Part — B

Answer the following questions in one or two sentences

Question 21. Define Utility.

Answer: Utility is the capacity of a commodity to satisfy human wants.

 

Question 22. Mention the classifications of wants.

Answer: (a) Necessaries (b) Comforts (c) Luxuries.

 

Question 23. There are two basic approaches, namely:

1. Utility approach

• The utility approach involves the use of measurable (cardinal) utility to study consumer behavior. 

• Marshall is the chief exponent of the utility approach to the theory of demand. It is known cardinal utility analysis or Marginal utility analysis or Marshallian utility analysis.

 

2. Indifference curve approach

• The indifference curve approach was the idea of comparable utility [ordinal utility] J.R. Hicks and R.G.D. Allen introduced the indifference curve approach.

 

Question 24. What are the degrees of price elasticity of Demand?

Answer: The Degrees of Price Elasticity of Demand:

1. Perfectly Elastic Demand (Ep = a)

2. Perfectly Inelastic Demand (Ep = 0)

3. Relatively Elastic Demand (Ep >1)

4. Relatively Inelastic Demand (Ep < 1)

5. Unitary Elastic Demand (Ep =1).

 

Question 25. State the meaning of indifference curves?

Answer:

1. The Consumer is rational and his aim is to derive maximum satisfaction.

2. The utility cannot be cardinally measured but can be ranked or compared or ordered by an ordinal number such as I, II, Ill, and so on.

3. The indifference curve approach is based on the concept "Diminishing Marginal Rate of Substitution'.

4. The consumer is consistent. This assumption is called the assumption of transitivity.

 

Question 26. Write the formula of consumer surplus.

Answer: Consumer's surplus = Potential price — Actual price. Consumer's surplus = TU-(P x 0) TU — Total Utility, P — Price, Q — Quantity.

 

 

Part — C

Answer the following questions in One Paragraph

 

Question 28. Describe the feature of human wants.

Answer: The Feature of Human wants:

1. Wants are unlimited

Human wants are unlimited in number and there is no end to them. When one want is satisfied then another arises. Wants go on multiplying. They are never com­pletely satisfied.

 

 2. Wants become habits

When a particular want is satisfied continuously, a person may get used to it and it may grow into a habit. For example regular drinking of tea, coffee, alcohol, etc. becomes a habit for many people.

 

3. Wants are satiable

An individual want can be completely satisfied at a particular point of time. For instance, when a hungry person takes food, his want is satisfied. But the same want will arise again. Some wants may never be satisfied e.g., miser's greed for wealth, politician's lust for power, etc.

 

4. Wants are alternative

A particular want may be satisfied in alternative ways. For example, a man can satisfy his hunger by taking bread, rice, fruits or sweets. When there are alternative ways of satisfying a want, we choose one of the ways depending upon our income, prices of alternative ways and our personal taste.

 

5. Wants are competitive

A person has several wants at the same time. But the means to satisfy them are limited. Therefore, he has to choose between several wants and arrange them in order of priority. He satisfies urgent wants and postpones many others to be satisfied in future.

 

6. Wants are complementary

Several wants must be satisfied together in a group. One want gives rise to another want. For example, if a person wants to write a letter he will require paper, pen and ink. Similarly, a person who buys a car requires petrol to run it.

 

7. Wants are recurring.

Many human wants are recurring in nature. For example, the need for food is felt after every few hours. Even the wants for durable goods like furniture and car, etc., keep on recurring after some period.

 

Question 29. Mention the relationship between marginal utility and total utility.

Answer:

Total Utility:

Marginal Utility:

1. If Total utility increases

1. Marginal utility declines

2. If Total utility reaches maximum.

2. Marginal utility reaches zero

3. If Total utility diminishes

3. Marginal utility becomes negative

Question 30. Explain the concept of consumer's equilibrium with a diagram.

Answer: The Consumer reaches equilibrium at the point where the budget line is tangent on the indifference curve.

Consumer Equilibrium = MRSXY = PX/ PY

 

T is the point of equlibuirum as budget line AB is tangent on indifference curve IC3 the upper most.


Question 31. Explain the theory of “Consumer’s Surplus”?

Answer: Alfred Marshall defines consumer's surplus as "the excess of price which a person would be willing to pay a thing rather than go without the thing, over that which he actually does pay is the economic measure of this surplus satisfaction. This may be called consumer's surplus.

Assumptions: 

 

(i) Utility can be measured 

(ii) Marginal Utility of money remain constant. 

(iii) Taste, income and character of consumer does not change. 

 

Measurement: 

Consumer's surplus: Potential Price Actual Price 

Consumer surplus: TU (P x Q) 

 

 

Question 33. What are the properties of indifference curves?

Answer:

1. Indifference curve must have negative slope.

2. Indifference curves are convex to the origin.

3. Indifference curve cannot intersect.

4. Indifference curves do not touch the horizontal or vertical axis.

 

Question 34. Briefly explain the concept of consumer's equilibrium.

Answer: Consumer's equilibrium refers to a situation under which a consumer spends his entire income on purchase of a goods, in such a manner that it gives him maximum satisfaction. The consumer reaches equilibrium at the point where the budget line is tangent on the indifference curve

The Consumer reaches equilibrium at the point where the budget line is tangent on the indifference curve.

Consumer Equilibrium = MRSXY = PX/ PY

 

Part - D

Answer the following questions in about a page

Question 35. Explain the law of demand and its exceptions.

Answer: The law of demand was first stated by Augustin Cournot in 1838. Later it was refined and elaborated by Alfred Marshall. Definition: The law of demand says as “the quantity demanded increases with a fall in price and diminishes with a rise in price" -Marshall.

Assumptions of the law:

1. The income, taste, habit, and preference of the consumer remain the same.

2. No change in the prices of related goods.

3. No substitutes for the commodity.

4. The demand for the commodity must be continuous.

5. No change in the quality of the commodity.

If there is change even in one of these assumptions, the law will not operate. Demand schedule:

 

 

From the above schedule if the price of the good is S then the quantity demanded is 1 unit and if the price decrease to 1 quantity demanded raises to 5 which shows the inverse relationship between price and quantity demanded.

Diagram:


In the above diagram, X axis represents the quantity demanded and Y axis represents the price. DD is the demand curve which has a negative slope. It indicates that when price falls, the demand expands and when price rises, the demand contracts.

Market demand for a commodity:

The market demand curve for a commodity is derived by adding the quantum demanded of the commodity by all the individuals in the market Exceptions to the law of demand:

1. There are some unusual demand curves which slopes upwards from left to right. It is known as exceptional demand curve.

2. In the case of exceptional demand curve a fall in price brings about contraction and a rise in price brings about extension of demand.

Reasons for exceptional demand curve:

1. Giffen paradox

2. Veblen or demonstration

3. Ignorance

4. Speculative effect

5. Fear of shortage

 

Question 36. Elucidate the law of diminishing marginal utility with diagram.

Answer: H.H. Gossen, an Austrian Economist first formulated this law in 1854. Hence Jevons called this law as "Gossen's first law of consumption". Marshall perfected this law on the basis of cardinal analysis and it is based on the characteristics of human wants, it wants are satiable.

 

Definition: Marshall states that "The additional benefit which a person derives from a given increase of his stock of a thing diminishes with even/ increase in the stock that he already has"

 

Assumptions:

1. Utility can be measured cardinally.

2. The marginal utility of money remains constant

3. Consumer is a rational economic man.

4. The units of the commodity consumed must be reasonable in size.

5. The commodity consumed should be homogeneous in all aspects.

6. Consumption takes place continuously at a given period of time.

7. No change in the taste, habits, preferences, fashions, income and character of the consumer during the process of consumption.

 

Explanation: The law states that if a consumer continues to consume more of more units of the same commodity, its marginal utility diminishes.

 

Illustration: This law can be explained with a simple illustration. Suppose a consumer wants to consume apples one after another the utility from the first apple is 20. But the utility from the second apple will be less than the first (say 15), the third less than the second (say 10) and so on. Finally, the utility from the fifth apple becomes zero.

The utilities from sixth and seventh apples are negative. This tendency is called "The law of diminishing marginal utility".



From the above table and diagram. We find that the total utility goes on increasing but at a diminishing rate. Whereas marginal utility goes on diminishing. When marginal utility becomes zero, the total utility is maximum, when marginal utility becomes negative, the total utility diminishes.

Criticisms:

1. As utility is subjective, it cannot be measured numerically. 2. This law is based on the unrealistic assumptions. 3. This law is not applicable to indivisible commodities.

 

Question 37. Explain the law of Equi-marginal utility.

Answer: To satisfy unlimited wants a consumer need more than one commodity. So, the law of diminishing marginal utility is extended and is called "Law of equi-marginal utility". It is also called the "Law of substitution" "The law of consumer's equilibrium", "Gossen second law" and "The law of maximum satisfaction".

 

Definition: Marshall states the law as, "If a person has a thing which he can put to several uses, he will distribute it among these uses in such a way that it has the same marginal utility in all. For if it had a greater marginal utility in one use than another he would gain by taking away some of it from the second use and applying it to first".

 

Assumptions:

1. The rational consumer wants to maximize his satisfaction.

2. Utility is measurable cardinally.

3. The marginal utility of money remains constant

4. The income of the consumer is given.

5. There is perfect competition in the market.

6. The prices of the commodities are given.

7. The law of diminishing marginal utility operates.

Explanation: The law can be explained with the help of an example. Suppose a consumer wants to spend his limited income on Apple and Orange. He is said to be in equilibrium, only when he gets maximum satisfaction with his limited income. Therefore, he will be in equilibrium, when

Let us assume that the consumer wants to spend his entire income (Rs.11) on Apple add Orange. The price of an Apple and Orange is Rs. 1 each. If the consumer wants to attain maximum utility he should buy 6 units of Apples and 5 units or Oranges so that he can get 150 units.

In the diagram X — axis represent amount of money spent and Y — axis marginal utilities of Apple and Orange. If the consumer spends Rs. 6 on Apple and Rs. 5 on Orange, the marginal utilities of both are equal (ie) AA, = BB. Hence he gets maximum utility.