GROUP-1
(Introduction and Consumer Equilibrium)
Q1. Why does an economic problem arise?
3
An economic problem arises primarily due to scarcity of resources.
The main causes of economic problems are as follows :1.
Human wants are unlimited.
2.
Limited means.
3.
Alternative uses
Whereas means are limited they have alternative uses as well.
Q2. Show with the help of diagram the effect of Digital India/Make in India on the
Production possibility of the country.
3
Ans: Digital India/Make in India have the positive impact on the production capacity of our
country and leads to the improvement in technology.Therefore PPC shifts to rightward
direction
Y
X
Q3. Explain the central problems of an economy.
3
Ans: 1.What to produce
If refers to which goods and services will be produced and in what quantities with the limited
resources i.e. consumption goods or capital goods.
2. How to produce
It refers to the choice of methods of production of goods & services i.e. whether labour
intensive or capital intensive technique is to be adopted taking into consideration the
proportion of capital and labour in an economy.
3.For whom to produce.
It concerns with the distribution of income & wealth which refers to who earns how much or
who has more assets than others.
Q4. Explain with the help of a numerical example, the meaning of diminishing marginal
rate of substitution.
3
Ans:The following table shows four such bundles of commodity X and Y which gives the consumer
same satisfaction –
Good X (Units)
Good Y (Units)
MRS
0
30
---
1
27
3:1
2
21
6:1
3
12
9:1
4
0
12:1
For each additional unit of X the consumer is willing to sacrifice less of Y. This is
diminishing marginal rate of substitution.
Q5. Give reason comment on the shape of Production possibility curve based on the
following schedule.
4
Good X (Units)
Good Y (Units)
0
30
1
27
2
21
3
12
4
0
Ans:
Good X (Units)
Good Y (Units)
MRT
0
30
---
1
27
3:1
2
21
6:1
3
12
9:1
4
0
12:1
Since MRT is increasing, the PP curve is downward sloping concave to the origin.
Q6. Define Total Utility and Marginal Utility. Show the relationship between TU and
MU with the help of schedule/diagram.
4
Ans:Total Utility: It signifies the total satisfaction which a consumer gets by consuming all
the units of a commodity.
Marginal Utility: - It is the addition in the total utility by consuming an additional unit of
commodity.
MUx = Tux – Tux-I
Relation between total Utility and Margin Utility Table-1:
Consumption Total
Marginal
(in Units)
Utility
Utilities
(Utils)
(Utils)
0
0
-
1
4
4
2
7
3
3
9
2
4
10
1
5
10
0
6
8
-2
Graphic presentation:
Y
M
TU
TU
O
X
MU
O
Graph -1:
M
=
0
X
MU
The relationship between total utility and marginal utility is summed up as:
1.
Initially total utility increases and reaches to point M at its maximum,
marginal utility diminishes and reaches to 0
2.
After point M, total utility diminishes and marginal utility becomes negative.
3.
At point M, TU is maximum and MU is 0.
Q7. Explain any two properties of Indifference curves.
4
Ans:
An indifference curve shows combination of goods between which a person is
indifferent. The main attributes or properties or characteristics of indifference curves are
as follows:
(1) Indifference curves are negatively sloped: The indifference curves must slope down
from left to right. This means that an indifference curve is negatively sloped. It slopes
downward because as the consumer increases the consumption of X commodity, he has to
give up certain units of Y commodity in order to maintain the same level of satisfaction.
(2) Higher indifference curve represents higher level: A higher indifference curve that
lies above and to the right of another indifference curve represents a higher level of
satisfaction and combination on a lower indifference curve yields a lower satisfaction.
Q10.Why Indifference curve is convex to the origin? Explain with diagram.
4
Indifference curve are convex to the origin: This is an important property of indifference
curves. They are convex to the origin (bowed inward). This is equivalent to saying that as the
consumer substitutes commodity X for commodity Y, the marginal rate of substitution
diminishes of X for Y along an indifference curve.
Q9. Explain consumer equilibrium by using Hicksian/Ordinal/Indifference curve
analysis.
6
Ans:
Consumer Equilibrium (IC Analysis) : Consumer Equilibrium refers to a situation in which
a consumer with given income and given prices purchases such a combination of goods and
services which gives his maximum satisfaction and he is not willing to make any change in
it.
Conditions of Consumer Equilibrium : The main conditions of Consumer’s Equilibrium are:
1)
Price Line should be tangent to the IC i.e., MRSxy=Px / Py
2)
IC should be convex to the point of origin.
When the consumer is in equilibrium his highest attainable IC is tangent to the Budget Line.
At equilibrium point D, slope of IC and Price Line coincide.
Slope IC = Slope of Price Line
Or MRSxy=Px / Py
Q10. Explain consumer equilibrium by using Marshallian/Cardinal/Utility analysis.
6
Ans:Consumer’s Equilibrium: Two Commodity Case
Meaning: A consumer is in equilibrium when the difference between total utility in terms of
money and the total expenditure on it is maximum.
Condition of consumer’s Equilibrium.
= MU of Product X= MU of Product Y = MU of Money
Price of X
Price of Y
Table-4:
Rupees Spent
MUx
MUy
1
12
10
2
10
8
3
8
6
4
6
4
5
4
2
Suppose a consumer is to spend Rs. 5/- price of each is Rs. 1/-. He will spend Rs. 3 on x and
2 on y. In this commodity he gets maximum satisfaction.
X
Y
MUy
12
MUx
10
10
8
8
6
6
4
MUy
MUx
2
4
2
Units