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NCERT Class 11 Economics Chapter 10 Theory of Consumer Behaviour
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Theory of Consumer Behaviour
Chapter: 10
PART – (B) INTRODUCTORY MICROECONOMICS
TEXTUAL QUESTION ANSWERS
1. What do you mean by the budget set of a consumer?
Ans: Consumer Budget means purchasing power or the spending power of a consumer with which the consumer can buy a set of two different goods in which their prices are mentioned.
2. What is the budget line?
Ans: Budget Line represents all possible combinations of two goods that a consumer can buy given their income and the prices of goods.
3. Explain why the budget line is downward sloping.
Ans: The budget line is downward sloping because when more and more units of one good are bought, it leads to a decrease in some units of other goods, with the given income.
4. A consumer wants to consume two goods. The prices of two goods are ₹4 and ₹5, respectively. The consumer’s income is ₹20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?
Note: Questions 5, 6 and 7 are related to question 4.
Ans: (i) Let two goods be X and Y We are given,
Consumer’s Income (M) = ₹20
∴ Equation of budget line =
Px X+Py. Y = M
4X + 5Y = 20
(ii) If quantity consumed of good Y = 0,
Budget equation becomes:
(iii) If quantity consumed of good X = 0,
Budget equation becomes:
(iv) Slope of budget line =
5. How does the budget line change if the consumer’s income increases to ₹40 but the price remains unchanged?
Ans: An increase in consumer’s income implies that the consumer can purchase increased quantities of both the commodities at the prevailing market price. As a result, the consumer would be faced with a new budget line. The new budget line will shift rightwards parallel to the original budget line.
In the above figure, given M = ₹20, the budget line formed an intercept at 4 units on Y axis and 5 units on X axis. With the increase in M to ₹40, the new intercepts are formed at 8 units on Y axis and 10 units on X axis. The new budget line is parallel to the original budget line.
6. How does the budget line change if the price of good 2 decreases by ₹1 but the price of good 1 and the consumer’s income remains unchanged?
Ans:
If the price of good-2 (shown on Y axis) decreases, consumers can buy more of good-2. The budget line AB will pivot at B and rotate upward to A₁ B.
7. What happens to be the budget set if both the prices of both goods as well as the income doubles?
Ans: There will be no change in the budget set.
8. Suppose a consumer can afford to buy 6 units of goods 1 and 8 units of goods 2, if he spends his entire income. The prices of two goods are ₹6 and ₹8 respectively. How much is the consumer’s income?
Ans: Budget equation is given as:
Let good 1 be X and good 2 be Y
Putting the value, we get (6) . (6) + (8) . (8) = M
M = 36 + 64 = 100
∴ Consumer’s income is ₹100.
9. Suppose a consumer wants to consume two goods which are available only in the integer units. The two goods are equally priced at ₹10 and the consumer’s income is ₹40.
(i) Write down all the bundles that are available to the consumer.
Ans: P1 = Rs.10
P2 = Rs.10
M = Rs.40
Budget set = P1 x 1 + P2 x 2 M
10 x 1 + 10 x 2 40
The bundles that are available to the consumer should cost less than or equal to rupees 40.
bundles 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) (4, 0).
(ii) Among the bundles that are available to the consumers, identify those which cost exactly ₹40.
Ans: The coordinates that lie on the line AB cost exactly the same as the income of the consumer.
The bundles are as follows: (0,4) (1,3) (2,2) (3,1) (4,0)
10. What do you mean by monotonic preferences?
Ans: Monotonic preferences means the consumer preferences are such that greater consumption of a commodity always offers him a higher level of satisfaction.
11. If a consumer has monotonic preferences can she be indifferent between the bundles (10, 8) and (8, 6)?
Ans: No, if a consumer has monotonic preferences than bundle (10, 8) is preferred to bundle (8, 6) as bundle (10, 8) has more of both goods.
12. Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?
Ans:
| Bundles | Ranking |
| (10, 10) | First |
| (10,9) | Second |
| (9,9) | Third |
13. Suppose your friend is indifferent between the bundles (5, 6) and (6, 6). Are the preferences of your friend monotoni?
Ans: No, the preferences of my friend are not monotonic since bundle (6, 6) should be monotonically preferred to bundle (5, 6).
14. Suppose there are two consumers in the market for a good and their demand functions are as follow:
d₁(p) = 20 – p for any price less than or equal to 20, and d₁(p) = 0 at any price greater than 20.
d₂(p) = 30 – 2p for any price less than or equal 15 and d₂(p) = 0 at any price greater than 15.
Find out the market demand function.
Ans:
For price less than Rs 15
Market demand for a good
= d₁(p) + d₂(p)
= 20 – p + 30 – 2p
= 50 – 3p
For price more than Rs 15 but less than Rs 20
Market demand = d₁(p) + d₂ (p)
= 20 – p + 0 (∵ for p > 15, d₂ (p) = 0
= 20 – p
For price more than Rs 20
Market demand = d₁ (p) + d₂ (p)
= 0 + 0 (∵ for p > 10, d₁ (p) =
0, d₂ (p) = 0)
= 0
Thus, market demand
= 50 – 3p if p ≤ 15
= 20 – p if 15 < p ≤ 20
= 0 if p > 20
15. Suppose there are 20 consumers for a good and they have identical demand functions:
d(p) = 10 – 3p for any price less than
or equal to 10/3 and
d₁ (p) = 0 at any price greater than 10/3
What is the market demand function?
Ans: The market demand function aggregates the identical individual demands of 20 consumers:
Individual demand:
d(p) = 10 – 3p for p ≤ 10/3, and d(p) = 0 for p > 10/3.
Market demand:
D(p) = 20 • d(p), so:
16. Consider a market where there are just two consumers and suppose their demands for the goods are as follows:
| P | d₁ | d₂ |
| 1 | 9 | 24 |
| 2 | 8 | 20 |
| 3 | 7 | 18 |
| 4 | 6 | 16 |
| 5 | 5 | 14 |
| 6 | 4 | 12 |
Calculate the market demand for the good.
Ans:
| P | d₁ | d₂ | Market Demand |
| 1 | 9 | 24 | 33 |
| 2 | 8 | 20 | 28 |
| 3 | 7 | 18 | 25 |
| 4 | 6 | 16 | 22 |
| 5 | 5 | 14 | 19 |
| 6 | 4 | 12 | 16 |
17. What do you mean by a normal good?
Ans: In economics, a normal good is a type of a good which experiences an increase in demand due to an increase in income, unlike inferior goods, for which the opposite is observed.
18. What do you mean by an inferior good? Give some examples.
Ans: Inferior goods are often low-cost replacement goods that are seen as poorer quality. A good whose demand decreases when income rises and increases when income falls. Examples: Instant noodles, public transport, low-cost rice.
19. What do you mean by substitute? Give examples of two goods which are substitutes of each other.
Ans: Goods that can be used in place of each other. Example: Tea and coffee, Coca-Cola and Pepsi.
20. What do you mean by compliments? Give examples of two goods which are complements of each other.
Ans: Goods that are used together. Example: Printer and ink, car and petrol.
21. Explain price elasticity of demand.
Ans: Price elasticity of demand is a measure of the responsiveness of demand to change in the commodity’s own price.
It is calculated as:
Or
22. Consider the demand curve for a good. At price 4 the demand for the good is 25 units. Suppose the price of the good increases to 5 and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.
Ans: Price Elasticity of Demand Formula:
Change in Quantity (%):
Change in Price (%):
Elasticity:
Price elasticity of demand = 0.8 (inelastic).
23. Consider the demand curve D(p) = 10 – 8p• What is the elasticity at price 5/3?
Ans: We know that a linear demand curve is expressed as:
Here Hence,
q = a – bP
D = 10 – 3P
a = 10
b = 3
P = 5/3
Hence, Elasticity of Price = – 1.
24. Suppose the price elasticity of demand for a good is – 0.2. If there is a 5% increase in the price of the good, by what percentage will the demand for the good go down?
Ans:
Substituting the value, we get
∴ Percentage change in quantity demanded = – 0.2 × 5 = – 1
25. Suppose the price elasticity of demand for a good is – 0.2. How will the expenditure on the good be affected if there is a 10% increase in the price of the good?
Ans: The price elasticity of demand (PED) measures how the quantity demanded of a good responds to changes in its price.
The formula is:
Given:
PID = – 0.2
% change in price = + 10%
(i) Calculate the percentage change in quantity demanded:
% change in quantity demanded = PED × % change in price
% change in quantity demanded = – 0.2 × 10 = – 2%
This means that the quantity demanded decreases by 2%.
(ii) Effect on expenditure: Total expenditure (TE) on the good is the product of price (P) and quantity demanded (Q):
TE = P × Q
When price increases by 10% and quantity demanded decreases by 2%, the net effect depends on the elasticity:
Sinor the absolute value of PED (| – 0.2 | = 0 .2) is less than 1, demand is inelastic. This implies that the percentage change in quantity demanded is smaller than the percentage change in price.
Therefore, the total expenditure Increases.
(iii) Conclusion The expenditure on the good will increase when the price increases by 10% as the densand is Imetec (| PED |< 1).
26. Suppose there was a 4% decrease in the price of a good and as a result the expenditure on the good increased by 2%. What can you say about the elasticity of demand?
Ans: The demand is inelastic (|PED| < 1) because when the price decreases, total expenditure increases only slightly.
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