CHAPTER – 2 - CONSUMER BEHAVIOUR

I Choose the correct answer

1. Utility is
a) Objective c) Both a and b
b) Subjective d) None of the above
Ans: (b) Subjective
2. The shape of an Indifference curve is normally
a) Convex to the origin c) Horizontal
b) Concave to the origin d) Vertical
Ans: (a) Convex to the origin
3. The consumption bundle that are available to the consumer depend on
a) Colour and shape c) Income and quality
b) Price and income d) None of the above
Ans: (b) Price and income
4. The equation of Budget line is
a) Px+p1x1=M c) P1x1+p2x2=M
b) M=P0X0+Px d) Y=Mx+C
Ans: c) P1x1+p2x2=M
5. The demand for these goods increases as income increases
a) Inferior goods c) Normal goods
b) Giffen goods d) None of the above
Ans: (c) Normal goods
6. A vertical demand curve is
a) Perfectly elastic c) Unitary elastic
b) Perfectly inelastic d) None of the above
Ans: (b) Perfectly inelastic
7. Ordinal utility analysis expresses utility in
a) Numbers c) Ranks
b) Returns d) awards
Ans: (c) Ranks

II Fill in the blanks

1. Wants satisfying capacity of commodity is ……………….
Ans: Utility

2. Two indifference curves never ……………….. each other.

Ans: Intersect
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3. As income increases, the demand curve for normal goods shifts
towards………………….
Ans: Rightward

4. The demand for a good moves in the …………………….direction of its price

Ans: Opposite
5. Method of adding two individual demand curve is called as……………………
Ans: Horizontal summation

6. An equation xy=c gives us ……………………hyperbola

Ans: Rectangular

III Match the following

A B

1. Demand curve a) D(p)=a-bp

2. Linear Demand curve b) Downward sloping
3. Unitary elasticity of c) Pen and ink
demand d) A family of Indifference
4. Complementary goods curve
5. Indifference map e) |ed|=1

Ans: 1-b; 2-a; 3-e; 4-c; 5-d;

IV Answer the following questions in a sentence or a word

1. What is budget line?

Ans: The line consists of all bundles of goods which cost exactly equal to the money
income of consumer is called budget line.

2. What do you mean cardinal utility analysis?

Ans: When the utility is measured in numbers like 1,2,3,4…., it is called as cardinal
utility analysis. It was advocated by Prof.Alfred Marshall.

3. Give the meaning of marginal utility.

Ans: Marginal utility refers to an additional utility derived by the consumer by

consuming an extra unit of a commodity.

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4. What is utility?

Ans: Utility refers to the want-satisfying power of a commodity or a service.

5. Expand MRS.

Ans: Marginal Rate of Substitution.

6. What do you mean by indifference curve?

Ans: Indifference curve shows the different combinations of two goods that give
same level of satisfaction to the consumer.

7. What is demand?

Ans: The concept ‘demand’ refers to the quantity of a good or service that a
consumer is willing and able to purchase at various prices, during a period. It
includes desire for a commodity, ability to pay and willingness to pay.

V Answer the followings in 4 sentences.

1. What is MRS?

Ans: MRS is the rate at which the consumer will substitute one product for another,
so that her total utility remains constant. It can be represented as follows:

MRS = ΔY/ΔX

2. What are the differences between budget line and budget set?

Budget Line Budget Set

• It is a locus of different • It is a collection of all bundles

combinations of the two goods available to a consumer at the
which the consumer consumes existing price at his given level of
and whose price exactly equals income.
his income.
• It is also known as opportunity
• It is also known as Price line. set

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3. What do you mean by inferior goods? Give example.

Ans: The inferior goods are those goods for which the demand increases with the
fall in income of consumer and vice-versa. That is, there will be a negative
relationship between income of consumer and demand for inferior goods. Example:
Low quality goods.

4. What is monotonic preference?

Ans: A consumer’s preferences are said to monotonic if and only if between any
two bundles, the consumer prefers the bundle which has more of at least one of the
goods and no less of the other good as compared to the other bundle.

For instance, the consumer, between any bundles say (x1,x2) and (y1, y2), if (x1,x2)
has more of at least one of the goods and no less of the other good compared to (y1,
y2) then the consumer prefers (x1,x2) to (y1, y2). This is called monotonic
preferences.

5. State the law of demand?

Ans: Law of Demand states that other things being equal, there is a negative relation
between demand for a commodity and its price.

• In other words, when price of the commodity increases, demand for it falls
and when price of the commodity decreases, demand for it rises, other factors
remaining the constant.

6. Mention two different approaches which explain consumer behavior.

Ans: The two approaches which explain consumer behaviour are:

• Cardinal Utility Analysis – Law of Diminishing Marginal Utility

• Ordinal Utility Analysis – Indifference Curve analysis

7. What do you mean price elasticity of demand?

Ans: Price elasticity of demand is a measure of the responsiveness of the demand

for a good to changes in its price. Price elasticity of demand for a good is defined as

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the percentage change in demand for the good divided by the percentage change in
its price. It is measured by using the following formula.

PED = Percentage change in demand for the good

Percentage change in price of the good
VI Answer the following questions in 12 sentences.

1. Write the differences between total utility and marginal utility.

Total Utility Marginal Utility

• It is the aggregate utility derived • It is the additional utility derived

by the consumer by consuming all by the consumer by consuming
the units. additional unit

• It represents utility of all the units • It represents the utility of single

consumed. unit.

• It may be symbolically written as • It may be written as

TUn=U1+U2+U3+U4………….U
MUn=TUn-TUn-1.
n.

• It increases in the beginning and

later decreases as the consumer • It decreases from the beginning
consumes more and more units. and becomes negative later.

2. Briefly explain the budget set with the help of a diagram.

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 Ans: The budget set is the collection of products that the consumer can buy with his
income at the prevailing market prices.

• The Budget set is also known as opportunity set. It includes all the
bundles (all possible combination of two goods) which the consumer can
purchase with his given level of income.
• The budget equation can be written as follows: P1X1 + P2 X2 ≤ M. For
example, a consumer who has Rs.20 and suppose, both the goods are priced
at Rs.5 and are available only in integral units.
• The bundles that this consumer can afford to buy are; (0,0), (0,1), (0,2),
(0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4,0).
• Among these bundles, (0,4), (1,3), (2,0), (2,2), (3,1) and (4,0) cost
exactly Rs.20 and all the other bundles cost less than Rs.20.
• If both the goods are perfectly divisible, the consumer’s budget set
would consist of all bundles (x1, x2) such that x1 and x2 are any numbers
greater than or equal to 0 and P1X1 + P2 X2 ≤ M.

The budget set can be represented in a diagram as follows:

MANGOES

M/P2 P1X1 + P2 X2 =M.

O BANANAS X

• Quantity of bananas is measured along the horizontal axis and quantity of

mangoes is measured along the vertical axis.
• Any point in the diagram represents a bundle of the two goods.

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 • The budget set consists of all points on or below the straight line having the
equation P1X1 + P2 X2 =M.

3. Explain the derivation of slope of the budget line.

Ans: The slope of the budget line measures the amount of change in mangoes
required per unit of change in bananas along the budget line.

• For example, the amount of change in mangoes required per unit of change in
bananas along the budget line is the derivation of slope of the budget line. It
can be represented in diagram as follows:

Mangoes

(X1,X2)

ΔX2

( X1 +ΔX1, X2+ΔX2)
ΔX1
X

Bananas

The absolute value of the slope of the budget line measures the rate at which the
consumer can substitute bananas for mangoes when she spends her entire budget.

➢ Let us consider two points (x1, x2) and (x1 + Δx1, x2+Δx2) on the budget line.
It will be as follows:
• P1X1 + P2 X2 =M……………..(1)
• P1 (x1 + Δx1) + P2( x2+Δx2)=M …………(2)

Now subtracting (1) from (2), we get

• P1Δx1+ P2Δx2=0…………….(3)

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By rearranging terms in (3) we get

• Δx2/Δx1 = -P1/P2 ....................(4).

Therefore, the slope of the budget line is -P1/P2.

This means, the Indifference curve is negatively sloped i.e., it slopes downwards.
An increase in the number of bananas along the indifference curve is associated with
a decrease in the number of mangoes.

4. Explain the indifference map with the diagram.

Ans: A family of indifference curves is called as indifference map. It refers to a set

of indifference curves for two commodities showing different levels of satisfaction.

A rational consumer always chooses more of that product that offers him a higher
level of satisfaction which is represented in higher Indifference Curve. It is also
called ‘Monotonic Preferences’.

Good x

IC3

BHI IC2

IC1

0 Good Y

In the above diagram, we see the group of three indifference curves showing
different levels of satisfaction to the consumer. The arrow indicates that bundles on
higher indifference curves are preferred by the consumer to the bundles on lower
indifference curves.

5. Write the differences between substitutes and complements.

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Ans: Substitute goods are the goods which are used alternatively to satisfy the wants.
Whereas complementary goods are consumed together to fulfil a want.

Substitute goods Complementary goods

• These are alternative goods • These are the goods which are
available to satisfy our wants. consumed together.

• If the price of a product • If the price of a product

increases, the demand for its increases, the demand for its
substitute also increases. complementary good decreases.

• Example for complementary

goods are Car and Petrol, Pen and
• Example for substitute goods are
Ink etc
Tea and Coffee, sugar and jaggery
etc. • Here the demand curve shifts to
left in case of price rise.
• Here the demand curve shifts to
the right in case of price rise.

• Price and demand move in same • Price and demand move in

direction. opposite directions.

6. Explain the differences between normal and inferior goods with examples.

Normal goods Inferior goods

• These are the goods for which • These are the goods for which
the demand increases with the the demand decreases with the
increase in the income of increase in the income of
consumer. consumer.

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• Example for normal goods are • Example for inferior goods are
food, cloths, electronic goods, low quality of goods like
luxury goods etc. unbranded products.

• There is positive relationship • There is inverse relationship

between income and demand. between income and demand.

• Here the demand curve shifts • Here the demand curve shifts
towards right if the income of towards left if the income of
consumer increases. consumer increases.

VII Answer the following questions in 20 sentences

1. Explain the law of diminishing marginal utility with the help of a table and
diagram.

One of the most important propositions of the cardinal utility approach to demand
was the Law of Diminishing Marginal Utility.

• German Economist Gossen was the first to explain it. Therefore, it is called
Gossen’s First Law.

Definition: According to Alfred Marshall, “The additional benefit which a person

derives from a given increase of a stock of a thing diminishes, other things being
equal, with every increase in the stock that he already has”.

• This law simply tells us that, we obtain less and less utility from the successive
units of a commodity as we consume more and more of it.

ASSUMPTIONS OF THE LAW OF DMU:

• Uniform quality and size of the commodity: The Successive units of the commodity
should not differ in any way either in quality or size.

• Suitable quantity of consumption: The commodity units should not be very small;
E.g. Milk should be in glasses and not in spoons.

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• Consumption within the same time: Consumption must be continuous. There
should not be so much difference in time between the consumption of successive
units.

• No change in the price of the commodity or its substitutes: The law assumes that
the commodity’s price is not changes with successive units. The price of the
substitutes is also kept at the same level.

• Utility can be measured in cardinal numbers i.e., 1, 2, 3, 4, …….

• Consumer must be rational, i.e., every consumer wants to maximize his

satisfaction.

➢ Explanation of Law of Diminishing Marginal Utility:

The basis of this law is that every want needs to be satisfied only upto a limit. After
this limit is reached the intensity of our want becomes zero. It is called complete
satisfaction of the want. Therefore, s we consume more and more units of a
commodity to satisfy our need, the intensity of our want for it becomes less and less.
Therefore, the utility obtained from the consumption of every unit of the commodity
is less than that of the units consumed earlier. This can be explained with the help of
the following table and the diagram. TU- Total Utility, MU- Marginal Utility.

Units of Apples TU MU

1 30 30

2 50 20

3 65 15

4 75 10

5 80 5

6 82 2

7 82 0

8 80 -2

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 T (Highest utility)

Utility

TU

Satiety

MU No. of Apples

Negative Utility

In the diagram,

• The horizontal axis shows the units of apples and the vertical axis measures
the MU and TU obtained from the units of apple.
• The total utility Curve will be increasing in the beginning and later falls.
• The Marginal Utility curve is falling from left down to the right clearly tells
us that the satisfaction derived from the successive consumption of apples is
falling.
• The Marginal Utility of the first apple is known as initial utility. It is 30 utils.
• The Marginal utility of the seventh apple is Zero.
• Therefore, this point is called the satiety point.
• The Marginal Utility of the eighth apple is -2. So, it is called Negative utility
and lies below the X axis.

2. Explain the features of Indifference curves with the help of diagrams.

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Ans: Indifference curve shows the different combinations of two goods that give
same level of satisfaction to the consumer. The main features of Indifference curves
are as follows:

a) Indifference curve slopes downwards from left to right: An indifference

curve slopes downwards from left to right because, the consumer in order to
have more of one product, he has to forego some units of other product. This
can be explained with the help of diagram.

Mangoes

IC

Bananas

Thus, according to above diagram, as long as the consumer is on the same

indifference curve, an increase in bananas must be compensated by a fall in quantity
of mangoes. That means, an increase in the amount of bananas along the indifference
curve is associated with a decrease in the amount of mangoes.

b) Higher indifference curve gives greater level of utility: As long as

marginal utility of a commodity is positive; a consumer always prefers more
of that commodity to increase his level of satisfaction. This can be explained
with the help of table and a diagram:

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Mangoes

10 A B C
IC3

IC2
IC1

1 2 3 Bananas

Combination Banana Mango

A 1 10

B 2 10

C 3 10

Let us consider the different combinations of two goods bananas and mangoes A, B
and C in the above table and diagram. All the three combinations consist of same
quantity of mangoes but different quantities of bananas. As combination B has more
bananas than A, B will provide the consumer higher level of satisfaction than A.
Therefore, B will lie on higher indifference curve. Similarly, C has more bananas
than B and therefore C will provide higher level of satisfaction than B and lie on
higher indifference curve than B.

Thus, higher indifference curves give greater level of utility.

c) Two indifference curves never intersect each other: If the two indifference
curves intersect each other, they will give conflicting results. This can be explained
with the help of diagram.

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MANGOES

A
B

C
BANANAS

In the above diagram the two indifference curves have intersected with each other.
As points A and B lie on IC2, utilities derived from A and B are same. Similarly, as
points A and C lie on the same indifference curve IC1, the utilities are same. From
this, it follows that utility from point B and C are same. But this is clearly an absurd
result as on B, the consumer gets a greater number of mangoes with the same
quantity of bananas. So, the consumer is better off at point B than at Point C. Thus,
intersecting indifference curves will lead to conflicting results. Thus, two
indifference curves cannot intersect each other.

3. Explain the derivation of demand curve in the case of single commodity.

Ans: By keeping the prices of other goods, the consumer’s income and her tastes and
preferences remain constant, the amount of a good that the consumer optimally
chooses becomes entirely dependent on its price.

• The relation between the consumer’s optimal choice of the quantity of a good
and its price is important, and this relation is called as demand function.
• Thus, the consumer’s demand function for a single commodity gives the
amount of the commodity that the consumer chooses at different levels of its
price when the other things remain unchanged.
• The consumer’s demand for a single commodity as a function of its price can
be written as

X = f (P) 18

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Where X denotes the quantity and P represents the price of the commodity.

The demand function can be represented graphically.

The graphically representation of the demand function is called the demand curve.

• The relation between the consumer’s demand for a good and the price of the
good is likely to be negative.
• That means, the amount of a good that a consumer would optimally choose is
likely to increase when the price of the good falls and it is likely to decrease
with a rise in the price of the good.

X
Price X=f(y)

O Y
Quantity

The demand curve is a relation between the quantity of the good chosen by a
consumer and the price of the good. The independent variable (price) is measured
along the vertical axis and dependent variable (quantity) is measured along the
horizontal axis. The demand curve gives the quantity demanded by the consumer at
each price.

4. Explain the optimal choice of consumer with the help of diagram.

It is assumed that the consumer chooses her consumption bundle based on her taste
and preferences over the bundles in the budget set.

• It is generally assumed that the consumer has well defined preferences over
the set of all possible bundles.

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 • She can compare any two bundles. In other words, between any two bundles,
she either prefers one to the other or she is indifferent between the two goods.
• It is further assumed that the consumer is a rational individual.
• A rational individual clearly knows what is good or what is bad for her and in
any given situation, she always tries to achieve the best for herself.
• From the bundles which are available to her, a rational consumer always
chooses the one which gives her maximum satisfaction.
• The consumer always tries to move to a point on the highest possible
indifference curve given her budget set.

Thus, the optimum point would be located on the budget line. A point below the
budget line cannot be the optimum. Compared to a point below the budget line, there
is always some point on the budget line which contains more of at least one of the
goods and no less of the other. Thus, the consumer’s preferences are monotonic.

The point at which the budget line is tangent to one of the indifference curves would
be the optimum choice of consumer. This is because, the budget line other than the
point at which it touches the indifference curves lies on a lower indifference curve
is considered as inferior. So, such a point cannot be the consumer’s optimum. The
optimum bundle is located on the budget line at the point where the budget line is
tangent to an indifference curve.

This can be explained with the help of the following diagram.

Mangoes

X1, X2

IC3

IC2

IC1

O Q Bananas

• In the above diagram, PQ is budget line, IC1, IC2 and IC3 are indifference
curves showing different levels of satisfaction.

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 • Banana is measured in OX axis and Mango is measured in OY axis.
• The above diagram illustrates the consumer’s optimal choice also known as
consumer’s equilibrium.
• At (x1,x2), the budget line PQ is tangent to the indifference curve IC2. The
indifference curve just touching the budget line is the highest possible
indifference curve given the consumer’s budget set. Bundles on the
indifference curve above IC2 are not affordable. Points on the indifference
curve IC2 are certainly inferior to the points on the IC2 as they lie on IC1.
Therefore, (x1,x2) is the consumer’s optimum bundle.

5. Explain the movement along the demand curve and shift in demand curve
with the help of two diagrams.

It is important to note that the amount of a good that the consumer chooses depends
on the price of the good, the prices of other goods, income of the consumer and her
tastes and preferences.

• The demand function is a relation between the amount of the good and its
price when other things remain constant.
• The demand curve is a graphical representation of the demand function. At
higher prices, the demand is less and at lower prices, the demand is more.
Thus, any change in the price leads to movements along the demand curve.
• On the other hand, changes in any of the other things like, income of
consumer, price of related goods (substitutes and complementary goods) and
tastes and preferences, lead to a shift in the demand curve. The following two
diagrams depict the movement along the demand curve and a shift in the
demand curve.

(a) (b)

Y Y

Price Price

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 O X Quantity X

The above diagrams show movement along a demand curve and shift of a demand
curve. Diagram (a) depicts a movement along the demand curve and diagram (b)
depicts a shift in the demand curve.

VIII Assignment and project-oriented question

1. A consumer wants to consume two goods. The Price of bananas is Rs.5 and
price of mangoes is Rs.10. The consumer income is Rs.40.

a) How much bananas can she consume if she spend her entire income on that
good

b) How much mangoes can she consume if she spend her entire income on that
good

c) Is the slope of budget line is downward or upward

d) Are the bundles on the budget line equal to the consumers’ income or not

e) If you want to have more of banana you have to give up mangoes. Is it true?

Ans: (a) 8 Bananas (40/5)

(b) 4 Mangoes (40/10)

(c) Slope of budget line is downward.

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(d) Yes, the bundles on the budget line are equal to the consumer’s income.

(e) True. If we want to have more of banana, we have to give up mangoes.

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