NCERT Solutions for Class 12th: Ch 2 Theory of Consumer Behaviour Microeconomics

NCERT Solutions for Class 12th: Ch 2 Theory of Consumer Behaviour Microeconomics

Page No: 34

Exercises

1. What do you mean by the budget set of a consumer?

Answer

The collection of all bundles that the consumer can buy with their income at the prevailing market prices is called budget set of a consumer.

2. What is a budget line?

Answer

The budget line represents the different combinations of two goods that a consumer can buy with their given income and prices of commodities.

Let x₁ be the amount of good 1.
x₂ be the amount of good 2.
P₁ be the price of good 1.
P₂ be the price of good 2.
P₁x₁ = Total money spent on good 1
P₁x₂ = Total money spent on good 2
Then, the budget line will be:
P₁x₁ + P₂x₂ = M

3. Explain why the budget line is downward sloping.

Answer

The budget line is downward sloping because a consumer can increase the consumption of good 1 only by decreasing the consumption of good 2. The consumer have limited income which she can spend to choose goods between good 1 and good 2.

4. A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer's income is Rs 20.
(i) Write down the equation of the budget line.
(ii) How much of good 1 can the consumer consume if he/she spends his/her entire income on that good?
(iii) How much of good 2 can be consumed if he/she spends his/her entire income on that good?
(iv) What is the slope of the budget line?

Answer

(i) P₁ = Rs 4

P₂ = Rs 5
M = Rs 20
Equation of the budget line = P₁x₁ + P₂x₂ = M
4x₁ + 5x₂=20

(ii) Total income = Rs 20
Price of good 1 per unit = Rs 4
Amount of good 1 consumer can purchase by spending entire income = 20/4 = 5 units.

(iii) Total income = Rs 20
Price of good 2 per unit = Rs 5
Amount of good 1 consumer can purchase by spending entire income = 20/5 = 4 units.

(iv) Slope of the budget lines = -P₁/P₂
= -Price of good 1/Price of good 2 = -4/5 = -0.8

5. How does the budget line change if the consumer's income increases to Rs 40 but the prices remain unchanged?

Answer

After income increase,

P₁ = Rs 4

P₂ = Rs 5
M = Rs 40
x₁ = 40/P₁ = 40/4 = 10 Units
x₂ = 40/P₂ = 40/5 = 8 Units
New Budget line is shown in the given figure

The new budget line R₁S₁ will show a parallel rightward shift from initial budget line RS. When the income increases then consumer can buy more goods at the prevailing market prices therefore intercept increases however slope of the line remains same as prices do not change.

6. How does the budget line change if the price of good 2 decreases by a rupee but the price of good 1 and the consumer's income remain unchanged?

Answer

After price of good 2 decreases by a rupee,

P₁ = Rs 4

P₂ = Rs 4
M = Rs 20
x₁ = 40/P₁ = 20/4 = 5 Units
x₂ = 40/P₂ = 20/4 = 5 Units
New Budget line is shown in the given figure

The slope of the new budget line will be more as price of good 2 changes. Also, the new budget line will be steeper than the initial budget line.

7. What happens to the budget set if the prices as well as the income double?

Answer

When the prices as well as the income double then there will be no impact on budget set. Original budget set is P₁x₁ + P₂x₂ = M. If the prices and income double then the new budget set will be:

2P₁x₁ + 2P₂x₂ = 2M

⇒ 2(P₁x₁ + P₂x₂) = 2M

⇒ P₁x₁ + P₂x₂ = M

So, there is no change in budget set. Also, the new budget line will be same.

8. Suppose a consumer can afford to buy 6 units of good 1 and 8 units of good 2 if he/she spends her entire income. The prices of two goods are Rs 6 and Rs 8. How much is the consumer's income?

Answer

P₁ = Rs 6

P₂ = Rs 8
x₁ = 6
x₂ = 8
Income = P₁x₁ + P₂x₂
∴ 6 × 6 + 8 × 8 = 36 + 64 = 100

Therefore, the consumer's income is Rs 100.

9. Suppose a consumer wants to consume two goods that are available only in integer units. The two goods are equally priced at Rs 10 and the consumer's income is Rs 40.
(i) Write down all the bundles that are available to the consumer.
(ii) Among the bundles that are available to a consumer, identify those that cost will him/her exactly Rs 40.

Answer

(i) The bundles that are available to the consumer as they cost Rs 40 or less are:

(0, 0)	(0, 1)	(0, 2)	(0, 3)	(0, 4)
(1, 0)	(1, 1)	(1, 2)	(1, 3)	(1, 4)
(2, 0)	(2, 1)	(2, 2)	(2, 3)	(2, 4)
(3, 0)	(3, 1)	(3, 2)	(3, 3)	(3, 4)
(4, 0)	(4, 1)	(4, 2)	(4, 3)	(4, 4)

(ii)  The bundles that are available to a consumer that cost him exactly Rs 40 are (0, 4), (1, 3), (2, 2), (3, 1), (4, 0).

10. What do you mean by monotonic preferences?

Answer

Monotonic preferences means that the consumer prefers a particular bundle over the other bundle if the former consists of at least more of one good and no less of the other good.

11. If the consumer has monotonic preferences, then can he/she be indifferent towards bundles (10, 8) and (8, 6)?

Answer

No, he/she cannot be indifferent between the two bundles because in the second bundle the quantity of both the goods has reduced.

Page No: 35

12. Suppose a consumer's preferences are monotonic. What can you say about his/her preference ranking over the bundles (10, 10), (10, 9) and (9, 9)?

Answer

If the consumer's preferences are monotonic then the ranking over the bundles will be (10, 10), (10, 9) and (9, 9) because consumer is not indifferent in monotonic preferences and wants more quantity than less.

13. Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic?

Answer

No, friend is not monotonic because he is indifferent to the bundles. If preferences of friend is monotonic then he must prefer second bundle as it contains more of both the goods.

14. Suppose there are two consumers in the market for a good and their demand functions are as follows:
d₁(p) = 20 - p for any price less than or equal to 20 and d₁(p) = 0 at any price greater than 20.
d₂(p) = 30 - 2p for any price less than or equal to 15 and d₁(p) = 0 at any price greater than 15.
Find out the market demand function.

Answer

d₁(p) = 20 - p         p ≤ 20
d₁(p) = 0                p > 20      ...(i)
d₂(p) = 30 - 2p      p ≤ 15
d₁(p) = 0               p > 2015      ...(ii)
Adding equation (i) and (ii) to market demand function (dm), we get
dm(p) = 50 - 3p for p ≤ 50/3
dm(p) = 20 - p   for p < 50/3 ≤ 20
dm(p) = 0          for p > 20

15. Suppose there are 20 consumers for a good and they have identical demand functions:

d(p) = 10 – 3p for any price less than or equal to 10/3 and d₁(p) = 0 at any price greater than 10/3.
What is the market demand function?

Answer

d₁(p) = 10 - 3p for p ≤ 10/3

d₁(p) = 0           for p ≤ 10/3

Number of consumers = 20

Market demand function dm(p) is obtained by multiplying individual demand function by 20.

Therefore, dm(p) = (10 - 3p) (20) for p ≤ 10/3

                 dm(p) = 0                     for p ≤ 10/3

16. Consider a market where there are just two consumers and suppose their demands for the good are given as follows:
Calculate the market demand for the goods.

p	d1	d2
1 2 3 4 5 6	9 8 7 6 5 4	24 20 18 16 14 12

Answer

p	d1	d2	Market demand = D = d1 + d2
1 2 3 4 5 6	9 8 7 6 5 4	24 20 18 16 14 12	9 + 24 = 33 8 + 20 = 28 7 + 18 = 25 6 + 16 = 22 5 + 14 = 19 4 + 12 = 16

17. What do you mean by a normal good?

Answer

A good whose demand increases with the increase in income of the consumers and demand decreases with the decrease in income of the consumers is known as normal good. There is a direct relationship between income and demand.

18. What do you mean by an 'inferior good'? Give some examples.

Answer

A good whose demands move in the opposite direction of the income of the consumer is known as an inferior good. For example: low quality food items like coarse cereals.

19. What do you mean by substitutes? Give examples of two goods which are substitutes of each other.

Answer

Those goods that can be consumed in place of other goods are called substitute goods. For example: Tea and coffee are goods that can be substitutes for each other. If the price of coffee increases, the consumers can shift to tea, and hence, the consumption of tea is likely to go up.

20. What do you mean by complements? Give examples of two goods which are complements of each other.

Answer

Those goods that are consumed together are called complementary goods. For example: Tea and sugar. An increase in the price of sugar is likely to decrease the demand for tea and a decrease in the price of sugar is likely to increase the demand for tea.

21. Explain price elasticity of demand.

Answer

Price-elasticity of demand is a measure of the responsiveness of the demand for a good to changes in its price. It is defined as the percentage change in demand for the good divided by the percentage change in its price.

e_D = Percentage change in demand for the good/Percentage change in the price of the good
e_D = ΔP/ΔQ × P/Q
where,
ΔQ = Q₂ - Q₁, change in demand
ΔP = P₂ - P₁, change in demand
P = Initial price
Q = Initial quantity

22. Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

Answer

P₁ = 4                 Q₁ = 25
P₂ = 5                 Q₂ = 20
ΔP = P₂ - P₁         ΔQ = Q₂ - Q₁
= 5 - 4                 = 20 - 25

= 1                      = -5

e_D = ΔP/ΔQ × P/Q
= -5/1 × 4/25
= -4/5
e_D = -0.8

23. Consider the demand curve D(p) = 10 – 3p. What is the elasticity at price 5/3?

Answer

Elasticity of demand of demand (e_D) alognwith linear demand curve q = a - bp

i.e., the elasticity of demand at price 5/3 is unitary elastic.

24. Suppose the price elasticity of demand for a good is -0.2. If there is a 5% increase in the price of the good, then by what percentage will the demand for the good go down?

Answer

Price elasticity of demand = -0.2

Percentage change in price = 5%

Price elasticity of demand = Percentage change in demand/Percentage change in the price

-0.2 = Percentage change in demand/5

Percentage change in demand = -1

The demand for good will go down by 1%.

25. Suppose the price elasticity of demand for a good is -0.2. How will the expenditure on the good be affected if there is a 10% increase in its price?

Answer

Price elasticity of demand = -0.2
Percentage increase in price = 10%

Price elasticity of demand = Percentage change in demand/Percentage change in the price

-0.2 = Percentage change in demand/10

Percentage change in demand = -2

Thus, percentage decrease in demand is less than the percentage increase in price. This means that when price increases and e_D < 1, the demand is inelastic and hence, the expenditure will increase.

26. Suppose there was a 4% decrease in the price of a good, and as a result, the expenditure on the good increased by 2%. What can you say about the elasticity of demand?

Answer

Decrease in price = 4%

Rise in expenditure = 2%

Since, expenditure (P×Q) rises by less than 4& which means quantity demand rises by less than 4%. Thus, it is a case of inelastic demand, 0 < e_D < 1.

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NCERT Solutions for Class 12th: Ch 1 Introduction Microeconomics

NCERT Solutions for Class 12th: Ch 1 Introduction Microeconomics

Exercises

Page No: 7

1. Discuss the central problems of an economy.

Answer

The allocation of scarce resources and the distribution of the final goods and services are the central problems of an economy. These are:

→ What to produce and in what quantities: An economy has to decide what goods and services are to be produce and in what quantity as resource is available in limited quantity and also it have alternative uses. Whether to produce more of food, clothing, housing or to have more of luxury goods. Whether to use more resources in education and health or to use more resources in building military services.

→ How to Produce: It is very important for an economy how to produce. Which of the resources to use in the production of each of the different goods and services. Whether to use more labour or more machines.

→ For whom to produce: It generally means the distribution of the final goods. Who gets what and how much. Whether or not elementary education and basic health services should be available freely for everyone in the economy.

2. What do you mean by the production possibilities of an economy?

Answer

The collection of all possible combinations of the goods and services that can be produced from a given amount of resources and a given stock of technological knowledge is called the production possibilities of the economy.

3. What is a production possibility frontier?

Answer

A curve showing different possibilities of two goods that can be produced with efficient utilisation of the given resources and technology is called production possibility frontier.

In the above representation, a production possibility frontier between cotton and corn has been drawn. The points A,B,C, D and E which lie on PPC represent the situation when the resources of the economy are fully utilised. While any point lie under the curve, say F, shows inefficiency or underutilisation of available resources.

4. Discuss the subject matter of economics.

Answer

The subject matter of economics has been studied under two broad branches: Microeconomics and Macroeconomics.

In microeconomics, we study the behaviour of individual economic agents in the markets for different goods and services and try to figure out how prices and quantities of goods and services are determined through the interaction of individuals in these markets. 

In macroeconomics, we try to get an understanding of the economy as a whole by focusing our attention on aggregate measures such as total output, employment and aggregate price level. We are interested in finding how the levels of these aggregate measures are determined and how the levels of these aggregate measures change over time. 

5. Distinguish between a centrally planned economy and a market economy.

Answer

Centrally Planned Economy	Market Economy
Means of production are owned by government.	Means of production are owned by private individuals.
The main motive of production is social welfare.	The main motive of production is profit making.
Prices of goods and services are generally high	Prices of goods and services are generally high
The production is governed by planning mechanism i.e., according to government plans.	The production is governed by price mechanism i.e., by demand and supply.
The inequality of income is low.	The inequality of income is high.

6. What do you understand by positive economic analysis?

Answer

Positive economics deals with what is, what was or how an economic problem facing the society is actually solved by analysing various positive statements and mechanisms.These statements can be tested, proven or disproven and do not involve personal value judgments. For example: India is an overpopulated country. India have adopted mixed economy.

7. What do you understand by normative economic analysis?

Answer

Normative economic analysis deals with what ought to be or how an economic problem should be solved. The normative statements that cannot be tested as they involve personal value judgments. For example: Government should encourage private companies to accelerate the pace of industrialisation.  

8. Distinguish between microeconomics and macroeconomics.

Answer

Microeconomics	Macroeconomics
It studies individual economic unit.	It studies entire economic unit
It deals with how prices and quantities of goods and services are determined in individual markets.	It deals with how general price level and quantities of goods and services are determined in entire economy.
It uses the method of partial equilibrium, i.e. equilibrium in one market.	It uses the method of general equilibrium, i.e. equilibrium in all markets of an economy.
The major microeconomic variables are price, individual consumer's demand, wages, rent, profit, revenues, etc.	The major macroeconomic variables are aggregate price, aggregate demand, aggregate supply, inflation, unemployment, etc.
Its central problems are price determination and allocation of resources.	Its central problem is determination of level of Income and employment in the economy.

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