Ncert Solutions for Class 12 Micro Economics Chapter 2 Theory of Consumer Behaviour

Microeconomics Class 12 Chapter 2 questions and answers: Theory of Consumer Behaviour ncert solutions

Textbook	NCERT
Class	Class 12
Subject	Economics
Chapter	Chapter 2
Chapter Name	Theory of Consumer Behaviour class 12 ncert solutions
Category	Ncert Solutions
Medium	English

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

Answer 1: The budget set of a consumer refers to the collection of all possible combinations of goods and services that a consumer can afford to purchase, given their income and the prices of those goods and services. It represents the feasible consumption choices available within their financial constraints.

Question 2: What is budget line?

Answer 2: The budget line is a graphical representation of all possible combinations of two goods that a consumer can purchase, given their income and the prices of the goods. It shows the maximum quantity of one good that can be bought for each possible quantity of the other good, assuming the consumer spends all of their income. The slope of the budget line reflects the trade-off between the two goods based on their relative prices.

Question 3: Explain why the budget line is downward sloping.

Answer 3: The budget line is downward sloping because it reflects the trade-off between the two goods a consumer can purchase given their limited income. When the consumer spends more on one good, they have less money available to spend on the other good. As a result, to buy more of one good, the consumer must reduce the quantity of the other good they purchase. This inverse relationship between the two goods is what causes the budget line to slope downward.

Question 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 she spends her entire income on that good?
(iii) How much of good 2 can she consume if she spends her entire income on that good?
(iv) What is the slope of the budget line?

Answer 4: Let us assume that the consumer wants to buy X amount of Good 1 and Y amount of Good 2. As given, Good 1 is priced at Rs.4 and Good 2 is priced at Rs.5. The income of the consumer is Rs.20.

i) The budget line can be represented using the equation 4X + 5Y = 20

ii) If the consumer spends the entire income on good 1, the value of Y will be zero.

Hence, 4X + 5(0) = 20

X = 20/4 = 5

Therefore, 5 units of Good 1 can be bought.

iii) If the consumer spends the entire income on good 2, the value of X will be zero.

Hence, 4(0) = 5Y = 20

Y = 20/5 = 4

Therefore, 4 units of Good 2 can be bought.

iv) The slope of the budget line can be determined by the units of good 1 that the consumer is willing to give up to gain equivalent amounts of good 2.

P1/P2 = -4/5 = 0.8

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

Answer 5: If the consumer’s income increases to Rs 40 while the prices of the goods remain unchanged, the budget line will shift outward, parallel to the original budget line. This is because the consumer can now afford to buy more of both goods. However, the slope of the budget line will not change since the prices of the goods have not changed, so the trade-off between the two goods remains the same. The entire budget line will shift outward to reflect the higher income and expanded set of affordable consumption choices.

Question 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 6: After price of good 2 decreases by a rupee,

P₁ = Rs 4P₂ = 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.

Question 7: What happens to the budget set if both the prices as well as the income double?

Answer 7: 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.

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

Answer 8: To calculate the consumer’s income, we use the formula for the budget line:

Income = (Price of Good 1 × Quantity of Good 1) + (Price of Good 2 × Quantity of Good 2)

Given:

• Price of Good 1 = Rs 6
• Quantity of Good 1 = 6 units
• Price of Good 2 = Rs 8
• Quantity of Good 2 = 8 units

Now, calculate the income:

Income = (6 × 6) + (8 × 8) = 36 + 64 = Rs 100

Therefore, the consumer’s income is Rs 100.

Question 9: Suppose a consumer wants to consume two goods which 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 the consumer, identify those which cost her exactly Rs 40

Answer 9: (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).

Question 10: What do you mean by ‘monotonic preferences’?

Answer 10: Monotonic preferences refer to a situation in consumer theory where a consumer always prefers more of a good to less, assuming that all other factors remain constant. In other words, if a consumer is given two bundles of goods, they will always prefer the bundle that has more of at least one good, without having less of the other goods. This implies that larger quantities of goods provide greater satisfaction (or utility) to the consumer. Monotonic preferences are based on the assumption that “more is better” for the consumer.

Question 11: If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)?

Answer 11: No, a consumer with monotonic preferences cannot be indifferent between the bundles (10, 8) and (8, 6).

Monotonic preferences mean that the consumer always prefers more of at least one good, provided that the quantity of the other good does not decrease. In the given bundles:

• Bundle (10, 8) contains 10 units of Good 1 and 8 units of Good 2.
• Bundle (8, 6) contains 8 units of Good 1 and 6 units of Good 2.

Since (10, 8) has more of both goods compared to (8, 6), the consumer would strictly prefer bundle (10, 8) under monotonic preferences. Therefore, they cannot be indifferent between the two bundles.

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

Answer 12: If a consumer’s preferences are monotonic, they always prefer more of a good to less, holding other goods constant. Given this:

• Bundle (10, 10) contains 10 units of both goods.
• Bundle (10, 9) contains 10 units of the first good and 9 units of the second good.
• Bundle (9, 9) contains 9 units of both goods.

The preference ranking based on monotonic preferences would be:

1. Bundle (10, 10) is preferred the most because it has the highest quantity of both goods (more is better).
2. Bundle (10, 9) would be preferred over (9, 9) because it has the same amount of Good 1 (10 units) but more of Good 2 (9 units vs. 9 units for both goods in the other bundle).
3. Bundle (9, 9) would be ranked the lowest since it has fewer units of both goods compared to the other bundles.

So, the ranking is: (10, 10) > (10, 9) > (9, 9).

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

Answer 13: No, the preferences of your friend are not monotonic if they are indifferent between the bundles (5, 6) and (6, 6).

Monotonic preferences imply that more of a good is always preferred, assuming the other good’s quantity remains constant. In the given bundles:

• Bundle (5, 6) has 5 units of Good 1 and 6 units of Good 2.
• Bundle (6, 6) has 6 units of Good 1 and 6 units of Good 2.

Since Bundle (6, 6) has more of Good 1 (while Good 2 remains the same), a consumer with monotonic preferences would strictly prefer Bundle (6, 6) over Bundle (5, 6). However, your friend is indifferent between these two bundles, which suggests their preferences are not monotonic, as they do not strictly prefer the bundle with more of Good 1.

Question 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 14: To find the market demand function, we need to sum the individual demand functions of the two consumers at each price level. The total (market) demand is the sum of the demands of both consumers at any given price, ( p ).

Given:

• Consumer 1’s demand: d₁​(p) = 20 − p for p ≤ 20, and d₁(p) = 0 for p > 20.
• Consumer 2’s demand: d₂​(p) = 30 − 2p for p ≤ 15, and d₂ (p) = 0 for p > 15.

Steps to derive the market demand:

1. For prices p ≤ 15:

• Both consumers are active in the market.
• Consumer 1’s demand is \( d_1(p) = 20 – p \).
• Consumer 2’s demand is \( d_2(p) = 30 – 2p \).
• The market demand for \( p \leq 15 \) is:
  D(p) = d₁(p) + d₂(p) = (20 – p) + (30 – 2p) = 50 – 3p

2. For prices 15 < p ≤ 20:

• Only Consumer 1 is active in the market because Consumer 2’s demand becomes zero when ( p > 15 ).
• Consumer 1’s demand is still ( d₁(p) = 20 – p ).
• The market demand for 15 < p ≤ 20 is:
  D(p) = d₁(p) = 20 – p

3. For prices ( p > 20 ):

• Both consumers’ demands are zero because ( d₁(p) = 0 ) for ( p > 20 ) and ( d₂(p) = 0 ) for ( p > 15 ).
• The market demand for ( p > 20 ) is:
  D(p) = 0

Market demand function summary:

\(D(p) = \begin{cases} 50 – 3p & \text{for } p \leq 15, \\ 20 – p & \text{for } 15 < p \leq 20, \\ 0 & \text{for } p > 20. \end{cases}\)

This is the market demand function for the given prices.

Question 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 \(\frac{10}{3}\) and d₁ (p) = 0 at any price greater than \(\frac{10}{3}\). What is the market demand function?

Answer 15: To determine the market demand function when there are 20 consumers with identical demand functions, we can follow these steps:

Given Demand Function

The individual demand function for each consumer is:
d(p) = 10 – 3p for p \(\leq \frac{10}{3}\)
d(p) = 0 for p > \(\frac{10}{3}\)

Finding the Market Demand Function

Since there are 20 consumers with identical demand functions, the market demand D(p) is the sum of the individual demands of all consumers.

1. For \( p \leq \frac{10}{3} \):

• The demand from one consumer is d(p) = 10 – 3p.
• The total market demand from 20 consumers is:
  D(p) = 20 × d(p) = 20 × (10 – 3p) = 200 – 60p

2. For \( p > \frac{10}{3} \):

• The demand from each consumer is d(p) = 0.
• Therefore, the total market demand is:
  D(p) = 0

Summary of the Market Demand Function

The market demand function can be summarized as follows:

\(D(p) = \begin{cases} 200 – 60p & \text{for } p \leq \frac{10}{3}, \\ 0 & \text{for } p > \frac{10}{3}. \end{cases}\)

This piecewise function represents the total quantity demanded in the market at different price levels.

Question 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.

Price (p)	Consumer 1’s Demand (d1)	Consumer 2’s Demand (d2)
1	9	24
2	8	20
3	7	18
4	6	16
5	5	14
6	4	12

Answer 16: To calculate the market demand, we sum the demands of both consumers (Consumer 1 and Consumer 2) at each price level.

Market Demand Calculation: The market demand is the sum of the demands of both consumers at each price level:

Market Demand = \(d_1(p) + d_2(p)\)

Let’s calculate the total market demand for each price:

Price (p)	Consumer 1’s Demand (d1)	Consumer 2’s Demand (d2)	Market Demand (D(p))
1	9	24	33
2	8	20	28
3	7	18	25
4	6	16	22
5	5	14	19
6	4	12	16

Market Demand Summary

At each price level, the market demand is as follows:

• At price 1, market demand = 33 units.
• At price 2, market demand = 28 units.
• At price 3, market demand = 25 units.
• At price 4, market demand = 22 units.
• At price 5, market demand = 19 units.
• At price 6, market demand = 16 units.

Question 17: What do you mean by a normal good?

Answer 17: A normal good is a good for which the demand increases with an increase in the consumer’s income or wages. For example, let’s consider a fruit like an apple. When the consumer’s income increases, the demand for apples also increases.

Question 18: What do you mean by an ‘inferior good’? Give some examples.

Answer 18: An inferior good is a type of good for which demand decreases as a consumer’s income increases, meaning people buy less of it when they can afford better alternatives. In contrast, demand for these goods rises when incomes fall.

• Examples of inferior goods:
  • Store-brand or generic products (consumers may switch to premium brands with higher incomes).
  • Instant noodles or canned food (as people buy fresher or higher-quality options when they earn more).
  • Public transportation (as people might opt for cars or ride-hailing services with higher incomes).

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

Answer 19: Substitutes are goods of the same category which can be used interchangeably to some extent. For example, let us consider the products tea and coffee. Both of these products fall under the same classification of hot beverages, fulfil similar needs and are also similarly priced. Hence, a consumer will shift to coffee if the price of tea increases and vice versa.

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

Answer 20: Complements are goods which are usually consumed together and complement each other. An example would be tea and sugar or printers and cartridges. The prices of complementary goods also affect each other’s demand. For example, if the price of sugar goes up, it is likely that the demand for tea will decrease significantly.

Question 21: Explain price elasticity of demand.

Answer 21: 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

Question 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 22: To calculate the price elasticity of demand (PED), we use the formula:

PED = \(\frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\)

Step 1: Calculate the percentage change in quantity demanded:

% change in quantity demanded = \(\frac{(20 – 25)}{25} \times 100 \)

\(= \frac{-5}{25} \times 100 = -20\%\)

Step 2: Calculate the percentage change in price:

% change in price = \(\frac{(5 – 4)}{4} \times 100 \)

\(= \frac{1}{4} \times 100 = 25\%\)

Step 3: Calculate the price elasticity of demand:

PED = \(\frac{-20\%}{25\%} = -0.8\)

The price elasticity of demand is -0.8, indicating inelastic demand (since the absolute value is less than 1).

Question 23: Consider the demand curve D(p) = 10 – 3p. What is the elasticity at price \(\frac{5}{3} \)?

Answer 23: To calculate the price elasticity of demand (PED) at a specific price using the demand curve D(p) = 10 – 3p, we can use the point elasticity formula:

PED = \(\frac{p}{q} \times \frac{dq}{dp}\)

Where:

• p is the price,
• q = D(p) ) is the quantity demanded,
• \(\frac{dq}{dp}\) is the derivative of the demand function with respect to price.

Step 1: Find ( q ) (Quantity demanded at \( p = \frac{5}{3} \)

The demand function is ( D(p) = 10 – 3p ). Plug in \( p = \frac{5}{3} \):

\(q = 10 – 3\left( \frac{5}{3} \right)\) = 10 – 5 = 5

So, the quantity demanded at \( p = \frac{5}{3} \) is q = 5.

Step 2: Find \( \frac{dq}{dp} \)

Differentiate the demand function D(p) = 10 – 3p with respect to ( p ):

\(\frac{dq}{dp} = -3\)

Step 3: Use the point elasticity formula

Now, we plug in the values:

• \( p = \frac{5}{3} \),
• q = 5,
• \( \frac{dq}{dp} = -3 \).

PED = \(\frac{\frac{5}{3}}{5} \times (-3) \)

\(= \frac{5}{3 \times 5} \times (-3) \)

\(= \frac{5}{15} \times (-3) = -1\)

The price elasticity of demand at \( p = \frac{5}{3} \) is -1, indicating unitary elasticity at that price.

Question 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, by what percentage will the demand for the good go down?

Answer 24: Price elasticity of demand = -0.2%

change in price = 5%

Price elasticity of demand = \(\frac{Percentage change in demand}{Percentage change in the price}\)

-0.2 = Percentage change in demand/5

Percentage change in demand = -1

The demand for good will go down by 1%.

Question 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 25: Price elasticity of demand = -0.2
Percentage increase in price = 10%

Price elasticity of demand = \(\frac{Percentage change in demand}{Percentage change in the price}\)

-0.2 = \(\frac{PPercentage change in demand}{10}\)

Percentage change in demand = -2Thus, 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.

Question 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 26: To determine the elasticity of demand based on the given information, we can analyze the relationship between the percentage change in price and the resulting change in expenditure.

Given:

• Percentage decrease in price: \( \Delta P = -4\% \)
• Percentage increase in expenditure: \( \Delta E = +2\% \)

Analysis:

1. Total Expenditure and Price Elasticity:

• When the price of a good decreases, if the total expenditure increases, this typically indicates that the demand is elastic.
• This is because, in the case of elastic demand, the percentage increase in quantity demanded resulting from the price decrease is proportionally larger than the percentage decrease in price.

2. Elasticity Relationship:

• The price elasticity of demand (PED) can be expressed as:
  PED = \(\frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}\)
• Since the expenditure increased, the increase in quantity demanded must be proportionally greater than the decrease in price.

Since a 4% decrease in price resulted in a 2% increase in expenditure, it suggests that the demand is elastic, meaning the absolute value of the price elasticity of demand is greater than 1 (|PED| > 1). This indicates that the quantity demanded is quite responsive to changes in price.