UGCNET Preparation

Dr. C. Selvaraj
selvaraj1971@gmail.com
Theory of Consumer Behavior
 The theory of consumer behavior
in particular
 deals with how consumers
allocated and
 spend their income
 among all the different goods and
services
Common characteristics
 Wants are unlimited. A human is never truly satisfied,
and so his wants to are endless
 Different wants have varying degrees of intensity. Some
wants are extremely urgent, some are less intense
 Human wants tend to be competitive. We have limited
means and so we cannot satisfy all of our wants. And the
most urgent want will be satisfied
 Wants can be complementary as well. To satisfy our want
for one good we have to make arrangements for another.
For example to run a car you need petrol
 The wants of any person will constantly be changing
according to the time and place and situation of the
person
Classification of Human Wants
 Marginal Utility Analysis
 Marginal Utility analysis helps us
understand the behavior of a consumer
by looking
 at the way he spends his income on
different goods and
 services to attain maximum
satisfaction
 Marginal Utility Analysis
 Total Utility or Full Satiety – is the sum of utility
derived from different units of a commodity consumed
by a consumer. Therefore, Total Utility = the sum total
of all marginal utility.
 Marginal Utility or Marginal Satiety – is the additional
utility derived from the consumption of an additional
unit of a commodity
 Therefore, Marginal Utility = the addition made to the
Total Utility by consuming one more unit of a
commodity
 Assumptions of Marginal Utility Analysis
 It is assumed that the unit of the consumer good is a standard one,
Such as, a cup of tea, a pair of shoes, bottle of cold drink, glass of water, etc
 It is assumed that the utility is measurable, and the satisfaction of the
consumers can be expressed in the quantitative terms
 The consumer’s tastes and preferences remain same during the period
of the consumption.
 There must be continuity in the consumption. If a break is necessary,
then the time interval between the consumption of two units should be
appropriately short.
 It is assumed that the quality of the commodity remains
uniform during the period of consumption.
 All the commodities consumed by the consumer are said to
be independent of each other
 It is assumed that the income of the consumer and the price of goods and
services remains unchanged during the period of consumption.
 The marginal utility of money remains constant for the consumer.
 The mental condition of the consumer should remain normal during the
consumption period
Marginal Utility
 The Marginal Utility refers to the
additional benefit (utility) a consumer
derives from the consumption of one
additional unit of good or service
Cardinal Utility
 The Cardinal Utility approach is propounded by neo-
classical economists, who believe that utility is
measurable, and the customer can express his
satisfaction in cardinal or quantitative numbers, such
as 1,2,3, and so on
 theory of consumption based on the assumption that
utility is measurable and can be expressed cardinally
 And to do so, they have introduced a hypothetical unit
called as “Utils” meaning the units of utility. Here,
one Util is equivalent to one rupee and the utility
of money remains constant.
Ordinal Utility
 The Ordinal Utility approach is based
on the fact that the utility of a
commodity cannot be measured in
absolute quantity,
 but however, it will be possible for a
consumer to tell subjectively whether the
commodity derives more or less or equal
satisfaction when compared to another
 Law of Diminishing Marginal Utility
 The law of Diminishing Marginal Utility posits that
with the more and more consumption of the units of
the commodity the utility derived from each
successive unit goes on diminishing, provided the
consumption of other commodities remain constant

 Suppose you are thirsty, and as you drink the first glass of
water, keeping the consumption of all other commodities
constant, you get the maximum satisfaction, and with each
successive glass of water, the additional benefit (utility)
diminishes
MCQs in Utility Analysis
Which of the following defines marginal utility?

 A) the change in total utility divided by the

price of a product
 B) the maximum amount of satisfaction from
consuming a product
 C) the total satisfaction received from
consuming as much of the product that is
available for consumption
 D) the additional satisfaction received from
consuming one more unit of a product
Which of the following defines marginal utility?

 A) the change in total utility divided by the

price of a product
 B) the maximum amount of satisfaction from
consuming a product
 C) the total satisfaction received from
consuming as much of the product that is
available for consumption
 D) the additional satisfaction received from
consuming one more unit of a product
Which best expresses the law of diminishing marginal
utility?

 A) The more consumption of a product, the smaller is

the total and marginal utility from the consumption.
 B) The less consumption of a product, the greater is
the total and marginal utility of the consumption.
 C) The more consumption of a product, the smaller is
the marginal utility from consuming an additional
unit.
 D) The more consumption of a produc t, the smaller is
the total and marginal utility from the consumption.
Which best expresses the law of diminishing marginal
utility?

 A) The more consumption of a product, the smaller is

the total and marginal utility from the consumption.
 B) The less consumption of a product, the greater is
the total and marginal utility of the consumption.
 C) The more consumption of a product, the smaller is
the marginal utility from consuming an additional
unit.
 D) The more consumption of a produc t, the smaller is
the total and marginal utility from the consumption.
Which situation is consistent with the law of
diminishing marginal utility?

 A) The more pizza Henry eats, the more he

enjoys another slice.
 B) The more pizza Henry eats, the less he
enjoys another slice.
 C) Henry's marginal utility from eating pizza
becomes positive after eating three slices.
 D) Henry's marginal utility from eating pizza
reaches a maximum when total utility is zero
Which situation is consistent with the law of
diminishing marginal utility?

 A) The more pizza Henry eats, the more he

enjoys another slice.
 B) The more pizza Henry eats, the less he
enjoys another slice.
 C) Henry's marginal utility from eating pizza
becomes positive after eating three slices.
 D) Henry's marginal utility from eating pizza
reaches a maximum when total utility is zero
When marginal utility is decreasing but
positive, total utility is

 A) increasing at a decreasing rate

 C) increasing at an increasing rate
 B) decreasing at a decreasing rate
 D) decreasing at an increasing rate
When marginal utility is decreasing but
positive, total utility is

 A) increasing at a decreasing rate

 C) increasing at an increasing rate
 B) decreasing at a decreasing rate
 D) decreasing at an increasing rate
_____ shows various combinations of
two products that give same amount of
satisfaction

 (a) ISO cost curve

 (b) Indifference curve
 (c) Marginal utility curve
 (d) ISO quant
_____ shows various combinations
of two products that give same
amount of satisfaction

 (a) ISO cost curve

 (b) Indifference curve
 (c) Marginal utility curve
 (d) ISO quant
Total utility is maximum when :

(a) Marginal utility is maximum

(b) Marginal utility is Zero
(c) Average utility is maximum
(d) Average utility is Zero
Total utility is maximum when :

(a) Marginal utility is maximum

(b) Marginal utility is Zero
(c) Average utility is maximum
(d) Average utility is Zero
An indifference curve is always :

 (a) Concave to the origin

 (b) Convex to the origin
 (c) L-shaped
 (d) A vertical straight line
An indifference curve is always :

 (a) Concave to the origin

 (b) Convex to the origin
 (c) L-shaped
 (d) A vertical straight line
 Marginal utility curve of a consumer is
also his:

 (a) Indifference curve

 (b) Total utility curve
 (c) Supply curve
 (d) Demand curve
 Marginal utility curve of a consumer is
also his:

 (a) Indifference curve

 (b) Total utility curve
 (c) Supply curve
 (d) Demand curve
At equilibrium, the slope of the
indifference curve is

 (a) Equal to the slope of budget line

 (b) Greater than the slope of budget line
 (c) Smaller than the slope of budget
line
 (d) None
At equilibrium, the slope of the
indifference curve is

 (a) Equal to the slope of budget line

 (b) Greater than the slope of budget
line
 (c) Smaller than the slope of budget
line
 (d) None
The law of equi marginal utility considers
price of money as

 (a) zero
 (b) less than one
 (c) more than one
 (d) one
The law of equi marginal utility
considers price of money as

 (a) zero
 (b) less than one
 (c) more than one
 (d) one
Marginal utility approach was given by

 (a) J.R. hicks

 (b) Alfred Marshall
 (c) Robbins
 (d) A.C. Pigou
Marginal utility approach was given by

 (a) J.R. hicks

 (b) Alfred Marshall
 (c) Robbins
 (d) A.C. Pigou
Indifference curves between income and
leisure for an individual are generally

 (a) Concave to the origin

 (b) Convex to the origin
 (c) Negatively sloped straight lines
 (d) Positively sloped straight lines
In case of a right angled indifference
curve the goods are

(a) Perfect complements

(b) Prefect substitutes
(c) Inferior goods
(d) Giffen good
Indifference curves never intersect each
other due to

 (a) Different levels of satisfaction

 (b) Same levels of satisfaction
 (c) Convex to origin
 (d) Concave to origin
 All combinations on IC1 offer the same
satisfaction, but all combinations on IC2
give greater satisfaction than those on IC1
Marginal Rate of Substitution
 This is the rate at which a consumer is prepared to
exchange a good X for Y

Combination Food Clothing MRS

A 1 12 –

B 2 6 6

C 3 4 2

D 4 3 1
Law of diminishing marginal utility states
A. Utility always diminishes whether something
is consumed or not
B. Total utility diminishes with the
consumption of every additional unit
C. Utility first increases and after that
diminishes at every point
D. The additional benefit which a person
derives from a given increase of his stock of a
thing diminishes with every increase in stock
that he already has.
 Thank You