Chapter – 2

Theory of consumer behaviour

I. Choose the correct answer (each question carries 1 mark)
1. Utility is
(a) Objective (b) Subjective(c) Both a & b (d) None of the above
2. The shape of an indifference curve is normally
(a) Convex to the origin(b) Concave to the origin (c) Horizontal (d) Vertical
3. The consumption bundles that are available to the consumer depend on
(a) Colour & Shape (b) Price & Income(c) Income & Quality (d) None of the
above
4. The equation of budget line is
(a) Px + P1 x1 = M (b) M = P0 x0+ Px (c) P1 X1 +P2 X2=M (d) Y = Mx + C
5. The demand for these goods increases as income increases
(a) Inferior goods (b) Giffen goods (c) Normal goods (d) None of the above
6. A vertical demand curve is
(a) Perfectly Elastic (b) Perfectly inelastic
(c) Unitary Elastic (d) None of the above
7. Ordinal utility analysis expresses in
(a) Numbers (b)Returns (c)Ranks (d) Awards

II. Fill in the blanks (each question carries 1 mark)

1.Want satisfying capacity of a commodity is utility
2. Two indifference curves never intersect each other
3. As income increases, the demand curve for normal goods shifts towards
rightward
4. The demand for a good move in the opposite direction of its price.
5. Method of adding two individual demand curve is called horizontal summation
6. An equation x y = C gives us rectangular hyperbola.
III. Match the following (each question carries 1 mark)
A B

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 1. Demand curve a. d(p)=a – bp (2)
2. Linear demand curve b. down ward sloping (1)
3. Unitary elasticity of demand c. pen & ink (4)
4. Complementary d. A family of indifference curve (5)
5. Indifference map e. |ed|=1 (3)
IV. Answer the following questions in a sentence/word. (each question carries 1 mark)
1. What is budget line?
Ans: It is a locus of different combinations of the two goods which the consumer
consumes whose price exactly equals his income.
2. What do you mean by cardinal Utility Analysis?
Ans. When the utility is measured & compared in terms of cardinal numbers like 1,
2, 3, 4, 5, and so on.
3. Give the meaning of marginal utility?
Ans. It is the utility derived by the consumer by consuming an additional unit.
4. What is utility?
Ans: Utility refers to the want-satisfying power of a commodity or a service.
5. Expand MRS.
Ans: MRS=marginal rate of substitution.
6. What do you mean by Indifference curve?
Ans: Indifference curve shows the different combinations of two products in which
the consumer gets equal satisfaction.
7. What is demand?
Ans: Demand refers the quantity of a good that consumer purchases in a market at
a particular price & time.
V. Answer the following questions in 4 sentences. (each question carries 2
marks)
1. What is MRS?
Ans: The rate at which one commodity is substitute for another commodity is
known as marginal rate of substitution. MRS is always diminishing in nature.
MRS XY= .
2. What are the difference between budget line and budget set?
Ans.
Budget line Budget set
Budget line budget Line Is A Budget set is a collection of all
locus of all different bundles of goods whose cost is
combinations of two goods equal or less than consumer’s
whose cost is exactly equal to income
consumer’s income
Budget line is also known as Budget set is also called
price line opportunity set
P1X1 +P2X2=M P1X1 +P2X2 ≤ M
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 3. what do you mean by inferior goods? give example.
Ans. the demand for goods which have inverse relationship with consumers
income is called inferior goods example low quality food items clothes, etc.
4. what is monotonic preference?
Ans. A consumers preference are monotonic if and only if between two bundles
the consumer prefers the bundle which has more of at least one of the good and no
less of other good as compared to the other bundles.
5. state the law of demand.
Ans. the law of demand states that if other things being equal a fall in price leads
to expansion in demand and a rise in price leads to contraction in demand the law
explains the negative relationship between price and quantity of demand
6. Mention two different approaches which explain consumer behaviour?
Ans. There are two approaches to study the consumer behaviour they are.
a. Cardinal utility analysis
b. ordinal utility analysis
7. what do you mean by price elasticity of demand?
Ans. Elasticity of demand refers to the percentage change in demand for a good
divided by the percentage change in its price.
ed = ×

VI. Answer the following questions in 12 sentences. (each question carries 4

marks)
1. Write the difference between total utility and marginal utility.
Ans.
TOTAL UTILITY MARGINAL UTILITY
1. It is the aggregate utility 1. It is the additional utility
derived by the consumer by derived by the consumer by
consuming all the units. consuming additional unit.
2. It represents Utility of all 2. It represents the utility of
the units consumed. single unit.
3. It may be symbolically 3. It may be written as
written as TUn=U MU n=TU n-TU n-1
1+U2+U3+U4+ ……...un
4.Total utility never become 4.Marginal utility may
negative. become negative.
2. Briefly explain the budget set with the help of a diagram.
Ans: Suppose the income of the consumer is M and the prices of the two goods are
p1 and p2 respectively.
p1 x1 +p 2 x2 ≤ M
The inequality is called the consumer’s budget constraint. The set of
bundles available to the consumer is called the budget set. The budget set is
thus, the collection of all bundles that the consumer can buy with her income at
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 the prevailing market prices.
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, 2), (3, 1) and (4, 0) cost exactly Rs 20 and all
the other bundles cost less than Rs 20. The consumer cannot afford to buy bundles
like (3, 3) and (4, 5) because they cost more than Rs 20 at the prevailing prices.

Quantity of banana is measured along the horizontal axis and quantity of mango is
measured along the vertical axis. Any point in the diagram represents a bundle of the
two goods. The budget set consists of all points on or below the straight line having
the equation. p1x1 + p2x2= M.

3. Explain the derivation of slope of the budget line with the help of diagram.
Ans: 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 + p2x2≤ M.
The budget set can be represented in a diagram as in

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 All bundles in the positive quadrant which are on or below the line are included in
the budget set.
The equation of the line is p1x1 + p2x2 = M.
The line consists of all bundles which cost exactly equal to M.
This line is called the budget line.
Points below the budget line represent bundles which cost strictly less than M. p1 x1
+p 2 x2 ≤ M
M/p1 The horizontal intercept represents the bundle that the consumer can buy if she
spends her entire income on good 1
and vertical Intercept M/P2the vertical intercept represents the bundle that the
consumer can buy if she spends her entire income on good 2.
The slope of the budget line is –p1/p2.
The slope of the budget line measures the amount of change in good 2 required per
unit of change in good 1 along the budget line.
Consider any two points (x1, x2) and (x1 + Δx1, x2 + Δx2) on the budget line. It must be
the case that p1x1 + p2x2 = M and
p1(x1 + Δx1) + p2(x2 + Δx2) = M
Subtracting 1 from 2, we obtain
p1Δx1 + p2Δx2 = 0
By rearranging terms in we obtainΔX2/∆X1= -P1/P2.

4. Explain the indifference map with a diagram.

Ans:The consumer’s preferences over all the bundles can be represented by a family
of indifference curves. Or it shows set of indifference curves.
Each indifference curve shows different level of satisfaction.
All points on an indifference curve represent bundles which are considered
indifferent by the consumer.

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 Monotonic preferences imply that between any two indifference curves, the bundles
on the above IC are preferred than the bundles on lower IC.

Indifference Map. IC1, IC2 and IC3 are the family of indifference curves. 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 complementary goods with

examples.
Ans:
Substitutes goods Complimentary goods
Goods which are used Goods which are
as alternatives to consumed together to
satisfy a particular satisfy a want are
want are called called complimentary
substitutes goods goods.
For eg. Coffee and tea, For eg. Pen and ink, tea
ball pen and ink pen, and sugar, shoes and
electricity and solar socks, car and petrol
energy etc. etc.
There is a direct There is a inverse
relationship between relationship between
price of a good and complimentary good
substitute good. and price of a good.
Substitute goods have Complimentary goods
competitive demand have joint demand.
One substitute good is Without one
useful in the scarcity complimentary good
of other substitute usage of main good is
good. impossible

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 6. Write the differences between normal and inferior goods.
Ans:
Normal good Inferior good
Normal goods are those goods Inferior goods are those goods
whose demand increases as whose demand decreases as
income increases. income increases.
There is a direct relationship There is an inverse
between consumer income relationship between
and demand for goods. consumer income and demand
for goods.
For e. g. Daily used goods Low quality goods such as
such as vegetables fruits etc. ragi, jowar etc.
The quantity of demand for The quantity of demand for
normal goods increase with an inferior goods deceases with
increase in income an increase in income
In the case of normal goods In case of inferior good
income effect is positive income effect is negative
Income demand curve of Income demand curve of
normal goods is positively inferior goods is negatively
sloped. sloped.

VII. Answer the following questions in 20 sentences. (each question carries 6

marks)
1. Explain the law of diminishing marginal utility(LDMU) with the help of a
table and diagram.
Ans. The law of diminishing marginal utility is one of the important laws of
cardinal utility analysis. German economist H. H GOSSEN was the first to explain
this law. Later it is popularised by prof. Alfred Marshall. This is also called as
Gossen’s first law.
According to Alfred Marshall “the additional benefit which a person derives from
a given increase of its stock of anything diminishes with every increase in the
stock that he already has”. This implies that as the consumer consumes more of a
commodity the utility of additional unit consumed diminished.
Assumptions:
1. Income of the consumer remain constant.
2. Identical units
3. Reasonable size
4. Taste and preference remain constant.
5. The consumer is rational.
6. Utility can be measured in cardinal numbers.

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 This law is explained with the help of following table and diagram.

No. of Total Marginal

mangos utility utility
consumed
1 12 12
2 18 06
3 22 04
4 24 02
5 24 0
6 22 -2

As mentioned in the above table when a consumer goes on consuming mangos one
after the other continuously the first mango gives more utility (12 units) the second
mango gives little less utility (6 units). When he consumes the fifth mango
marginal utility becomes zero and there after becomes negative.

In the above diagram ox axis represents units of mangos consumed and oy axis
represents total utility and marginal utility. The TU curve first rises becomes
constant and then starts falling. The MU curve slops downwards from left to
rightwards. It clearly tells us that the satisfaction derived from the successive
consumption of mangos is falling.

2. Explain the features of indifference curve with the help of diagrams.

Ans: Indifference curves is the locus of different combinations of two commodities
which provide the same level of satisfaction.
1. Indifference curve slops downwards from left to rightwards:
An indifference curve slops downwards from left to rightwards which means as
long as the consumer is on the same indifference curve an increase in one
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 commodity must be compensated by a fall in quantity of another commodity. This
can be shown with the help of following diagram.

As mentioned in the above diagram indifference curve slops downwards an

increase in the number of bananas. (∆X2) associates with a decrease in the number
of mangos (∆X1).
2. Higher the indifference curve gives higher level of satisfaction.
An indifference curve at the extreme right represents higher level of satisfaction
and the curve at the extreme left represents lowest amount of satisfaction.
This can be shown with the help of following table and diagram.
combination Quantity Quantity
of bananas of mangos
A 1 10
B 2 10
C 3 10

As mentioned in the above table and diagram combination A B and C consists of

same quantity of mangos but different quantities of bananas hence higher
indifference curves give higher level of satisfaction (IC3>IC2>IC1).

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 3. Two indifference curves never intersect each other.
Two indifference curves never intersect each other because they represent two
different sets of combinations of two goods providing unequal level of satisfaction.
This can be explained with the help of following diagram.

Two indifference curves cannot represent the same level of satisfaction so they
cannot intersect. C = A, B = A, but C ≠ B. because two indifference curve gives
different level of satisfaction.

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

Ans. The law of demand states that if the other things being equal, a fall in price
leads to increase in quantity demand and a rise in price leads to decrease in
quantity demand.
Demand is not only the function of price of that commodity but also the function
of consumers income price of related goods and commodity so on. The law of
demand is based upon the LDMU. We know that MU curve has negative slope.
Therefore demand curve also has negative slope. Marginal utility and demand
curve are identical to each other. When a consumer buys more and more unit of
commodity, the marginal utility of successive unit of commodity declines.
Therefore, a consumer buys additional unit of commodity only when price falls
because of this reason there is a inverse relationship between price and quantity
demanded.

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 In the above diagram OX axis represents quantity demanded and OY axis
represents price. DD is a demand curve. DD curve is a downward sloping which
shows that people will buy more at lower price as marginal utility will be low and
will buy less at higher price as marginal utility will be high.

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

Ans. It is a situation in which a consumer purchases such a combination of goods
which gives him maximum satisfaction with given income and price and he does
not want to bring any change in it.
Assumptions:
1. Rational consumers
2. Consumers has monotonic preference.
3. Price of a goods and income of the consumer given.
4. No change in taste and preferences.
Two conditions of equilibrium:
1. Budget line should be tangent to IC.
MRSXY = PX/ PY
That is slop of IC and budget line equal to each other.
2. IC should be convex to origin that is MRSXY falls continuously.
The point is where these conditions are fulfilled is called consumer equilibrium
point as shown in the diagram.

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 The consumer buys OX of good X and OY of good Y. any other point like Q and S
cannot be a optimal point because they lie on lower IC1.any point lying onIC3 like
K is beyond the reach of the consumer.
Thus among all combinations on price line or budget line AB, R is on the heist
possible IC that gives maximum satisfaction to consumer. the point R is called
consumer equilibrium because at that point budget line is tangent to IC and
MRSXY = PX/ PY.

5. Explain the movement along the demand curve and shift in demand curve
with the help of diagram.
Ans: We know that DX = f( Px,Pr,Y, T) but demand function is a relationship
between the quantity of the good and its price, when other things remain constant.
The demand curve is a graphical presentation of demand function.
Any change in price leads to movement along the demand curve assuming other
things remain constant (ceteris paribus).

In the diagram on X axis quantity demanded and on Y axis price.

Expansion of demand: when the price deceases from P to P1, the demand curve
expands from Q to Q1 so demand curve moves downwards. This is called
expansion of demand.
Contraction of demand: when the price increases from P to P2, the demand curve
contracts from Q to Q2 so demand curve moves downwards. This is called
contraction of demand.
Shift in demand curve: except price any change in any one of the other
determinants of demand leads to shift in demand curve.
There are Two types of shifts:
a. Increase in demand.
b. Decrease in demand.
This can be shown with the help of following diagram.

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 a. Increase in demand: Other things remaining constant if income of the consumer’s
increases the demand for good changes at given price .the demand curve shifts to
rightward (DD to D2D2) likewise if price of relative good increases (substitute
goods)demand for good increases, if taste and preferences of a consumer is in
favourable for a commodity the demand curve will shift to rightward.

b. Decrease in demand: Other things remaining constant if income of the

consumer’s decreases the demand for good changes at given price, the demand
curve shifts to leftward (DD to D1D1) likewise if price of relative good decreases
(substitute goods)demand for good decreases, if taste and preferences of a
consumer is in unfavourable for a commodity the demand curve will shift to
leftward.

6. Give the meaning and formula of price elasticity of demand and explain the
elasticity along a linear demand curve?
Ans. Elasticity of demand refers to the percentage change in demand for a good
divided by the percentage change in its price.
ed =
∆
ed = ×
∆
elasticity along a linear demand curve let linear demand curve q =a – bp
here any point on the demand curve, the change in demand per unit change in the
∆
price is -b =
∆

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 ∆
ed = ×
∆
∆
= -b × as -b =
∆
= -b × as q = a – bp
=-
Degrees of elasticity of demand can be expressed in the following diagram.

As shown in the diagram price elasticity of demand is different at different points

on the linear demand curve. they are
a. Perfectly elastic demand is at q = 0, i.e., ed = ∞
b. Perfectly inelastic demand is at p = 0, i.e., ed = 0
c. Unitary elastic demand is at p = , i.e., ed = 1
d. Relatively elastic demand is at p > , i.e., ed >1
e. Relatively inelastic demand is at 0 <p < , i.e., ed <1

7. Explain the derivation of the demand curve from indifference curve and
budget constraints.
Ans. If a consumer consuming bananas (B)and mangos(M), whose income is M
and Price of banana=P1 and Price of mangoes = P2. Then the consumer is in
equilibrium as shown in the diagram.

Suppose the price of bananas drops from P1 to P11 and M remaining constant. BL
shifts from AB to AB1 and consumer moves to new equilibrium on higher
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 indifference curve at point D. here he buys more of bananas (X2) thus demand for
bananas increases as price falls. Likewise, price of banana can be dropped further
P111 results in further increase in consumption of banana(X3). Therefor demand
curve for bananas is thus negatively sloped.
Negative slop of demand curve can also explain in terms of Two effects namely,
a. substitution effect.
b. income effect.
a) Substitution effect: when the price of a commodity falls, price of substitutes
remains constant, the consumer will buy more of that commodity. For e.g. When
bananas become cheaper the consumer maximises his utility by substituting
bananas for mangos in order to derive the same level of satisfaction of a price
change. So, demand for bananas increases.
b) Income effect: a change in price of a commodity affects consumer real income is
called income effect. For e. g, as price of bananas drops consumer’s purchasing
power increases, which further increase in demand for bananas.
8. Explain market demand with the help of diagram?
Ans. In the market for a good, there are many consumers. It is important to
find market demand for a good.
Meaning. Market demand for a good at a particular price is total demand of
all consumers.
Derivation of demand curve.
The market demand for a good can be derived from the individual demand
curves as shown in the diagram.

If there are only two consumers in the market. Suppose at price 𝑃 , demand of
/ /
consumer 1 is 𝑞 and demand of consumer 2 is 𝑞 . Then market demand of the
/ /
good at P1 is 𝑞 +𝑞 . Similarly at price ,demand of consumer 1 is and
demand of consumer 2 is . Then market demand is + as shown in the
diagram.
Market demand curve of a good can be derived by adding up the individual
demand curves horizontally called horizontal summation.
Adding up two linear demand curve.d1 (p) = 10 -p
.d2(p) = 15-p

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 -----------------
Md = 25 – 2p
VIII. Assignment and project-oriented question.( 5 Marks)
1. A consumer wants to consume Two goods. The price of bananas is Rs.5and the
price of mangos is Rs.10. the consumer income is Rs.40.
a. How much bananas can he consumes if he spent his entire income on that good.
b. How much mangos can he consumes if he spent his entire income on that good.
c. Is the slop of budget line downward or upward?
d. Are the bundles on the budget line equal to the consumer’s income or not?
e. If you want to have more of bananas you have to give up mangos. Is it true?
Ans. a. he can consume 8 bananas, (40/5=8) if he spent his entire income on that good.
b. he can consume 4 mangoes, (40/10=4) if he spent his entire income on that good.
c. the slop of budget line is downward.
d. yes, The bundles on the Budget line are equal to consumer’s income.
e. True. If we want to have more of banana, we must give up mangoes.

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