# NCERT Solutions for class 12th Economics Part A Chapter 2 Theory of Consumer Behaviour

#### NCERT Textbook Questions Solved

Question 1. What do you mean by budget set of a consumer?

Ans. Budget set refers to set of all those bundles which are available to the consumer within his income.
In addition to the three options, these are some more options available to the consumer within his income, even if entire income is not spent. For example: A consume has an income of Rs.20. He wants to spend it on two commodities: X and Y and both are priced at Rs.10 each. Budget set includes all the bundles with the total income of Rs. 20, i.e. possible bundles are (0,0); (0,1); (0,2); (1,0); (2,0); (1,1).

Question 2. What is budget line?

Ans. Budget line is a graphical representation of all possible combinations of two goods which can be purchased with given incomes and prices, such that the cost of each of these combinations is equal to the money income of the consumer. It is shown below:

(PA × QA) + (PB × QB) ≤M
Where:
M = Money Income
QA = Quantity of apples (A);
QB = Quantity of Bananas (B);
PA = Price of each apple;
PB = Price of each Banana.
All points on the budget line ‘AB’ indicate those bundles, which cost exactly equal to ‘M’
Algebraic Expression for Budget Set: The consumer can buy any bundle (A,B),
Such that: M> (PA x QA) + (PB x QB)

Question 3. Explain why the budget line is downward sloping.

Ans. A budget line is downward sloping because we have assumed that prices of the two goods and income of the consumer are given to us. And the consumer is spending his entire income when he is on the budget line. Therefore, it is not possible for him to increase the consumption of X without reducing the consumption of Y. and when two variables are inversely related, their curve is a downward sloping line. In the conditions given above it is obvious that when X increases, Y decreases and vice versa.

Question 4. A consumer wants to consume two goods. The prices of two goods are `4 and` 5 respectively. The consumer’s income is rs. 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 the consumer consume if she spends her entire income on that good.
(iv) What is the slope of the budget line?

Ans. (i) Budget Line Equation = 4Qx + 5Qy ≤ 20
(ii) In Budget line equation put Qy equal to zero and solve it
4Qx + 5(0) = 20
4Qx = 20
Qx = 5 units.
(iii) In Budget line equation put Qx equal to zero and
solve it
4(0) + 5Qy = 20
5Qy = 20
Qy = 4 units.
(iv) Slope of Budget line = – px/py
= – 4/5= – 0.8
Note : Q5, 6 and 7 are related to Q4.

Question 5. How does the budget line change if the consumer’s
income increases to ` 40 but the prices remain
unchanged?

Ans. New Budget Line Equation = 4Qx + 5Qy ≤ 40

Question 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?

Ans. New Budget Line Equation = 4Qx + 4Qy ≤ 20

Question 7. What happens to budget line if both the prices as well as income sets double?

Ans. Budget line will remain same because in that case, increase in prices will make adjustments for increase in income. New budget line equation will be:
8Qx + 10Qy ≤ 40

Question 8. Suppose a consumer can afford to buy 6 units of goods 1 and 8 units of goods 2 if she spends her entire income. The prices of two goods are `6 and` 8 respectively. How much is the consumer’s income?

Ans. The budget line can be expressed as an equation:
(PA × QA) + (PB x QB) ≤Y
Putting values in the equation we get,
6 × 6 + 8 × 8 = 36 + 64 = 100
His income is ` 100.

Question 9. Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally prices at `10 `each and the consumer’s income is rs. 40. Write down all the bundles that are available to the consumer. Among all the bundles that are available to the consumer, identify those which cost her exactly 40.

Ans. Budget line equation is: 10Qx +10Qy ≤ 40
All the bundles that the person can afford are as follows:
(0,0) (0,1), (0,2), (0,3) (0,4) (1,0) , (2,0) , (3,0), (4,0) , (1,1),
(2,1), (1,2), (2,2)
Following bundles will cost exactly rs. 40 to the consumer.
(0,4), (4,0), (1,3), (3,1), (2,2)

Question 10. What do you mean by monotonic preferences?

Ans. A consumer’s choices are monotonic if and only if between two bundles, the consumer prefers the bundle which has at least more of one of the goods and no less of the other goods. IC Analysis assumes consumer preferences to be monotonic as she has not reached her saturation point. Monotonic preferences can also be defined as a fact that a consumer always prefers more of commodity as compared to less of it.

Question 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, she cannot be indifferent between the bundles (10,8) and (8,6) because consumer’s choices are monotonic if and only if between two bundles, the consumer prefers the bundle which has at least more of one of the goods and no less of the other goods.

Question 12. Suppose a consumer’s preferences are monotonic. What can you say about her preferences ranking over the bundles (10,10), (10,9) and (9,9)?

Ans. If a consumer’s preferences are monotonic then he will prefer (10,10) to (10,9) to (9,9) because consumer’s choices are monotonic if and only if between two bundles, the consumer prefers the bundle which has at least more of one of the goods and no less of the other goods.

Question 13. Suppose your friend is indifferent to the bundles (5,6) and (6,6). Are the preferences of your friend monotonic?

Ans. No, his preferences are not monotonic because had his preferences been monotonic he would have preferred (6,6) to (5,6)

Question 14. Suppose there are two consumers in a market for a good and their demand functions are as follows:
d1(p) = 20 – p for any price equal to less than 15 and
d1(p)= 0 for any price greater than 15
d2(p) = 30 – 2p for any price equal to less than 15 and
d2(p) = 0 for any price greater than 15
Find out the market demand function.

Ans. Market Demand Function= d1(p)+ d2(p)
= 20-P + 30-2P
= 50-3P for any prices less than 50/3 and dm9p) =0 for
any price more than dm(p) = 0.

Question 15. Suppose there are 20 consumers who have identical demand functions:
d1(p)= 10-3p for any price equal to less than 10/3 and d1(p)=0 for any price greater than 10/3. What is the market demand function?

Ans. Market Demand Function= d1(p)+ d2(p)
= 20 (10-3P)
= 200-60P for any price equal to less than 10/3 and
dm(p)=0 for any price greater than 10/3.

Question 16. Consider a market where there are only two consumers and suppose their demands for the goods are given as follows:

Calculate market demand for the good

Ans. Market demand for the goods is as follows

Question 17. What do you mean by a normal good?

Ans. Normal goods are those goods whose demand increases with the increase in income decrease with decrease in increase

Question 18. What do you mean by inferior good/give some examples.

Ans. Inferior goods are those goods whose demand tends to decrease with increase in income, whose demand increases with the decrease in income. They have negative relation with income. It is shown by figures also.

It is difficult to give a precise example of inferior goods however, black and white tv, coarse gain can be used as example because inferiority is a subjective concept. What is inferior for one may not be inferior for other. For example, eating in a local restaurant may be normal for a school teacher but inferior for Anil Ambani.

Question 19. What do you mean by substitute goods? Give two examples of substitute goods.

Ans. These are the goods which can be used in place of each other, such as tea and coffee, or ball-pen and ink-pen. They satisfy human wants with equal ease. In case of such goods, an increase in the price of one causes increase in demand for the other and decrease in the price of one causes decrease in the demand for the other. Increase in the price of coffee, for example, will increase the demand for tea – the consumers will shift from the consumption of coffee to the consumption of tea. The demand curve of tea shifts rightward. Its impact on demand curve is shown with the help of following diagram:

Question 20. What do you mean by complementary goods? Give two examples of goods which complement each other.

Ans. Complementary Goods are those goods which complete the demand for each other, and are, therefore, demanded together. For example:- Pen and Ink, or mobile and sim. In case of complementary goods, a fall in the price of one causes increase in the demand of the other and a rise in the price of one causes decrease in the demand for the other. For example: if price of milk decreases, people will make more of khoya and sweets and demand for sugar will also increase.

Question 21. Explain price elasticity of demand.

Ans. The law of demand states that when the price of a good falls, consumers demand more units of the good. But how much more? It is important and useful to have magnitude of change in quantity demanded to a change in price. It is price elasticity of demand. Elasticity of demand measures the extent to which quantity demanded of a commodity increases or decreases in response to increase or decrease in any of its quantitative determinants. Thus, by price elasticity of demand, we mean the extent to which the quantity demanded of a commodity changes with change in its price.

Where, Ed = Price elasticity of demand, Q = Initial Demand;
P = Initial Price;
DQ = Change in Demand; DP = Change in Price.
The absolute value of the coefficient of elasticity of demand ranges from zero to infinity (0 < eD < ∞). The five different magnitudes of elasticity of demand are explained below:

1. Perfectly Inelastic Demand (ED = 0)

When the demand of a commodity does not change as a result of change in its price, the demand is said to be perfectly inelastic. The perfectly inelastic demand curve is a vertical line parallel to y-axis as shown in figure. As it is clear from the diagram, price may be `2 or` 4 or ` 6, but the demand will be constant at 4 units. In other words, there is no effect of changes in th price on the quaintly demanded. It exists in case of essentials like life saving drugs.

2. Inelastic (or Less Than Unit Elastic) Demand (0 < Ed < 1 )
When a change in price leads to a less than proportionate change in the demand, the demand is said to be less elastic or inelastic.
It is shown in Table, where price falls by rs. 8, quantity demanded said to be less than 1 unit. The slope of an inelastic demand curve is more i.e., the demand curve is steep as shown in figure. It exists in case of necessities like food, fuel etc.

3. Unit Elastic Demand (ED = 1 )
When percentage change in demand is equal to the percentage change in price, the demand for the commodity is said to be unitary elastic. It is shown in table, where when price falls by ` 5, demand increases by 10 Units. The unitary elastic demand curve is a straight downward sloping line forming 45° angles with both the axis. It is also a rectangular hyperbola. It is drawn in figure also. It exists in case of normal goods. It exists in case of necessities like food, fuel, etc

4. Elastic (or more than unit elastic) Demand (1 < ED < ∞)
When a change in price leads to a more than proportionate change in demand, the demand is said to be elastic or more than unit elastic. It is shown in Table, when price falls by ` 1 demand increases by 20 units. The coefficient of elasticity ofdemand is greater than unity. The demand curve is downward sloping and flatter as shown in fiure. It exists in case of luxuries. The change in demand is more than the change in price.

5. Perfectly Elastic Demand (ED = ∞ )
When the demand for a commodity rises or falls to any extent without any change in price, the demand for the commodity is said to be perfectly elastic. It is shown in Table, where quantity demanded keeps on changing at the same price of `4.`The coefficient of price elasticity of demand is infinity. It is shown graphically in figure. It exists under perfect competition, which is an ideal and imaginary situation. Perfectly Elastic Demand Curve is a horizontal line parallel to the x-axis. It means that at price of rs.4, quantity demanded can be 10 or 40.

Question 22. Consider the demand for a good. At price 4, the demand for the good is 25 units. Suppose the price of the good increased to rs. 5 per unit and as a result the demand for the good falls to 20 units. Calculate the price elasticity.

Ed = – 4/25 × 5/1
= – 0.8
Price elasticity is less than unitary elastic.

Question 23. Consider the demand curve D(P) = 10 – 3p. Find price elasticity at 5/6.

Ans. Original Price = 5/3
Original quantity = 10 – 3 (5/3)
10 – 5 = 5
Change in Quantity/Change in price = slope of demand
curve = – 3

Question 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. Edp = Proportionate change in Quantity Demanded /Proportionate change in Price
– 0 . 2 = Proportionate change in Quantity
Demanded/5%
– 0.2 × 5 = Proportionate change in Quantity
Demanded
Proportionate change in Quantity Demanded = 1%

Question 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. Total Expenditure Method to measure elasticity of demand was evolved by Marshall. Under this method, to measure elasticity of demand, we find out how much and in what direction total expenditure changes as a result of change in the price of a commodity. We can consider three possible situations:
(i) If rise or fall in price of a commodity makes no change in its total expenditure, then elasticity of demand is unitary.
(ii) If with fall in price of a commodity, total expenditure increases and with rise in its price, total expenditure decrease then demand for that commodity is greater than unitary elastic.
(iii) If with fall in price of a commodity, total expenditure decrease and with rise in its price total expenditure increase then demand for that commodity is less than unitary elastic. In this case, total expenditure goes in the same direction as the price does.

It can be explained with the help of the following table:

The three situations of the total expenditure method is shown on the x-axis and price of the good on the y-axis. OABC is the total expenditure / outlay curve.
(a) Between points O and A, Ed < 1 or inelastic. It shows that with rise in price, total outlay also rises and vice versa.

(b) Between points A and B, Ed = 1 or unitary elastic. It shows that with rise or fall in price, total outlay is constant.

(c) Between point B and C, Ed is > 1 or elastic, showing that with rise in price, total outlay falls and vice versa.

Since Edp is less than 1, with increase in price, total expenditure will also increase but this method cannot tell us by what percentage will it increase.

Question 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. EDp is less than one because with increase in price, total expenditure is also increasing.

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