INDIAN SCHOOL AL WADI AL KABIR

MACRO-ECONOMICS-XII

CONSUMER EQUILIBRIUM AND DEMAND

1 mark questions:

1.Define budget set of a consumer.

2.Explain the meaning of equilibrium for a rational consumer.

3.What is meant by demand in economics?

4.What is law of demand?

5.Define the following:

a.Normal good

b.Inferior good

c.Substitute good

d.Complementary good

6.If a good can be used for many purposes, the demand for it will be elastic. Why?

7.A budget set is a collection of such bundles of goods that give same satisfaction. True or false? Give reasons.

8.State whether demand for luxuries is elastic or inelastic. Why?

9.“If a product price increases, a family‘s spending on the product has to increase”. Defend or refute.

10.How is PED affected by;

a.Number of substitutes available for the good.

b. Nature of the good.

3-4mark questions:

  1. Explain the concept of marginal utility by giving a numerical example.
  2. State and explain the Law of diminishing marginal utility with the help of a numerical example.
  3. Given price of a good, how does a consumer decide as to how much of that good to buy?
  4. A consumer consumes only two goods X and Y and is in equilibrium. Price of x falls. Explain the reaction of the consumer through the utility analysis.
  5. Distinguish between a normal good and an inferior good. Give examples.
  6. Goods X and Y are substitutes. Explain the effect of fall in price of Y on demand for X.
  7. Explain the distinction between ‘change in demand’ and ‘change in quantity demanded’.
  8. Distinguish between individual demand curve and market demand curve.
  9. Explain how rise in income of a consumer affects the demand of a good. Give examples.
  10. Why does a demand curve slope downwards? Explain.
  11. Explain the relationship between

a. prices of other goods and demand for the given good.

b. income of the buyers and demand for a good.

  1. Explain two causes of ‘decrease’ in demand for a commodity.
  2. What happens to the budget set if both the prices as well as the income double?
  3. Which of the following commodities have inelastic demand? Give reason.

Salt, a particular brand of lipstick, medicine, mobile phone and school uniform.

  1. Draw and explain the different types of price elasticity of demand.
  2. Explain the geometric method of measuring price elasticity of demand.
  3. How does the availability of close substitutes of a good affect the price elasticity of demand of that good? Explain.
  4. ‘’ if a product price increases, a family s spending on the product has to increase.’’ Defend or refute.
  5. Explain the factors affecting the magnitude of price elasticity of demand.
  6. Ice cream sells for Rs.20.Rita who likes ice-cream, has already consumed 4. Her MU of one rupee is 4. Should she consume more ice-cream or stop the consumption?
  7. Distinguish between cardinal utility and ordinal utility.
  8. Why is an indifference curve strictly convex? Explain.
  9. Distinguish between budget set and budget line. Use diagram.
  10. Distinguish between change in demand and change in quantity demanded of a commodity.
  11. State three causes for a rightward shift of a demand curve.
  12. There is a mass campaign against consuming tobacco in the country. Explain and show graphically, its likely impact on market demand for tobacco.
  13. Government aims at discouraging consumption of junk food but only through the market .what, any one, option is available to the government to influence the market demand for junk food. Explain.
  14. Draw a downward sloping straight line demand curve. Indicate the points on this demand curve, where Ep = 0, Ep = 1, Ep =infinity.
  15. Why is demand for water inelastic?
  16. Explain monotonic preference with an example.

6mark questions:

  1. Explain the conditions of equilibrium assuming that consumer consumes only two goods.
  2. Explain consumer’s equilibrium with the help of indifference curve analysis. Use diagram.
  3. Draw a negatively sloped straight line demand curve joining two axes. How is price elasticity of demand measured at a given point on the demand curve?
  4. Explain the relationship between price elasticity of demand and total expenditure with the help of a table.
  5. Explain the properties of indifference curves.

HOTs:

  1. The theory of indifference curve depends on the level of income. Discuss.
  2. Consumer’s equilibrium is price sensitive. Do you agree? Substantiate your answer.
  3. Why does marginal utility become zero at the highest point of total utility?
  4. During economic depression consumer’s equilibrium shifts leftward. Do you agree? Why or why not?

MCQ s:

  1. The supply curve of a commodity implies
  1. actual product of a good
  2. stock available for sale
  3. Total existing stock of the good.
  1. The amt of goods offered for sale at different prices, per unit of time

2. If with rise in price of good Y , demand for good X rises, the two goods are;

a.Substitutes

b.Complements

c.Not related

d.Jointly demanded

  1. A consumer consumes only two goods. If price of the goods falls, the indifference curve;

a.Shifts upwards

b.Shifts downwards

c.Can shift both upwards or downwards

d.Does not shift

  1. Price elasticity of supply of a good is 2, it shows that;

a.When supply rises by 1%,price rises by 2%

b.When supply falls by 1%, price rises by 2%

c.When price rises by 1% , supply rises by 2%

d.When price falls by 1%, supply rises by 2%

  1. On account of a fall in the price of crude oil in the international market, price of diesel has fallen in the domestic market. What kind of change in terms of the budget line of; given consumer will take place, who spends his entire income on goods X and Y, of which X is diesel? Explain.
  2. government reduces railway fare between two zones A & B .this will lead to ;

a.downward movement on its demand curve

b.rightward shift of its demand curve

c.leftward shift of its demand curve

d.upward movement on its demand curve

  1. Total utility is maximum when

A .MU=1

b. MU=0

C. MU is positive

d. MU is negative

  1. Total utility increases at an increasing rate when marginal utility;
  1. Decreases
  2. Increases
  3. Stays constant
  4. Becomes negative
  1. A demand curve shifts due to change in;

a. Tastes

b. Income

c. Price of the related goods

d. All the above

  1. Spot the inferior good;

a. Wheat

b. Bajra

c. Rice

d. None of the above.

  1. PED measure shows;
  1. Response of price to change in demand

b. Response of demand to change in price

c. Degree of response of price to change in demand.

d. Degree of response of demand to change in price.

NUMERICALS:

1.A consumer buys 80 units of a good at a price of Rs.4 per unit. When the price falls, he buys 100 units. If PED is (-) 1, find out the new price.

2.Price of a good falls from Rs.10 to Rs.8. as a result its demand raises from 80 units to 100 units. What can you say about PED by considering total expenditures?

3.A 5 % fall in the price of x leads to a 10% rise in demand for x . a 2% rise in the price of y leads to a 6% fall in demand for y. calculate the PED of x and y.

4.A consumer spends Rs 400 on a good priced at Rs 4 per unit. When the price rises by 25%, the consumer continues to spend Rs 400. Calculate the price elasticity of demand by percentage method.

BOARD QUESTIONS:

  1. Why is minus sign attached to the measure of price elasticity of demand of a normal good in comparison to the plus sign attached to the measure of price elasticity of supply? (3m)
  2. Explain the meaning of Diminishing marginal Rate of substitution with the help of a numerical example. (4m)
  3. Explain the Law of DMU with the help of an example. (4m)
  4. A consumer consumes only two goods, each priced at Rs2 per unit. If the consumer chooses a combination of the two goods with MRS=2, is the consumer in equilibrium? Give reasons. Explain what will a rational consumer do? (6m)
  5. A consumer consumes only 2 goods X and Y whose prices are Rs 2 nd re 1 respectively. If the consumer chooses a combination of the two goods with MU of X being 4 and that of Y being also 4, is the consumer in equilibrium? Give reasons. Explain what will a consumer do in this situation? Use MU analysis. (6m)

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