ET Consumer Behaviour-I

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Economics PG Entrance
Economics: Consumer Behaviour-I

I. Budget Line: The set of all those bundles of the two goods that cost exactly M
𝑝1 𝑥1 + 𝑝2 𝑥2 = M
Properties of budget line :
1. The slope of a budget line i.e. 𝑑𝑥2 /𝑑𝑥1 = -𝑝1 /𝑝2 in case of a linear set
2. Vertical intercept: M/𝑝2 , horizontal intercept: M/𝑝1
3. If p1 increases (decreases), budget line becomes steeper (flatter).
4. If M increases (decreases), budget line shifts parallely outwards (inwards).
5. A budget set can take various shapes and sizes. It can be non-linear, truncated, disjoined
etc. In that case, construction of the budget set has to follow the definition of 𝑑𝑥2 /𝑑𝑥1

Is the two good world enough for all analysis? Yes, if we can interpret one of the two goods as
representing everything else the consumer might want to consume. In that case, we can
interpret say good 2 as not the quantity of all other goods but money spent on all other goods.
Budget set then would be 𝑝1 𝑥1 + 𝑥2 = M

II. Preferences of a consumer

Properties for consumer’s prefernces:

1. Completeness
A consumer can always rank any 2 bundles as
a) X ≥ Y
b) Y ≥ X
c) Both a and b

2. Reflexivity
Any bundle is atleast as good as itself. X ≥ X

3. Transitivity
If, X ≥ Y, and Y ≥ Z then X ≥ Z

4. Monotonicity
“More is preferred to less”; this implies that, given any set of two bundles, if one of them
contains at least as much of all goods and more of one good than the other, then the first
bundle will be preferred to the second.

5. Strict Convexity
Any combination of two equally preferable bundles will be more desirable than these
bundles.

Indifference curves: IC represents all those combinations of two goods over which a consumer
is indifferent. Along an IC, the level of utility attained is constant. A higher indifference curve for
two represents a higher utility level as more is better. The set of all ICs for a consumer is called
his indifference map.

Theorem: A consumer’s ICs are strictly convex to the origin iff law of diminishing MU holds

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Utility functions:
Utility functions are mathematical expressions of indifference curves. Higher ICs give a larger
value for a utility function. These values are not cardinal utilities but preference rankings, with a
larger utility number representing higher rankings

The slope of an IC is called the marginal rate of substitution and is calculated by dx2/dx1. It
comes to MRS = MU𝑥1 /MU𝑥2

Some standardised preference relations:

1. Coke and Pepsi are examples of Perfect Substitutes: Two goods that a consumer is
willing to substitute one for another at a constant rate. Slope of the IC is constant.
U= ax+by where a and b indicate the value of the good to the consumer

2. Left shoe and right shoe are examples of Perfect Compliments: Two goods that a
consumer will always use together in a constant proportion.
U= min(x/a ,y/b) where a and b indicate the proportions in which goods are consumed.

3. Economic bad: A good is called an economic bad if the consumer does not like
consuming it.

4. A good is called a neutral good if a consumer is indifferent between consuming and not
consuming that good.

5. Concave preferences: Two economics goods that a consumer likes but doesn’t prefer
consuming them together.

6. Quasilinear preferences: Quasi linear or partially linear IC s are vertically shifted

versions of one another. Hence they all have the same slopes. U(𝑥1 ,𝑥2 )= v(𝑥1 )+𝑥2

c d
7. Cobb Douglas Preferences: U= x1 x2

8. Non-existence of a utility function: lexicographic ordering

Out of two bundles A(x1, y1) & B (x2, y2) a consumer prefers the bundle which has more of
good x, irrespective of the amount of good y. If x1=x2, then he would prefer the bundle
which has a larger quantity of Y.

9. Satiation: when there exists a bliss point i.e. you don’t want more or less of that good,
but one particular quantity. Then the ICs are concentric circles around that bliss point.

Monotonic Transformation of Utility: Transform a utility function into another function in

such a manner that it preserves the preference rankings generated by the first function.
Eg: addition of a number to the existing utility function, multiplication by a positive
number, raising utility to an odd power.

Optimal choice: Choosing a bundle which h gives the maximum utility with the given
income.

Types of Solutions :
1. Perfect Substitutes- Boundary or infinite solutions depending on the slopes
2. Perfect compliments-Interior solution-may at the kink or the arms of ICs

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3. Concave preferences-boundary solution

4. Cobb Douglas -Fraction of income that the consumer spends on two goods isc/c+d for
good 1 and d/d+c for good 2.. Hence a cobb-douglas consumer always spends a fixed
fraction of his income on the two goods.
x1.p1/m1 = c/c+d
x1=m1c/p1(c+d)
(The above equations straight away gives the demand function of good x1. This result may
be memorised.)

Past Years’ Questions

ISI
2018 – 1(Satiation), 2, 3 (P.C.)
2017-16(sub)
2016 – 3(BLine)
2015 - Q1(combi)
2014 Q:2(a) (bad)
2012 Q:3 (demand fn) Q:5
2011 Q:2 (B line), 4 (DD Fn)
2010 Q6(B) (Bline) , 9 (convex)
2007 Q1(B)(CS),Q4 A (convex), Q5 B (min), Q6 B(dd fn)
2006 Q6 (bad)
2005 Q:3
2004 Q5, 6

DSE
2019 Q21(Quasi-Linear), 25(BLine)
2018 Q36 (Properties IC)
2017 Q1,2, (Lexico), 13(min)
2016 Q19(min) 20(min)
2015 Q5(lexico)
2013 Q31(min)
2012 Q4,
2011 Q41(min),42(min)
2010 Q7,8, 37(convex)
2009 Q11(BLine), 21(concave), 22(convex), 26(B line), 27 (B line)
2008 Q6, 7(min)
2007 Q1, (sub), Q23
2006 Q11, 42 (min)
2005 Q15 (B line)

JNU Questions

SIS Papers SSS Papers

2017 - 7 (subs) , 8(homoge), 21(cobb) 2017 - 20( e) ,28 , 29(decomp),

36(decomp) ,41(quasi)
2016 – 42,(quasi) 43(comple)
2015 – 32(decom),34(decom), 37(e),
38(cobb)
2013 – 1(quasi),2(cobb), 10 (decom)
2011 – 1(decom), 5(Cobb), 25(U)
2010 – 1(a)(quasi)
40(decomp),43(max),45(comple)
2016 – 11(axiom), 30(MRS), 33-36(quasi),
46(lexi), 48(subs)
2015 – 51(optimiza), 53(B line), 54(B line),
57(B line)
2014 – 23(decom)
2013 – 2(B line), 59(Indirect u),71(decom)

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2009 – 1(Quasi + dd fn) 2012 – 56-58(cobb), 62(min max),

2006 – 2(a)(perfect sub + engel)
2005 – 2(a)(dd fn cobb douglas)
80,81(decomp)82-87(comple)
2011 – 9(subs), 24-27(discount & risk),
29(easy),30( e), 31(subs), 96(B line), 97(B
line)
2010 – 17(subs), 19-21(decomp), 23(max)
2009 – A1(engel) A2(easy),,B3(comp),
B7(reveal)
2008 – A8((e),9(easy),A26(subs)
2006 – 1(IC prop), 12(comple+e)
2005 - 8(easy)

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Revision Questions on Consumer Behaviour Basics

1. Find the equilibrium quantities of X & Y : Let U= 10x +6 Y M=300 for all. Draw Diagrams for
all.
a) Px = 1 Py=2
b) Px=2 Py=1
c) Px=2 Py=2
d) Px=10 Py=6
e) For what price ratio can the consumer choose 18,20 as his equilibrium point?
f) For what price ratio can the consumer choose 24,10 as his equilibrium point?
g) For what price ratio can the consumer choose 30,0 as his equilibrium point?
h) For what price ratio can the consumer choose 0,50 as his equilibrium point?

(Hint: Choose price of 1 of the goods as the numeraire)

2. Find the equilibrium quantities of X & Y: U=min(5X, 3Y) M=150 Draw Diagrams for all.
a) Px=1, Py=1
b) Px=1, Py=2
c) Px=2, Py=1

3. Find the equilibrium quantities of X & Y: U=min(5X+2, 3Y) M=150, px=1, py=2. Draw Diagram

4. Find the equilibrium quantities of X & Y: U=min(5X+y, 3Y) M=150. Draw Diagrams for all.
a) Px=1, Py=5
b) Px=5, Py=1
c) Px=10, Py=1
d) Px=10, Py=0

5. Find the equilibrium quantities of X & Y: U=min(5X+y, 3X +Y) M=150. Draw Diagrams for all.
a) Px=2, Py=1
b) Px=3, Py=1
c) Px=4, Py=1
d) Px=5, Py=1
e) Px=6, Py=1

6. Let U=min(4X+y, X +2Y) M=100. Draw Diagrams for all.

a) For what price ratio can the consumer choose 100,0 as his equilibrium point?
b) For what price ratio can the consumer choose 50,25 as his equilibrium point?
c) For what price ratio can the consumer choose 25,50 as his equilibrium point?
d) For what price ratio can the consumer choose 75,25 as his equilibrium point?
e) For what price ratio can the consumer choose 20,20 as his equilibrium point?
f) For what price ratio can the consumer choose 20,0 as his equilibrium point?

(Hint: Choose price of 1 of the goods as the numeraire)

7. Let U=√x + Y. Draw Diagrams for all.

a) Let Px=4, Py=1, M=100. Find the equilibrium?
b) What if Px=4, Py=2? M=100
c) Px=4, Py=1, M=200

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8. What kind of a curve is U=x2 +Y? Draw Diagram. Find equilibrium if Px=1, Py=2? M=4
9. What kind of a curve is U=x2 -XY? Draw Diagram. Find equilibrium if Px=1, M=10, & X=2Y

Past year questions

ISI 2017

ISI 2016

ISI 2014

ISI 2011

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2010 Q6

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ISI 2007

4. (a) Consider a consumer with income W who consumes three goods, which we denote as i = 1, 2,
3. Let the amount of good i that the consumer consumes be xi and the price of good i be pi .

Suppose that the consumer’s preference is described by the utility function

U ( x1 , x 2 , x3 ) = x1 x 2 x3 .

(i) Set up the utility maximization problem and write down the Lagrangian.

(ii) Write down the first order necessary conditions for an interior maximum and then obtain the
Marshallian (or uncompensated) demand functions.

5(b) Mrs. Pathak is very particular about her consumption of tea. She always takes 50 grams of sugar
with 20 grams of ground tea. She has allocated Rs 55 for her spending on tea and sugar per month.
(Assume that she doesn’t offer tea to her guests or anybody else and she doesn’t consume sugar for
any other purpose). Sugar and tea are sold at 2 paisa per 10 grams and 50 paisa per 10 grams
respectively. Determine how much of tea and sugar she demands per month.

6(b) Consider two consumers A and B, each with income W . They spend their entire budget over
the two commodities, X and Y . Compare the demand curves of the two consumers under the
assumption that their utility functions are U A = x + y and U B = x + y respectively.
2 2

ISI 2006

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ISI 2004

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DSE 2017

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DSE 2016 Q19

A Consumer has utility function U=min(3x1 + x2, x1 + 2x2), price is p1, p2. A consumer will buy
positive quantities of both goods only if p1/p2 is

a) Greater than 3
b) Between ½ and 3
c) Between 2 & 3
d) Less than ½

Q20: Utility function of a consumer is U(x,y,z) = y*min(x,z). Prices of all the 3 goods are the same. 3
discount deals are available:

Deal I-Get 1 unit of Z free with 1 unit of X

Deal II-Get 1 unit of Z free with 1 unit of y

Deal III -Get 1/2 unit of Z and ½ unit of X free with 1 unit of Y

Which deal should the consumer choose?

a) Deal I
b) Deal II
c) Deal III
d) All deals are the same

DSE 2015

DSE 2013

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DSE 2014

DSE 2011

DSE 2010

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DSE 2009

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DSE 2008

DSE 2007

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DSE 2006

DSE 2005

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