Economics

Inside Classroom…

KEEP THE CLASSROOM MOBILE PHONES TO BE NO SCRIBBLING

CLEAN PLEASE SWITCHED OFF ON DESKS
 Economics

Theory
of
Consumer’s Behaviour
 Economics

Learning Objective…
▪ Understand as to how MU will behave with the change in TU or vice-versa.

▪ Relate the law of diminishing utility in everyday life.

▪ How consumer decides how many units to buy.

▪ Determine how many units of two commodities will be purchased.

▪ Know the reasons for -

Downward sloping indifference curve
Convex shape of indifference curve

▪ Comprehends the meaning of budget set and budget line.

 Economics

1. Consumer

▪ The one who takes decisions about what to buy for satisfaction of wants, both as an
individual and as a member of household, is called a consumer.

2. Rational Consumer

▪ A consumer who seeks to maximize utility or satisfaction in spending his income is called a
rational consumer.

3. Equilibrium

▪ Equilibrium is a state of balance or stability.

 Economics

4. Consumer’s Equilibrium

▪ Consumer’s equilibrium is the point at which a consumer maximizes her satisfaction levels,
subject to her budget constraint.

5. Budget constraint

▪ The consumer can buy any combination of two goods within his income constraint i.e.

Px. X + Py. Y  M
Where,
▪ Px and Py are price of X and Y goods
▪ X and Y are the amount of X and Y goods purchased
▪ M – money income of the consumer
 Economics

Theory of consumer behavior

Cardinal utility analysis Ordinal utility analysis

Alfred Marshall J. R. Hicks

Utility can be measured Utility can be measured

Cardinally (numerical Ordinally
terms). (ranked)

Theory of Utility Indifference curve theory

 Economics

Cardinal Utility Analysis…

▪ “Utility refers to the want – satisfying power of a commodity”.

▪ “The capacity / ability of a commodity to satisfy human want”

▪ Commodity will possess utility only if it satisfies a want.

Prof Alfred Marshall

 Economics

Features of Utility…

1. Utility is subjective.
It differs from person to 2. Utility is different from
person. usefulness of a commodity.
 Economics

Features of Utility…

3. Utility depends
upon intensity
or urgency of 22
wants
18

10

0
 Economics

Total Utility…
▪ Total utility (TU) refers to the total satisfaction obtained from the consumption of all possible
units of a commodity. It measures total satisfaction obtained from consumption of
all units of that commodity.

▪ Where TUx = Total utility of a commodity X

▪ TU is zero when zero units are consumed. Initial utility - Utility derived from first
unit of a commodity.

▪ TU =  MU
 Economics

Marginal Utility…
▪ Marginal utility refers to the additional utility derived by a consumer by consuming an
additional unit of a commodity at a given point of time. It is utility derived from
the last unit of a commodity purchased.

▪ This is calculated as follows :

a. MU(n) = TU(n) – TU(n-1)

where , MUn = Marginal Utility of nth unit

TUn = Total Utility of (nth) units

OR

𝚫𝐓𝐨𝐭𝐚𝐥𝐔𝐭𝐢𝐥𝐢𝐭𝐲
b. MU =
𝚫𝐔𝐧𝐢𝐭𝐬𝐨𝐟𝐂𝐨𝐦𝐦𝐨𝐝𝐢𝐭𝐲𝐂𝐨𝐧𝐬𝐮𝐦𝐞𝐝
 Economics

TU and MU Schedule…
Bars of Chocolates (N) TU (Utils) MU (TU / N)

0 0 —

1 8 8

2 14 6
Positive
MU
3 18 4

4 20 2
Zero
5 20 0 MU

6 18 –2 Negative
MU
 Economics
TU is Maximum
TU

Total Utility
TU and MU Curve…

0
1 2 3 4 5 6 7 8 9
Marginal Utility No. of units consumed

Positive MU

Zero MU

1 2 3 4 5 6 7 8 9 Negative MU
MU
No. of units consumed
 Economics

Relationship between TU and MU…

1. When TU increases at a decreasing rate, MU decreases but
remains positive.

2. When TU is maximum, MU is zero ( point of saturation/

point of satiety).

3. When TU falls, MU is negative.

 Economics

Law of Diminishing Marginal Utility…

The law states, ‘As more and more units of a commodity are consumed, marginal utility derived from
additional units goes on falling’.

This is the basic tendency of the human nature and that is why this law is considered as a Fundamental
Psychological law. The law was given by H. H. Gossen and thus is also known as
Gossen’s first law of consumption.
 Economics

Assumptions of Diminishing Marginal Utility…

1. The Cardinal Measurability of Utility -

▪ According to Marshall, it is possible to measure utility in numerical terms. The unit of

measuring utility is called ‘utils’.
 Economics

2. Continuity -

▪ The law of DMU holds only when consumption of successive units of commodity is without a
time gap.
 Economics

3. Rationality -

▪ All consumers are assumed to be rational. In other words, they would like to
maximise their utility, given the price of the commodity and their
income levels.
 Economics

4. Homogeneity -

▪ All units of the commodity consumed are homogeneous and perfect

substitutes.

▪ Thus quality is assumed to be uniform.

 Economics

Are the Following Statements True or False..?

1. Total utility is at its maximum when Marginal utility is negative. False

2. When MU declines and is positive, TU increases at a decreasing rate. True

3. Acc. to the law of diminishing MU, as consumption increases TU declines. False

4. If TU after 3 bars of chocolate is 35 utils and after 4 bars is 40 utils, then the MU of the
False
fourth bar is chocolate is 75 utils.

5. Is Equilibrium, a state of balance or stability..? True

 Economics

Fill in the Blanks…

Utility
1. ______________refers to the want – satisfying power of a commodity.

2. The consumer can buy any combination of two goods within his
income constraint
_________________.

subjective
3. Utility is a ______________ concept. It differs from person to person.

saturation
4. When TU is maximum, MU is zero this is known as the point of ___________.

5. The one who takes decisions about what to buy for satisfaction of wants,
both as an individual and as a member of household,
consumer
is called a _____________.

utils
6. The unit for measuring satisfaction is called ____________.
 Economics

Consumer’s Equilibrium…
Consumer’s Equilibrium refers to the situation where the consumer is having maximum
satisfaction with limited income and has no urge\tendency to change his way of
expenditure on the commodity.
 Economics

Assumptions of the Utility Approach…

1.Utility can be
cardinally
measurable
Marginal utility of money is the additional
satisfaction a consumer gains from
spending an extra unit
of money.

2. Prices of
commodities
are given
and remain
constant.

4. Constant
3. Consumer’s
Marginal Utility of
income is given.
Money.
 Economics

Equilibrium Condition
for a
Single Commodity
 Economics
Equilibrium Condition for a Single Commodity…
Let’s understand the equilibrium through an illustration.
Taking MUm = 2 utils.
Units of Marginal MU in terms Price of Gain Direction of
Oranges Utility of Money Oranges (Rs.) Change
Consumed (Utils) (Rs.) (Rs.)

0 0 0 1 –

1 8 8/2 = 4 1 3  Consumption

2 6 6/2 = 3 1 2  Consumption

3 4 4/2 = 2 1 1  Consumption

4 2 2/2 = 1 1 0 Attains equilibrium

5 0 0/2 = 0 1 –1  Consumption

6 –2 –2/2 = –1 1 –2  Consumption
 Economics

Equilibrium Condition for a Single Commodity…

1. MUx (Money) = Px (Price of x)

MUx (Utils)
Mux(money ) =
MU of a rupee

▪ Equilibrium condition can be written as :

MUx (Utils)
 = Px
MU of a rupee

▪ Total gain falls as more is consumed after equilibrium .

 Economics

Equilibrium Condition for a Single Commodity…

CASE I : • If MUx (money) > Px, consumer keeps on consuming more units.When he consumes
more unit, the additional utility derived from consuming X keeps on falling. He keeps
MUx (money) > Px on consuming till MUx (money) = Px.

CASE II : • If MUx (money) < Px, he will decrease the consumption of X.When he decreases the
consumption of X, the marginal utility of X will increase. He will keep on decreasing
MUx (money) < Px consumption of X till MUx (money) = Px.

▪ Thus, MUx (money) = Px is the condition for consumer’s equilibrium in a single commodity case.

▪ The consumer continues to purchase as long as gain is increasing or at least constant .

 Economics

Equilibrium Condition for a Single Commodity…

Y
Consumer’s equilibrium is attained
Price,
MUx when the consumer is consuming 4
Utility
units of commodity.

E P
Px x

X
O N1 N N2
MUx
Units of consumption of Good X
 Economics

Consumer’s Equilibrium
for
Many Commodities
 Economics

Consumer’s Equilibrium for many Commodities…

▪ The law states that, a consumer allocates his expenditure in such a way that the utility
gained from the last rupee spent on each commodity is equal , i.e.,

MUx (Utils) MUy (Utils)

= = MUm
Px Py

▪ Note : The term ‘equi-Mu ‘ doesn't’t refer to the equality of MUs of goods, but
MUs of the last rupee spent on each good.
 Economics

Px = Rs. 2 per unit, Py = Rs. 4 per unit and consumer’s money income is Rs. 20. MUx and
MUy is given in the table shown below:

MUx MUy
Units MUx MUy Px Py
1 20 24 20/2 = 10 24/4 = 6

2 18 20 18/2 = 9 20/4 = 5

3 16 16 16/2 = 8 16/4 = 4
4 14 12 14/2 = 7 12/4 = 3

5 12 8 12/2 = 6 8/4 = 2

6 10 4 10/2 = 5 4/4 = 1
 Economics
▪ As per consumer’s equilibrium conditions, it is satisfied at the following combination
of two goods.
6x + 2y = 6 × 2 + 2 × 4 = 12 + 8 = 20
▪ The entire income of the consumer is spent when he purchases 6 units of X and 2
units of Y.
Px . X + P y . Y = M

6 × 2 + 2 × 4 = 20

20 = 20
 Economics

1. Equilibrium condition for commodity X: Equilibrium condition for commodity Y :

MUx (Utils) MUy (Utils)
= MUm = MUm
Px Py

MUm is constant:

MUx (Utils) MUy (Utils)

= = MUm
Px Py

2.MU of a good falls if more is consumed .

 Economics

Consumer’s Equilibrium for many Commodities…

Case - 1 MUx MUy

Px Py

1. MU from the last rupee spent on X > MU from the last rupee spent on Y

2. Consumer buys more of X and less of Y

3. Marginal utility derived from consuming X decreases due to law of DMU

MUx MUy
4. He keeps on consuming X till - =
Px Py
 Economics
MUx MUy
Case - 2 
Px Py

1. MU from the last rupee spent on X < MU from the last rupee spent on Y

2. Consumer buys more of Y and less of X

3. Marginal utility derived from consuming Y decreases due to law of DMU

4. He keeps on consuming Y till:

MUx MUy
=
Px Py
 Economics

Fill in the Blanks…

consumer’s equilibrium
1. MUx (money) = Px is the condition for _________________________ in a single
commodity case.

Marginal Utility of Money

2. _________________________ is the additional satisfaction a consumer gains
from spending an extra unit of money.

3. Consumer’s Equilibrium refers to the situation where the consumer is having

maximum satisfaction
___________________with limited income and has no urge to change.
________________

cardinally
4.Utility can be ______________ measurable.

Diminishing Marginal Utility

5. DMU stands for ___________________________ .
 Economics

Ordinal Utility Analysis…

This approach is based on ordinal numbers like 1st, 2nd, 4th, etc. which
can be used only for ranking.
 Economics

Useful concepts of Indifference Curve Analysis…

Meaning of Indifference Set -

▪ The combinations A, B, C and D give equal satisfaction to the consumer and

therefore he is indifferent among them. These combinations are together
known as ‘Indifference Set’.
Meaning of Monotonic Preferences -

▪ A consumer’s preferences are monotonic if and only if between

any two bundles, the consumers prefers the bundle which has
more of at least one of the good and no less of the
other good as compared to the other bundle.
 Economics
Comparing two bundles -

(1) 1st.( 2,2) and 2nd. (3,3) • Prefers 2nd bundle to 1st. (More of both the goods)

(2) 1st. (2,2) and 2nd.

• Prefers 2nd bundle to 1st. (More of at least one good)
( 3,2)

(3) 1st. (2,3) and 2nd. • Indifferent between two bundles. (More of one and less
(3,2) of other )
 Economics

Useful concepts of Indifference Curve Analysis…

Meaning of Indifference Map -

▪ Indifference Map refers to the family of indifference curves that represent consumer
preference over all the bundles of the two goods.

Indifference Map
Y
Higher IC represents Higher
level of utility

Commodity Y CI3
IC2
IC1
O X
Commodity X
 Economics

Useful concepts of Indifference Curve Analysis…

Marginal rate of substitution

MRS is defined as the amount of one good the consumer is willing to give up to consume an
additional unit of the other good.

MRS xy = Quantity of the good sacrificed Y Marginal Rate of

Quantity of the good obtained
= Combinations Good X Good Y
X Substitution

A 1 8 —

B 2 4 4Y : 1X

C 3 2 2Y : 1X

D 4 1 1Y : 1X
 Economics
Assumptions of Indifference Curve…
Assumptions
 Economics

Meaning of Indifference Curve…

Indifference curve refers to the graphical representation
of various alternative combinations of the goods, which
Combinations Good X Good Y
provide same level of satisfaction to the consumer.
Y
A 1 8 A (1x + 8y)
8
7
B 2 4
6

Good Y
5
C 3 2 B (2x + 4y)
4
3
D 4 1 C (3x + 2y )
2 D (4x + 1y)
1 IC
X
1 2 3 4
Good X
 Economics
Properties of Indifference Curve…
▪ The indifference curve slopes downwards from left to right i.e. It is negatively
sloped.

▪ This is because when consumer increases consumption of X, he must reduce

consumption of Y to keep the utility level unchanged.

[IC doesn’t touch

either axis
because the
assumption of IC
curve is that he
consumes both
the goods].
 Economics
2. The indifference curve is strictly convex to the origin. This is because MRS declines as he moves downwards
along the indifference curve.
Y
MRS xy = Slope of indifference curve
A
8
7
Combinations Good X Good Y MRS
6

Good Y
5
8 B
A 1 — 4
3 4Y:1X
C
B 2 4 4Y : 1X 2
D
1 2Y:1X
IC
C 3 2 2Y : 1X 1Y:1X
X
1 2 3 4
D 4 1 1Y : 1X Good X

➢ This rate keeps on decreasing due to law of diminishing marginal utility.

➢ He is willing to sacrifice less units of Y to obtain additional units of X .[Initially he is willing to sacrifice 4 units of
X, then 2 units and so on]
 Economics

3. Higher Indifference Curve represents Higher Utility. A set of indifference curves

representing various levels of satisfaction is known as indifference map.

Y2 D

C IC3
Y1
A IC2

IC1

O X
X1 X2
 Economics
4. Indifference curve can never intersect each other.
▪ As two indifference curves cannot represent the same level of satisfaction, they cannot
intersect each other.

▪ Point A and B on IC1 give the same level of satisfaction.

▪ Point A and C on IC2 give the same level of satisfaction.

▪ However, B and C lie on different indifference curves and therefore

can not give the same level of satisfaction. Y
B
▪ Therefore IC1 and IC2 can’t intersect each other.
C

A
IC2
IC1

O X
 Economics

Budget constraint…
The consumer can buy any combination of two goods within his income constraint i.e.
Px. . X + Py . Y  M

Where,

Px and Py are price of X and Y goods

X and Y are the amount of X and Y goods purchased

M – Money income of the consumer.

 Economics
Budget Set…
▪ Budget set refers to the set of possible combinations of the two goods the consumer consumes
which he can afford from his income and prices.
Income = 50 Rs. Price of X = Rs. 10/unit Price of Y = Rs. 5/unit

Affordable bundles :

(0,1) , ( 0,2) , (0,3), (0,4), (0,5), (0,6) , (0,7) , (0,8) , (0,9) ,(0,10)
B
U
(1,1) , (1,2) , (1,3) , (1,4) , (1,5), (1,6), (1,7), (1,8)
D
G
(2,1) , (2,2) , (2,3) , (2,4) , (2,5), (2,6)
E
T
(3,1) , (3,2) , (3,3), (3,4)
S
(4,1) , (4,2)
E
(5,0) T
 Economics

Budget Line…
▪ Budget line is a graphical representation of all possible combination of two goods which can be
purchased with given income and prices, such that the cost of each of these combinations is
equal to the money income of consumer i.e.

PxX + PyY = M

It is also known as
price line.
 Economics

Budget Line…
Income = Rs. 50
Budget Line
Price of X = Rs. 10/unit Price of Y = Rs. 5/unit

Combinations
Good Good Money Spent = Income Y H
X Y (Rs.) 10 A
Unattainable
A 0 10 (0×10) + (10×5)=50 Combination
8 B
B 1 8 (1×10) + (8×5)=50
C
C 2 6 (2×10) + (6×5)=50 Good 6
D 3 4 (3×10) + (4×5)=50 Y 4
G D
E 4 2 (4×10) + (2×5)=50 Income is
2 underspent E
F 5 0 (5×10) + (0×5)=50
F
X
0
1 2 3 4 5
Good X
 Economics

Slope of Budget Line…

▪ The market rate of exchange is the rate at which the two goods can be exchanged
in the market or it is the rate at which the market requires sacrifice of one good to
obtain an extra unit of the other good.
▪ Slope of the budget line = MRE (Market Rate of Exchange)

Quantity of the good sacrificed Y

▪ Thus, MRE = Quantity of the good obtained = X

Price of the good obtained Y

MRE = =
Price of the good sacrified X

Px
MRE = P
y
 Economics
Properties of Budget Line…
1. Budget line is downward sloping from left to right .
▪ The market requires consumer to sacrifice certain units of one good to obtain an extra unit
of the other good. Y
A
10
8 B

Good 6 C
Y 4 D
2 E
F X
0 1 2 3 4 5
Good X
 Economics
Properties of Budget Line…
2. Budget line is downward sloping straight line .
▪ Slope of budget line is equal to MRE i.e. ‘Price Ratio’ of two goods which remains
constant . Y
10 A

8 B

Good 6 C
Y
4 D

2 E

F X
0
1 2 3 4 5
Good X
 Economics

Shift in Budget Line…

▪ Budget line is drawn with the assumptions of constant income of consumer and constant prices
of the commodities.

➢ Effect of Change in the Income of the Consumer

Y
▪ Increase in income - Budget line shifts to right A1
from AB to A1B1.
A
▪ Decrease in income - Budget line shift to A2
left from AB to A2B2.

B2 B1 X
B
 Economics

Activity: Fill in the Blanks…

Indifference Map
1. __________________ refers to the family of indifference curves.
on the budget line
2. Bundles which cost exactly equal to consumer’s money income lie ________________ .
Marginal rate of substitution
3. ______________________________ is defined as the amount of one good the
consumer is willing to give up to consume an additional unit of the other good.
4. Bundles which cost less than consumer’s money income shows under spending.
inside the budget line
They lie_________________________.
5. Bundles which cost more than consumer’s money income are not available to the
outside the budget line
consumer. They lie________________________.
Budget line
6. ________________ is a graphical representation of all possible combination of two goods
which can be purchased with given income and prices.
 Economics
Multiple Choice Questions…
1. Which of this not a property of indifference curve?
(a) Indifference curve slopes downwards
(b) Indifference curve is concave to the origin.
(c) Two indifference curves cannot intersect each other.
(d) Higher indifference curve represents higher level of satisfaction. Ans. (b)

2. Indifference curves are convex to the origin because of -

(a) Increasing MRS
(b) Diminishing MRS
(c) Law of Diminishing Marginal Utility
(d) Law of Equi-Marginal Utility Ans. (b)
 Economics

Multiple Choice Questions…

3. Budget set includes -
(a) All those combinations of two goods which a consumer already possesses
(b) All those combinations of two goods which a consumer cannot afford
(c) All those combinations of two goods which a consumer is willing to buy
(d) All those combinations of two goods which a consumer can afford. Ans. (d)

4. The slope of price line (in case of commodities X and Y) is given by -

(a) Taste and preferences of consumer
(b) Prices of both the commodities
(c) Price of commodity X alone
(d) Price of commodityY alone Ans. (b)
 Economics
Multiple Choice Questions…
5. In the following diagram of budget line, point “D” represents:
(a) Bundle which cost equal to money income of consumer
(b) Bundle which cost less than money income of consumer
(c) Bundle which cost greater than money income of consumer Y
(d) None of these 10 Ans. (b)
8

Good Y
6

2 D
X
O
1 2 3 4 5
Good X
 Economics

Multiple Choice Questions…

6. Slope of budget line is indicated by -
𝑃𝑋 𝑃𝑌
(a) (b)
P𝑦 P𝑥
(c) Both of these (d) None of these Ans. (a)

7. Indifference Map refers to -

(a) Highest Indifference curve (b) Lowest Indifference curve

(c) Family of indifference curves (d) None of these Ans. (c)
 Economics

Multiple Choice Questions…

8. Indifference curves are -
(a) Concave to the origin (b) Convex to the origin
(c) Upward sloping straight line passing from the origin (d) None of these Ans. (b)

9. A consumer in consumption of two commodities A and B is at equilibrium.The prices of A

and B are Rs. 10 and Rs. 20 respectively and the marginal utility of product B is 50.
What will be the marginal utility of product A?
(a) 100 (b) 25
(c) 250 (d) 4 Ans. (b)
 Economics

Consumer’s Equilibrium
through
Indifference Curve Approach
 Economics

Consumer’s Equilibrium through Indifference Curve

Approach…
▪ Consumer’s equilibrium is the point at which a consumer maximizes
her satisfaction levels, subject to her budget constraint and feels no
urge to change .
▪ According to indifference curve approach consumers equilibrium is
determined if the following two conditions are satisfied -

1. MRSxy = MRE = Px / Py

2. MRSxy is declining.
 Economics

Understanding Equilibrium through example -

Let PX = Rs. 4, Py = Rs. 2

Y Px
MRSxy = = Slope of indifference curve MRE = P = Slope of the budget line
X y

Good
Combinations Good X MRS MRE
Y
A 1 8 — —
B 2 4 4Y : 1X 2Y : 1X
C 3 2 2Y : 1X 2Y : 1X
D 4 1 1Y : 1X 2Y : 1X
 Economics

Consumer’s Equilibrium through Indifference Curve

Approach…
Condition 1 - MRSxy = MRE = Px / Py

CASE I : MRSxy > Px / Py

▪ The consumer is willing to pay more for X than the price prevailing in the market.
▪ Consumer would buy more of x.
▪ When he buys more of x, utility derived from X falls and he is willing to sacrifice less of Y.
▪ Thus MRSxy starts declining.
▪ He continues to consume more of X, till MRSxy = MRE = Px / Py
 Economics

Consumer’s Equilibrium through Indifference Curve

Approach…
CASE II: MRSxy < Px / P y

▪ The consumer is willing to pay less for X than the price prevailing in the market.

▪ It induces the consumer to buy less of X and more of Y.

▪ MRSxy began to rise.

▪ He continues to decrease the consumption of X, till MRSxy = Px / Py

 Economics
Consumer’s Equilibrium through Indifference Curve
Approach…
Condition 2 - MRSxy is declining

▪ The indifference curve must be convex to the origin at the point of equilibrium. Unless
MRS continuously falls, the equilibrium cannot be established.
 Economics

Consumer’s Equilibrium through Indifference Curve

Approach…
“A consumer is in equilibrium at a point
where budget line is tangent to
Y
indifference curve”.
F

Good K
Y E Slope of indifference
y1
IC3 curve = Slope of
A budget line i.e.
IC2 MRSxy = Px /Py
G
IC1
O X
x1
Good X
 Economics
Consumer’s Equilibrium through Indifference Curve
Approach…
▪ In the diagram, Equilibrium is at point E, (Budget line touches the highest indifference curve
IC2) where the consumer purchases OX1 quantity of commodity ‘X’ and OY1 quantity of
commodity ‘Y’
▪ Bundles on IC3 are not affordable.

▪ Bundles on the indifference curve IC1 (i.e., points F and G) are on Y

a lower indifference curve. F

Good Y
E
Y1
IC3
A
G IC2
IC1
O X1 X
Good X
 Economics

Did you know...

An indifference curve Ordinal theory is also known

is also known as as neo-classical theory of
‘equal satisfaction consumer equilibrium,
curve’ or ‘iso-utility Hicksian theory of consumer
curve’. behavior,
indifference curve theory,
optimal choice theory.
 Economics
Multiple Choice Questions…
1. Which of these is a condition for consumer’s equilibrium by indifference curve analysis?
𝑀𝑈𝑥 𝑀𝑈𝑌
(a) MUx = Px (b) =
𝑃𝑋 P𝑌
𝑃𝑋
(c) 𝑀𝑅𝑆𝑋𝑌 = (d) MUx = MUy
P𝑌
Ans. (c)
2. The consumer will be in equilibrium where there is tangency between price line
and indifference curve because at this point:
(a) MRS < Price Ratio (b) MRS > Price Ratio
(c) MRS = Price Ratio (d) None of these

Ans. (c)
 Economics
Multiple Choice Questions…
3. For consumer’s equilibrium to be stable, the requirement is:
(a) Constant MRS (b) Increasing MRS
(c) Diminishing MRS (d) None of these Ans. (c)

4. The farther the indifference curve is from the origin, then:

(a) Higher is the satisfaction level
(b) Lower is the satisfaction level
(c) Same satisfaction level will be obtained
(d) Nothing can be said about satisfaction Ans. (a)
 Economics

Multiple Choice Questions…

5. Consumer’s equilibrium is the point at which a consumer maximizes her
satisfaction levels, subject to her ________.

1. Budget Set 2. Budget Constraint

3. Budget Line 4. Budget Ans. (b)
 Economics
Fill in the Blanks…
MRSxy
1. ___________ is the rate at which the consumer is willing to sacrifice Y to obtain
one more unit of X.
Convex
2.The indifference curve must be __________ to the origin at the point of
equilibrium.

equal satisfaction curve

3. An indifference curve is also known as ______________________or
iso-utility curve
_______________.

MRE
4. _______is the rate at which market requires a consumer to sacrifice units ofY to
buy one more unit of X which is equal to ratio of prices of x and y good.

tangent
5. A consumer is in equilibrium at a point where budget line is ____________ to
indifference curve.
 Economics

Let’s Practice…
Ques: A consumer consumes only two goods X andY, both priced at 2 per unit. If the
consumer chooses a combination of the two goods with Marginal Rate of
Substitution equal to 2, is the consumer in equilibrium? Why or why
not? What will a rational consumer do in this
situation? Explain.
▪ Ans - Given Px = 2 , Py = 2 and MRS = 2
▪ A consumer is said to be in equilibrium when MRS = Px/Py. Substituting the values we find that 2 > 2/2
i.e. MRS > Px/Py. Therefore, consumer is not in equilibrium.
▪ MRS > Px/Py means that consumer is willing to pay more for one more unit of X as compared to what
the market demands.
▪ The consumer will buy more and more of X. As a result MRS will fall due to the Law of Diminishing
Marginal Utility.
▪ This will continue till MRS = Px/Py and consumer is in equilibrium.
 Economics

“Success is the sum

of small efforts,
repeated”
Thank You…