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Chapter Analysis
Intermediate38 pages • EnglishQuick Summary
The chapter 'Theory of Consumer Behaviour' explores the decision-making processes of consumers, detailing how they select optimal consumption bundles within budget constraints. It introduces the concepts of utility, including cardinal and ordinal utility, and discusses consumer preferences through indifference curves and the marginal rate of substitution. The chapter also discusses the demand curve and how consumer choices influence it, incorporating the effects of changes in income and the prices of goods.
Key Topics
- •Utility and its forms
- •The budget constraint
- •Indifference curve analysis
- •The concept of marginal utility
- •The demand curve
- •Effect of income changes
- •Substitute and complementary goods
- •Price elasticity of demand
Learning Objectives
- ✓Understanding consumer decision-making processes
- ✓Analyzing the impact of budget constraints on consumer choices
- ✓Applying the concept of utility in consumer preferences
- ✓Deriving and interpreting demand curves
- ✓Exploring effects of income and price changes on consumption
- ✓Evaluating different market goods and their relationships
Questions in Chapter
What do you mean by the budget set of a consumer?
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What is budget line?
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Explain why the budget line is downward sloping.
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A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 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 she consume if she spends her entire income on that good? (iv) What is the slope of the budget line?
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Additional Practice Questions
Explain the concept of marginal utility with an example.
mediumAnswer: Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service. For instance, if consuming one apple gives a utility of 10 units and a second apple increases total utility to 18, the marginal utility of the second apple is 8 units.
How does a change in income affect the budget line?
mediumAnswer: An increase in income shifts the budget line to the right, allowing the consumer to buy more or higher quality goods. Conversely, a decrease in income shifts it to the left, reducing the consumer’s purchasing capacity.
Describe the Law of Diminishing Marginal Rate of Substitution.
hardAnswer: The Law of Diminishing Marginal Rate of Substitution states that as a consumer substitutes one good for another, the amount of the second good that the consumer is willing to give up to obtain an additional unit of the first good decreases.
What is an indifference curve and what does its shape signify?
easyAnswer: An indifference curve represents combinations of two goods that provide the consumer with the same level of satisfaction. The convex shape generally indicates a diminishing marginal rate of substitution between the two goods.
Discuss how price changes can lead to movement along the demand curve versus a shift in the demand curve.
mediumAnswer: A movement along the demand curve happens due to a change in the price of the good itself, whereas a shift in the demand curve occurs due to changes in other factors like consumer income or prices of related goods.