Study Important Questions for class 12

Macro Economics
Chapter 2 – Theory of Consumer Behaviour

Very Short Answer Questions 1 Mark

1. Which of the following statements regarding utility is not true?

(a) It is a satisfying power of a commodity.

(b) Utility is always measurable

(c) It helps consumers to make choices.
(d) It is purely a subjective entity.

Ans: (b) Utility is always measurable

2. Which of the following utility approaches is based on the theory of Alfred

Marshall?

(a) Ordinal utility approach

(b) Cardinal utility approach
(c) Independent variable approach

(d) None of the these

Ans: (b) Cardinal utility approach

3. _____________ is the addition to total utility by the consumption of one

additional unit of the commodity?
(a) Ordinal utility

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(b) Total utility

(c) Marginal utility

(d) Average utility

Ans: (c) Marginal utility

4. Is the demand for the following elastic, moderate elastic, highly elastic?
Give reasons.

(a) Demand for petrol

(b) Demand for textbooks

(c) Demand for cars
(d) Demand for milk

Ans: a) Demand for Petrol is moderate elastic, because when the price of gasoline
rises, consumers lower their usage of it.

b) Textbook demand is fully inelastic. In the case of textbooks, even a significant

price rise has no effect on demand.

b) Car demand is elastic. It is a luxury item, and as the price of the car climbs, so
does the demand for the car.
d) Milk demand is elastic, which means that as the price of milk rises, consumers
buy less milk.

5. What do you mean by utility?

Ans: The wants satisfying the ability and power of a commodity is known as
utility. It is a degree of satisfaction related to an act of economics.

6. How is total utility derived from marginal utility?

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Ans: The total utility is equal to the sum of the marginal utilities of a commodity's
multiple units.

It is represented as TUn + MU1 + MU2 + MU3 − MUn

7. State the law of equi-marginal utility.

Ans: It asserts that a customer is most satisfied when the ratio of the marginal
MU x MU y
utilities and prices of two commodities is equal, i.e. =
Px Py

8. What will you say about MU when TU is maximum?

Ans: When TU is at its maximum, MU is zero. This is based on law of diminishing
marginal utility.

9. Give the reason behind a convex indifference curve.

Ans: A convex indifference curve is caused by a decreasing marginal rate of

substitution. The indifference curves are convex to the base as the consumers start
to increase their consumption of one good in the place of another goods. MRS falls
when consumers start consuming one good more than other goods.

10. ____________ shows various combinations of two goods that give same
amount of satisfaction to the consumer?

Ans: Indifference curve

11. Indifference curve slopes___________?

Ans: Downward to the right

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12. _____________ is defined as the difference between what the consumer is
willing to pay for a product and what he is able to pay?

Ans: Consumer Surplus

13. According to the law of diminishing marginal utility, _________?

Ans: A declining marginal rate of substitution causes a convex indifference curve.

After a certain point, Any increment in the consumption can leads to reduction in
TU (Total Utility)

14. What is called point of satiety?

Ans: The moment at which marginal utility equals zero is known as the point of
satiety.

15. The total utility divided by the number of units consumed is known as?

Ans: The total utility divided by the number of units consumed is known as
Average utility.

Short answer Questions 3 Marks

16. Explain the various degrees of price elasticity of demand with the help of
diagrams.
Ans: Price elasticity of demand has five levels. These are their names:

a. Perfectly elastic demand (Ed = ) : a small or no change in price results in

limitless changes in the quantity desired.

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 b. Perfectly inelastic demand (Ed = 0) : A commodity's demand remains
constant regardless of price changes.

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 c. Unitary elastic demand (Ed = 1) : When a commodity's percentage change in
demand (percent) equals the percentage change in price.

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 d. Greater than unitary elastic demand ( Ed  1) : When the percentage
change in a commodity's demand exceeds the percentage change in its price.

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 e. Less than unitary elastic demand ( Ed  1) : When the percentage change in
a commodity's demand is lesser than the percentage change in its price.

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17. A consumer buys 50 units of a good at Rs. 4/- per unit. When its price falls
by 25 percent its demand rises to 100 units. Find out the price elasticity of
demand.
Ans: Given:
P=4

Q = 50 units

Q1 = 100 units

Fall in price is calculated as:

25
P = 4
100

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=1
P = P1 − P

= 3-4

= -1
Similarly,
Q = Q1 − Q

= 100-50

= 50
The elasticity of demand is calculated by the formula,
P Q
Ed = − 
Q P

4 50
=− 
50 −1

=4

Therefore, the price elasticity of demand is 4 .

18. Price elasticity of demand for wheat is equal to unity and a household
demands 40 Kg of wheat when the price is Rs.1 per kg. At what price will the
household demand 36 kg of wheat?

Ans: Given:
Ed = 1

P =1

Q = 40

Q1 = 36

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Q = Q1 − Q

= 36 − 40

= -4

The elasticity of demand is formulated as,

P Q
Ed = − 
Q P

1 (−4)
1= − 
40 P

P = 0.1

Now, the new price is calculated

P = P1 − P

0.1 = P1 − 1

P1 = 1.10

Therefore, the price of wheat rises to Rs.1.10 per kg.

19. The quantity demanded of a commodity at a price of Rs.10 per unit is 40

units. Its price elasticity of demand is -2. Its price falls by Rs.2 /- per unit.
Calculate its quantity demanded at the new price.
Ans: Given:
P0 = 10

P0 = 40

Ed = −2

P = −2

P = P1 − P0

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−2 = P1 − 10

P1 = −8

The elasticity of demand is formulated as,

P0 Q
Ed = 
Q0 P

10 Q
−2 = 
40 (−2)

Q = 16

According to the law of demand, the demanded quantity decreases with an increase
in price.
Q1Q = Q0 +

= 40 + 16

= 56 units

Therefore, the quantity demanded at the new price is 56 units.

20. Explain any four determinants of demand for a commodity.

Ans: The following are the demand determinants:

i. Commodity price: When the price of a commodity rises, so does
demand for that commodity, and vice versa.
ii. Consumer income: As consumer income rises, so does demand for
standard commodities, and vice versa.
iii. Price of associated items: As the price of linked goods falls, so does
demand for additional goods. In the case of substitute goods, demand for
a product diminishes as the price of other substitute items falls.
iv. Customer taste and preferences: If a customer's taste and preferences
are favorable, demand for any good increases; if they are unfavorable,
demand decreases.
Long Answer Questions 6 Marks

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21. What are the methods of measuring price elasticity of demand?

Ans: The methods of measuring price elasticity of demand are as follows:

Proportionate or percentage method:

Elasticity is calculated using this method as the ratio of the percentage change in
quantity required to the percentage change in price.

The formula is shown below.

% change in quantity demanded
Ed =
% change in price

Or
Q P
Ed = 
P Q

Total outlay method: If total outlay increases as prices fall, the elasticity of
demand is more than one; if total outlay remains constant, the elasticity is equal to
one; and if total outlay drops, the elasticity is less than one.

Geometric or point method:

This term assesses the elasticity of demand at various places along the same
demand curve.
lower segment of the demand curve
Ed =
upper segment of the demand curve

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22. Explain the factors affecting the market demand of a commodity.

Ans: The entire demand for a commodity made by all individuals in the market is
referred to as market demand. The market demand for a commodity is the various
amounts of a commodity demanded each time period, at various alternative prices,
by all market participants. It is determined by all of the things that influence an
individual's demand. The following are some of the elements that influence a
commodity's market demand:

i. Consumer Tastes and Preferences - Changes in demand for various

commodities occur owing to changes in fashion as well as the pressure of
ads by producers and dealers of various products.
ii. People's Income - Demand for commodities is also affected by people's
incomes. The more the people's incomes, the larger their desire for
commodities.
iii. Price Changes in Related Items - The price of other goods, particularly
those related to it as substitutes or complements, affects demand for a
good. When we design a demand schedule or demand curve for an item,
we assume that the prices of comparable goods remain constant.
iv. Consumer Expectations Regarding Future Prices - If consumers think
that the costs of things will rise in the near future for whatever reason,

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 they would demand more of the commodities now so that they will not
have to pay higher prices in the future.
v. The Market Demand for a Good - The market demand for a good is
calculated by aggregating the individual wants of current and potential
customers of a good at various conceivable prices. The greater the
number of people who buy a product, the higher the market demand for
it.

23. How is equilibrium achieved with the help of indifference curve analysis?

Ans: When a consumer receives the greatest amount of satisfaction from his
expenditure, he is considered to be in equilibrium. The term "consumer's
equilibrium" refers to the highest level of satisfaction that a consumer can achieve
given their income and prices. The indifference curve technique can be used to
describe consumer equilibrium.

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The explanation of the above diagram is shown below.

(i) The budget line is denoted by AB.

(ii) It is certain that the consumers' equilibrium will be located at the same
position on AB.
(iii) An indifference map (set of IC1 , IC2 , and IC3 ) depicts consumers'
preferences for various combinations of good x and good y .
(iv) Consumers will achieve equilibrium where the budget line (AB) is
tangent to the IC2

The following assumptions are employed to determine the consumer's equilibrium

position:
(i) Rationality: The customer is a logical being. Given his money and
pricing, he seeks maximum satisfaction.
(ii) Utility is ordinal: It is presumed that the customer can order his
preferences based on how satisfied each combination of products makes
him.
(iii) Choice consistency: It is also believed that the consumer makes
consistent purchases.
(iv) Perfect competition: In the market where the consumer purchases the
items, there is perfect competition.
(v) Total utility: The consumer's total utility is determined by the quantity
of the good consumed.

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