Consumer’s Equilibrium - Utility & Indifference Curve

CBSE Test Paper-01

Class – 11 Economics (Consumer’s Equilibrium and Demand)

General Instruction: All questions are compulsory. Marks are given alongwith their questions.

Demand for a commodity refers to: (1)
1. The desire for a commodity.
2. Need for a commodity.
3. Quantity demanded of a commodity.
4. The quantity of the commodity demanded at a certain price during any particular period of time.
In the case of a straight-line demand curve meeting the two axes, the price-elasticity of demand at the mid-point of the line would be: (1)
a = 0, b = 1, c = 1.5, d = 2
What would be the impact on Total Utility, if Marginal Utility curve lies below X-axis? (2)
Is the law of diminishing Marginal Utility applicable in case of money? (2)
A consumer consumes only two goods X and Y and is in equilibrium. The price of X falls. Explain the reaction of the consumer through the utility analysis. (3)
What price, a consumer is ready to pay for a commodity in the state of equilibrium? (3)
What is the difference between cardinal utility and ordinal utility? (3)
The cost of an ice-cream is Rs.20. Sonali who like ice-cream has already consumed 4 ice-creams. Her Marginal Utility is 4 off one rupee. Should she consume more ice-cream or should she stop the consumption? (3)
Mr. Dhoni was hungry, hence he decided to eat apples, however, after eating 2 apples, he suddenly realized that now he is not enjoying eating any further unit. Hence, he decided to eat rest of apples later on.
Identify the reason behind the above case. Also, state the underlying assumptions. (6)
A consumer consumes only two goods X and Y and is in equilibrium. Show that when the price of good Y falls, demand for Y rises. Answer this question with the help of utility analysis.(6)

CBSE Test Paper-01
Class - 11 Economics (Consumer’s Equilibrium and Demand)
Answers

d) The quantity of the commodity demanded at a certain price during any particular period of time.
(b) 1
If Marginal Utility curve lies below X-axis, i.e. Marginal Utility becomes negative, then Total Utility will fall.
Law of Diminishing Marginal Utility is not applicable in the case of money. In the case of money, as more money is acquired, desire for acquiring more amount increases. This law doesn’t hold true in the case of ‘Knowledge’ as well.
If the price of X falls, the consumer gets greater Marginal Utility than in the case of good Y. Accordingly, he will spend more on X than Y. As consumption of X rises, Mux will fall. On the other hand, as consumption of Y falls, MUy will rise. The consumer will stop buying more of X in place of Y only when $\frac{M U_{x}}{P_{x}} = \frac{M U_{y}}{P_{y}}$ . Hence, we can say that price and demand are negatively related.
In a state of equilibrium, the price that the consumer is ready to pay is exactly equal to the price prevailing in the market. Because in a state of equilibrium, money worth of Marginal Utility,that the consumer gets is exactly equal to the market price,he has to pay.

Basis	Cardinal utility	Ordinal utility
Concept	It refers to the measurement of utility in terms of numbers as 1,2,3, etc.	It refers to the measurement of utility in terms of psychological satisfaction on consuming one good in comparison to other.
Example	A basket of oranges offers 10 Units to a consumer.	A pizza offers greater satisfaction to a consumer than a chapatti.

A consumer attains equilibrium, when $\frac{M U_{x}}{M U_{m}} = P_{x}$ . Substituting the given values, we get $\frac{M U_{x}}{4} = 20$ implying that, in a state of equilibrium, Sonali’s Mux must be equal to 80 utils. If having consumed 4 ice-creams, Sonali’s Mux=80 utils, then she must stop consuming more.
However, if Mux>80, she should have consumed more ice-creams till Mux reduces to 80 and in terms of its money, worth is equal to $P_{x}$ (where, $P_{x}$ = 20).
In the above case, this happened due to Law of Diminishing Marginal Utility, which states that as he consumes more & more units of apples, his Marginal utility goes on diminishing.
Assumptions of Law of Diminishing Marginal Utility:
1. Cardinal measurement of utility.
2. Rational consumer.
3. Continuous consumption.
4. Standard and identical units are consumed.
5. The marginal utility of money is constant.
6. The price of good and income of the consumer is constant.
In the case of 2 commodities,consumer attains equilibrium,when MUx/Px=MUy/Py=MUM
So in the case of two commodities, the consumer is said to be in equilibrium when the ratio of marginal utilities of both the goods to their respective prices becomes equal to the utility of a rupee.
MUx/Px denotes utility per rupee while consuming good x
MUy/Py denotes utility per rupee while consuming good y
We can also say that when utility per rupee from the last rupee spent on each good becomes equal the consumer attains equilibrium.
If MUx/Px > MUy/Py it means utility per rupee from consumption of good x is greater than utility per rupee from consumption of good y.
The consumer should increase the consumption of good x and reduce the consumption of good y. By doing this utility per rupee from good x will decrease and utility per rupee from good y will increase and ultimately the consumer will attain equilibrium.
If MUx/Px < MUy/Py it means utility per rupee from consumption of good x is less than utility per rupee from consumption of good y.
The consumer should increase the consumption of good y and reduce the consumption of good x. By doing this utility per rupee from good y will decrease and utility per rupee from good x will increase and ultimately the consumer will attain equilibrium.
Hence in case of two commodities, the consumer attains equilibrium when
MUx/Px = MUy/Py = MUm

Consumer’s Equilibrium - Utility & Indifference Curve - Test Papers