UNIT II
CONSUMERS
EQUILIBRIUM
AND DEMAND
CBSE BOARD QUESTION BANK (2014-16)
UNIT-II CONSUMERS EQUILIBRIUM AND DEMAND
I
1)
MCQ
There is inverse relation between price and demand for the product of a firm under:
(a) Monopoly only
(b) Monopolistic competition only
(c) Both under monopoly and monopolistic competition
(d) (d) Perfect competition only
2)
If due to fall in the price of good x, demand for good y rises, the two goods are
:(choose the correct alternative)
a) Substitutes
b) Complements
c) Not related
d) competitive
If marginal rate of substitution is increasing throughout the indifference curve will
be:(choose the correct alternative)
a) Downward sloping concave
b) Downward sloping convex
c) Downward sloping straight line
d) Upward sloping convex
VERYS SHORT ANSWERS
When does ‘increase’ in demand take place?
When demand for a good increases with the change in factors other than the price of
the good, then increase in demands takes place.
Define budget line.
Budget line is the locus of points that represent such bundles of only two goods the
consumer consumes on which consumers on which consumer’s expenditure is exactly
equal to consumer’s income.
Define indifference map
A set of indifference curves of a consumer is called indifference map.
Define Indifference Curve?
Indifference Curve is the ‘locus of points representing different combinations of the
only two goods the consumer consumes with each combination having the same
utility.’
What is Monotonic Preferences?
Monotonic Preferences refer to a situation when consumption increases; total utility
also increases along with.
Give the meaning of ‘inelastic demand.’
When percentage changes in the amount demand is less than the percentage change in
the price of the good, it is inelastic demanded.
SHORT ANSWERS
A Consumer consumes only two goods X and Y. Marginal utilities of X and Y are 5
and 4 respectively. The prices of X and Y are Rs. 4 per unit and Rs. 5 per unit
3)
II
1)
2)
3)
4)
5)
6)
III
1)
1
1
1
1
(3)
respectively. Is the consumer in equilibrium? What will be the further reaction of the
consumer? Explain.
 According to the utility approach, a consumer reaches equilibrium where the
following equality is met.

MUx/Px= MUy/Py




According to the given question:
MUx/Px = 5/4 = 1.25
MUy/Py= 4/5 = 0.8
Since, MUx/Px>MUy/Py{ 1.25 > 0.8 }

2)
3)
Thus, a consumer is not in equilibrium. In order to reach the equilibrium, a
rational consumer would increase the consumption of good X and decrease
that of good Y.
Price elasticity of demand of good X is -2 and of good Y is -3. Which of the two
goods is more price elastic and why?
 Demand of good Y is more elastic as compared to good X.

Since elasticity of good Y is (-) 3, it signifies that % change in quantity of
good Y is 3 times the % change in price of good Y whereas it is only (-) 2 in
case of good X.

So, Good Y is more elastic as compared to Good X.
Explain the effect of change in prices of the related goods on demand for the given
good.
 Change in price of Related Goods: The related goods can be classified into the
following two categories.
i) Substitute Goods: Substitute goods refer to those goods that can be consumed in
place of each other.

For example: tea and coffee.

In case the price of one good increases, the consumer shifts his demand to the
other good i.e. rise in the price of substitute good results in a rise in the
demand of the concerned good.

In this case, the demand curve shifts to the right. (Fig. 1)
(3)
3
Fig.1: Increase in price of substitute Good
In case, there is a fall in the price of the substitute goods, then the demand for the
concerned good will also fall (Fig. 2).
Fig.2: Fall in Price of substitute Good
ii) Complementary Goods: Complementary goods refer to those goods that are
consumed together.
For example: ink and ink pens.
In case of complementary goods, if the price of one good increase then a consumer
complementary good results in a fall in demand of the concerned good.
In this case, the demand curve shifts inwards to the left. (Fig.3)
4)
In case, there is a fall in the price of the complementary good, then the demand for the
other good will rise. (Fig.4)
Explain the effects of change in income on demand for a good.

Change in the income of the consumer affects the demand for goods but the
(4)
change depends on the type of the good.
5)

Demand for normal goods has a positive relationship with consumer’s income.

As income increases the demand for normal gods also increases and viceversa.

Demand for inferior goods/giffen goods has a negative relationshi with
consumer’s income.
 As the income increases the demand for inferior goods falls and vice-versa.
Explain the effect of (a) change in own price and (b) change in price of substitute on
demand of a good.

a) Change in own price: Other things remaining constant, as the price of good
rises (or falls), the quantity demanded of the good falls(or rises).

Thus, price of a good and its quantity demanded has a negative relationship.

b) Change in price of substitute good: In case the price of substitute good
increases, the consumer shifts his demand to the other good.
(4)

6)
7)
i.e. rise in the price of substitute good results in a rise in the demand of the
concerned good and vice-versa.
Explain the significance of minus sign attached to the measure of price elasticity of
demand in case of normal good, as compared to the plus sign attached tom the
measure of price elasticity of supply?
ANS:-the measure of price elasticity of demand has a minus sign because there is
inverse relation between price and demand of normal good, while the measure of
price elasticity of supply has plus sign because there is direct relation between price
and good.
A consumer spends RS 1000 on a good priced at RS 10 per unit. When its price falls
by 20% the consumer spends RS 800 on the good. Calculate the price elasticity of
demand by the percentage method.
ANS:- Price
Exp
Demand
10
1000
100
8
800
100
Ep= P x Q
Q
P
=10 x 0
100 -2
=0
3
1½
1
1
1/2
8)
3
Giving reason comment on the shape of production possibilities curve based on the
following schedule :
GOOD X (UNITS)
0
1
2
3
4
GOOD Y (UNITS)
16
12
8
4
0
ANS:-
9)
GOOD X
GOOD Y
MRT
0
16
1
12
4Y:1X
2
8
4Y:1X
3
4
4Y:1X
4
0
4Y:1X
Since MRT is constant, pp curve will be downward sloping straight line.
A Consumer Spends Rs 100 On A Good Priced At Rs 4 Per Unit. When its price falls
by 20%,the consumer spends RS 75 on the good. Calculate the price elasticity of
demand by the percentage method.
ANS:- price
exp
demand
4
100
25
3
75
25
E p=P x Q
Q
P
=4 x 0
25
-1
= 0
4
11/2
1
1
1/2
10)
11)
A consumer spends Rs400on a good priced art Rs8 per unit. When its price rises by
25%, the consumer spends Rs500 on the good .calculate the price elasticity of demand
by the percentage method.
ANS:- price exp
demand
8
400
50
10
500
50
Ep= P x Q
Q
P
=8
0
50 2
=0
Given the price of a good, how will a consumer decide how much quantity of that
good to buy? Use utility analysis.
ANS: - According to the utility analysis, the given consumer is in equilibrium when:
MUx = MUy
Px
Py
4
11/2
1
1
1/2
3
12)
When price of a good falls from RS 15 per unit to RS 12 per unit, its demand rises by
25 percent. Calculate price elasticity of demand.
ANS: - %changes in demand for a good = 25/ P/Px100 = 1.25
%change in its price
3
13)
Give one reason for a rightward shift in demand curve?
 A fall in the price of the complementary good
 Rise in the price of the substitute goods
 Rise in the income
 Fall in the income of the consumer
 Favourable change in preference
How is the demand of a good affected by the rise in price of related goods? Explain.
ANS: - Related goods are of 2 types:
 Substitute goods
 Complementary goods
 In case of substitute goods, IF there is a rise in the price of the substitute good
the demand for the given good will increase, and the demand for substitute
good is likely to fall. Thus, there is a positive relation between the price of a
substitute good and the demand for the given good.
LONG ANSWERS
Explain the conditions of consumer’s equilibrium using indifference curve analysis.
3
14)
IV
1)
Consumer’s equilibrium is a point where a consumer gets maximum satisfaction with
his given income and he has no urge to change his state.
According to the indifference curve approach, a consumer will be at equilibrium when
the following two conditions are satisfied:
(i)
(ii)
MRS = MRE: The scope of an indifference curve(i.e. MRS) should be
equal to the slope of a budget line(i.e. MRE). According to this condition,

MRSxy = Px/Py

Suppose, MRSxy>Px/Py (i.e. at point A).

It implies that the consumer is willing to pay more than the actual
price for Good X.

As a result, he will increase the consumption of Good X which
leads to fall in the utility of Good X and finally, MRS starts falling
till the time MRSxy = Px/Py

Similarly, if MRSxy<Px/Py (i.e. at point B), the consumer will
decrease the consumption of Good X till the time MRSxy = Px/Py.
MRS is diminishing i.e. the indifference curve should be convex to the
origin – Unless the IC is convex, equilibrium cannot be estabilished.
3
6
The given diagram shows the equilibrium:
The consumer will attain equilibrium at point E where the budget line is
tangent to IC2. Points A and B show lower satisfaction and point H is
unattainable, therefore, the consumer will not shift from point E.
2)
Explain the distinction between “change in quantity supplied” and “change in
supply”. Use diagram.
Basis
Meaning
Function
Shift &
Movement
Types
Diagram
Change in Supply
When supply changes due to the
change in all factors other than
the price of good(i.e. price of
good remains same), then it is
referred as change in supply.
It is represented as
Qx = f(Px,PR,F ,T, O)
It results in a shift in the supply
curve of the firm which can be
rightwards or leftwards.
The following are its types:
1.Increase in Supply
2.Decrease in Supply
1.Increase in Supply
Change in Quantity Supplied
When supply changes due to
change in the price of good only,
assuming other factors remaining
unchanged, then it is referred as
change in quantity supplied.
It is represented as
Qx = f(Px,PR,F ,T, O)
It results in a shift in the supply
curve of the firm which can be
upwards or downwards.
The following are its types:
1.Expansion in Supply
2.Contraction in Supply
1.Expansion in Supply
2.Decrease in Supply
3
4
2.Contraction in Supply
A consumer consumes only two goods X and y , both priced at RS 2 per unit . if the
consumer chooses a combination of the two goods wit marginal rate of substitution
equal to 2,is the consumer in equilibrium ?why or why not ? What will a rational
consumer do in this situation? Explain?
Ans:-given Px =2,Py=2and MRS=2, a consumer issaid to be in equilibrium when MRS
=Px
Py
Substituting the alues we find that 2>2
2
I,e. MRS >Px
Py
Therefore,consumer is not in equilibrium
MRS>Px means that consumer is willing to pay
PY
More for one more unit of X as compared to what the market demands .the consumer
will buy more and more of X. As result MRS will fall due to the law of diminishing
marginal utility .this will continue till MRS =Px and consumer is in
Py
Equilibrium.
A consumer consumes only two goods X and Y whose prices are RS 5 and RS 4
respectively . if the consumer chooses a combination of the two goods with marginal
utility of X equal to 4 and that of Y equal to 5 is the consume r in equilibrium ? why
or why not ? what will a rational consumer do in this situation ? use utility analysis.
ANS:-given Px=5, py=4,MU=4,MU=5, the consumer will be3 equilibrium when
MUx=MUy
5
6
PxPy
Substituting values, we find that
4
5
or MUxMUy
5
4
PxPy
The consumer is not in equilibrium.
Since per rupee MUx is lower than per rupee MUy, the consumer will buy less of x
and more y. As result due to law of diminishing marginal utility,MUxwill rise and
MUy will fakll till
MUx=MUy
PxPy
Give the meaning of ‘inferior’ goods and explain the same with the help of an
example.
ANS: - 1) When with the rise in the income of a consumer, the consumer reduces the
quantity of the good, and then the good is known as an inferior good for that
consumer.
2) It should be remembered that no good is always normal or always inferior. It is the
income level of the given consumer which makes a good normal or inferior good for
him.
3) Y (income) increases and D (Demand) decreases. (Direct relationship.
Explain the concept of ‘Marginal Rate of Substitution’ with the help of a numerical
6
example. Also explain its behaviour along an indifference Curve.
ANS: - Marginal Rate of Substitution (MRS) means the rate at which a consumer is
willing to sacrifice quantity of one good to obtain more units of the other good.
Let the two goods being consumed be A and B. Suppose the different combinations of
these two goods, having the same utility level are:
GOOD A GOOD B
MRS
1
8
2
4
4B : 1A
3
1
3B : 1A
The consumer is willing to sacrifice 4B to obtain second unit of A. For third unit of A,
he is willing to sacrifice less because Marginal Utility of A decreases as he consumes
more of A.
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UNIT III
PRODUCERS
BEHAVIOUR
AND SUPPLY