3

QUICK
1. Consumer is a person who takes decisions about what to consume and how much to consume for the
satisfaction of his wants.
2. Utility: The want satisfying power of a commodity is known as utility. The units of measurement of utility is
called Utility.
3. Marginal Utility: The additional or extra utility received from consuming each additional unit of the
commodity is called marginal utility.
MU = TUn - TUn - 1
4. Total Utility: Total utility is the sum of marginal utilities. The more units of a commodity, a consumer
consumes per unit of time, the greater is the total utility he obtains.
5. Measurement of Utility: Utility derived from the consumption of any commodity can be measured in
cardinal number such as 1, 2, 3, 4, 5, etc. According to Hicks, utility can only be measured in ordinal numbers
such as 1st , 2nd , 3rd , 4th , 5th etc.
6. Relationship between Total Utility and Marginal Utility:
(i) When MU falls, but remains positive, TU increases.
(ii) When MU is zero, TU is maximum and constant
(iii) When MU is negative, TU declines.
7. Law of Diminishing Marginal Utility: According to this law, as the amount consumed of a commodity
increases, the utility derived by the consumer from the additional units (i.e. ,_marginal utility) goes on
diminishing,,
8. Assumptions of the Low of DMU:
(i) A consumer should be a rational, i,e. he should be willing to maximize his satisfaction.
(ii) The goods should be homogeneous,' i.e., it 'should be same in every aspect, e.g., colour, taste, size, etc,.
(iii) The unit of the goods must be standard, e.g., a glass of water not a cup of water.
(iv) There should be no change in the taste and preferences of the consumer during the process of consumption.
(v) Utility can be measured ,by absolute numbers. , , ,, n
(vi) There must be a continuity in consumption and if break is needed it should be very short.
9. Reasons behind Operation of Law:
(i) Intensity of Desire: According to this when more and more units of a commodity are consumed the
consumer intensity of desire to consume that commodity decreases and the utility derived from additional unit
also decreases
(ii) Priority to Important Use: If there are many uses of the commodity, the most urgent requirement will be
fulfilled first followed by next important use and so on, e.g. , electricity. _
10 Exceptions to the Law:
Law of DMU is not applicable in the following cases:
(i) Hobbies (ii) Goods of display
(iii) Intoxicants (iv) Money
(v) Good books poetry (vi) Rare goods, etc.
11. Marginal Utility of Money: It refers to worth of a unit of money to a consumer. It implies the utility that a
consumer expects to obtain from a standard basket of goods that he can purchase by spending a unit of money.
12. Consumers Equilibrium: Utility approach under one commodity case:
Consumer's equilibrium is attained when the marginal utility in terms of money is equal to the price.
MUx = Px. Two commodities case : MUx /Px = MUy/Py
13. Law of Equi-marginal: The law of equi-marginal utility states; if a person has a thing which he can put to
several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all.
14. Limitations of the Law of Equi-marginal Utility:
(i) Utility cannot be measured. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers. Thus, their decisions regarding buying
commodity are mainly governed by habits and customs instead of utility.
(iii) Many consumers are ignorant regarding equilibrium positions and utility derived from the commodities.
(iv) The demand for expensive and indivisible goods cannot be adjusted easily. Thus, it is not possible to equate
the MU on it.
(v) Marginal utility of money is not constant. As the consumer spends more and more of his income in buying
more and more units of the commodity the marginal utility of money income rises.
15. Relationship between the Marginal Utility Curve and the Demand Curve: The marginal utility curve itself
is the demand curve. The demand curve is downward sloping because of the law of diminishing marginal
utility.
16. Indifference Curve Approach: This approach was given by Prof. Hicks and Allen. According to this
approach, utility is ordinal i.e., utility cannot be measured in cardinal numbers such as 1, 2, 3, etc. It can be
measured in ordinal numbers such as 1st, 2nd, 3rd, etc. '
17. Indifference Curve: It shows different combinations of two goods that provide the same level of utility or
satisfaction to the consumer. The consumer preferences can be represented by a family of indifference ,curves
known as indifference map.
18. Properties of Indifference Curve:
(i) An indifference curve always slopes downward from left to right.
(ii) Indifference curve is convex to the origin.
(iii) Higher indifference curve gives higher level of satisfaction.
(iv) Two indifference curves never intersect each other.
19. Marginal Rate of Substitution: It is the rate at which consumer sacrifices one commodity to consume some
units of the other commodity to keep the level of satisfaction same. It can be calculated as : MRS = Change in
X/Change in Y.
20. Budget Line: It shows different possible combinations of goods which a consumer can buy with his given
income and price of goods. The consumer cannot afford to buy any combination of two goods that lies outside
his budget line.
21. Budget Set: All combinations of two goods that lie on or below the budget line constitute the budget set.
22. Condit ions of Consumer's Equilibrium: Indifference Curve Approach:
(i) Budget line should be tangent to the indifference curve.
(ii) MRS xy= Px/ Py
(iii) MRS should be diminishing at the point of equilibrium.

1 MARK QUESTIONS
A. FILL IN THE BLANKS
1. Want satisfying power is termed as ____
2- At 'point of satiety' marginal utility is ____
3. For a consumer to be in equilibrium, consuming one commodity, MUx = ____
4- When total utility is maximum, marginal utility is ____
5. When marginal utility becomes negative, TU ____
6. When only one unit of a commodity is consumed, MU = ___
7. If MUx = 80 utils and MUy = 60 utils, the price of X at equilibrium is Rs 4 then price of Y will be ___
8. At 'point of satiety' marginal utility curve intersects ____ axis.
9. Slope of budget line, in case of X and Y is estimated by ___
10. For consumer to be in equilibrium MRSxy = ___
11. Indifference curve is ____ sloping and ____ to the origin.
12. Indifference curve is convex to the origin due to ___
13. At equilibrium, slope of budget line = ___
14. The consumer is in equilibrium consuming two goods X and Y. The price of X falls, consumer will buy less
of ____.
15. A set of indifference curves is called ___
16. Budget line can shift due to change in ____ or ___
17. Two indifference curves ____ intersect.
18. Indifference curve is convex to the origin because of ___
19. In case of equi-marginal utility, the condition of equilibrium= ___
20. When MU can be measured, added or subtracted is known as ___
21. When MU of two goods can be compared, it is known as ___
22. Indifference curve is also known as ___
23. Price line is alternatively known as ___
24. Monotonic preference refers to when a consumer gets ___
25. If MRS is rising throughout, the indifference curve will be ___

ANSWERS
1. Utility 2. Zero 3. Px 4. Zero
5. Starts falling 6. TU 7. 3 8. X-axis
9. Px/Py 10. Px/Py 11. Downward sloping, 12. DMRS
convex
13. Slope of the 14. Commodity Y 15. Indifference map 16. Income, price of
indifference curve goods
17. Never 18. DMRS 19. MUx / Px = MUy / 20. Cardinal utility
Py=MUM
21. Ordinal Utility 22. Iso-utility curve 23. Budget line 24. More of one
commodity but no
less of the other
commodity
25. Concave to the origin
B. TRUE OR FALSE
1. Any consumption beyond the point of satiety leads to disutility.
Ans. [True] Point of satiety shows the stage of maximum satisfaction. Any consumption beyond this point leads
to disutility as MU becomes negative.
2. Different points on an indifference curve represent different levels of satisfaction.
Ans. [False] All points on the indifference curve show same level of satisfaction.
3. An indifference curve is convex to the origin because of DMU.
Ans. [False] Indifference curve is convex to the origin because of the law of diminishing marginal rate of
substitution.
4. Marginal rate of substitution indicates the slope of budget line.
Ans. [False] Price ratio measures the slope of budget line.
5. Marginal rate of substitution remains same along the indifference curve.
Ans. [False] It diminishes along the indifference curve.
6. The bundles of budget set lie either on or below the budget line.
Ans. [True] Budget set include all the possible bundles which cost less than or equal to consumer's money
income. Bundles costing less than income lie below the budget line and bundles costing equal to income lie on
the budget line.
7. Two indifference curves intersect each other when they represent same level of satisfaction.
Ans. [False] Two indifference curves never represent same level of satisfaction. So, they can never intersect
each other.
8. Total utility is minimum when marginal utility is zero.
Ans. [False] Total utility is maximum when marginal utility is zero.
9. When the marginal utility starts falling, total utility also starts decreasing.
Ans. [False] Total utility starts decreasing only when marginal utility is negative.
1 o. Marginal utility can never be negative.
Ans. [False] When consumption increases beyond the point of satiety the marginal utility becomes negative.
11 . A budget set is the collection of all bundles of goods that a consumer wants to buy.
Ans. [False] Budget set consists of all those bundles of two goods, which a consumer can afford within his given
income at given prices.
12. A consumer is in equilibrium when he earns maximum profit.
Ans. [False] Because a consumer is in equilibrium when he gets maximum satisfaction from purchase of a
goods.
13. A consumer is in equilibrium where indifference curve is equal to budget line.
Ans. [False] Because a consumer is in equilibrium where budget line is tangent to indifference curve.
14. Marginal utility of analysis of consumer equilibrium assumes that utility can be expressed in cardinal
numbers.
Ans. [True] MU approach assumes that consumer can express utility in terms of cardinal numbers like 1,2,3,
etc.
15. According to cardinal approach consumer is at equilibrium where MUx > Px·
Ans. [False] Because consumer is at equilibrium where MUx = Px,

C. MULTIPLE CHOICE QUESTIONS

1. Want-satisfying power of a commodity is known as:
(a) productivity (b) satisfaction (c) utility (d) efficiency
2. Sum of utility from all the units consumed by a consumer is known as:
(a) marginal utility (b) total utility (c) maximum utility (d) diminishing utility
3. Utility of an additional unit consumed by a consumer is known as:
(a) average utility (b) marginal utility (c) diminishing (d) any of these
4. Get tendency of additional utility from additional unit of a goods is:
(a) increasing (b) remains constant (c) diminishing (d) all of these
5. When marginal utility is zero, total utility would be:
(a) minimum (b) maximum (c) zero (d) negative
6. When total utility diminishes, marginal utility has the tendency of:
(a) increasing (b) diminishing (c) negative (d) none of these
7. How marginal utility (MU) is calculated?
(a) TU/Q (b)MU/Q (c) Q/TU (d) Q/MU
8. What is formula for calculating MU?
(a) TUn + TUn+l (b) TUn + TUn-1 (c) TUn - TUn+l (d) TUn - TUn-1
9. Law of diminishing marginal utility is based on the assumption of:
(a) consumer is rational (b) each particular want can be satisfied
(c) marginal utility diminishes (d) all of these
10. A consumer consuming one commodity, will be in equilibrium, when he applies which of following
formula:
(a) MPP = Price (b) TU = Price (c) MU = Price (d) AU = Price
11 . A consumer consumes two goods. He will be in equilibrium when:
(a) MUx = Px (b) MUx/Px = Py / MUy (c) MUx/Px = MUy Py (d) none of these
12. When marginal utility of a commodity is measured, added or subtracted, it is known as:
(a) cardinal utility (b) ordinal utility (c) initial utility (d) none of these
13. When marginal utility of two goods can be compared, it is knowQ as:
(a) cardinal utility (b) ordinal utility (c) objective utility (d) none of these
14. When we get equal satisfaction on all the points of a curve, it is known as:
(a) equal marginal utility curve (b) indifference curve
(c) marginal productivity curve (d) none of these
15. Indifference curve is also known as:
(a) iso-utility curve (b) iso-productivity curve (c) marginal utility curve (d) equal opportunity
curve
16. An indifference curve is always:
(a) concave to the origin (b) convex to the origin
(c) straight line downward sloping (d) any of these shape
17. An indifference curve has a ____ slope.
(a) downward (b) upward (c) parallel to X-axis (d) parallel to the Y-axis
18. Price line is alternatively known as:
(a) budget line (b) market offer curve (c) market opportunity curve (d) all of these
19. A price line has the tendency of:
(a) convex to the origin (b) concave to the origin
(c) straight line downward sloping (d) parallel to the Y-axis
20. A consumer is in equilibrium when an indifference curve is:
(a) equal to price line (b) tangent to price line
(c) tangent to price line in convex form (d) tangent to price line in concave form
21. For consumer equilibrium with indifference curve, following formula should be applied:
(a) MRSxy = Py/Px (b)Mux/Px (c) MRSxy = Px/Py (d) none of these
22. When price of a commodity falls, price line rotates:
(a) to the right (b) to the left
(c) shift as parallel to origi,nal IC (d) none
23. When income of a consumer rises, price line shifts to:
(a) leftward parallel to original IC (b) rightward parallel to original
(c) rotates rightward (d) rotates leftward
24. Monotonic preference refers to when a consumer gets:
(a) maximum satisfaction from both the goods
(b) more quantity of one goods and no less quantity of the other
(c) least quantity of both the goods
(d) any of these
25. Budget set refers to:
(a) combination of two goods available from the market
(b) combination of two goods designed by the consumer
(c) market offer of different combination of two goods on a given income .
(d) any of these
26. Slope of price line is:
(A) Py/Px (b) Px/Py (c) (+) Px/Py (d)(+) Py/Px
21. Which of the following statement is wrong?
(a) MU is always of diminishing nature.
(b) A consumer is in equilibrium when Mux/Px = MUy/Py
(c) An indifference curve has the basis of cardinal utility.
(d) MRP is always diminishing.
28. If marginal rate of substitution is increasing throughout, the difference curve will be:
(a) downward sloping convex (b) downward sloping concave
(c) downward sloping straight line (d) upward sloping convex
29. If marginal rate of substitution is constant throughout, the indifference curve will be:
(a) parallel to the X-axis (b) downward sloping concave
(c) downward sloping convex (d) downward sloping straight line

ANSWERS
l. (c) 2. (b) 3. (b) 4. (c) 5. (b) 6. (c) 7. (a) 8. (d) 9.(b) 10. (c)
11. (c) 12. (a) 13. (b) 14. (b) 15. (a) 16. (b) 17. (a) 18. (d) 19.(c) 11. (c)
21. (c) 22. (a) 23. (b) 24. (b) 25. (c) 26. (b) 27. (c) 28. (b) 29.(d)

D. ASSERTION-REASON TYPE
Read the following statements-Assertion (A) and Reason (R), and select the correct alternative in each case:
(a) (A) is true, but (R) is false.
(b) (A) is false, but (R) is true.
(c) Both (A) and (R) are true and (R) is the correct explanation of (A).
(d) Both (Al and (R) are true but (R) is not the correct explanation of (A).
1. Assertion (A) :Indifference curve is convex to the origin
Reason (R) : Diminishing marginal rate of substitution.
2. Assertion (A) : Additional utility derived from the consumption of one more unit of commodity is always
diminishing.
Reason (R): It happens because of decreasing intensity of desire.
3. Assertion (A): MU can never be nigative.
Reason (R): MU can become negative when TU falls with increase in consumption of a commodity.
4. Assertion (A) : If a consumer consumes a goods with a time lag then the law of DMU does not hold true.
Reason (R): Human wants are unlimited, as soon as one want gets satisfied another want arises .
5. Assertion (A) : The slope of the budget line is represented by the price ratio.
Reason (R) : Budget line slopes downwards as more of one goods can be bought by decreasing some units of
the other goods.
6, Assertion (A) : Consumer's utility is the point of 'satiety' where he attains maximum gain with given resources.
Reason (R):A rational consumer always prefers the consumption of more units of goods as compared to Jess
units.
7. Assertion (A) : A consumer attains equilibrium at a point where the budget line is tangent to the indifference
curve
Reason (R): At the point of tangency, indifference curve is convex to the origin.

ANSWERS

1. (a) 2. (d) 3. (b) 4. (d) 5. (d) 6. (d) 7. (c)

2 MARK QUESTIONS

1. Define the term utility.

Ans. Utility is the want satisfying power of the commodity.
2. Define total utility.
Ans. TU refers to the total satisfaction obtained from consumption of all possible units of the commodity.
3. Define marginal utility.
Ans. MU is the additional utility derived from the consumption of one additional unit of the commodity.
MU = TUn - TUn - 1
4. What happens to MU when TU is maximum and constant?
Ans. When TU is maximum and constant MU becomes zero.
5. What happens to TU when MU is positive?
Ans. TU increases when MU is positive.
6. Is the law of DMU applicable in case of money?
Ans. No, it is not applicable in case of money.
7. What is the shape of marginal utility curve?
Ans. Marginal utility curve slopes downward from left to right.
8. Mention two shortcomings of utility analysis.
Ans. (i) The utility analysis assumed that the utility is measurable cardinally, i.e., it can be assigned definite numbers.
But the fact is that the cardinal measurement is not possible.
(ii) There is wrong assumption of independent utilities. The marginal utility of a commodity depends not merely on
its own consumption, but also on the consumption of some other commodity or commodities. This is so because
goods may be complements or substitute.
9. What does the law of equi-marginal utility state?
Ans. The law of equi-marginal utility states that a consumer maximizing his total utility from the purchase of
different commodities should allocate his income among various commodities in such a way that the marginal utility
of the last rupee spent on each commodity is equal. ·
10. What do you mean by point of satiety?
Ans. A situation in which the additional unit of a commodity consumed by a consumer generates no utility or zero
marginal utility. At this level total utility becomes maximum.
11 . What is consumer's equilibrium?
Ans. It refers to a situation when a consumer gets maximum satisfaction out of his limited income and he has no
tendency to make any changes in his existing expenditure. In other words, consumer's equilibrium refers to a
situation where the consumer gets maximum satisfaction out of his scarce resources.
12. What are the conditions of consumer's equilibrium according to the law of DMU and EMU?
Ans. According to DMU : MUx = Px
According to EMU : MUx/ Px = MUy/Py = Mum
13, What are the limitations of law of DMU?
Ans. Law of DMU is not applicable in the following cases.
(i) Hobbies (ii) Goods of display (iii) lntoxicants (iv) Money (v) Good books poetry (vi) Rare goods, etc.
14. State the law of diminishing marginal utility.
Ans. Law of diminishing marginal utility states that as we consume more and more units of a commodity, utility
derived from each successive unit goes on diminishing.
15. What is budget line?
Ans. The budget line represents all the commodities which a consumer can purchase with his entire money income.
16. What is indifference curve?
Ans. Indifference curve is the set of combination of two commodities which offer's the consumer the same level of
satisfaction.
17. What do you mean by indifference map?
Ans. Indifference Map: A set of indifference curves is known as indifference map.
Each indifference curve represents a different level of satisfaction. Higher indifference
curve gives higher satisfaction and the lower indifference curve gives lower satisfaction
18. What is marginal rate of substitution?
Ans. MRSxv is the number of units of goods Y that the consumer is willing to forego for an additional unit of goods X so as
to maintain the same level of satisfaction. The law of diminishing marginal rate of substitution states that as X is substituted
for Y, the marginal rate of substitution of X for Y goes on diminishing.
19. Give the condition of consumer's equilibrium with the help of indifference curve analysis.
Ans. The conditions for consumer's equilibrium can be stated as follows :
(i) The budget line should be tangent to an indifference curve.
(ii) At the point of tangency, the marginal rate of substitution should be diminishing
(iii) MRSxy = Px/Py.
20. Why are indifference curves convex to the origin?
Ans. Indifference curves are convex to the origin because of diminishing marginal rate of substitution.
21. Why are indifference curves slope downwards?
Ans. Indifference curve slopes downwards because increase in units of one goods requires decrease in the number of
units of another goods to maintain the same level of satisfaction.
 3-4 MARK QUESTIONS

1. Discuss the relationship between TU and MU.

Ans. (i) When TU increases at diminishing rate, MU falls but remains positive.
(ii) When TU becomes maximum and constant, MU becomes zero.
(iii) When TU declines, MU is negative (graph of TU and MU).

2. What are the assumptions of the law of DMU?

Ans. (i) A consumer should be a rational consumer, i.e., he should be willing to maximize his satisfaction.
(ii) The good should be homogenous, i.e., it should be same in every aspect, i.e., colour, taste, size, etc.
(iii) The unit of goods must be standard, i.e., a glass of water not a cup of water.
(iv) There should be no change in taste and preferences of the consumer during the process of consumption.

3. Give the limitations of equi-marginal utility

Ans. (i) Utility cannot be measure. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers thus their decisions regarding buying commodity
are mainly governed by habits and customs instead of utility.

4. Give the assumptions of consumer's equilibrium.

Ans. (i) The consumer is rational, it means he aims at the maximization of utility.
(ii) Consumer's income is given and remains constant.
(iii) Price of the commodity is given and remains constant.
(iv) Utility can be measured in terms of cardinal numbers.
5. What are the assumption of indifference curve?
Ans. The assumptions underlying indifference curves are as follows:
(i) Utility is ordinal, it can be measured according to order or preference.
(ii) Consumer is a rational person, he wants maximum satisfaction with his money income.
(iii) The consumer is assumed to be consistent in his choice of goods and services.
(iv) The law of diminish marginal rate substitution exists in the economy.
(v) Consumer preferences remain constant.

6-8 MARK QUESTIONS

1. Explain law of diminishing marginal utility.

Ans. Law of Diminishing Marginal Utility: According to Professor Marshall, the additional benefit which a person
derives from a given increase of his stock of a thing diminishes with every increase in the stock that ·h~ already has.
It means as the amount consumed of a commodity increases, the utility derived by the consumer from the additional
units, i.e., MU goes on diminishing.
Assumption of Law of DMU:
(i) A consumer should be a rational consumer, i.e., he should be willing to maximize his
satisfaction.
(ii) The goods should be homogeneous, i.e., it should be same in every aspect, e.g.,
colour, taste, size, etc.
(iii) The unit of the goods must be standard, e.g., a glass of water not a cup of water.
(iv) There should be no change in the taste and preferences of the consumer during the
process of consumption.
(v) Utility can be measured by absolute numbers.
(vi) There must be a continuity in consumption and i f break is needed, it should be very
short.
Reasons behind Operation of Law:
(i) Intensity of Desire: According to this, when more and more units of a commodity are consumed , the consumer’s
intensity of desire decreases the utility derived from additional unit also decreases.
(ii) Priority to Import. ant Use: If there are many uses of the commodity, the most urgent requirement will be fulfilled
first followed by next important use and so on, e.g., electricity.
2. Explain the law of equi-marginal utility. Is there any limitation of it?
Ans. Law of Equi.- marginal Utility: The law of equi-marginal utility states,· if a person has thing which he can put
to several uses, he will distribute 1t among these uses in such a way that it has the same marginal utii1ty in all.
Assumptions: The law of equi-marginal utility is based on the assumptions given ahead :
(i) All consumers attempt to maximize their econ om1·c satisfaction
(ii) Consumer has a limited money to spend. ·
(iii) Utility is cardinally measurable.
(iv) Marginal utility of money remains constant.
(v) lncome, habits, attitudes, etc. of the consumer do not change.
Explanation of the Law: With the given income, the consumer will go on purchasing goods until the marginal utility
of expenditure on each goods becomes equal and his given income is fully spent. In other words, consumer will
maximize his utility by allocating his given income in such a way that the marginal utility of the last rupee spent on
each goods he consumes is the same. Thus, the consumer will be in equilibrium when he is spending his given
income in such a manner that the following equation holds good: MUx/ Px= MUy/ Py= MUM which is constant.
This can be explained with the help of following table:
Units MUx MUy MUx/ Px MUy/ Py
1 20 24 10 8
2 18 21 9 7
3 16 18 8 6
4 14 15 7 5
5 12 12 6 4
6 20 9 5 3

Let us assume that the prices of goods X and Y are Rs 2 and Rs 3 respectively and the consumer has Rs 24 to spend
on these two commodities. In order to maximize his utility, consumer will equate the marginal utility of the last
rupee spent on these two commodities. In other words, he will equate MUx/Px with MUy /Py while spending his
given income on the two commodities.
As it is clear from the above table that MUx/Px is equal to 5 utils when the consumer purchases 6 units of commodity
X and MUy /Py is equal to 5 utils when he purchases 4 units of commodity Y. Therefore, consumer will be in
equilibrium when he is buying 6 units of X and 4 units of Y and will be spending Rs 24 (Rs 2 x 6 + 3 x 4) in all. This js
the equilibrium position where consumer maximizes his utility.

Limitations of Law of Equi-Marginal Utility:

(i) Utility cannot be measured. Thus, it is very difficult for the consumer to know the utility derived from a
commodity.
(ii) Habits and custom play a very important role for consumers thus their decisions regarding buying commodity
are mainly governed by habits and customs instead of utility.
(iii) Many consumers are ignorant regarding equilibrium positions and utility derived from the commodities.
(iv) The demand for expensive and indivisible goods cannot be adjusted easily. Thus, it is not possible to equate the
MU on it.
(v) Marginal util ity of money is not constant. As the consumer spends more and more of his income in buying more
and more units of the commodity, the marginal utility of money income rises.

3. Explain consumer's equilibrium with the help of utility approach.

Ans. Consumer's Equilibrium: It refers to a situation when a consumer gets maximum satisfaction out of his limited
income and he has no tendency to make any change in his existing expenditure. In other words, consumer's
equilibrium refers to a situation where the consumer gets maximum satisfaction out of his scarce resources.
Assumptions:
(i) The consumer is rational, it means he aims at the maximization of utility.
(ii) Consumer's income is given and remains constant.
(iii) Price of the commodity is given and remains constant.
(iv) Utility can be measured in terms of cardinal numbers.
(v) Law of DMU operates.
(vi) MU of money remains constant and consumer's equilibrium= MUx = Px

Units Px MUx
1 50 80
2 50 70
3 50 60
4 50 50
5 50 40
6 50 30

In the above table, it shows that if Px = Rs 50, then the consumer will buy 4 units of goods X. If he purchases less than
4 units, say 3 units, then the MU he derives from 3 units is worth Rs 60 and the price he pay is Rs 50. Since, MUx >
Px, he purchases more. In other words, since price is less he purchases more which is the logical basis of the law of
demand.
A consumer will not buy more than 4 units of X this is because if he purchases 5 units of X
then the price he pays will be more than the MU he derives which is worth Rs 40. Hence, in
order to maximise utility a consumer will buy that commodity of goods where MU of the goods
X is equal to the price which he has to pay for it. Thus, consumer's equilibrium = MUx = Px,
The consumer's equilibrium can be explained graphically also in the graph given aside. The
consumer will be at equilibrium at point E where MUx = Px, The equilibrium price is given
at OP and equilibrium quantity is given as OQ.

4. Explain consumer's equilibrium with the help of ordinal analysis.

Ans. Consumer's Equilibrium: Consumer's equilibrium is defined as a situation in which a consumer has allocated
his limited income in such a way that he gets maximum satisfaction.
In determining the consumer's equilibrium position, following assumptions are made:
(i) The consumer has an indifference map showing his scale.
(ii) All price are given and constant.
(iii) All goods are homogeneous and divisible.
(iv) The consumer acts rationally and tries to maximize his satisfaction.
The Conditions for Consumer's Equilibrium can be Stated as Follows:
(i) The budget line should be tangent to an indifference curve.
(ii) At the point of tangency, the marginal rate of substitution should
be diminishing.
(iii) MRSxv = Px /Py.
MRS measures the slope of indifference curve and price ratio measures
the slope of budget line. Consumer's equilibrium is achieved when
budget line is tangent to indifference curve, i.e., when slope of budget
line is equal to slope of indifference curve. So for consumer's equilibrium
MRS should be equal to the ratio of prices of goods.

5. Give any four properties of indifference curve.

Ans. Properties of Indifference Curve:
(i) An indifference curve slopes downward from left to right.
(ii) An indifference curve is convex to the origin (due to diminishing MRS).
(iii) In an indifference map, combinations of commodities lying on higher indifference curve yield higher level of
satisfaction and combinations on a lower indifference curve yie1d a lower satisfaction (graph of indifference map).
(iv) Indifference curves will never intersect each other.

6. Explain the following:

(i) Indifference Set (ii) Indifference Curve (iii) Indifference Map
Ans. (i)Indifference set is a set of two commodities ·which offers the consumer same level of satisfaction, so that he
is indifferent between these combinations.
(ii) Indifference curve is the diagrammatic presentation of an indifference set. It shows the set of two commodities
That offers the consumer the same level of satisfaction, so that he is indifferent between these combinations.
(iii) Indifference map refers to a set of indifference curves.

QUESTION BASED ON DIFFERENTIATION

1. Differentiate between cardinal utility and ordinal utility.

S.No Basis of Difference Cadinal Utility Ordinal Utility

1 Valuation of satisfaction
2 Measurement of
satisfaction
3 Measuring order
According to the cardinal utility, the According to the ordinal utility, the
satisfaction derived from the consumption satisfaction derived from the
of a particular goods and service can be consumption of a particular goods and
measured in absolute numbers. service cannot be measured in absolute
numbers.
Cardinal utility measures satisfaction in Ordinal utility measures satisfaction in
terms of utils. terms.
Under cardinal utility, the consumption of Under ordinal utility, the consumption of
goods and services providing higher goods and services providing higher
satisfaction are accorded higher utils. satisfaction are accorded higher ranks
i.e., the consumption providing the
highest satisfaction is accorded first rank
 4 Example For example, utility derived from the For example, a glass of milk is ranked 1 st
consumption of a glass of milk is 3 utils while a glass of soda is ranked 2nd .

CASE BASED QUESTIONS

CASE 1
In economic terms, a consumer is an economic agent, who consumes a goods or service for satisfaction of his/her
wants. Keeping in mind the said definition, every individual consumer is a rational consumer and understands
his/her best interest. However, on certain occasions can observe that people buys goods or services without their
choice or needs, i.e., influenced by certain external factors/components. In such situations, utility is derived by mere
purchase of goods and not from its consumption. Also, under such cases determining optimum level of consumption
becomes difficult. One such example can be drawn from festive buying in India.
Answer the following questions based on the above paragraph:
1. Rationality of a consumer depends upon which of the following factors?
(a) Consumer's taste and preferences
(b) Utility from consumption of a goods
(c) Based upon the habit of a consumer
(d) All of the above
2. Which of the following statements is/are true for utility?
(a) Utility is the want satisfying power of a commodity .
(b) Utility depends upon want and choice
(c) Same goods may give different utility in different situations
(d) All of the above
3. In the above case, utility should be considered as _____ in nature.
(a) qualitative (b) quantitative (c) Both (a) and (b) (d) Neither (a) nor (b)

4. Assertion (A) : A consumer is an economic agent who maximises profits.

Reason (R) : At equilibrium point, utility from units of goods consumed can be negative as well.
Alternatives:
(a) Both Assertion (A) and Reason (R) are true and Reason (R) is the correct explanation of Assertion (A).
(b) Both Assertion (A) and Reason (R) are true, but Reason (R) is not the correct explanation of Assertion (A).
(c) Assertion (A) is true, but Reason (R) is false.
(d) Both are false.
Ans. 1. (d), 2. (d), 3. (c), 4. (b).

CASE 2

We buy many goods and services to satisfy our wants. Using goods and services to satisfy wants is called
consumption and the person who buys goods and services is called consumer. When a consumer purchases any
goods or service, his main objective is to maximise the satisfaction. The way consumer maximises his satisfaction
from spending his income on various goods and services is the subject matter of consumer behaviour. There are
two approaches to study the consumer behaviour.
Answer the following questions based on the above paragraph:
1. Define the term 'consumption'.
2. Name two terms used to measure the consumer's equilibrium.
3. What do you mean by consumer equilibrium?
Ans. 1. Act of using goods and services to satisfy human wants is known as consumption.
2. Cardinal approach and ordinal approach.
3. Consumer's equilibrium take place at a point where he gets the maximum satisfaction
 CASE 3

Utility is known as want satisfying power of a commodity. Total utility is the total satisfaction derived from
consuming given number of units of a particular commodity. Total utility increases at a diminishing rate. Marginal
utility on the other hand is the additional utility derived from consuming one more unit of a commodity. Marginal
utility is always diminishing, it goes into negative also. When marginal utility becomes zero, total utility is
maximum and constant but when marginal utility goes into negative, total utilities starts falling. Law of DMU is
based on the nature of MU only.
Answer the following questions based on the above paragraph:
1. Draw the graph of TU and MU.
2. What do we call the point where TU is maximum and MU is zero?
3. Explain the reason behind diminishing marginal utility.
4. Wis increasing at a diminishing rate'. What do you mean by 'rate' in this sentence?

2. Point of satiety or saturation point.

3. Intensity of desire. As we consume a commodity the intensity of desire to consume it decreases and thus the MU
diminishes.
4. Marginal Utility.

QUESTION WITH HIGH DIFFICULTY LEVEL

1 What are 'monotonic preferences'? Explain with the help of example.
Ans. Monotonic Preferences: A consumer's preferences are said to be monotonic if and only if, between any two
bundles of the two goods, he prefers that bundle which has at least more quantity of one goods but no less of other
goods.
Example: If bund1e A(3, 5) and bundle B(3, 2) are available to the consumer, then consumer will prefer bundle A
over bundle B as bundle A consists of more units of good 2 than bundle B.
2. Define budget line. Briefly explain the factors that cause changes in the budget line.
Ans. Budget line: It's a line which shows various combinations of two goods which a consumer can purchase with
his given income and given prices of goods.
Changes in the Budget line: The factors which cause change in budget line are:
(i) Change in Consumer Income: If consumer's income increases, then he can purchase more quantities of both
the goods. Therefore, budget line of consumer shifts rightward and vice-versa.
(ii) Change in Prices of Commodities: If price of both the commodities decreases then, consumer can purchase
more quantities of both the goods. So, budget line shifts rightward and vice-versa.
3. Give the formula for calculating the slope of the budget line.
Ans. Slope of the budget line is equal to the ratio of the prices of the two commodities, i.e., Px/ Py.
4. What do you mean by the axiom of non-satiety?
Ans. According to the axiom of indifference curve analysis, more of a commodity is always preferred to less of it.
5. What is the constraint in the process of utility maximization by any consumer?
Ans. The given budget acts as a constraint in the process of utility maximization by any consumer.
6. What is meant by MU of one rupee?
Ans. MU of one rupee refers to the utility obtained from purchases of commodities with one rupee.
7. What do you mean by the budget set of a consumer?
Ans. Budget set of a consumer refers to the set of all the bundles which are available to the consumer with his
income.
8. What do you understand by the term rationality in economics?
Ans. Rationality refers to the tendency of an individual to promote his self-interest. A consumer is rational in his
behaviour if he attempts to maximise his satisfaction while he is spending money on the purchase of different
goods and services. likewise a producer is rational, if he attempts to maximise his profits.
9. If you are provided commodities free of cost, at what level you would stop consuming those goods?
Ans. The moment MU = 0.

WORKSHEET FOR SELF EVALUATION

1. A person's MU schedule is given below. Derive TU. (2 Marks)

UNITS 1 2 3 4 5 6
MU 9 6 4 2 0 -2

2. Calculate the missing figures (2 Marks)

UNITS 1 2 3 4 5
TU 16 40
MU 12 8 6

3. Suppose, the price of the commodity 'X' is given as 8 and the MU for 4 units is given below. Tell how many units
consumer should consume to reach at equilibrium and why? (3 Marks)

UNITS 1 2 3 4
MUx 12 10 8 6

4. A marginal utility schedule of a person is given below. Discuss the law underlying the given (6 Marks)
schedule
PENS (Units) 1 2 3 4 5
MARGINAL 25 20 15 10 5
UTILITY (Utils)

5. What is meant by consumer's equilibrium? State its condition in case of one and more than (4 Marks)
one commodity.
6. What do you mean by point of satiety? (2 Marks)
7. The following table shows the marginal utility derived from the purchase of a bag. The price of the bag is Rs 400.
With the help of a diagram explain consumer's equilibrium when MUx = Px. (4 Marks)
UNITS 1 2 3 4 5
MU 600 500 400 300 200
8. Give the assumptions of law of DMU. Is there any exception to the law of DMU? (6 Marks)
9. A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The
consumer's income is Rs 20. (6 Marks)
(i) Make a budget schedule for that consumer.
(ii) Draw a budget line on the basis of the schedule.
(iii) What is the slope of the budget line?
(iv) What happens to the budget line if consumer's income increases to Rs 50?
10. Explain why a consumer would be in equilibrium where the slope of the budget line is equal to the slope of the
indifference curve. (6 Marks)
11 . (i) Study the schedule given below and identify how much of commodity A and commodity B will a utility
maximising consumer buy. (6 Marks)