chapter 2

Question 1

consumer

Answer 1

one who buys goods and services for satisfaction of wants.

Question 2

utility

Answer 2

want satisfying power of a commodity.

Question 3

total utility

Answer 3

total utility refers to total satisfaction obtained from the consumption if all possible units of a commodity.

Question 4

formula for total utility

Answer 4

1. TU(n)=U(1)+U(2)+U(3)……+U(n)
2. TU=sum of MU

Question 5

marginal utility

Answer 5

additional utility derived from the consumption of one more unit of the given commodity.

Question 6

formula for marginal utility

Answer 6

1. MU(n)=TU(n)-TU(n-1)
2. MU= change in total utility/change in number of units

Question 7

point of satiety

Answer 7

point or stage of maximum satisfaction

Question 8

relationship between TU and MU

Answer 8

1. TU increase in consumption of a commodity as long as MU is positive
2. when TU reaches its maximum, MU becomes zero
3. when TU falls MU become negative

Question 9

law of diminishing utility

Answer 9

as we consume more and more units of a commodity, the utility derived from each successive unit goes on decreasing.

Question 10

Assumptions of law of diminishing utility

Answer 10

1. cardinal measurement of utility
2. monetary measurement of utility
3. consumption of reasonable quantity
4. continuous consumption
5. no change in quality
6. rational consumers
7. Independent utilities
8. MU of money remains constant
9. fixed income and price
10. perfect knowledge

Question 11

consumer’s equilibrium

Answer 11

consumer’s equilibrium refers to the situations when a consumer is having maximum satisfaction with limited income and has no tendency to change his way of existing expenditure.

Question 12

initial utility

Answer 12

utility from the first unit of commodity

Question 13

consumer’s equilibrium in case of single commodity

Answer 13

when marginal utility from the commodity is cal to price paid for the commodity

Question 14

formula for consumer’s equilibrium in case of single commodity

Answer 14

marginal utility in terms of money= marginal utility in utils/ marginal utility of one rupee

Question 15

consumer’s equilibrium in case of two commodity

Answer 15

the ratio of mu to price is same in case of both goods and mu falls as consumption increases

Question 16

formula for consumer’s equilibrium in case of two commodity

Answer 16

mux/px =muy/py

Question 17

indifference curve

Answer 17

graphical representation of various alternate combination of goods which provide the same level of satisfaction to the consumer

Question 18

properties of indifference curve

Answer 18

1. curves slope downwards
2. always convex to origin
3. higher indifference curve represents higher levels of satisfaction
4. indifference curve represents higher level of staisfaction
5. indifference curve can never intersect each other

Question 19

indifference maps

Answer 19

a set of indifference curves representing various level of satisfaction of a consumer

Question 20

marginal rate of substitution

Answer 20

the rate at which commodities can be substituted with each other so that the total satisfaction of consumer remains same

Question 21

formula for marginal rate of substitution

Answer 21

units lost// units gained

Question 22

budget line

Answer 22

graphical representation of all possible combinations of two goods which can be purchased with given income and prices such that the cost of each of these combination is equal to the money income of a customers

Question 23

budget line formula

Answer 23

p1x1+p2x2=y

Question 24

budget set

Answer 24

set of all possible combination of two goods which a consumer can afford with his given income and prices in market

Question 25

budget line shifts

Answer 25

there is a change on the income of consumer or a change in the prices of commodities

Question 26

properties needed for consumer equiibilrum using indifference approach

Answer 26

slope of indifference curve id equal to slope of budget line