly deals with production and not consumer satisfaction.
• None of these: This option is incorrect, as the cardinal approach is directly related to the equi-marginal utility principle.

So, the correct answer is:

B:

Equi-marginal utility

Explanation: To calculate the consumer surplus, we need to find out the total value of the commodity to the consumer and then subtract the total expenditure on the commodity. Let's break it down step by step: 1. Total Utility (TU): Given in the question as Rs. 5. 2. Marginal Utility (MU): Given in the question as 1. This means that the consumer derives an additional utility of 1 for each additional unit consumed. 3. Units Consumed: Given in the question as 3 units. 4. Total Expenditure: Since MU is the additional utility derived from each additional unit, and it is constant at 1, we can assume that the price of each unit is Rs. 1 (as the consumer is willing to pay Rs. 1 for each additional unit). Therefore, the total expenditure on 3 units would be Rs. 3 (3 units * Rs. 1 per unit). 5. Consumer Surplus (CS): The consumer surplus is the difference between the total utility derived from the consumption of the commodity and the total expenditure on the commodity. In this case, the consumer surplus is: CS = TU - Total Expenditure CS = Rs. 5 - Rs. 3 CS = Rs. 2 So, the consumer surplus in this case is Rs. 2 (Option A).

Answer: A. Perfect complements Explanation: - Right-angled indifference curve: It is a type of indifference curve that forms a right angle or L-shape. This indicates that the consumer prefers consuming goods in fixed proportions, meaning the consumer will not substitute one good for another. - Perfect complements: These are goods that are consumed together in fixed proportions. The utility derived from one good directly depends on the consumption of the other good. Examples include left and right shoes, or a pen and ink. - Reason for the answer: In the case of a right-angled indifference curve, since the goods are consumed together in fixed proportions, they exhibit the characteristics of perfect complements. Other types of goods mentioned in the options: - Perfect substitutes: These are goods that can be completely substituted for each other without affecting the utility derived by the consumer. In this case, the indifference curve would be a straight line with a constant slope. - Inferior goods: These are goods for which demand decreases as a consumer's income increases. This has no direct relation to the shape of the indifference curve. - Giffen goods: These are a specific type of inferior goods, where demand increases as the price of the good increases. This is a rare phenomenon and also has no direct relation to the shape of the indifference curve.

The correct answer is (c) Process. In the adoption process for innovations, consumers typically go through stages such as awareness, interest, trial, and evaluation before making a decision. "Process" is not a specific stage in the adoption process, making it the exception among the options provided.

The correct answer is (c) Physiological needs. Maslow's Hierarchy of Needs is a psychological theory that categorizes human needs into five levels. The lowest order of needs, representing the most basic and essential requirements for human survival, is physiological needs. These include necessities such as food, water, shelter, and other fundamental biological requirements.

The correct answer is (A) The greater the customer’s dissatisfaction. In post-purchase behavior, when there is a significant gap between a customer's expectations and the actual performance or experience with a product or service, it leads to dissatisfaction. A larger gap typically results in greater dissatisfaction, potentially leading to negative feedback, returns, or a decreased likelihood of repeat purchases.

Total utility is maximum when:

• Marginal utility is Zero

Explanation:

• Total utility refers to the total satisfaction or benefit derived from consuming a good or service.
• Marginal utility is the additional satisfaction or benefit gained from consuming one more unit of a good or service.
• As a consumer consumes more units of a good, the marginal utility of that good eventually decreases.
• This concept is known as the Law of Diminishing Marginal Utility.
• When the marginal utility of a good becomes zero, it means that consuming one more unit of the good will not provide any additional satisfaction or benefit to the consumer.
• At this point, the total utility derived from the good is at its maximum, as consuming more units will not increase the consumer's satisfaction.