3. theory of consumer behavior: MU & Ind. Curve Analysis

Question 1

when will a consumer be in equilibrium?

Answer 1

a consumer will be in equilibrium when he spends his given income on the purchase of goods so as to maximise his total utility.

Question 2

What is Utility?

Answer 2

Utility refers to the amount of satisfaction derived from the consumption of a commodity.

Question 3

Define Total Utility.

Answer 3

Refers to the total satisfaction derived by the consumer from the consumption of a specific quantity of a commodity.

Question 4

Define Marginal Utility.

Answer 4

Refers to the additional utility derived from the consumption of an additional unit of a commodity.

Question 5

Define Satiation Point.

Answer 5

A Satiation point is a point beyond which additional consumption actually reduces total utility.

Question 6

Describe the relationship between Total and Marginal Utilities.

Answer 6

When TU is: When MU is:
1. increasing at a 1. decreasing,
decreasing rate. but is positive.
2. at the maximum 2. zero.
3. decreasing. 3. negative.

Question 7

State the Law of Diminishing MArginal Utility.

Answer 7

The law states that as the amount consumed of a commodity increases, other things being equal, the utility derived by the consumer from the additional units, i.e., marginal utility, goes on decreasing.

Question 8

Consumer’s Equilibrium (One Commodity Case) is based on which approach?

Answer 8

Cardinal Approach.

Question 9

Explain briefly Consumer’s Equilibrium through Cardinal Utility Approach.

Answer 9

A utility maximising consumer will be in equilibrium when he purchases that much quantity of the commodity where the marginal utility of the commodity equals its price.

Question 10

State the Law of Equi-Marginal Utility.

Answer 10

The law states that the utility maximising consumer must allocate his income among various commodities in such a way that the last unit of money spent on each commodity gives him the same marginal utility.

Question 11

State the formula used in consideration of the Law of Equi - Marginal Utility.

Answer 11

MU(x)/P(x) = MU(y)/p(y) = MU per unit of money

Question 12

Indifference Curve Analysis is based on which approach?

Answer 12

Ordinal Utility Approach.

Question 13

What is the Indifference Curve?

Answer 13

An Indifference Schedule refers to a schedule that shows various combinations of two goods that give equal amount of satisfaction to the consumer.

Question 14

Give the other name for Indifference Curve.

Answer 14

ISO - Utility Curve

Question 15

What is an Indifference Map?

Answer 15

A group or set of indifference curves each one of which represent a given level of satisfaction.
example - IC1 / IC2 / IC3, etc.

Question 16

Define Marginal Rate of Substitution.

Answer 16

MRS is the rate at which the consumer is willing to substitute one good for another without changing the level of satisfaction.

Question 17

Mention the properties of Indifference Curve.

Answer 17

1. Slopes Downward from left to right.
2. Convex to the Origin.
3. A higher IC yields higher satisfaction.
4. Two ICs never intersect each other.

Question 18

What is a Budget Line?

Answer 18

A Budget Line shows various combinations of two commodities which can be purchased with a given budget at given prices of two commodities.

Question 19

Explain in brief Consumer’s Equilibrium through the Indifference Curve Approach.

Answer 19

A consumer attains his equilibrium when he maximises his tital utility, given his income and the prices of the two commodities.

Question 20

What is Tangency Point?

Answer 20

Tangency Point, often denoted by the letter T, is the highest level of utility or the highest indifference curve that the consumer can achieve, subject to the budget constraint.

Question 21

Give the MRS formula in consideration of the price ratio of two goods.

Answer 21

MRS = Price Ratio of two goods.
or
MRS(xy) = Px/Py