Download MASTER CARDS UNIT II (MICRO ECONOMICS)

MASTER CARDS UNIT II (MICRO ECONOMICS)
UTILITY CONCEPTSQue-1-Define the Marginal Utility?
Ans:- It refers to additional utility an account of consumption of an additional unit of a
commodity
Que-2-Explain the law of diminishing marginal utility(LDMU) with the help of example .
OR
Explain the law of diminishing marginal utility(LDMU) with the help of diagram.
Ans:- Law of diminishing marginal utility states that as more and more units of a commodity are
consumed, marginal utility derived from every additional unit declines. For example if a Ram eat
banana if other things remains the same then the MUs of each successive unit for Ram will
decline because his needs (hungriness) would decline as he consumes more unit of banana.
unit
1
2
3
4
5
price
5
5
5
5
5
MU
20
15
10
5
0
UNIT
Assumption(Other thing which to remain constant) of LDMU:1- unit of commodity is identical.
2-Price of commodity remains the same.
3- Taste for commodity remain same.
4- continuous consumption .no time lag.
5- consumer is rational , his motto is to maximize herb satisfaction.
Que-3- Shows the relation between TU and MU. Use diagram.
Ans:- Relationship between MU and TU :i) When MU is positive TU rises.
ii) When MU is zero TU is maximum.
iii) When MU is negative, TU falls
MU
Diagram:
Y
TU/MU
TU
X
o
Quantity
(-)MU
Consumer Equilibrium
The consumer is in equilibrium when, given his income and market prices, he plan his
expenditure (on different goods and services) in such a manner that he maximizes his total
satisfaction. In other word it is the level of consumption where a consumer get maximum
satisfaction level .
Que-1- A consumer consumes only two goods X and Y and is in equilibrium . Show that when the
price of good X rises, the consumer buys less of good X. Use utility approach
Or
A consumer consumes only two goods X and Y and is in equilibrium . Show that when the price of
good Y falls, the consumer buys more of good Y. Use utility approach
Ans:- When consumer is in equilibrium it means he is receiving same level of MU from good-X and
good-Y by spending a unit of rupee. i.e.
Mum= MU x/Px = MUy/ Py -------------(1)
If the price of X rise it means (or when price of good Y falls below situation may occure)
MUx/ Px < MU y / Py----------------------(2)
In this case the consumer will respectively get more marginal utility from Y than that of from X
good.Therefore he reduce the consumption of X good and increase the consumption of Y good till the
new equilibrium situation does not come finally.
Mum= MU x/Px = MUy/ Py
-------------(3)
Que-2- A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the
reaction of the consumer through the Utility Analysis.
OR
A consumer consumes only two goods X and Y and is in equilibrium. Price of y rises. Explain the
reaction of the consumer through the Utility Analysis.
Ans:- When consumer is in equilibrium it means he is receiving same level of MU from good-X and
good-Y by spending a unit of rupee. i.e.
Mum= MU x/Px = MUy/ Py -------------(1)
If the price of X falls it means (or when price of good Y rises below situation may occure)
MUx/ Px > MU y / Py----------------------(2)
In this case the consumer will respectively get more marginal utility from X than that of from X good.
Therefore he reduce the consumption of Y good and increase the consumption of X good till the new
equilibrium situation does not come finally.
Mum= MU x/Px = MUy/ Py
-------------(3)
Que-3-Given the price of good, how will a consumer decide as to how much quantity of that good to
buy? Use utility analysis.
Or
If a commodity is free of cost , where would be the consumer in equilibrium? or where should a
consumer stop the consumption?
Ans:- A consumer purchasing a single commodity will be at equilibrium, when he is
buying such a quantity of that commodity, which gives him maximum satisfaction. The
number of units to be consumed of the given commodity by a consumer depends on 2
factors.
1. Price of the given commodity;
2. Expected utility (Marginal utility) from each successive unit.
Let us now determine the consumer’s equilibrium it the consumer spends his entire income on
single commodity. Suppose, the consumer wants to buy a good (say, x), which is priced at Rs. 10
per unit (in utils and in Rs.) is determined and is given in Table (For sake of simplicity, it is
assumed that 1 unit = Rs.1, i.e. MUM=Rs.1)
Consumer’s Equilibrium in case of Single Commodity
Price
Marginal
Marginal Utility
(PX)
Utility
In Rs. (MUX) 1
(Rs.)
(utils)
util = Rs.1
1
10
20
20 ÷ 1 = 20
20 - 10 = 10
2
10
16
16 ÷ 1 =16
16 -10 = 6
3
10
10
10 ÷ 1 = 10
10 – 10 = 0
Units of
X
Difference
MUX and PX
Remarks
MUX > PX’ so
Consumer will increase the
consumption
Consumer’s Equilibrium (MUX =
PX)
MUX < PX’
4
10
4
4÷1=4
4-10= -6
vv
Curve slopes downwards, indicating that the marginal utility falls with successive consumption
of commodity x due to operation of Law of DMU. Price (Px) is a horizontal and straight price
line as price is fixed at Rs. 10 per unit. From the given schedule and diagram, it is clear that the
consumer will be at equilibrium at point ‘E’, when he consumes 3 units of commodity x, because
at point E, MUX = PX

He will not consume 4 units of x as MU of Rs. 4 is less than price paid of Rs. 10.

Similarly, he will not consume 2 units of x as MU of Rs.16 is more than the price paid.
OR
If price of commodity is zero i.e. free of cost then consumer should stop the consumption where
he get zero MU from that unit. Y
Price&MU
PX=MU
O
UNIT
On e point of consumption MU=Px,( O=O)
e
X
MU
Indifference curve:- It is a locus of different combinations of two goods which give same level
of satisfaction to consumer. Consumer is indifferent between Each combination.
Que-4- Explain why is the indifference curve (a) downward sloping and (b) convex.
Ans:-
Y
Good ‘y’
IC3
IC1
O
Good x
IC2
X
A- An indifference curve is downward sloping . This is because without sacrificing of one
good another good consumption unit can not be increased due to the given price and
given income condition.
B- An indifference curve is convex to the origin because of the decreasing Marginal rate
of Substitution MRS the ratio of - ∆Y/∆X. This ratio tend to decrease as good X
increases with sacrificing of good Y. That is why the indifference curve is convex to
origin. Decreasing MRS comes due to the implication of law of diminishing marginal
utility ( LDMU).
Que-5- Explain the concept of MRS with the help of a numerical example. Also explain its behavior
along an indifference curve.
OR
Explain with the help of numerical example,the meaning of diminishing marginal rate of
substitution.
Ans:- MRS refers the rate of sacrifice of good Y for increase the unit of good X i.e .= - ∆Y/∆X. It tends
to decrease along an IC that implying –the consumer is willing to give up less and less unit of
good Y for every additional unit of good X. This is due to the law of diminishing marginal
utility ( LDMU).
Combination Good X
Good Y
MRS= ∆Y/∆X.
I
1
10
---II
2
7
3/1= 3
III
3
5
2/1 =2
IV
4
4
1/1= 1
Y
Good ‘y’
IC1
O
Good x
X
Que-6- Explain the conditions of consumer’s equilibrium with the help of the Indifferent curve analysis.
Ans:- a) definition: In the indifference curve approach, consumer’s equilibrium is
achieved at the point at which budget line just touches a particular indifference curve, i.e.
the point, at which the budget line is tangent to a particular indifference curve. This is the
point of maximum satisfaction.
b) Essential conditions for consumers equilibrium:
i) Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py
ii) Indifference curve must be convex to the origin. or MRS decreasing.
c) Diagram:
Y
A
P
Good ‘y’
Q
IC1
O
IC3
IC2
r
Good x
B
X
Diagram Explanation:
i) ‘AB’ is the budget line.
ii) It is sure that consumer’s equilibrium will lie on some point on ‘AB’
iii) Indifference map (set of IC1 , IC2 , IC3) shows consumers scale of preferences
between different combinations of good ‘x’ and good ‘y’
iv) Consumers equilibrium will achieve where budget line (AB) is tangent to the IC2.
Consumers cannot achieve the following:
i) P and ‘r’ points on budget line give satisfaction, but, choosing point ‘q’ puts him on a
higher IC gives more satisfaction.
ii) He cannot move on IC3 , as it is beyond his money income.
Que-7-Explain the concept of Marginal Rate of Substitution. Explain the reaction of the
consumer when MRS is higher than the ratio of the price.?
OR
A consumer consume only two good X nad Y both priced at Rs. 2 per unit. If the consumer chooses a
combination of the two goods with Marginal Rate of Substitution equal to 2 , is the consumer in
iquilibrium? Why or Why not? What will a rational consumer do in this situation? Explain.
Ans:- MRS refers the rate of sacrifice of good Y for increase the unit of good X i.e .= - ∆Y/∆X. This is
in accordance with the preferences of the consumer. This is the same as the slope of IC.
Essential conditions for consumers equilibrium:
i)
Budget line must be tangent to indifference curve i.e., MRS xy = Px / Py
If MRSxy > Px / Py ,( like in alternate question MRS is 2 and price ratio is 2/2=1 that
means 2 >1 ) the marginal utility for X comparatively higher than that of in case of good
Y . therefore the consumer increase the consumption of good X in place of Y and move
downward along with IC, MRSxy tends to fall .
Note : opposite reaction may occur when MRSxy < Px / Py situation occur.
DEMAND
1-What is demand function?
Answer: - A demand function shows the functional relationship between the quantity demanded
and the factors on which demand depends on.
2- Explain the law of Demand with the help of schedule & Diagram
Ans:-Law of demand:-The law of demand states that other things remaining constant like
income , taste , preferences etc., quantity demanded of a commodity increases with a fall in price
and diminishes when price increases.
Demand schedule
Px(Rs)
Qx(units)
1
40
2
30
3
20
3
Change in demand or Shift in demand curve
demand for the commodity changes due to change
in other factors affecting demand like income ,
taste , preferences etc.
Price remains constant
It is of two types
(a) increase in demand, demand curve Shifts
upwards to right from D to D1
(b) decrease in demand, demand curve Shifts
downwards to left from D to D2
Change in Quantity demanded or
movement along the same demand
curve
Other factors affecting demand remain
constant like income , taste , preferences
etc.
It occurs due to fall or rise in the price of
good
It is of two types
(a)Extension in demand, upward
movement along the same demand
curve from A to B
(b)contraction in demand, downward
movement along the same demand
curve from B to A.
Price
A
O
4
Increase in demand
B
quantity demanded
Extension in demand
demand curve Shifts upwards to right from D to upward movement
along the same
D1
demand curve from A to B
Price remains constant
It occurs due to fall in the price of
good
increase in demand occurs when
(i)When income increases of the consumer
Other factors affecting demand remain
constant like income , taste , preferences
consuming normal good.
(ii)When income decreases of the consumer
consuming inferior good.
(iii) due to favourable change in fashion or
climate.
(iv)When price of substitute good increases.
(v) When price of complementary good falls.
(iv) When taste of the consumer shifts in favour
of the commodity
(v) When price of the commodity is expected to
increase in the near future.
(vi) Increase in number of consumers, and
(vii) When the income of the consumer is
expected to increase in near future.
5
etc.
Decrease in demand
contraction in demand
demand curve Shifts downwards to left from D to It is the downward movement along the
D2
same demand curve from B to A.
Price remains constant
It occurs due to rise in the price of
Good
Decrease in demand occurs when
(i)When income decreases. of the consumer
consuming normal good
(ii)When income increases. Of the consumer
consuming inferior good
(iii) due to unfavourable change in fashion or
climate.
(iv)When price of substitute good decreases.
(v) When price of complementary good rises.
(iv) When taste of the consumer is unfavourable
for the commodity
(v) When price of the commodity is expected to
decrease in the near future.
(vi) decrease in number of consumers, and
(vii) When the income of the consumer is
expected to decrease in near future.
Contraction in demand,
Other factors affecting demand remain
constant like income , taste , preferences
etc.
6-Explain how the change in related good’s price affect the demand of a good? Give example.
a) Ans:- Price of related goods :
i) Complementary goods :The demand for a commodity rises with a fall in the
price of its complementary good (Car and petrol)
Suppose the price of good -2 (complementary item like car) rises then the demand for petrol will
decrease because the demand of petrol depends on car due to rise in price of car its demand
decrease therefore demand for petrol also decrease and demand curve of petrol shift left ward.
And vice –versa* draw diagram of demand curve and shift in demand also as per the changes
come.
ii-Substitute goods: Demand for a commodity falls with a fall in the price of other substitute
good (Tea& Coffee).
Suppose price of good -2 (like tea) increase then in case of substitute item the demand for a good
(like coffee) increase. And demand curve for good 1(coffee) shift right wards and vice- versa.*
draw diagram of demand curve and shift in demand also as per the changes come.
7- What do you mean by substitute and complementary goods? Give two examples each.
Ans:- Substitute goods are those goods which can be used in place of each other. Ex. Tea
and Coffee. .
Complementary goods are those goods which are used together to satisfy a given want. Ex:
Car and petrol.
8- What do you mean by normal good and inferior goods? Give examples each
Ans:- Normal good is that good which demand increases as income increase and vice-versa. On
normal good income effect is positive. like- brand goods
Inferior good is that good which demand decreases as income increase and vice-versa. On
the inferior good income effect is negative. Loose items.
8- Explain how rise in the income of the consumer affect the demand of a good. Give example.
Ans;- Due to increase in income there would increase in demand for the good if it is normal and
demand curve shift rightward.(use rightward shift in demand curve).
9- Explain the various degrees of price elasticity of demand with the help of diagrams.
Ans:- There are five degrees of price elasticity of demand. They are,
a) Perfectly elastic demand (Ed=∞):-a slight or no change in the price leads to infinite
changes in the quantity demanded.
b) Perfectly Inelastic demand (Ed=0) :- Demand of a commodity does not change at all
irrespective of any change in its price.
c) Unitary elastic demand (Ed=1):-When the percentage change in demand (%) of a
commodity is equal to the percentage change in price.
d) Greater than unitary elastic demand (Ed>1):- When percentage change in demand of a
commodity is more than the percentage change in its price.
e) Less than unitary elastic demand (Ed<1) :- When percentage change in demand of a
commodity is less than the percentage change in its price.
Diagrams
Ed=∞
y
0
y
y
x
Ed>1
0
Ed=0
0
y
x
y
Ed=1
0
x
Ed<1
0
10- How is elasticity of demand measured through geometric method/ point method?
Or
Explain with the help of a diagram, the geometric method of measuring price elasticity of
demand.
Ans:- Ed = lower segment of a demand curve/upper segment of a demand curve.
(1)Unitary Elastic Demand at mid point C,
Ed = AC/CB=1 (since AC=CB)
(2) Elastic Demand occurs at any point Above point C
For example at E elasticity=EB/AE>1 (Since EB>AE)
(3) Inelastic Demand occurs at any point below point C
For example at D elasticity=DB/AD<1 (Since DB<AD)
(4) ) Perfectly elastic Demand occurs at A
For example at A elasticity=AB/0= ∞
(5) ) Perfectly inelastic Demand occurs at B
For example at B elasticity=0/AB=0
11-Explain any four factors that affect elasticity of demand.
Ans :- factors affecting price elasticity of demand.
a) Nature of the commodity.-1-If necessary, the less elastic.
2-if luxurious ,more elastic.
b) Availability of substitutes.( more substitute , more elastic and less substitutes less elastic)
c) Possibility of postponement of use.(possible to postponement then elastic and if postponement
not possible then less elastioc.)
d)
Various uses of the commodity( More uses more elastic and less uses less elastic)
QUESTIONS ASKED FROM LAST YEARS ALL INDIA QUESTION PAPERS OF XII
ECONOMICS FROM UNIT 2
2015
1-If the MRS is increasing , the Indifference curve will be? 1
2-Define budget line.
1
3-If due to fall in the price of good X, demand for good Y rise, the two goods are?
4-Explain the significance of minus sign attached to the measure of price elasticity
of demand in case of a normal goods, as copared to the plus sign attached to the
measure of price elasticity of supply.
3
5-A consumer spends Rs. 100 on a good at Rs 4 per unit. When its price falls by 25
percent, the consumer spends Rs.75 on the good.Calculate the price elasticity of
of the demand by percentage method.
4
6- A consumer consume only two good X nad Y both priced at Rs. 2 per unit. If the
consumer chooses a combination of the two goods with Marginal Rate of
Substitution equal to 2 , is the consumer in iquilibrium? Why or Why not? What
will a rational consumer do in this situation? Explain.
6
OR
A consumer consumes two goods X and Y whose price s are Rs.5 and Rs. 4
respectively. If the consumer chooses a combination of the two goods with
marginal utility of X equal to 4 and that of Y equal to5, is the consumer in
equilibrium? Why or Why not? What will a rational consumer do in this situation?
Explain.
7 -Define the indifference curve?
1
8- A consumer spends Rs. 1000 on a good at Rs 10 per unit. When its price falls by
20 percent, the consumer spends Rs.800 on the good.Calculate the price elasticity
of of the demand by percentage method
9- Define the indifference map.
1
10- A consumer spends Rs. 400 on a good at Rs 8 per unit. When its price falls by
25 percent, the consumer spends Rs.500 on the good.Calculate the price elasticity
of of the demand by percentage method
2014
1- Define the indifference curve?
1
2-When the price of a good falls from 10rupee to 8 rupee per unit, its demand
rises from 20 units to 24 units.What can you say about the price elasticity of
demand through the expenditure method.
3
3-A consumer consumes only two goods X and Y and is in equilibrium . Show that
when the price of good X rises, the consumer buys less of good X. Use utility
approach.4
OR
Given the price of good, how will a consumer decide as to how much quantity of
that good to buy? Use utility analysis .
4-Explain why is the indifference curve (a) downward sloping and (b) convex.
6
OR
Explain the concept of MRS with the help of a numerical example. Also explain
its behavior along an indifference curve.
5- Give the meaning of inelastic demand .
1
6- When the price of a good rises from 10rupee to 12 rupee per unit, its demand
falls from 25 units to 20 units.What can you say about the price elasticity of
demand through the expenditure method.
3
7-How does the change in the price of substitute good affect the demand of the
given good? Explain with the help of an example.
4
8-What do you mean by the monotonic preferences?
1
9- How does the change in the complementary good’s price affect the demand of
that of given good? Explain with the help of an example.?
4
2012
Q2 Give one reason for a shift in demand curve. (1)
Q7 A consumer consumes only two goods X and Y and is in equilibrium. Price of X falls. Explain the
reaction of the consumer through the Utility Analysis. (3)
Q11 Define an indifference map. Why does an indifference curve to the right show more utility ?
Explain. (4)
Q12 A consumer buys 10 units of a commodity at a price of Rs. 10 per unit. He incurs an expenditure of
Rs. 200 on buying 20 units. Calculate price elasticity of demand by the percentage method. Comment
upon the shape of demand curve based on this information. (4)
Q15 Explain the distinction between “change in quantity supplied” and “change in supply”. Use diagram.
(6)
2011
Q3 Define a budget line. (1)
Q7 When price of a good is Rs. 13 per unit, the consumer buys 11 units of that good. When price rises to
Rs. 15 per unit, the consumer continues to buy 11 units. Calculate price elasticity of demand. (3)
Q11 A consumer consumes only two goods X and Y. At a consumption level of these two goods, he finds
that the ratio of marginal utility to price in case of X is higher than in case of Y. Explain the reaction of
the consumer. (4)
Q12 Explain how rise in income of a consumer affects the demand of a good. Give examples. (4)
Q15 Explain the conditions of consumer’s equilibrium with the help of the Indifferent curve analysis. (6)
2010
Q1 Define budget line. (1)
Q2 What is meant by inferior good in eonomics ? (1)
Q6 Explain the effect of the following on the price elasticity of demand of a
commodity : (3)
(i)
(ii)
Number of substitutes
Nature of the commodity
Q7 Explain any two causes of ‘increase’ in demand of a commodity. (3)
OR
Explain the inverse relationship between price and quantity demanded of a commodity.
Q12 When price of a commodity falls by Re.1 per unit, its quantity demanded rises by 3 units. Its price
elasticity of demand is (-)2. Calculate its quantity demanded if the price before the change was Rs.10 per
unit. (4)
Q15 What are the conditions of consumer’s equilibrium under the indifference curve approach ? What
changes will take place if the conditions are not fulfilled to reach equilibrium ? (6)
2009
Q2 What is meant by inferior good in economics ? (1)
Q6 State the law of demand and show it with the help of a schedule. (3)
Q7 Explain the geometric method of measuring price elasticity of demand. (3)
Q16 Explain the effect of the following on the market demand of a commodity : (6)
(i)
(ii)
Change in price of related goods.
Change in the number of its buyers.
2008
Q2 What is demand schedule ? (1)
Q7 Price elasticity of demand of a good is (-) 1. At a given price the consumer buys 60 units of the good.
How many units will the consumer buy if the price falls by
10 percent. (3)
Q8 Given the market price of a good, how does a consumer decide as to how many units of that good to
buy ? Explan. (3)
Q14 Explain the effect of the following on demand for a good : (6)
(i)
(ii)
Rise in income
Rise in prices of related goods.
2007
Q2 Explain the effect of rise in the price of related goods on the demand of a good. (3)
Q6 When price of good falls by 10 percent, its quantity demanded rises from 40 units to 50 units.
Calculate price elasticity of demand by the percentage method. (4)
Q10 Distinguish between the following : (6)
(a) Normal good and Inferior good
(b) Marginal utility and Total utility
(c) Individual demand schedule and Market demand schedule