Introduction Important Questions for Class 12 Economics Consumer’s Equilibrium Through Utility Approach
1.Consumer’s Equilibrium It refers to a situation wherein a consumer gets maximum satisfaction from the purchases of given units of the commodity with his given income.
2.Cases of Consumer’s Equilibrium using Marginal Utility Analysis The conditions of consumer’s equilibrium using Marginal Utility analysis is studied under two situations.
(i) When only one commodity is consumed.
(ii) When two or more commodities are consumed.
3.Equilibrium in Case of Single Commodity
In case of single commodity, consumer attains equilibrium, when
Where, MU
X
= Marginal Utility of V, P
x
= Price of V MU m = Marginal Utility of money.
Assumption of equilibrium (One-commodity case)
(a)Cardinal measurement of utility
(b)Price of commodity and income of consumer is constant.
4.Equilibrium in Case of Two Commodities In case of two commodities, consumer attains equilibrium,when
Previous Years Examination Questions
1 Mark Question
1.What is meant by consumer’s equilibrium? (Delhi 2011c, 2010,2009)
Ans . Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction from the purchase of the commodity with the given income.
3 Marks Questions
2.A consumer consumes only two goods and is in equilibrium. Show that price and demand for a good are inversely related. Explain using utility analysis.
or
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. (All India 2012)
Ans. If the price of x falls, the consumer gets greater Marginal Utility than in case of good y. Accordingly, he will spend more on x than y. As consumption of x rises, MU X will fall. On the other hand, as consumption of y falls, MU y will rise. The consumer will stop buying more of x in place of y only when
Hence, we can only say that price and demand are negatively related.
3.Explain the conditions of consumer’s equilibrium with the help of utility analysis. (Delhi 2013) or
Explain the conditions of consumer’s equilibrium under utility analysis.(All India 2013)
Ans. Conditions of consumer’s equilibrium using utility approach are as follows:
Where, MU X is Marginal Utility of commodity x; MU y is Marginal Utility of commodity y; P x is price of commodity X and P y is price of commodity y.
(ii) Marginal Utility of money remains constant.
(iii) Law of Diminishing Marginal Utility must hold good, implying that Marginal Utility must decline as more of a commodity is consumed.
4.If a price of a good is given, how does a consumer decide as to how many units of that good to buy? Explain. (hots; Delhi 2012; All India 2009,2008)
Ans. Given price of a good, a consumer decides on the basis of the following conditions:
Total gain falls as more is purchased after equilibrium.
If MU X > P x
Consumer keeps on consuming more units. When he consumes more units, the additional utility derived from consuming x keeps on falling. He keeps on consuming till MU X = P x If MU X < P x .
He will decrease the consumption of x. When he decreases the consumption of x, the Marginal Utility of x will increase. He will keep on decreasing consumption of x till MU X = P x .
Thus, MU X = P x is the condition for consumer’s equilibrium in a single commodity case.
5.What is meant by consumer’s equilibrium? State its condition in case of a single commodity. (Delhi 2006)
Ans . Consumer’s equilibrium refers to a situation wherein a consumer gets maximum satisfaction from the purchase of the commodity with the given income.
Given price of a good, a consumer decides on the basis of the following conditions:
Total gain falls as more is purchased after equilibrium.
If MU X > P x
Consumer keeps on consuming more units. When he consumes more units, the additional utility derived from consuming x keeps on falling. He keeps on consuming till MU X = P x If MU X < P x .
He will decrease the consumption of x. When he decreases the consumption of x, the Marginal Utility of x will increase. He will keep on decreasing consumption of x till MU X = P x .
Thus, MU X = P x is the condition for consumer’s equilibrium in a single commodity case.
4 Marks Questions
6.Given the price of a good, how will a consumer decide as to how much quantity of that good to buy? Use utility analysis. (All India 2014)
Ans . Given price of a good, a consumer decided how much quantity of that good to buy on the basis of the following conditions: –
Total gains falls as more is purchased after equilibrium.
Case I: If MU x (money) > P x
Consumer keeps on consuming more units. When he consumes more units, the additional utility derived from consuming X keeps on falling. He keeps on consuming till MU X = P x
Case II : lfMU x (money)< P x
He will decrease the consumption of X, when he decreases the consumption of X, the Marginal Utility of X will increase. He will keep on decreasing consumption of X till MU X = P x .
Thus, MU x (money) = P x is the conditioner consumer’s equilibrium in a single commodity case.
7.What are the conditions of consumer’s equilibrium under utility analyis? (All India 2011)
Ans. Conditions of consumer’s equilibrium using utility approach are as follows:
Where, MU X is Marginal Utility of commodity x; MU y is Marginal Utility of commodity y; P x is price of commodity X and P y is price of commodity y.
(ii) Marginal Utility of money remains constant.
(iii) Law of Diminishing Marginal Utility must hold good, implying that Marginal Utility must decline as more of a commodity is consumed.
8.A consumer consumes only two goods x and y. State and explain the conditions of
consumer’s equilibrium, with the help of utility analysis. . (hots; Delhi 2011)
Ans.
9.A Consumer consumes only two goods X and Y.At a consumption level of these two goods, he finds that the ratio of Marginal utility to price in case of X is higher than in case of Y. Expalin the reaction of the consumer. (All India 2011)
Ans.
6 Marks Questions
10.A consumer consumes only two goods. Explain consumer’s equilibrium with the help Of Utility analysis.
(Delhi 2014; Compartment 2014)
or
A consumer consumes only two goods A and B and is in equilibrium. Show that when price of good B falls, demand for B rises. Answer this question with the help of Utility analysis. (All India 2014, Froiegn 2014)
Ans
. In case of two commodities, consumer attains equilibrium, when
(i)
It implies that in state of equilibrium utility per rupee from good X must be equal to utility per rupee from good Y.
The above condition can also be written as
It implies that in state of equilibrium, ratio of Marginal Utilities of two commodities is equal to the ratio of their prices.
It implies that in state of equilibrium utility per rupee obtained by the consumer from good X or good Y should be equal to Marginal Utility of money.
Assumption : P
x
= P
y
= 1 per unit)of utility analysis.
In case of two commodities, consumer attains equilibrium, when
That is, Marginal Utility of a rupee spent on good A is equal to the Marginal Utility of rupee spent on good B, which is equal to the Marginal Utility of money,
i.e. MU
(A)
P
(A)
= MUgPg = MU
m
If price of good B falls, then the value of the fraction (i.e. MUgPg) increases. Mathematically, this implies.
MUgPg >MU
a
P
a
=MU
m
In such a situation, the demand for good B rises and consumer would increase his consumption of good B. He will continue to increase his consumption of good B untill the equality between the Marginal Utilities of each of the goods become equal to the Marginal Utility of money. At this situation, the equilibrium is restored. That is, MU^P
A
= MUgPg = MU
m
11.Explain the conditions of consumer’s equilibrium in case of
(i)single commodity (ii) two commodities
Use utility approach. (Delhi 2009)
Ans
.
(i) Consumer equilibrium in case of single commodity
Consumer is at equilibrium with respect to purchase of one good only where MU in terms of Money = Price:
(ii) Consumer’s equilibrium in case of two commodities
12.A consumer consumes only two goods. What are the conditions of consumer’s equilibrium in the utility approach? Explain the changes that will take place when the consumer is not at equilibrium. (Delhi 2009c)
Ans.
Conditions of Consumer’s equilibrium
Where, MU
X
is Marginal Utility of commodity x; MU
y
is Marginal Utility of commodity y; P
x
is price of commodity X and P
y
is price of commodity y.
(ii) Marginal Utility of money remains constant.
(iii) Law of Diminishing Marginal Utility must hold good, implying that Marginal Utility must decline as more of a commodity is consumed.if
By spending a rupee on good x, the consumer gets greater Marginal Utility than in case of good y. Accordingly, he will spend more on x than y. As consumption of x rises, MU
X
will fall. On the other hand, as consumption of y falls, MUy will rise. The consumer will stop buying more of x in place of y only when
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