NCERT Solution Economics Class 12 Chapter 2 Theory of Consumer Behaviour
NCERT Solution Economics Class 12 Chapter 2 Theory of Consumer Behaviour all questions and answers. Economics Class 12 2nd Chapter Theory of Consumer Behaviour exercise solution and experts answer. As one of online learning platforms, we (netex.) are excited to offer the NCERT Solution Economics Class 12 Chapter 2. This solution is designed to help students who are looking to brush up on their economics concepts on Chapter 2 Theory of Consumer Behaviour.
1.) What do you mean by the budget set of a consumer?
The set of bundles available to the consumer is called the budget set. The budget set is thus the collection of all bundles that the consumer can buy with her income at the prevailing market prices. A change in price of mangoes, when price of bananas and the consumer’s income remain unchanged, will bring about similar changes in the budget set of the consumer. The budget set is the collection of all bundles of goods that a consumer can buy with her income at the prevailing market prices..The budget set changes if either of the two prices or the income changes.
3.) Explain why the budget line is downward sloping.
An explanation for a downward sloping demand curve rests on the notion of diminishing marginal utility. The law of diminishing marginal utility states that each successive unit of a commodity provides lower marginal utility. Therefore, the individual will not be willing to pay as much for each additional unit and this results in a downward sloping demand curve. 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.
5.) How does the budget line change if the consumer’s income increases to Rs 40 but the pricesremain unchanged?
If the consumers income increased income of र 40, the consumer can buy more of both the goods. So the budget line will shift rightwards parallel to original budget line. If the income increases, the consumer can buy more of the goods at the prevailing market prices.
6.) How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?
The consumers income and the price of good 1 are unchanged, the decrease in the price of good 2 will increase the vertical intercept of the budget line. The new budget line will also pivot outwards around the same horizontal intercept. The slope of the budget line and horizontal intercept have changed after the price change. It pivots inwards around the vertical intercept and horizontal intercept decreases.the consumer’s income remain unchanged, will bring about similar changes in the budget set of the consumer.
7.) What happens to the budget set if both the prices as well as the income double?
The budget set If both the prices as well as the income doubles, it suggests equally proportionate change in both income and prices, thus, the budget set would remain the same as before, since the attainable combinations would not change for the consumer. The set of bundles available to the consumer is called the budget set. The budget set is thus the collection of all bundles that the consumer can buy with her income at the prevailing market prices.
8.) Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if she spends her entire income. The prices of the two goods are Rs 6 and Rs 8 respectively. How much is the consumer’s income?
quantity of 1 Good = 6 units
Quantity of 2 Good = 8 units
Price of Good 1 = Rs 6
Price of Good 2 = Rs 8
goods 1 = X & goods 2 = Y
price of X =Px, price of Y = Py , income = M
X=6 UNITS
Px=6 rs
Y=8units
Py=8rs
Budget line = M=P1X1+P2X2
M=6*6+8*8
M=36+64
M=100
consumer’s income is Rs 100.
9.) Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally priced at Rs 10 and the consumer’s income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to the consumer, identify those which cost her exactly Rs40.
(i) P1P1 = Rs 10
P2P2 = Rs 10
M = Rs 40
BUDGET SET = p1x1 + p2x2 = M
10*1+10*2=40
10+20=30
The bundles that are available to the consumer should cost less than or equal to Rs 40.
The bundles are available to the consumer.
First option : (0, 0), (0, 1), (0, 2), (0, 3) and (0, 4)
Second option : (1, 0), (1, 1), (1, 2), (1, 3)
Third option : (2, 0), (2, 1), (2, 2)
Fourth option : (3, 0), (3, 1)
Fifth option : (4, 0)
(ii) The cost of Rs. 40, the bundles are (0, 4), (1, 3), (2, 2), (3, 1) and (4, 0)
Explanation
(a) First bundle (0, 4)
Cost =0*10+4*10
=0+40=40
(b) Second bundle (1, 3)
Cost =1*10+3*10=
=10+30
=40
(c) Fifth bundle (4, 0)
Cost =4*10+0*10
=40+0
=40
10.) What do you mean by ‘monotonic preferences’?
Consumer preferences are such that greater consumption of a commodity always offers him a higher level of satisfaction. For ex. Consumer’s preferences are assumed to be such that between any two bundles (x1, x2) and (y1, y2), if (x1, x2) has more of at least one of the goods and no less of the other good compared to (y1, y2), then the consumer prefers (x1, x2) to (y1, y2). Preferences of this kind are called monotonic preferences. please refer diagram
11.) If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?
If The bundle (10, 8) instead of the bundle (8, 6) because bundle (10, 8) has more of both goods. The consumer cannot be indifferent between the two. consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.
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)?
Consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle. Consumer’s preferences are monotonic, more is better prefer bundle I over the rest of the bundles.It means that the consumer prefers a particular bundle over the other bundle if the former consists of at least more of one good and no less of the other good. The consumer’s preferences are assumed to be monotonic.Monotonicity of preferences implies that the indifference curve is downward sloping.consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.Compared to a point below the budget line, there is always some point on the budget line which contains more of at least one of the goods and no less of the other, and is, therefore, preferred by a consumer whose preferences are monotonic. Therefore, if the consumer’s preferences are monotonic, for any point below the budget line, there is some point on the budget line which is preferred by the consumer.
Therefore consumers choice is monotonic if between 2 bundles , the consumer chooses the bundle that has more of atleast one good.
Rank 1=10,10
Rank 2 =10,9
rank 3 =9,9
ranks are based on monotonic preferences.
13.) Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?
Ans.
No. These preferences are not monotonic. Therefore, if the consumer’s preferences are monotonic, for any point below the budget line, there is some point on the budget line which is preferred by the consumer. Points above the budget line are not available to the consumer. If a consumer has monotonic preferences, he would prefer the bundle (6, 6) to the bundle (5, 6) because the bundle (6, 6) has more of Good-1 as compared to the bundle (5, 6).
14.) Suppose there are two consumers in the market for a good and their demand functions are as follows: 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 to 15 and d1(p) = 0 at any price greater than 15. Find out the market demand function.
Ans.
in the market for a good, there are many consumers. It is important to find out the market demand for the good. The market demand for a good at a particular price is the total demand of all consumers taken together. The market demand for a good can be derived from the individual demand curves.
The market demand curve represents the demand of all consumers in the market taken together at different levels of the price of the good.
(P)=D1(P)+D2(P)
(P)=20-P+30-2P
(P)=50-3P
Price less than or equal to 15.
Market demand = 0 at any price greater than 15.
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 .
Ans.
D(p)=10-3
P≤10/3
Price ≤10/3
Market demand=20*(10-3p)
=200-60p
Market demand = 20*d1(p)
=20*0
=0
Market demand function=200-60p
If p≤10/3
p≥10/3
=0
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16.) Consider a market where there are just two consumers and suppose their demands for the good are given as follows: Calculate the market demand for the good.
P | D1 | D2 |
1 | 9 | 24 |
2 | 8 | 20 |
3 | 7 | 18 |
4 | 6 | 16 |
5 | 5 | 14 |
6 | 4 | 12 |
Ans.
P | D1 | D2 | Market demand=d1+d2 |
1 | 9 | 24 | 9+24=33 |
2 | 8 | 20 | 8+20=28 |
3 | 7 | 18 | 7+18=25 |
4 | 6 | 16 | 6+16=22 |
5 | 5 | 14 | 5+14=19 |
6 | 4 | 12 | 4+12=16 |
17.) What do you mean by a normal good?.
Ans.
A good can be a normal good for the consumer at some levels of income and an inferior good for her at other levels of income. At very low levels of income, a consumer’s demand for low quality cereals can increase with income. But, beyond a level, any increase in income of the consumer is likely to reduce her consumption of such food items as she switches to better quality cereals. The demand for a normal good increases (decreases) with increase (decrease) in the consumer’s income. For normal goods, the demand curve shifts rightward and for inferior goods, the demand curve shifts leftward. The quantity of a good that the consumer demands can increase or decrease with the rise in income depending on the nature of the good. For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods. Ex for normal goods food staples , clothing , household appliance.
18.) What do you mean by an ‘inferior good’? Give some examples
Ans.
A good can be a normal good for the consumer at some levels of income and an inferior good for her at other levels of income. if the income increases, the demand for the good at each price changes, and hence, there is a shift in the demand curve. For normal goods, the demand curve shifts rightward and for inferior goods, the demand curve shifts leftward. a consumer’s demand for a normal good moves in the same direction as the income of the consumer. However, there are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods.As the income of the consumer increases, the demand for an inferior good falls, and as the income decreases, the demand for an inferiorgood rises. Examples of inferior goods include low quality food items like coarse cereals. if the demand for sugar , decreases with an increase in income , then sugar is an inferior good.
19.) What do you mean by substitutes? Give examples of two goods which are substitutes of each other.
Ans.
The quantity of a good that the consumer chooses can increase or decrease with the rise in the price of a related good depending on whether the two goods are substitutes or complementary to each other.In contrast to complements, goods like tea and coffee are not consumed together. In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each other. Since tea is a substitute for coffee, if the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up. On the other hand, if the price of coffee decreases, the consumption of tea is likely to go down. The demand for a good usually moves in the direction of the price of its substitutes. The demand for a good is likely to be elastic if close substitutes are easily available. On the other hand, if close substitutes are not available easily, the demand for a good is likely to be inelastic.
20.) What do you mean by complements? Give examples of two goods which are complements of each other.
Ans.
In contrast to complements, goods like tea and coffee are not consumed together. In fact, they are substitutes for each otherSimilar is the case with other complements. In general, the demand for a good moves in the opposite direction of the price of its complementary goods.
21.) Explain price elasticity of demand.
Ans.
Price elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price. Price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. Price elasticity of demand for a goode D = percentage change in demand for the good/ percentage change in the price of the good Sometimes, the demand for a good changes considerably even for small price changes. On the other hand, there are some goods for which the demand is not affected much by price changes Demands for some goods are very responsive to price changes while demands for certain others are not so responsive to price changes. The price elasticity of demand for a good depends on the nature of the good and the availability of close substitutes of the good. The price elasticity of demand for a good is defined as the percentage change in demand for the good divided by the percentage change in its price. The elasticity of demand is a pure number. Elasticity of demand for a good and total expenditure on the good are closely related.
22.) Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity .
Ans.
Price=p=4
P1=5
Elasticity of demand = (-)P/Q*∆Q/∆P
=∆P=P1-P=5-4=1
Q=25 units
Q1=20 units
∆Q=Q1-Q=(20-25)
=(-5)
Ed=(-)4/25*05/1
=0.8
23.) Consider the demand curve D (p) = 10 – 3p. What is the elasticity at price 5/3 ?
Ans.
Given,
Price=5/3
D=10-3*5/3
=10-5
=5
D=5units
D(p)=10-3p
∆D/∆P=-3
Elasticity of demand=ed
=(-)5/3*1/5*-0
=1
Elasticity of demand =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.
Change in price = 5%
Elasticity demand = (ed)=-0.2
-0.2=% in change in quantity demanded/5%
=% change in quantity demanded=-0.2*5%
=0-1%
Demand for the good down by 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.
Elasticity of demand -0.2 is less than one. its demand is inelastic Increase in price of good an increase in the expenditure.
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 expenditure increases with a decrease in the price of good. This is a contradictory change. the elasticity of demand is more than unitary elastic .
decrease price 4
Rise in expenditure = 2
The elasticity of demand is a pure number. Elasticity of demand for a good and total expenditure on the good are closely related.
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