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Important Questions of Introduction To Micro Economics Class 12
Hots Question
Question. What is likely to be the impact of efforts towards reducing unemployment on the production potential of the economy? Explain.
Answer. Reducing unemployment has no effect on the production potential of the country. It is because production potential is determined assuming full employment. Unemployment indicates that the country is operating below potential. Reducing unemployment simply helps in reaching potential.
Question. ‘‘Scarcity and choice problem go together.’’ Do you agree with the statement? Give reasons in support of your answer.
Answer. The given statement is true. Scarcity of resources is the root cause of an economic problem. We live in a world of scarcity. All of us want better food, clothing, housing, schooling, entertainment, etc. But resources are not enough to meet all our wants. Even the richest economy (like USA) cannot satisfy all the needs of people. Scarcity of resources gives rise to the problem of choice, i.e., economic problem. If resources were available in plenty, there would not have been any problem of choice.
Question. Classify the following statements into positive economics or normative economics, with suitable reasons:
(a) Consumer price index presents a more realistic picture of the inflation rate in a country, than the wholesale price index.
(b) Subsidies should be offered very carefully.
Answer. (a) Positive statement – it deals with a real life situation, justifiable by facts.
(b) Normative statement – it deals with a situation as it ‘ought to be’.
Question. Assuming that no resource is equally efficient in production of all goods, name the curve which shows production potential of the economy. State its properties.
Answer. The curve is called Production Possibilities Curve (PPC) or Production Possibilities Frontier (PPF). Properties of PPC:
(i) PPC is downward sloping from left to right (negatively sloped) because to produce more of a good (Good X), the economy has to sacrifice some production of other good (Good Y).
(ii) PPC is concave to the origin because of increasing Marginal Rate of Transformation (MRT) as we move downwards along the PPC curve from left to right.
Question. Comment upon the shape of production possibility curve, if the marginal rate of transformation is constant.
Answer. Since the marginal rate of transformation is constant, in order to produce an additional unit of commodity X, same units of good Y are scarified, i.e rate of sacrifice remains constant. Therefore, the shape of production possibility curve will be a straight line, downward sloping from left to right.
Question. Comment upon the shape of production possibility curve, if the marginal rate of transformation decreases.
Answer. Since the marginal rate of transformation decreases, in order to produce additional unit of commodity X, lesser and lesser units of good Y are scarified i.e. the rate of sacrifice decreases. Therefore, the shape of the production possibility curve will be convex to origin, sloping downward from left to right.
Question. (a) Why is a production possibilities curve concave?
(b) What does a point lying below the PPC highlight?
Answer. (a) A production possibilities curve (PPC) is concave to the origin, i.e., its slope is increasing, because Rate of Marginal Transformation (MRT) increases as we move downwards along the curve from left to right. MRT increases because no resource is equally efficient in production of both the goods. As we transfer resources from one good to another, the rate of sacrifice, i.e., MRT increases because we have to transfer less and less efficient resources.
(b) Any point below the PPC highlights the problem of unemployment and inefficiency in the economy. It represents a combination of the two goods that will be produced when the resources are under-utilised or inefficiently utilised or both. In other words, production is below the potential in the economy.
Question. What is the effect on MRT as we move downwards along a PPC?
Answer. As we move downwards along a PPC, the slope of the concave PP curve increases. Since Marginal Rate of Transformation (MRT) is the measure of slope of PPC, MRT increases. It is based on the assumption that no resource is equally efficient in production of both the goods. As more of one good is produced by reducing the production of the other good, less and less efficient resources are transferred. So, marginal opportunity cost (technically termed as MRT) increases.
Question. ‘‘Problem of resource allocation would not arise, if resources do not have alternative uses.’’ Defend or refute the statement with valid arguments.
Answer. Yes the given statement is correct. The economic problem of resource allocation arises because resources are scare & can be put to alternate uses. If a resource can be put only to a specific use then the problem of resource allocation would not arise.
Question. Explain the likely impact of large scale outflow of foreign capital on Production Possibilities curve of the economy.
Answer. Large scale outflow of foreign capital from the economy will reduce resources and thus production potential of the country will fall. Fall in production potential in turn will shift the PP Curve to the left towards the origin.
Question. Why does the problem of choice arise for producers and for consumers?
Answer. The problem of choice arises for producers because resources are limited and have alternative uses. Since resources are available in limited quantities and a resource can be used for producing more than one product , this creates a problem of choice which product should be produced. The problem of choice arises for the consumers because their wants are unlimited while resources to fulfill these wants are limited. Since a resource can be used for satisfying more than one want, this creates a problem of choice which want should be satisfied first.
Question. What will be the impact of recently launched ‘Clean India Mission’ (Swachh Bharat Mission) on the Production Possibilities Curve of the economy and why?
Answer. Cleanliness reduces chances of people falling ill and, thus can ensure better health. This in turn will reduce forced absenteeism from work, raise efficiency level and thus raise country’s production potential. As a result, the PP Curve will shift to the right.
Question. State giving reasons whether the following statements are true or false:
(a) The PP curve is a graphical medium of highlighting the central problem of ‘How to produce’.
(b) Growth of resources shifts the production possibility frontier towards right.
(c) In an economy, production takes place always on the PPC.
Answer. (a) False: The PP curve is a graphical medium of highlighting the central problem of ‘what to produce’.
(b) True: Growth of resources increase the production potential of the economy, i.e., it can now produce more output. Therefore, the PPF shifts towards right.
(c) False: Production in the economy may also take place at any point below the PPC if the given resources are either under-utilised or inefficiently utilised or both.
Question. Economic slowdown in some parts of the world has adversely affected demand for Indian exports. What will be its effect on the production possibilities frontier of India? Explain.
Answer. There will be no effect on the Production Possibilities Frontier (PPF) of India. It is because PPF shows only what a country can potentially produce, and not what it actually produces. Slowdown by reducing demand for Indian exports, may ultimately bring down output. Therefore, production will take place at a point somewhere below the PPF. That is, production in the economy will be below its potential.
Question. Explain the behaviour of ‘marginal rate of transformation’ along a production possibility curve.
Answer. Marginal Rate of transformation (MRT) increases as we move along the Production Possibility Curve (PPC) from left to right. MRT increases because it is based on the assumption that resources are not equally efficient in production of both the goods. Thus, when resources are transferred from one use (Good Y) to another (Good X), more and more units of Good Y are to be sacrificed to produce an additional unit of Good X.
Question. What is likely to be the impact of “Make in India’ appeal to the foreign investors by the Prime Minister of India, on the production possibilities frontier of India? Explain.
Answer. ‘Make in India’ appeal signifies invitation of foreign producers to produce in India. This will lead to increase in resources thus raising production potential of the country. As a result, the PP Curve will shift to the right.
Question. What is the effect of unemployment on the production possibilities curve? Explain.
Answer. There will be no effect on the PPC because a PPC shows only what an economy can potentially produce, and not what it actually produces. Unemployment in the economy implies under-utilisation of resources. So, production takes place at any point below the PPC. That is, production in the economy is below its potential.
Question. Large number of technical training institutions have been started by the government. State its economic value in the context of production possibilities frontier.
Answer. The economic value of technical training is that it raises the production potential of the country by raising the efficiency of the labour. The production possibilities frontier (PPF) of the economy will shift rightwards. It leads to economic growth.
Question. State giving reasons whether the following statements are true or false:
(a) A point above the PPC represents the growth of resources.
(b) The concavity of PPC implies diminishing marginal rate of transformation.
(c) Massive unemployment shifts the PPC to the left.
Answer. (a) False: A point above the PPC represents a combination of the two goods which is not obtainable because of scarcity of resources.
(b) False: The concave downward sloping PP curve has an increasing slope. The slope of the PP curve is the same as Marginal Rate of Transformation (MRT). So, concavity of PP curve implies increasing MRT.
(c) False: Due to massive unemployment, production will take place at any point inside the PPC, but it will not shift to the left. This is because unemployment implies under-utilisation of resources, not decrease in resources.
Question. What will be the impact of “Education for All campaign” (Sarv Shiksha Abhiyan) on the Production Possibilities Curve of the Indian economy and why?
Answer. Education raises efficiency by making a worker a skilled worker. This will increase production potential shifting the PP curve to the right.
Question. The government has started promoting foreign capital. What is its effect on Production Possibilities Frontier?
Answer. It will increase inflow of foreign capital. It implies increase in resources. This will increase the production potential in the economy, i.e., the economy may be able to produce more output. As a result, production possibilities frontier (PPF) will shift to the right. Rise in production potential will lead to economic growth.
Question. What is a budget line ? Why the budget line is left to right downward sloping?
Answer. Budget line is a graphical presentation of all those combinations of two goods which costs the consumer exactly his income.
It is downward sloping because to buy more of one good, the consumer must reduce the purchase of the other goods as income remains same.
Question. Discuss briefly the following properties of an indifference curve, using diagram:
(a) Convexity to origin
(b) Downward sloping from left to right
Answer. (a) An Indifference curve is convex to the origin due to Diminishing Marginal Rate of Substitution (DY/DX). In the above diagram, the consumer is willing to sacrifice lesser and lesser units of good Y to gain one additional units of good X.
(b) An Indifference curve is downward sloping – meAnswer that the indifference curve is negatively sloped. This property signifies that to remain on the same level of satisfaction the consumer must forego units of one good if he wishes to consume more units of the other good.
Question. A consumer consumes only two goods X and Y whose prices are `4 and `5 per unit respectively. If
the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that
of Y equal to 4, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this
situation? Use utility analysis.
Answer. The consumer is in equilibrium when MUx/Px = MUy/Py (Law of Equi-Marginal Utility).
Since Px = 4, Py = 5, MUx = 5 and MUy= 4, therefore, MUx/Px = 5/4 = 1.25 and MUy/Py = 4/5 = 0.8.
Since MUx/Px ≠ MUy/Py, therefore, the consumer is not in equilibrium. Here, MUx/Px > MUy/Py. It meAnswer that the satisfaction a consumer derives from spending a rupee on Good X is
greater than the satisfaction derived from spending a rupee on Good Y. The consumer will reallocate his income – substitute Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the consumption of Good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium.
Question. If a rational consumer is consuming only two Goods X and Y, state her likely behaviour to attain
consumer’s equilibrium if she faces a situation where MUx/Px < MUy/Py.
Answer. When MUx/Px < MUy/Py, the consumer is obtaining greater marginal utility per rupee in case of good Y as compared to good X. Therefore, he would prefer to buy more units of good Y and lesser units of good X. This will lead to a decline in MUy and rise in MUX. The consumer will continue to buy more of Y till he attains equilibrium at a point where MUx/Px = MUy/Py.
Question. State giving reasons whether the following statements are true or false:
(a) Marginal utility can never be negative.
(b) When the marginal utility falls, total utility also decreases.
Answer. (a) False: Marginal utility of a good falls and becomes negative when total utility falls as consumption of additional units of a commodity.
(b) False: When marginal utility (MU) falls, total utility (TU) may increase (at decreasing rate) so long as MU is positive.
Question. Explain the following conditions:
(a) Movement along the same indifference curve.
(b) Shift from a lower to a higher indifference curve.
Answer. (a) Movement along the same indifference curve shows various bundles of two goods that provide equal satisfaction to the consumer. In order to increase the consumption of one commodity, the consumer has to sacrifice the consumption of the other and he moves up or down on the same indifference curve.
(b) A consumer will shift from a lower indifference curve to a higher indifference curve when he wants to have a new bundle of two goods, which has more quantity of at least one good and no less of the other good (monotonic preference). Alternatively, the new bundle may offer more quantity of both the goods, thereby providing the consumer greater level of satisfaction.
Question. A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the reaction of consumer through the marginal utility analysis.
Answer. According to the marginal utility analysis, the consumer is in equilibrium when MUy/Py = MUy/Py.
Now, given that Px falls, then MUx/Px > MUy/Py. Since per rupee MUx is greater than per rupee MUy, it meAnswer that satisfaction derived from consumption of good X is greater than the satisfaction derived from consumption of good Y.
This will induce the consumer to buy more of X by reducing expenditure on Y.
— Buying more of X reduces MUx. Px remaining unchanged, MUx/Px is also reduced.
— Buying less of Y raises MUy/Py remaining unchanged, it raises MUy/Py
The change continues till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium.
Question. A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of the good X rises, the consumer buys less of good X. Explain using the law of Equi-Marginal Utility.
Answer. According to the law of Equi-Marginal Utility, the consumer is in equilibrium when MUx/Px = MUy/Py. Now, given that Px rises, then MUx/Px < MUy/Py. Since per rupee MUx is lower than per rupee MUy, it meAnswer that satisfaction derived from consumption of good X is less than the satisfaction derived from consumption of good Y.Therefore, the consumer will buy less of X. It shows that when Px rises, demand for X falls.
Question. A consumer consumes only two goods A and B and is in equilibrium. If the price of good B rises, explain the likely reaction of the consumer under utility analysis.
Answer. In case of two goods A and B, a consumer will at equilibrium when:
• MU of good A/Price of good A = MU of good B/Price of good B
• MU falls as consumption increases
If the price of Good B rises the per rupee Marginal Utility derived from the consumption of
Good A will be more than the consumption of Good B. This will create a situation where:
MU of good A/Price of good A > MU of good B/Price of good B
This will induce the consumer to reallocate his expenditure from Good B (less satisfying) to Good A (more satisfying). Therefore, consumer will buy more of Good A and less of Good B.
As a result, MU derived from consumption of Good A decreases gradually while the MU derived from
consumption of Good B increases. Eventually, this process will continue till MU of good A/Price of good A = MU of good B/Price of good B
Question. A consumer, Mr. Aman is in state of equilibrium consuming two goods X and Y, with given prices Px and Py. Explain what will happen if:
(a) MUx/Px is greater than MUy/Py.
(b) Py falls
Answer. (a) If MUx/Px > MUy/Py, then it meAnswer that satisfaction of Mr. Aman, derived from spending a rupee on Good X is greater than the satisfaction derived from spending a rupee on Good Y. Mr. Aman, will reallocate his income by substituting Good X for Good Y. As the consumption of Good X increases its marginal utility will fall. As the consumption of Good Y decreases, its marginal utility will increase. This is due to the law of diminishing marginal utility. This process will continue till MUx/Px becomes equal to MUy/Py and the consumer is in equilibrium. (b) If Py falls, MUx/Px < MUy/Py, then it meAnswer that satisfaction derived from spending a rupee on Good X is lesser than the satisfaction derived from spending a rupee on Good Y. Mr. Aman will reallocate his income by substituting Good Y for Good X. As the consumption of Good Y increases the marginal utility derived from it goes on diminishing and reverse proposition occurs for Good X, this process will continue till MUx/Px becomes equal to MUy/Py.
Question. Explain the meaning of budget line. What can cause a change in it ? Explain.
Answer. A budget line is the locus of points that represent such combinations of two goods on which total expenditure equals total income.
Causes of change in budget line are –
(i) Change in income of the consumer.
(ii) Change in prices of one or both the commodities.
(i) Change in income shifts the budget line parallel because consumer can now buy more or less of either of the goods in the same proportion.
(ii) Change in price changes the maximum quantity consumer can buy of one or both the goods, changing one or both the ends of budget line.
Question. Why should marginal rate of substitution diminish for a stable consumer’s equilibrium?
Answer. Marginal rate of substitution (MRS) is the rate at which consumer is willing to trade-off one good for the other. It depends on the quantity of the two goods s/he is consuming. A rational consumer will sacrifice lesser units of Good Y so as to acquire additional units of Good X, due to the application of law of diminishing marginal utility. MRS should be diminishing as additional consumption of Commodity X, symbolises fall in marginal utility due to which the consumer will not further increase its consumption. If it does not fall, s/he will keep on increasing the consumption of Commodity-X and will not reach a stable equilibrium.
Question. A rational consumer is consuming only two goods, Good X and Good Y. The prices of the goods are `20 and `10 respectively.
Her total money income is `200. Answerwer the following questions, using the given information :
(i) State her Budget line equation.
(ii) State the slope of the Budget line of the consumer.
(iii) If she decides to spend her entire income on Good Y, how many units of Good Y can she buy ?
Answer. (i) Px.Qx + Py.Qy = M
20.Qx + 10.Qy = 200
(ii) Slope of Budget line = (ignoring minus sign) = 2
(iii) If the entire income is spent on Good Y Qx is zero;
Px.Qx + Py.Qy = M
20 × 0 + 10 × Qy = 200
Qy = 20 units.
Question. Discuss briefly, using a hypothetical schedule the concept of diminishing marginal rate of substitution.
Answer.
Diminishing Marginal Rate of Substitution implies that a consumer is willing to sacrifice lesser unitsof Good Y for every additional unit of Good X. As given in the schedule, moving from combination B to C the consumer is willing to give up 2 units of Good Y so as to gain an additional unit of Good X(2Y : 1X), which diminishes to 1Y : 1X in combination D.
Question.Give any three factors that can cause a rightward shift of demand curve.
Answer. Rightwards shift of demand curve can be caused by:
(i) Fall in price of complementary goods
(ii) Rise in price of substitute good
(iii) Change in preference in favour of the good
Question. Explain the law of diminishing marginal utility, using a hypothetical schedule.
Answer. The law of diminishing marginal utility states as follows:
“As a consumer consumes more and more units of a specific commodity, without a time lag, the additional utility (satisfaction), he expects to derive from each successive unit will go on diminishing.”
As per the schedule, marginal utility at first unit of consumption is 12 utils and it goes on falling as consumption
increases. As the consumer consumes more and more units of a commodity one after the other, the marginal
utility falls to zero(at 5th unit) and even becomes negative (at 6th unit).
Question. State giving reasons whether the following statements are true or false:
(a) Marginal rate of substitution (MRS) is the term used to denote the rate at which the consumer is
required to sacrifice units of one good to obtain one more unit of the other good.
(b) At the point of consumer’s equilibrium marginal rate of substitution should be diminishing.
Answer. (a) False: Marginal rate of substitution (MRS) is the term used to denote the rate at which the consumer is willing to sacrifice units of one good to obtain one more unit of the other good.
(b) True: At the point of consumer’s equilibrium, MRS falls because of the law of Diminishing Marginal Rate of Substitution. So, the indifference curve is convex to the origin.
Question. How would the demand for a commodity be affected by a change in ‘‘tastes and preferences’’ of the consumers in favour of the commodity ? Explain using a diagram.
Answer. If there is a favourable change in taste and preferences of the consumer for a good at the same price OP the quantity demanded would increase from OQ to OQ1.
Demand curve (DD) will shift to the right (D1D1).
This rightward shift shows increase in demand for the good at the same price, keeping other factors constant.
Question. Explain the effect of the increase in the level of air pollution, on the market demand for ‘‘Air Purifiers’’.
(Use diagram)
Answer.
With increase in level of air pollution market demand for air purifiers will increase. DD is the market demand curve of air purifier at a given level of air pollution. It will shift rightwards to D1D1 due to change in preference for air purifiers, as the pollution level rises.
Question. State any six causes of rightward shift of demand curve.
Answer. Causes of rightward shift of demand curve:
(i) Rise in prices of substitute goods
(ii) Fall in price of the complementary good
(iii) Favourable change in taste etc. for the good
(iv) Rise in income of its buyers (in case of a normal good)
(v) Fall in income of its buyers (in case of an inferior good)
(vi) Increase in the number of its buyers
Question. A consumer consumes only two goods X and Y both priced at `3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is the consumer in equilibrium? Give reasons. What will a rational consumer do in this situation? Explain.
Answer. The consumer is in equilibrium when Marginal Rate of Substitution is equal to the ratio of prices of the two goods X and Y, i.e., MRS = Px/Py.
Since Px = 3 and Py = 3, therefore, Px/Py = 3/3 = 1. MRS = 3
Since MRS < Px/Py, therefore, the consumer is not in equilibrium.
Here, MRS > Px/Py. It meAnswer that to obtain one extra unit of good X the consumer is willing to sacrifice more units of good Y than what he is required to sacrifice in the market. The consumer gains and buys more quantity of good X. As he goes on obtaining more and more units of good X, marginal utility of good X goes on declining due to the operation of the law of diminishing marginal utility. Therefore, the consumer is willing to sacrifice less and less of good Y each time he obtains one extra unit of good X. In other words, MRS continuously falls. The process continues till MRS becomes equal to Px/Py and the consumer is in equilibrium.
Question. Suppose a consumer whose budget is `500, wants to consume only two goods, Good X and Good Y. The goods are respectively priced at `50 and `25.
Answer. the following questions on the basis of the given information :
(a) State the budget equation of the consumer.
(b) What is the slope of the budget line ?
(c) How many units can she purchase if she spends the entire `500 on Good X ?
(d) How many units can she purchase if she spends the entire `500 on Good Y, given that the price of
good Y has doubled ?
Answer. (a) PxQx + PyQy = M
50.Qx + 25.Qy = 500
(b) Slope = –Px/Py = –50/25 = –2
(c) Qx = M/Px = 500/10 = 10 units of Good X.
(d) Qy = M/Py = 500/50 = 10 units of Good Y. (since price of commodity Y has doubled)
Question. State giving reasons whether the following statements are true or false:
(a) Lower indifference curve represents higher level of satisfaction.
(b) Marginal rate of substitution is a measure of the slope of a budget line.
(c) A budget set is a collection of such bundles of goods that give same satisfaction.
Answer. (a) False: Lower indifference curve represents lower level of satisfaction because a point on a lower indifference curve represents a consumption bundle which contains less good(s).
(b) False: Marginal rate of substitution (MRS) is a measure of the slope of indifference curve.
(c) False: Budget set is a collection such bundles of goods which cost less than or equal to the consumer’s money income at the given prices.
Question. Consider a market where there are just two consumers and suppose their demands for the good at different prices are given below. Calculate the market demand for the good at each price.
Answer. Market demand is the total quantity demanded of a good by all the consumers at a given price during a given period of time.
Question. Distinguish between normal goods and inferior goods, with examples.
Answer. Normal Goods are those Goods whose demand tends to increase with an increase in the income of a consumer. The demand for the normal goods is directly related to the income of a consumer.
Inferior Goods are those goods whose demand decreases with an increase in the income of a consumer. The demand for the inferior goods is inversely related to the income of a consumer.
For example – with an increase in income, more generally, a consumer would like to shift to a smart phone from a simple mobile phone he is using at present. Now, the simple mobile phone is an inferior good for him whereas, the smart phone is a normal good.
Question. A good is an ‘inferior’ good for one and at the same time ‘normal ‘good for another consumer. Do you agree? Explain with the help of an example.
Answer. Yes, the same good can be inferior for one person and normal for another. Whether a good is normal or inferior is determined by the income level of the consumer. A good which is a normal good for a consumer with a lower income, may become an inferior good for a consumer with higher income.
For example, coarse cloth may be a normal good for a low income consumer, but for a high income consumer it may be an inferior good as she can afford a better quality cloth. Thus, when a consumer moves to a higher income level, she may consider coarse cloth as being below their income status, and has the ability to buy more expensive fine cloth, thus considering coarse cloth as being inferior.
Question.State any three factors causing “increase” in market demand.
Answer. Factors of increase in market demand:
(i) Rise in income of consumers (in case of a normal goods)
(ii) Favourable change in taste & preferences
(iii) Increase in number of consumers
(iv) Fall in price of complementary goods
(v) Rise in price of substitute goods (any three)
Question. How is the price elasticity of demand of a commodity affected by the number of its substitutes? Explain.
Answer. More the number of substitutes available of a good, higher is its price elasticity of demand because in case of price change, the consumers can conveniently shift from one substitute to another. For example, Pepsi has many close substitutes, e.g., Coca-Cola, Limca, etc. If its price goes up, people can shift to other brands of cold drinks. Therefore, demand for Pepsi is elastic. If close substitutes of a good are not available easily in the market, the demand for the good is likely to be inelastic. For example, demand for salt is inelastic.
Question. What is the slope of an Indifference curve?
Answer. Slope of the indifference curve = Marginal rate of substitution (ΔY/ΔX)
Question. State giving reasons whether the following statements are true or false:
(a) A budget set is the collection of all bundles of goods that a consumer wants to buy.
(b) An indifference curve is convex to the origin because of the operation of the law of diminishing
marginal utility.
Answer. (a) False: A budget set is the collection of all bundles of goods that a consumer can afford to buy with his given income and the prices of the goods in the market.
(b) True: The indifference curve is convex to the origin because when a consumer moves downwards along the indifference curve, Marginal Rate of Substitution (MRS) between the two
Question. Discuss briefly, using a hypothetical schedule, the relation between marginal utilityand total Utility
Relationship between total utility and Marginal Utility
(i) Marginal utility falls but remains positive as long as total utility increases from 1st unit to 4th unit of
consumption.
(ii) When marginal utility is Zero, total utility is maximum i.e. at 5th unit of consumption.
(iii) When marginal utility becomes negative, total utility starts falling but remains positive i.e. at 6th unit of
consumption and beyond.
Question. ‘‘For a consumer to be in equilibrium position, marginal rate of substitution between the two goods must be equal to ratio of prices of the two goods.’’ Do you agree with the given statement? .
Answer. The given partially statement is true.
As the consumer will get stable equilibrium only when the following two conditions are satisfied:
(i) Slope of Indifference Curve is equal to the price ratio or MRSxy = Px/Py
(ii) MRSxy must be diminishing.
There may be following two situations that may arise:
• If MRSxy > Px/Py consumer is willing to pay more for commodity X than the price preventing in the market It will induce him to purchase more of X less of Good Y, which leads to decline of MRS. This will continue until MRSxy = Px/Py.
• It must be supported by the second condition i.e. MRS must diminish. Thus, the consumer will get stable equilibrium only when MRSxy = Px/Py and Indifference curve is convex to the origin.
Question.What is the elasticity of demand associated with necessities and luxuries? Give reasons.
Answer. Demand for necessities (e.g. food, textbooks, etc.) is inelastic (eD < 1) because in case of price change, it becomes difficult to reduce its consumption significantly.
Demand for luxuries (e.g. air conditioners, costly furniture, etc.) is very elastic (eD > 1) because luxurious goods generally have many substitutes. If price of a brand rises, the consumer will switch over to other brands. Therefore, a slight change in price affects demand for luxurious goods to a large extent.
Question. Giving reason, state the impact of each of the following on demand curve of normal good ‘X’ if
(i) Price of its complementary good falls.
(ii) News reports claims that consumption of product X has harmful effect on human health.
(iii) Income of consumer increases.
Answer. (i) Demand of the good X will increase, hence demand curve of good X shifts towards right.
(ii) Demand of Good X may decrease as people may be inclined to consume less due to media reports of harmful effect of the good X. As a result, demand curve may shift towards left.
(iii) When income of consumer increases the disposable income increases and consumer is in a better position of spending more on the good X. Hence, consumer may consume more of the commodity due to which the demand for the goods increases and demand curve shifts away from origin.
Question. If the income of a consumer increases, discuss briefly its likely impact on the demand for an inferior good, Good X.
Answer. Increase in income of consumer leads to an increase in his purchasing power so the demand for inferior goods falls as consumer will tend to shift from an inferior product to a better quality product.
Question. Giving valid reasons, state whether the following statements are true or false:
(a) An increase in the income of a consumer would lead to an increase in demand for all types of goods demanded by him.
(b) If percentage change in quantity demanded is equal to percentage change in price, the demand curve will be a straight line parallel to y-axis.
Answer. (a) The given statement is false: The quantity of a good that a consumer demands can increase or decrease with rise in income. This depends upon the nature of the good i.e. normal good or an inferior good. With increase
in income of an individual, the demand for normal good rises whereas demand for inferior good falls.
(b) The given statement is false: The demand curve in this situation will be downward sloping from left to right due to inverse relationship between price and its quantity demanded. Since percentage change in quantity demanded is equal to percentage change in price, therefore Ed = 1 (ignoring minus sign). Hence the demand curve will be a rectangular hyperbola.
Question. Name four goods having inelastic demand. Give reasons why demand for salt or water bottle is inelastic?
Answer. Goods having inelastic demand: Food, newspapers, toothpaste, match-box Demand for salt or water bottle is inelastic because:
(i) It has no close substitute.
(ii) It is a necessity.
(iii) A very small proportion of a consumer’s income is spent on its purchase.
Question. State giving reasons whether the following statements are true or false:
(a) The demand for a good always increases with increase in the prices of other goods.
(b) Demand for a good always increases with the increase in income of its buyers.
Answer. (a) False: With increase in the price of a substitute good, the demand for a good increases. But with increase
in the price of the complementary good, the demand for the given good decreases.
(b) False: With the increase in income, demand for a normal good increases but demand for an inferior good decreases.
Question. Good X and Good Y are complementary goods. If price of Good X increases, discuss briefly its likely impact on the demand for Good Y.
Answer. Good X and Good Y are complementary goods which are jointly demanded therefore if the price of Good X increases the demand for Good Y will decrease. This is due to the inverse relationship between the price ofgiven good and demand for its complementary good.
Question. If the income of a consumer increases, discuss briefly its likely impact on the demand for a normal good, Good X.
Answer. Increase in income of consumer leads to an increase in purchasing power of consumer so the demand for normal good X increases, as the demand for normal good is directly related to the income of consumer.
Question. When does a consumer buy more quantity of a commodity at a given price? Give three points.
Answer. (i) When income of the consumer increases, if it is a normal good.
(ii) When there is a fall in the price of the complementary good.
(iii) When there is a rise in prices of substitute goods.
Question.’As the price of a good falls, the resulting increased purchasing power may be a reason for increase in quantity demanded’. Do you agree with the given statement? Give reason for your Answer.
Answer. When price of a good falls the purchasing power (real income) of the consumer increases as he will able to purchase more units of the given good with the same money income. This phenomenon is called as income effect and is one of the main reasons for negative slope of demand curve.
Question. State giving reasons whether the following statements are true or false:
(a) If goods X and Y are substitutes, a rise in price of X will result in a rightward shift in demand curve of Y.
(b) If a fall in price of good X leads to a rise in demand for good Y, then X and Y are substitute goods.
Answer. (a) True: If goods X and Y are substitutes, a rise in price of X makes Y relatively cheaper. Therefore, it leads to increase in demand for good Y at the same price. As a result, demand curve of Y shifts to the right.
(b) False: X and Y are complementary goods and not substitute goods.
Question. Price elasticity of demand of two goods A and B is (–) 3 and (–) 4 respectively. Which of the two goods has higher elasticity and why?
Answer. Good B has higher elasticity as compared to A. It is because with change in price by one per cent, percentage change in demand for B is 4% while in case of good A it is only 3%.
Question. Explain the effect of the following on the demand for a good:
(i) Increase in income of its consumer
(ii) Rise in price of its substitute good
Answer. (i) When the good is normal, increase in income of its consumer raises his purchasing power, so he buys more of it.
When the good is inferior, then with an increase in income the demand for such good will fall.
(ii) Rise in the price of substitute goods makes the given good relatively cheaper. So its demand increases and demand for substitute good falls.
Question. State any one valid reason for leftward shift in demand curve.
Answer. Leftward Shift in demand curve:
(i) Fall in the price of substitute goods
(ii) Rise in the price of Complementary goods
(iii) Decrease in the size of population
(iv) Unfavourable Change in taste
(v) Fall in income of the consumer (in case of normal goods) (any one valid reason)
Question. Good X and Good Y are substitute goods. If price of Good X increases, discuss briefly its likely impact on the demand for Good Y.
Answer. Good X and Good Y are substitute goods, if the price of Good X rises, it makes the Good X costlier and Good Y relatively cheaper. As a result demand for Good Y will increase and consumer will substitute Good Y over Good X.
Question. State whether the following statements are true or false. Give valid reasons in support of your Answer.
(a) The coefficient of price elasticity of demand for the commodity is inversely related to the number of
alternative uses of the commodity.
(b) Luxury goods often have lower price elasticity of demand.
Answer. (a) The given statement is false: A commodity with a number of alternative uses carries positive relation with the coefficient of price elasticity of demand. With the fall in the price of such a commodity the quantity demanded increases as people can put it for different uses.
(b) The given statement is false: If the price of luxury goods increases, people may postpone its consumption. Hence the demand is elastic in nature.
Question. (a) What will be the effect of increase in number of buyers on demand curve for a good?
(b) Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X.
Answer. (a) If the number of buyers of a good in the market increases, it leads to increase in market demand for the good at the same price. As a result, market demand curve shifts to the right.
(b) Goods X and Y are substitutes for each other. Fall in price of Y makes it relatively cheaper. Good X becomes relatively expensive as compared to Y. The consumers will shift to Y. It leads to decrease in demand for X at the same price.
