Chapter 2
THEORY OF CONSUMER BEHAVIOUR
Practice Exercises
1. What is meant by a consumer's budget setting?
Answer: Budget set is the collection of all the packages that the consumer can purchase at the prevailing market price according to his income capacity.
2. What is the Budget Line?
Answer: The budget line is made up of packages whose consumption cost is exactly equal to the income of the consumer.
3. Describe why the budget line is downward sloping.
Answer: If one good is to be purchased, the other good must be reduced. Because the consumer's income and the price of the two goods are assumed to remain constant. The slope of the budget line determines how much a unit of material changes on the budget line.
4. A consumer wants to enjoy two goods. The prices of the two goods are Rs. 4 and Rs. 5 respectively. The consumer's income is Rs.
(i) Write the equation of the budget line.
Answer:
(ii) If the consumer spends all his income on item 1, how much of item 1 can he enjoy?
Answer:
(ii) If the consumer spends all his income on item 2, how much of item 2 can he enjoy?
Answer:
(iv) What will be the slope of the budget line?
Answer: (iv) Slope of budget line = ( - P1 ➗ P2) = - (5 ➗ 4)
5. How will the budget line change if the consumer's income increases to Rs. 40 with the price unchanged ?
Answer:
6. How will the budget line change if the price of commodity 2 decreases by Rs. 1 while the price of commodity 1 and the income of the consumer remain unchanged?
Answer:
7. If the price and income of both commodities are doubled, what will happen to the budget integration?
Answer: There is no change in the budget setting.
4. Suppose that if a consumer spends all his income, he can buy 6 units of commodity 1 and 4 units of commodity The prices of the two items are Rs. 6 and Rs. 8 respectively. What is the income of the consumer?
Answer:
9. Suppose a consumer wants to consume two goods that are available only in integer units. The price of both the goods is Rs. 10 and the income of the consumer is Rs.
(i) Write down all the packages available to the consumer.
Answer:
(ii) Identify the packages available to the consumer that cost exactly Rs .
Answer:
10. What does immutable priority mean?
Answer: Of any two packages, the consumer prefers the package that contains more of at least one substance than the other and no less of the other. That is called immutable priority.
11. Can the consumer be neutral between packages (10, 8) and (8, 6) if his preferences are invariant?
Answer: No.
12. Suppose a consumer's priorities are immutable. So what can you say about his priority position of packages (10, 10), (10, 9) and (9, 9)?
Answer:
13, Suppose your friend is neutral between packages (5, 6) and (6, 6). Are your friend’s priorities immutable?
Answer: No, it is not.
14. Suppose there are two consumers of a commodity in the market and their demand function is d 1 (p) = 20 - p (for any price equal to or less than 20)
and
d 1 (p) = 0 (for any price greater than 20)
d 2 (p) = 30 – 2p (for any price equal to or less than 15)
and d 2 (p) = 0 (for any price greater than 15) Find the market demand function.
Answer:
15. Suppose there are 20 consumers of a commodity and their demand function is the same:
Answer:
16. Suppose a market has two consumers and their demand for a commodity is-
Determine the market demand for the commodity.
10
p
d 1
d
1
2
3
4
5
6
9
8
7
6
5
4
24
20
18
1
14
12
17. What is meant by natural matter?
Answer: When a consumer's income and demand for a commodity move in the same direction, it is called a normal commodity.
18. What is meant by bad matter? Give some examples.
Answer: When a consumer's income and demand for a commodity move in the opposite direction, it is called a poor commodity.
Examples of poor quality goods are low quality food items.
19. What is an option? Give examples of two substances which are substitutes for each other.
Answer: If the price of coffee increases, the consumption of tea will increase. And if the price of coffee goes down, consumption of tea will go down. The demand for a commodity and the price of its substitute move in the same direction. This is called an alternative.
Examples of substitutes are tea and coffee.
20. What is meant by complementarity? Give examples of two substances which complement each other.
Answer: When more than one product is used to meet a specific need of a consumer, such products are called complements.
Examples of supplements are cars and petrol. Tea and sugar.
21. Describe the concept of price elasticity of demand.
Answer:
22. Suppose the demand for a commodity. The demand for the product is 25 units at Rs. Suppose the price of the commodity increases to Rs. 5 and the demand for the commodity decreases to 20 units. Derive the price elasticity of demand.
Answer:
23. Suppose the price elasticity of demand for a commodity is – 0.2, if the price of the commodity increases by 5%, by what percentage will the demand for the commodity decrease?
Answer:
24. Suppose the price elasticity of demand is – 0.2, what will be the effect on the expenditure on the good if the price of the good increases by 10%? -
Answer:
25. Suppose the price of a commodity decreases by 4%. resulting in a 2% increase in expenditure on the item. What would you say about the elasticity of demand?
Answer:
