# Theory of Consumer Behaviour Class 12 Economics Important Questions

Please refer to Theory Of Consumer Behaviour Class 12 Economics Important Questions with solutions provided below. These questions and answers have been provided for Class 12 Economics based on the latest syllabus and examination guidelines issued by CBSE, NCERT, and KVS. Students should learn these problem solutions as it will help them to gain more marks in examinations. We have provided Important Questions for Class 12 Economics for all chapters in your book. These Board exam questions have been designed by expert teachers of Standard 12.

## Class 12 Economics Important Questions Theory Of Consumer Behaviour

Question: When does a good is called ‘Inferior Good’?
Answer: If the income effect of a commodity is negative, it is called ‘Inferior Good’.

Question: When does a good is called ‘Normal Good’?
Answer: If the income effect of a commodity is positive and price effect is negative, it is called ‘Normal Good’.

Question: Write equation of Budget line
Answer: M = Px . X + Py . Y

Question: Define Market Demand.
Answer: Market Demand refers to various quantities that all the consumers in a market are ready and able to purchase at various prices in a given period of time.

Question: What is the meaning of Marginal Rate of Substitution?
Answer: MRS is the rate at which a consumer is willing to substitute good Y for good X, assuming that there is no change in the level of satisfaction.

Question: Why the demand of water is Inelastic?
Answer: Because water is a necessary good.

Question: What is the meaning of ‘Monotonic Preference’.
Answer: Consumer’s preference is called monotonic when between any two bundles, consumer give preference to that bundle, which contains more quantity of at least one commodity and not less quantity of other commodity.

Question: Write equation of Budget set
Answer: Px . X + Py . Y ≤ M

Question: Explain how the demand for a good is affected by the price of its substitute goods. Give examples.
Answer: Related goods are either substitutes or complementary.
Substitute Goods : When price of a substitute falls, it becomes cheaper than the given good. So the consumer substitutes it for given good then demand of given good will decreases.
Similarly, a rise in the price of substitute will result in increase in the demand for given good. For example : Tea and Coffee.

Question: Given price of a good, how does a consumer decide as to howmuch of that good to buy?
Answer: Consumer purchases upto the point where marginal utility is equal to the price (MU = P). So long as marginal utility is greater than price, he keeps on purchasing. As he makes purchases MU falls and at a particular quantity of the good MU becomes equal to price. Consumer purchases upto this point.

Question: Distinguish between increase in demand and increase in quantity demanded of a commodity.

Answer: When demand increase at given price due to the change in other factor. It is called increase in demand. On the other hand when other things remain constant and demand increase by decrease in the price of a commodity then, it is called increase in quantity demanded.

Question: A consumer consumes only two goods X and Y. State and explainthe conditions of consumer’s equilibrium with the help of utility analysis.
Answer: There are two conditions of consumer equilibrium.
Explain :
(i) MUx /PX=MUY/PY
When MUX/PX>MUY/P
In this case, the consumer is getting more marginal utility per rupee in case of good x as compared to good y. Therefore, he will buy more of x and less of y. This will lead to fall in MUx and rise in MUy. The consumer will continue to buy more of x till MUX/PX=MUY/PY
When MUX/PX<MUy/Py
In this case the consumer is getting more
Therefore, he will buy more of y and less of x. This will lead to fall in MUy and rise in MUx. The consumer will continue to buy more of y till  MUX/PX=MUy/Py

(ii) MU falls as consumption increases : If MU does not fall as consumption increases the consumer will end up buying only good which is unrealistic or consumer will never reach the equilibrium position.

Question: Explain any four factors that affect price elasticity of demand.
1. Nature of Commodity : Necess asities like Salt, Kerosene oil etc. have inelastic demand and luxuries have elastic demand.
2. Availability of substitutes : Demand for goods which have close substitute is relatively more elastic and goods without close substitutes have less elastic demand.
3Different uses : Commodities that can be put to different uses have elastic demand for instance electricity has different uses.
4. Habit of the consumer : Goods to which consumer become habitual will have inelastic demand.
Example : Liquor and Cigarette.

Question: Explain relationship between total utility and marginal utility with help of a schedule.

(1)As long as MU decreases but is positive, TU increases at decreasing rate.
(2)When marginal utility is equal to zero then total utility is maximum.
(3)When marginal utility is negative. Total utility starts diminishing.

Question: Distinguish between Normal Goods and Inferior Goods. Explain with Example.
Answer: Normal Goods : These are the goods the demand for which increase as Income of the buyers rise. There is a positive
relationship between Income and demand or in case of normal goods income effect is positive.
Inferior Good : There are the goods the demand for which decreases as income of buyer rises. Thus, there is negative relationship between income and demand or income effect is negative.

Question: Define marginal utility. State the law of diminishing marginal utility.
Answer: Marginal Utility : It is addition to the total utility as consumption
is increased by one more unit of the commodity.
Law of Diminishing Marginal Utility : It states that as consumer consumes more and more units of a commodity, the utility derived from each successive unit goes on decreasing. According to this law TU increases at decreasing rate and MU decreases.

Question: Explain the conditions of consumer’s equilibrium using indifference curve analysis. Use diagram.
Answer: There are two conditions for consumer’s equilibrium.
(i) MRS = Px/Py
(ii) MRS is continuously falling.

Explanation

Suppose there are two goods X and Y the first condition of consumer’s equilibrium is MRS must be equal to the ratio of prices of two goods Px Py If MRS > Px/Py, It means consumer values X more than what market values and willing to give more price than market price, he will purchase more of X this cause fall in MRS and it will continue up to that when MRS = Px/Py.
If Px MRS.<Px/Py. It means consumer values X less than what market values.
Consumer is willing to give less price than market price and he will purchase less of X, by this MRS will increase and it will continue till MRS. =PX/PY.

(ii) MRS is continuously falling unless the equality between the MRS and Px/Py will not be reached.

Consumer is in equilibrium at point E. OX of X and OY of Y is optimum bundle of both goods.

Question: Explain the three properties of indifference curves.
Answer: Three properties of indifference curves are as follows :
1. Slopes downward from left to right : To consume more of one good the consumer must give up some quantity of the other good so that satisfaction remains at the same level.
2. Convex towards the origin : MRS declines continuously due to the operation of the law of diminishing marginal utility.
3. Higher indifference curves represents higher utility :
Higher indifference curve represent large bundle of goods.
Which means more utility because of monotonic preference.

Question: Why does demand curve slope downwards?
Answer: Following is the cause why demand curve slope downward –
(i) Law of Diminishing Marginal Utility : According to this law, as consumption of the commodity increases, marginal utility of successive unit goes on diminishing to a consumer.
Accordingly, for every additional unit, consumer is willing to pay less and less price.

Question: A consumer consumes only two goods X and Y both priced at Rs.
3 per unit. If the consumer chooses a combination of these two goods with Marginal Rate of Substitution equal to 3, is he consumer in equilibrium? Give reason. What will a rational consumer do in this situation? Explain.
Answer: Given Px = 3, Py = 3 and MRS = 3, A consumer is said to be in

Therefore consumer is not in equilibrium. Px MRS >Px/Py means that consume is willing to pay more for one more unit of x as compared to what market demands. The consumer will buy more and more of x. As a result MRS will fall due to the law of Diminishing Marginal Utility. This will continue till MRS= px/py and consumer is in equilibrium again.

Question: A consumer consumes only two good x and y whose prices are Rs. 4 and Rs. 5 per unit respectively. If the consumer chooses a combination of the two goods with marginal utility of X equal to 5 and that of Y equal to 4, is the consumer in equilibrium? Give reason.
What will a rational consumer do in this situation? Use utility analysis
Answer: Given Px = 4, Py = 5 and MUx = 5, MUy = 4, and consumer will be
in equilibrium when MUX/PX=MUY/PY Substituting values, we find that 5/4>4/5 or MUX/PX>MUy/Py

Since per rupee MUx, is higher than per rupee MUy, consumer is not in equilibrium.
The consumer will buy more of x and less of y, As a result MUx will fall and MUy will rise. The reaction will continue till MUx/Px and MUy/Py
are equal and consumer is in equilibrium again.

Question: Explain the effect of change in Income of the consumer on the demand for a good.
Answer: Normal Goods : In the situations when the income increases consumer will increase the demand of Normal goods and if the Income decreases consumer will decrease the demand of normal good, because in normal goods, income effect is positive.
Inferior Goods : In the situations when the Income decreases consumer will increase the demand of inferior goods and if the income increases a consumer will decrease the demand of inferior good because in inferior goods, income effect is negative.