Get summaries, questions, answers, solutions, notes, extras, PDF and guide of Class 11 (first year) Economics textbook, chapter 2, Consumer’s Equilibrium: AHSEC Class 11 Economics notes, which is part of the syllabus of students studying under AHSEC/ASSEB (Assam Board). These solutions, however, should only be treated as references and can be modified/changed.
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Summary
Chapter 2 of the textbook provides an in-depth exploration of consumer behavior, focusing on how individuals maximize satisfaction from their purchases given their income and market prices. It delves into two major theoretical frameworks: Utility Analysis and Indifference Curve Analysis.
Utility Analysis, introduced by Alfred Marshall, rests on several assumptions. Consumers are assumed to be rational, aiming to maximize their utility with a given income and market prices, and possessing full knowledge of all available commodities. This theory also assumes that utility, the satisfaction derived from consuming goods, is measurable and quantifiable in cardinal terms. One key concept is the principle of diminishing marginal utility, which states that the utility gained from successive units of a commodity decreases. Another important assumption is the constancy of the marginal utility of money, which remains unchanged regardless of the quantity of the commodity purchased.
Utility is defined as the want-satisfying power of a commodity, varying from person to person and situation to situation. It’s different from usefulness, as a commodity might have utility even if it is not particularly useful. Marginal utility is the additional utility gained from consuming one more unit of a commodity, and the law of diminishing marginal utility states that as more units of a commodity are consumed, the marginal utility decreases.
Consumer equilibrium is achieved when a consumer maximizes total satisfaction from spending their income on various goods at given prices. This equilibrium can be examined in two scenarios: when a consumer spends their entire income on a single commodity or on two commodities. For a single commodity, equilibrium is reached when the marginal utility of the commodity equals its price. For two commodities, equilibrium is attained when the marginal utility per unit of currency spent on each commodity is equal.
The concept of indifference curves, developed by J.R. Hicks and R.G.G. Allen, offers an alternative to utility analysis. Indifference curves represent combinations of two goods that provide equal satisfaction to the consumer. Several properties of indifference curves include: they slope downward from left to right, indicating a trade-off between the two goods; they are convex to the origin due to the diminishing marginal rate of substitution (MRS), meaning the consumer is willing to sacrifice fewer units of one good to gain additional units of another; and higher indifference curves represent higher satisfaction levels.
A consumer’s equilibrium in the context of indifference curves is found where the budget line (representing all combinations of goods that can be bought with a given income at prevailing prices) is tangent to an indifference curve. This tangency point indicates that the consumer is maximizing their satisfaction given their budget constraint. The slope of the budget line is determined by the price ratio of the two goods.
The chapter also introduces the concept of a budget line and budget set. The budget line illustrates all combinations of two goods that can be purchased with a given income, while the budget set includes all combinations that a consumer can afford, both on and below the budget line. Changes in income or prices shift the budget line, altering the consumer’s potential consumption bundles.
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Textbook solutions
Very Short Answer Type Questions
1. Fill up the blanks in the following sentences.
(i) The capacity of a commodity to satisfy human want is called __________.
Answer: utility
(ii) The utility of the last unit consumed is called __________.
Answer: marginal utility
(iii) When marginal utility is zero, the total utility is __________.
Answer: maximum
(iv) When the consumer gets maximum satisfaction from his consumption, it is called consumer’s __________.
Answer: equilibrium
(v) Consumer’s equilibrium is attained at the point where marginal utility of commodity is equal to its __________.
Answer: price
2. What does the slope of the consumer’s budget line determine?
Answer: The slope of the consumer’s budget line determines the rate at which the consumer can trade one good for another while staying within their budget.
3. Define utility.
Answer: Utility refers to the satisfaction, actual or expected, derived from the consumption of a commodity.
4. What is meant by marginal utility?
Answer: Marginal utility refers to the additional satisfaction derived from the consumption of an additional unit of a commodity.
5. Define total utility.
Answer: Total utility is the total satisfaction obtained from the consumption of all possible units of a commodity.
6. State the concept of utility function.
Answer: The utility function is a mathematical representation that assigns a level of utility to individual consumption bundles, indicating the consumer’s preferences for different combinations of goods.
7. State the law of diminishing marginal utility.
Answer: The law of diminishing marginal utility states that as more and more units of a commodity are consumed, the additional satisfaction derived from each subsequent unit decreases.
8. What is consumer’s equilibrium?
Answer: A consumer is said to be in equilibrium when he gets maximum satisfaction by spending his given income.
9. State the conditions of consumer’s equilibrium in case of two commodities.
Answer: The conditions of consumer’s equilibrium in the case of two commodities are: (i) The marginal utility per unit of currency spent on each commodity should be equal. (ii) The consumer’s budget line should be tangent to the highest attainable indifference curve.
10. Why does an indifference curve slope downward?
Answer: An indifference curve slopes downward because to maintain the same level of satisfaction, an increase in the quantity of one good must be compensated by a decrease in the quantity of the other good.
11. What is an indifference curve or what does an indifference curve show?
Answer: An indifference curve shows various combinations of two goods that provide equal satisfaction to the consumer.
12. The total utility of a consumer is found to be 80 after the consumption of 10 units of a commodity. The marginal utility he derives from the consumption of the 11th unit is 9. Find out the total utility after the consumption of 11 units.
Answer: Total utility after the consumption of 11 units = 80 + 9 = 89
13. The total utility of a consumer has been found to be 70 after the consumption of 10 units of a commodity. His total utility decreases to 60 if he reduces his consumption by one unit. Calculate the marginal utility of the consumer.
Answer: Marginal utility of the consumer = 70 – 60 = 10
14. What is a consumption bundle?
Answer: A consumption bundle refers to a specific combination of different goods that a consumer may choose to consume.
15. Why does the budget line slope downward?
Answer: The budget line slopes downward because the consumer can buy more of one good only by sacrificing some quantity of the other good, given their fixed income and the prices of the goods.
16. What do you mean by the budget set of a consumer?
Answer: The budget set of a consumer includes all possible combinations of goods that a consumer can afford to buy with their given income at prevailing prices.
17. What is budget constraint?
Answer: Budget constraint refers to the limitation imposed on the consumer’s choices by their income and the prices of goods, restricting the combinations of goods they can afford.
18. Is a consumer willing to move away from the consumer’s equilibrium point?
Answer: No, a consumer is not willing to move away from the consumer’s equilibrium point as it provides maximum satisfaction given their income and prices of goods.
19. What do the points below the consumer’s budget line indicate?
Answer: The points below the consumer’s budget line indicate combinations of goods that the consumer can afford but do not fully utilize their available income.
Short Answer Type Questions
1. Explain why consumer’s equilibrium is attained when the marginal utility of a good in terms of money is equal to its price.
Answer: Consumer’s equilibrium is attained when the marginal utility of a good in terms of money is equal to its price because at this point, the consumer maximizes satisfaction by allocating income in such a way that the utility derived from the last unit of money spent on each good is the same.
2. Given the market price of a good, how does a consumer decide as to how many units of that good he should buy? Explain.
Answer: A consumer decides how many units of a good to buy by comparing the marginal utility per unit of money spent on the good with the price of the good. The consumer will continue to buy additional units until the marginal utility per unit of money spent equals the price of the good.
3. Explain conditions determining how many units of a good a consumer will buy at a given price.
Answer: The conditions determining how many units of a good a consumer will buy at a given price are: the consumer’s income, the price of the good, and the marginal utility derived from the good. The consumer will purchase units until the marginal utility per unit of money spent equals the price of the good.
4. The monthly income of a consumer is ₹400 and he spends this income entirely on two commodities, X and Y. The price of commodity X is ₹20 and that of Y is ₹25. On the basis of this information:
(i) Draw the budget line of the consumer.
(ii) What will happen to the budget line if the price of commodity Y decreases to ₹20 while the income of the consumer and the price of commodity X remain the same?
Answer: (i) Monthly income (M) = ₹400
Price of commodity X (Px) = ₹20
Price of commodity Y (Py) = ₹25
The budget line equation is given by: Px⋅X+Py⋅Y=M
Substituting the given values: 20X+25Y=400
When X=0
25Y=400
⇒Y = 400/25
⇒Y=16
When Y=0
⇒20X=400
⇒20X = 400
⇒X=400/20
⇒X=20
| X | Y |
| 20 | 0 |
| 0 | 16 |
(ii) If the price of commodity Y decreases to ₹20, the new budget line equation will be 20X + 20Y = 400. The budget line will pivot outward, allowing the consumer to buy more of Y for the same income.
5. What is budget line? Why does it slope downward?
Answer: A budget line represents all the combinations of two goods that a consumer can purchase with a given income and prices. It slopes downward because to purchase more of one good, the consumer must purchase less of the other due to the limited income.
6. The total money income of a consumer is M and he spends his entire money income on the consumption of two commodities viz X and Y. The price of X and Y are P and P respectively. State the budget equation.
Answer: The budget equation is P₁X₁ + P₂X₂ = M, where P₁ and P₂ are the prices of commodities X and Y, respectively, and X₁ and X₂ are the quantities of commodities X and Y, respectively.
7. A consumer consumes only two goods X and Y. State and explain the conditions of consumer’s equilibrium with the help of utility analysis.
Answer: A consumer’s equilibrium in the case of two goods is attained when the ratio of the marginal utility of X to the price of X is equal to the ratio of the marginal utility of Y to the price of Y (MRS = P₁/P₂). The consumer allocates his income in such a way that the last unit of money spent on each good provides the same level of utility.
Explain the conditions of consumer’s equilibrium with the help of utility analysis.
Answer: The conditions of consumer’s equilibrium are: (i) The marginal utility per unit of money spent on each good must be equal, and (ii) the consumer must spend all of his income. Mathematically, MUx/Px = MUy/Py, and the budget constraint must be satisfied.
8. Define the following terms: (a) indifference map, (b) marginal rate of substitution.
Answer: (a) Indifference map: An indifference map is a set of indifference curves, each representing different levels of satisfaction. (b) Marginal rate of substitution (MRS): The marginal rate of substitution is the rate at which a consumer is willing to substitute one good for another while maintaining the same level of satisfaction.
9. Define an indifference curve. Explain why an indifference curve is downward sloping from left to right.
Answer: An indifference curve is a curve that shows various combinations of two goods that provide equal satisfaction to the consumer. It is downward sloping from left to right because as the consumer increases consumption of one good, they must decrease consumption of the other to maintain the same level of satisfaction due to the law of diminishing marginal utility.
10. What are monotonic preferences? Explain why an indifference curve to the right shows higher utility.
Answer: Monotonic preferences imply that more of a good is always preferred to less. An indifference curve to the right shows higher utility because it represents a combination of goods that provides a higher level of satisfaction compared to a curve to the left, assuming more of both goods.
11. What does an indifference map indicate?
Answer: An indifference map indicates a set of indifference curves each representing a different level of satisfaction. Higher indifference curves represent higher levels of satisfaction.
12. By spending his entire income only on two goods X and Y a consumer finds that:
Marginal Utility of X / Price of X < Marginal Utility of Y / Price of Y
Explain how will the consumer react.
Answer: If a consumer finds that MUX/PX=MUY/PY, the consumer is in equilibrium and will not change the consumption of goods X and Y, as he is maximizing his utility given his budget constraint.
14. Starting from the initial situation of consumer’s equilibrium, suppose that the marginal utility of a rupee increases. Will it increase or decrease the quantity demanded of a product?
Answer: If the marginal utility of a rupee increases, the consumer will reallocate his spending to maximize utility. This usually results in an increase in the quantity demanded of the product with a higher marginal utility per rupee until a new equilibrium is achieved.
15. Suppose there are four bundles containing goods X and goods Y: Bundle (10, 10), Bundle (8, 8), Bundle (10, 8), Bundle (8, 10). If a consumer’s preferences are monotonic, then which bundle will be preferred by the consumer? Give reason for your answer.
Answer: If a consumer’s preferences are monotonic, Bundle (10, 10) will be preferred because it contains more of both goods compared to the other bundles, providing a higher level of satisfaction.
16. Define the terms (a) utility, (b) marginal utility, and (c) total utility.
Answer: (a) Utility: Utility is the want-satisfying power of a commodity. (b) Marginal utility: Marginal utility refers to the additional satisfaction obtained from consuming one more unit of a commodity. (c) Total utility: Total utility is the total satisfaction derived from consuming a certain number of units of a commodity.
17. What does the utility of a consumer represent?
Answer: The utility of a consumer represents the actual or expected satisfaction that a consumer derives from the consumption of a commodity.
18. A consumer’s total utility has been found to be 60 after consumption of 5 units of a commodity. His total utility was 56 after the consumption of 4 units. Calculate his marginal utility.
Answer: MU=ΔTU/ΔQ
=60−56/5−4
=4
Marginal utility is 4.
Long Answer Type Questions
1. Define utility and discuss the relationship between marginal utility and total utility.
Answer: Utility refers to want satisfying power of a commodity. It is the satisfaction, actual or expected, derived from the consumption of a commodity. Utility can be of two types – Total Utility and Marginal Utility. Total utility (TU) is the sum total of the satisfaction that a consumer derives when a certain number of units of a particular commodity consumed. It can be expressed as: TU = f(N), where TU is total utility from the consumption of a commodity, f is function and N is the number of units consumed of the commodity. Marginal utility (MU) is the additional satisfaction derived from the consumption of an additional unit of the commodity. It can be calculated as: MU = ΔTU / ΔQ, where ΔTU denotes change in total utility and ΔQ indicates change in quantity of consumption. The relationship between total utility and marginal utility is such that while marginal utility keeps on diminishing, the total utility continues to increase so long as the marginal utility is positive. Total utility increases so long as the marginal utility does not drop to zero. When the marginal utility is zero, the total utility is maximum. After this stage, marginal utility becomes negative and the total utility starts declining.
2. Distinguish between marginal utility and total utility. Why is total utility maximum when marginal utility is zero?
Answer: Total utility (TU) is the sum total of the satisfaction that a consumer derives when a certain number of units of a particular commodity are consumed. Marginal utility (MU) is the additional satisfaction derived from the consumption of an additional unit of the commodity. The total utility is maximum when marginal utility is zero because at this point, any additional unit consumed does not increase the total satisfaction; it means the consumer has reached a level of consumption where they are fully satisfied with the amount of the commodity consumed.
3. State and explain the law of diminishing marginal utility. What are its causes of operation?
Answer: The law of diminishing marginal utility states that as more and more units of a commodity are consumed, the marginal utility derived from each subsequent unit diminishes. This means that the first unit of a commodity consumed provides the highest utility, and each additional unit provides less and less utility. The main causes of operation of this law are:
- Satisfaction of Particular Wants: One particular want can be fully satisfied, leading to a decrease in additional satisfaction from further consumption.
- Commodities are not Perfect Substitutes: The more a commodity is consumed, the less is the desire to consume additional units because the consumer’s need for variety increases.
4. What do you mean by consumer’s equilibrium? How is consumer’s equilibrium attained in case of one good? Explain with the help of utility schedule.
Answer: Consumer’s equilibrium is a situation where a consumer gets maximum satisfaction by spending his given income. In the case of one good, consumer’s equilibrium is attained when the marginal utility of the good in terms of money is equal to its price. The utility schedule helps in understanding this equilibrium point by showing the total utility and marginal utility for different quantities of the good. The consumer adjusts his consumption to the point where the marginal utility per unit of money spent on the good is equal to the price of the good.
5. Explain the position of consumer’s equilibrium in case of two goods with the help of utility schedule.
Answer: In the case of two goods, a consumer attains equilibrium when he spends his income in such a way that the marginal utility of the last rupee spent on each good is equal. The condition for consumer’s equilibrium in case of two goods can be expressed as: MUx/Px = MUy/Py. This means that the ratio of marginal utility to price for both goods should be equal. The utility schedule for two goods helps in identifying the point where this condition is satisfied.
6. Explain clearly consumer’s equilibrium in case of (i) single commodity and (ii) two commodities with the help of cardinal utility approach.
Answer: (i) In the case of a single commodity, a consumer is in equilibrium when the marginal utility (MU) of the commodity in terms of money is equal to its price (P). Mathematically, this condition is represented as: MUx = Px. (ii) In the case of two commodities, the consumer’s equilibrium is achieved when the marginal utility per rupee spent on each commodity is equal. This can be expressed as: MUx/Px = MUy/Py. The consumer adjusts his consumption to ensure that the last unit of money spent on each commodity provides the same level of satisfaction.
7. Using indifference curves approach, explain the conditions of consumer’s equilibrium. Or Explain consumer’s equilibrium with the help of indifference curve analysis.
Answer: Consumer’s equilibrium using the indifference curves approach is achieved at the point where the budget line is tangent to the highest possible indifference curve. The conditions for consumer’s equilibrium are:
- The marginal rate of substitution (MRS) between two goods must be equal to the ratio of their prices. Mathematically, this condition is represented as: MRS = Px/Py.
- The indifference curve should be convex to the origin, indicating a diminishing marginal rate of substitution. At the equilibrium point, the consumer maximizes his satisfaction given his budget constraint.
8. A consumer consumes only two goods. Why is the consumer said to be in equilibrium when he buys only that combination of the two goods which lies at that point on the indifference curve where the budget line is tangent to the indifference curve? Explain. Use diagram.
Answer: A consumer is said to be in equilibrium when he buys the combination of two goods that lies at the point where the budget line is tangent to the indifference curve because, at this point, the marginal rate of substitution (MRS) between the two goods is equal to the ratio of their prices. This tangency point represents the highest level of satisfaction the consumer can achieve given his budget constraint. The diagram shows the budget line and indifference curve intersecting at the tangency point, indicating consumer equilibrium.
9. Prove that at consumer’s optimum point on an indifference curve, the marginal rate of substitution is equal to the ratio of the prices.
Answer: At the consumer’s optimum point on an indifference curve, the slope of the indifference curve (which represents the marginal rate of substitution, MRS) is equal to the slope of the budget line (which represents the ratio of the prices of the two goods). Mathematically, this can be represented as: MRS = MUx/MUy = Px/Py. At the tangency point, the consumer maximizes his satisfaction by equating the MRS to the price ratio, thereby achieving equilibrium.
10. Explain monotonic preferences with an example.
Answer: Monotonic preferences refer to the assumption that a consumer always prefers more of a good to less, given that more quantity of a good provides higher utility. For example, if a consumer has a choice between two bundles of goods, (10X, 8Y) and (8X, 6Y), the consumer will prefer the bundle with more of both goods, which is (10X, 8Y), because it provides greater satisfaction. This demonstrates the principle of monotonic preferences where more is always better.
11. A consumer consumes only two goods X and Y and is in equilibrium. Price of good Y rises. Show that it will lead to fall in demand for good Y.
Answer: When the price of good Y rises, the budget line of the consumer rotates inward, reducing the quantity of good Y that can be purchased for the same income. Since the consumer is initially in equilibrium, the increase in price of good Y disturbs this equilibrium, leading to a new equilibrium point where less of good Y is consumed. The consumer will substitute good Y with more of good X, leading to a fall in the demand for good Y. This can be represented by the movement along the indifference curve to a lower quantity of good Y.
12. A consumer consumes only two goods X and Y. Her money income is 100 and the prices of goods X and Y are 6 and 3 respectively. Answer the following questions: (i) Can the consumer afford a bundle 12X and 8Y? Explain. (ii) What will be the MRS XY, when the consumer is in equilibrium? Explain.
Answer: (i) The consumer’s total expenditure on the bundle 12X and 8Y can be calculated as: Expenditure = (12 * 6) + (8 * 3) = 72 + 24 = 96. Since the total expenditure (96) is less than the consumer’s income (100), the consumer can afford the bundle 12X and 8Y. (ii) The marginal rate of substitution (MRS) is the rate at which the consumer is willing to give up good Y for good X while maintaining the same level of satisfaction. When the consumer is in equilibrium, the MRS XY is equal to the ratio of the prices of X and Y. Mathematically: MRS XY = Px/Py = 6/3 = 2. This means that the consumer is willing to give up 2 units of good Y for each additional unit of good X while remaining equally satisfied.
13. You are given the following marginal utilities of goods x and y obtained by a consumer. Given that price of X=10, price of Y = 5 and income = 50, determine the position of consumer’s equilibrium.
| Units of Consumption | MUx (Utils) | MUy (Utils) |
|---|---|---|
| 1 | 90 | 60 |
| 2 | 80 | 50 |
| 3 | 70 | 45 |
| 4 | 60 | 35 |
| 5 | 50 | 25 |
| 6 | 40 | 20 |
Answer: The consumer is in equilibrium when the marginal utility per rupee spent on each good is equal. This condition can be represented as: MUx/Px = MUy/Py.
Calculating the marginal utility per rupee for each unit consumed:
For X: 90/10 = 9
80/10 = 8
70/10 = 7
60/10 = 6
50/10 = 5
40/10 = 4
For Y: 60/5 = 12
50/5 = 10
45/5 = 9
35/5 = 7
25/5 = 5
20/5 = 4
The consumer reaches equilibrium at the point where the marginal utility per rupee is equal for both goods. This occurs when the consumer buys 3 units of X and 4 units of Y, as: 70/10 = 45/5 = 7.
Therefore, the position of consumer’s equilibrium is at the bundle where the consumer buys 3 units of X and 4 units of Y.
14. A consumer wants to consume good 1 and good 2 whose prices are 20 and 10 respectively. The consumer’s income is 100. Construct the budget line of the consumer. How does the budget line change if the consumer’s income increases to 120, prices of the two goods remaining unchanged.
Answer: The budget line equation can be written as: 20×1 + 10×2 = 100, where x1 is the quantity of good 1 and x2 is the quantity of good 2. The intercepts of the budget line on the axes can be found by setting x1 and x2 to zero respectively: When x1 = 0: x2 = 100/10 = 10. When x2 = 0: x1 = 100/20 = 5.
If the consumer’s income increases to 120, the new budget line equation becomes: 20×1 + 10×2 = 120.
The new intercepts of the budget line on the axes are: When x1 = 0: x2 = 120/10 = 12. When x2 = 0: x1 = 120/20 = 6.
Therefore, the budget line shifts outward, indicating that the consumer can now afford more of both goods.
15. A consumer wants to consume two goods whose prices are 5 and 6 respectively. The consumer’s income is 60. Construct the budget line of the consumer. How does the budget line change if the price of good 2 decreases by rupee 1 and the price of good 1 increases by rupee 1, consumer’s income remaining unchanged.
Answer: The budget line equation can be written as: 5×1 + 6×2 = 60, where x1 is the quantity of good 1 and x2 is the quantity of good 2. The intercepts of the budget line on the axes can be found by setting x1 and x2 to zero respectively: When x1 = 0: x2 = 60/6 = 10. When x2 = 0: x1 = 60/5 = 12.
If the price of good 2 decreases to 5 and the price of good 1 increases to 6, the new budget line equation becomes: 6×1 + 5×2 = 60.
The new intercepts of the budget line on the axes are: When x1 = 0: x2 = 60/5 = 12. When x2 = 0: x1 = 60/6 = 10.
Therefore, the budget line will pivot around the point (10, 12), reflecting the change in prices of the two goods.
16. Suppose the MU of good X is 20, its price is ₹4, and the MU of good Y is 50 and its price is 5. The individual to whom this information applies is spending 20 on each good. Is he or she maximising satisfaction? Why or why not?
Answer: The individual is not maximizing satisfaction because the marginal utility per rupee spent on each good is not equal. The marginal utility per rupee spent on good X is: MUx/Px = 20/4 = 5. The marginal utility per rupee spent on good Y is: MUy/Py = 50/5 = 10.
Since the marginal utility per rupee spent on good Y is higher than that spent on good X, the individual should reallocate spending to buy more of good Y and less of good X until the marginal utility per rupee is equal for both goods.
Extra/additional questions and answers
1: What is a consumer?
Answer: A consumer is a person who buys goods and services for satisfaction of wants.
37: What happens to the budget line if the consumer’s income changes but prices remain the same?
Answer: If the prices of the two goods remain unchanged and the consumer’s income changes, the budget line will shift. If the consumer’s income increases, the budget line will shift upwards, and if his income decreases, the budget line will shift downwards. The slope of the budget line remains unchanged in both cases because the prices of the two commodities do not change. The new budget lines will be parallel to the original budget line.
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