NCERT Solutions for Class 12 Economics (Microeconomics) Chapter 2 Theory of Consumer Behavior

NCERT
SOLUTIONS
CLASS - 12th

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Class : 12th

Subject : Economics

Chapter : 2

Chapter Name : Theory of Consumer Behaviour

Q1 What do you mean by the budget set of a consumer?

Answer. Budget set of a consumer refers to various combinations of two commodities that a
consumer can buy within the income available with the consumer and price of the commodities
given.

It is given by .

Page : 34 , Block Name : Exercises

Q2 What is budget line?

Answer. Budget line is the locus of various combinations of two commodities that a consumer
can buy given the income and price of the commodities. Entire income is spent on buying both

the commodities. Budget line can be expressed as .where,

M= Money income of consumer

X= No. of units of commodity X

Y= No. of units of commodity Y

= Price of commodity X

= Price of commodity Y

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

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Page : 34 , Block Name : Exercises

Q3 Explain why the Budget line is downward sloping?

Answer. Budget line is the locus of various combinations of two commodities that a consumer
can buy given the income and price of the commodities; and entire income is spent on buying
both the commodities. It is expressed as .; where, M is the money income of the consumer, X
and Y are the two commodities and Px and Py are the respective prices.

Now, if a rational consumer wants to increase the consumption of commodity X, he has to
decrease the consumption units of commodity Y because he has income constraint M. Thus the
budget line is downward sloping from left to right as to remain in the given budget constraint.
Thus we can say that increase in consumption of 1 good leads to decrease in consumption of
another given the income and price of both the commodities .

Page : 34 , Block Name : Exercises

Q4 A consumer wants to consume two goods. The prices of two goods are Rs. 4 and Rs 5
respectively. The consumer's income is 20.

i) Write the equation of the budget line.

ii) How much of good 1 can consumer consume if he/she spends his/her entire income on that
good.

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

iii) How much of the good 2 can the consumer consume if he/she spends his/her entire income
on that good.

iv) What is the slope of the budget line?

Answer.

i) Let the units of the two commodities be X and Y.

Equation of the budget line is .and here in the above is 20=4x +5y.

ii) .

20= 4x+5y

Now, y=0; Therefore, 4x=20 and x=5.

Hence, 5 units of good 1 can be consumed if the consumer spends entire income on that good.

iii) .

20= 4x=5y

Now, x=0: Therefore, 20=5y and y=4

Hence, 4 units of good 2 can be consumed if the consumer spends entire income on that good.

iv) Slope of the budget line = -

=-

= - 0.8

Note: (-) sign has been given because budget line is negatively sloped.

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

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Page : 34 , Block Name : Exercises

Q5 How does the budget line change if consumer’s income increases to Rs. 40 but price
remains unchanged?

Answer. The equation of new budget line will be ​ which is equal to 40= 4x +
5y

The budget line will shift parallely in the rightward direction because the money income of
consumer increases.

Here, is the rightward shift of the budget line when the income of the consumer increase
with the price of the two commodities remaining the same.

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

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Page : 34 , Block Name : Exercises

Q6 How does the budget line change if price of good 1 and consumer income remains
unchanged?

Answer. Budget line given by .will in this case be 20= 4x+4y because of
price of commodity Y decreases s form Rs. 5 to Rs. 4.

Since, the price of good X and income of consumer remains unchanged there will be an
increase in the units of commodity Y and the budget line will rotate outwards as the real income
of consumers increases with decrease in the price of commodity Y.

Hence, LB’ (20= 4x=4y) is the outward shift budget line of the earlier budget line LB (20= 4x=5y)
as the real income of consumer increases with decrease in price Y.

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

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Page : 34 , Block Name : Exercises

Q7 What happens to Budget set if both price as well as income doubles.

Answer. Old Case,

M= 20, = Rs. 4, = Rs. 5

Budget line is 20= 4x+5y

Slope = - =- = -0.8

New Case,

M= 40, = Rs. 8, = Rs. 10

Budget line is 40= 8x+10y

Slope= - =- = -0.8

Thus we can say that though the income has increased yet rise in the price of the commodity
has no effect as due to rise in price the increase in income is compensated in budget equation.
Therefore, the Slope of the budget line will remain constant in both the cases. Hence, there will
be no shifting and no rotation in both the cases.

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No shift in budget line.

Page : 34 , Block Name : Exercises

Q8 Suppose a consumer can afford to buy 6 units of goods 1 and 8 units of good 2 if he spends
her entire income. The prices of two goods are Rs. 6 and Rs. 8 respectively. How much is the
consumer's income?

Answer. Price of good 1= Rs. 6

Units of good 1 = 6

Money spent on good 1 =Price of good1 × No of units= 6×6 = 36.

Price of good 2= Rs. 8

Units of good is 8

Money spent on good 2= Price of good × No of units = 8×8 = 64

.

=36+64 = 100

Therefore, Money income is Rs. 100.

Here the consumer will spend entire income of Rs. 100 on both the commodities given the price
of both the goods so as to lie on budget line.

Page : 34 , Block Name : Exercises

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Q9 Suppose a consumer wants to consume two goods which are available only in integer units.
The two goods are equally priced and at Rs. 10 and consumer income is 40.

i) Write down all the bundles available to the consumer.

ii) Among the bundles available to the consumer, identify those which cost her exactly 40.

Answer. The possible bundles of 2 units are, within the budget set => 40 ​>
10x+10y,

These bundles will cost either equal or less than the cost that is 40. Bundles here refers to all
the possible combinations of 2 units that can be available to the consumer in a given cost and
income.

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

b) (1,0) (1,2) (1,2) (1,3)

c) (2,0) (2,1) (2,2)

d) (3,0) (3,1)

e) (4,0)

ii) The bundle that will cost exactly Rs. 40 are (0,4) (1,3) (2,2) (3,1), (4,0) as budget line is
which is equal to 40 = 10x+10y

Page : 34 , Block Name : Exercises

Q10 What do you mean by monotonic preference?

Answer. Monotonic preference refers to a situation which advocates two important situations
with regard to combination of commodities-

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

i) An increase in the consumption of one commodity is essential as compared to previous
combination

ii) But there cannot be a decrease in the consumption of other commodity as compared to
previous combination.

In other words monotonic preference refers to a condition in which consumption of one
commodity must increase whereas that of other commodity cannot decrease as compared to
previous combination.

Page : 34 , Block Name : Exercises

Q11 If a consumer has monotonic preference can she be indifferent between bundles (10,8)
and (8,6).

Answer. Monotonic preference refers to a situation which advocates two important situations
with regard to combination of commodities

i) There must be an increase in the consumption of one commodity as compared to previous
combination

ii) But there cannot be a decrease in consumption of other commodity as compared to
previous combination.

Here consumer can't be indifferent between two bundles preferring (10,8) more than (8,6)
because it has more unit of both the commodities. So, (10,8) will give him more satisfaction as
compared to (8,6).

Page : 34 , Block Name : Exercises

Q12 Suppose a consumer preference is monotonic. What can you say about her preference
ranking over the bundles (10,10), (10,9) and (9,9)?

Answer. Monotonic preference refers to a situation which advocates two important situations
with regard to combination of commodities

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

i) There must be an increase in the consumption of one commodity as compared to previous
combination

ii) But there cannot be a decrease in consumption of other commodity as compared to
previous combination.

Consumer will rank his preference in the following order : (10,10) > (10,9) > (9,9) because
consumer will prefer more number of units to attain higher satisfaction as per monotonic
preference.

Page : 34 , Block Name : Exercises

Q13 Suppose your friend is indifferent to bundles (5,6) and (6,6). Are the preferences of your
friend monotonic?

Answer. Since my friend is indifferent to bundles (5,6) and (6,6) it implies preference is not
monotonic. Consumer will derive the same satisfaction from both the bundles as he is indifferent
to them. But as (6,6) has more units than(5,6), he will prefer (6,6) over (5,6).

A monotonic consumer is one who will increase the consumption of one commodity without
decreasing the consumption of the other commodity as compared to the previous consumption.

Page : 35 , Block Name : Exercises

Q14 Suppose there are two consumers in the market for a good and their demand functions are
as follows:

for any price less than or equal to 20 and at any price greater than
20.

for any price equals to 15 and at any price greater than 15. Find out
market demand function.

Answer. In the given demand functions first consumer does not demand goods for any price
above 20 and the second consumer for any price above 15. So, the market demand will be an
aggregate of the demand for both consumers.

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Therefore,

= (20-p) + (30-2p), for p <15

= 50-3p ,for p<15

For 15 ​<​ p ​<​ 20 , demand = (20 - p) + 0 = 20-p

For p ​>​ 20, D = 0 + 0 = 0

Hence demand function is -

{ 50- 3p, p < 15

{20 - p, 15 ​<​ p ​<​ 20

{0, p ​>​ 20

Page : 35 , Block Name : Exercises

Q15 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 d(p)= 0 for any price greater than 10/3.
What is the market demand function?

Answer. For a single consumer is 10-3p for any price equal to 10/3 and 0 for a price greater
than 10/3, the market demand for 20 consumers is D= 20(10-3p) for a price equal to or less
than 10/3 and for a price greater than 10/3.

So, the demand function will be as follows -

{20(10- 3p), p ​<​ 10/3

{0, p > 10/3

= { 200 - 60p, p ​<​ 10/3

{ 0, p > 10/3

Page : 35 , Block Name : Exercises

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Q16 Consider a market where there are just two consumers and suppose their demand for
goods are given below:

P

1 9 24

2 8 20

3 7 18

4 6 16

5 5 14

6 4 12

Calculate market demand for that good.

Answer. Market demand refers to the aggregate of demand of all the individuals in the market.

Market Demand:

P

(Market Demand)

1 9 24 9 + 24 = 33

2 8 20 8 + 20 = 28

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3 1 18 7 + 18 = 25

4 6 16 6 + 16 = 22

5 5 14 5 + 14 = 19

6 4 12 4 + 12 = 16

Page : 35 , Block Name : Exercises

Q17 What do you mean by a normal good?

Answer. Normal goods are goods which have positive income effect and negative price effect.
Positive income effect means as income increases consumer will increase his demand for that
good and vice-versa. Negative price effect implies with increase in the price of the good, the
demand for it will decrease and vice-versa.

Page : 35 , Block Name : Exercises

Q18 What do you mean by an Inferior good? Give some examples.

Answer. Inferior goods refer to those goods which have negative income effect and positive
price effect. Negative income effect implies with increase in income, demand decreases and
vice versa. Positive price effect means with the decrease in price, the demand also decreases
and vice-versa. Ex. low quality rice, kerosene Lamps etc.

Page : 35 , Block Name : Exercises

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Q19 What do you mean by substitutes ? Give examples of goods which are substitutes of each
other.

Answer. Substitute goods are those goods which can be consumed in place of one another.
They give the consumer almost same satisfaction.Two goods X and Y are said to be substitute
goods when the increase in the price of good X leads to an increase in demand for good Y. Ex.
tea and coffee, Pepsi and Coca cola. Now if the price of Pepsi goes up, consumers can easily
substitute it with coca cola thus increasing the demand of coca cola and vice versa. So this is an
example of substitute goods.

Page : 35 , Block Name : Exercises

Q20 What do mean by complements? Give examples of goods which are complementary to
each other.

Answer. Two goods X and Y are complementary goods if increase in the price of X lead to
decrease in demand of Y. Complementary goods are those goods which are used together to
get the required satisfaction. These goods are consumed together. Ex. petrol and car are
complementary to each other. Now if the price of petrol rises demand for cars will decrease and
vice versa. Thus here price of goods and demand of its complementary good moves in opposite
direction.

Page : 35 , Block Name : Exercises

Q21 Explain price elasticity of demand?

Answer. Price elasticity of demand refers to the degree of responsiveness of change in quantity
demanded due to a change in price.

Price elasticity of demand = Percentage change in quantity demanded / percentage change in
price

= (ΔQ ×100/ Q) ÷ (ΔP × 100/ P)

= (ΔQ/ ΔP) ÷ (P/Q)

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Here delta Q is change in quantity demanded and delta P is change in price. P and Q are
original price and quantity demanded of the commodity respectively.

Page : 35 , Block Name : Exercises

Q22 Consider the demand for a good at price Rs. 4, the demand for the good is 25 units.
Suppose price of good increases to Rs. 5 and as a result the demand for good falls to 20 units.
Calculate price elasticity.

Answer. Price elasticity of demand refers to the degree of responsiveness of change in quantity
demanded due to a change in price.

= Rs. 4

= 25 units

= Rs. 5

= 20 units

Ed = Proportionate change in quantity demanded/Proportionate change in price

=-

= - 0.8

Therefore, . Price elasticity is less than 1.

Page : 35 , Block Name : Exercises

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Q23 Consider the demand curve D(p) = 10-3p. What is elasticity at price 5/3?

Answer. Given that the demand curve of the firm is

q = 10 - 3p.

At price = 5/3, quantity demanded is = 10 - 3 × 5÷ 3 = 5.

Again, Δq = 3Δp (From the given equation).

Hence, Δq/Δp = 3.

Price elasticity = (Δq/Δp) × (p/q)

= 3 × 5/3 ÷ 5

=5÷5

= 1.

Page : 35 , Block Name : Exercises

Q24 Suppose the price elasticity of demand for a good is -0.2. If there is a 5% increase in price,
by what percentage will demand for good go down?

Answer. = Percentage change in quantity demanded/ Percentage change in price

-0.2 = Percentage change in quantity demanded/ 5%

Therefore, the percentage change in quantity demanded is -1%

Hence, Demand for goods will go down by 1%.

Page : 35 , Block Name : Exercises

Q25 Suppose the price elasticity of demand for the good is 0.2. How will the expenditure on
good be affected if there is a 10% increase in the price of goods?

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Book : Introductory Microeconomics Ncert Solutions | Chapter - 2 Economics

Answer. Since price elasticity of demand is -0.2, the good has inelastic demand ; therefore, a
10% increase in price will not affect demand to a great extent. It will be nearly the same. In case
when the elasticity of goods is defined as inelastic , there exists a positive relation between
expenditure and the price of the good. Thus demand remaining the same, price increasing will
ultimately increase the expenditure.. So the expenditure will rise with 10% increase in price.

Page : 35 , Block Name : Exercises

Q26 Suppose there was a 4% decrease in the price of a good and as a result, the expenditure
on good increased by 2%. What can you say about the elasticity of demand?

Answer. Elasticity of demand is greater than 1 because with 4% decrease in price, the
expenditure rises by 2% which implies the demand increases in good proportion. Hence the
commodity has elastic demand.

The formula for computing the elasticity is -

Change in Expenditure = Change in Price {q+ (1+ed)}.

ΔE = Δp {q + (1 + ed)}

Since with a fall in the price, the total expenditure increases, hence the percentage rise in
demand is more than the percentage fall in the price. Hence, the elasticity of demand will be
greater than 1.

Page : 35 , Block Name : Exercises

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