 ## NCERT Solutions for Class 12th Microeconomics Chapter 2 – Theory of Consumer Behavior

National Council of Educational Research and Training (NCERT) Book Solutions for class 12th
Subject: Economics
Chapter: Chapter 2 – Theory o Consumer Behavior

These Class 12th NCERT Solutions for Economics provide detailed, step-by-step solutions to all questions in an Economics NCERT textbook.

for Class 12 Economics Notes.

Class 12th Economics Chapter 2 – Theory of Consumer Behavior NCERT Solution is given below.

Question 1. What do you mean by the budget set of a consumer?

Answer Budget set is a set of all possible combinations of the set of two goods, which a consumer can afford at given price and income.

Question 2. What is budget line?

Answer Budget line represents different possible combinations of two goods which can be purchased by consumer with given income and prices, and the cost of each of these combinations is equal to the income of consumer.

Question 3. Explain why the budget line is downward sloping.

Answer The budget line is downward sloping because when more and more units of one good can be bought, it leads to decrease some units of
other good with the given income.

Question 4. A consumer wants to consume two goods. The prices of two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.
(i) Write down the equation of budget line.
(ii) How much of good 1 can the consumer consume if she spends her entire income on that goods?
(iii) How much of good 2 can she consume if she spends her entire income on that goods?
(iv) What is the slope of the budget line?

Answer (i) Assume Good 1 be X and Good 2 be Y

Price of X = Rs 4 (P= Rs 4)
Price of Y= Rs 5 (P= Rs 5)
Income of the consumer= Rs 20
Budget line = Px + Py = Income
Budget line will be 4X + 5Y = 20
Budget line= Money spent= Income

(ii) If she spends her entire income on good 1 (X) then the consumption of good 2 (Y) will be zero.

Budget line = Px + Py= Income(from(i)
4X + 5(0) = 20
X = 20/4 = 5 units

(iii) If she spends her entire income on good 2 (Y). then the consumption of good 1 (X) will be zero.
Budget line =Px + Py = Income (from (i)
4(0)+5Y= 20
Y = 20/5 = 4 units

(IV) Slope of budget line = Units of good 1 Willing to sacrifice/units of good 2 willing to gain

= -ΔPx/ΔPy = -4/5=-0.8
Note Sacrificed units always have negative value.

Question 5. How does the budget line change, if the consumer’s income increases to Rs 40 but the prices remain unchanged?

Answer If consumer’s income increases to Rs 40. then consumer can buy more of both the goods (combination goods) It will shift the budget line
upward right from AB to A1 B1 but new budget line will be parallel to the old budget line as there is no change in slope of budget line Question 6. How does the budget line change, if the price of good 2 decreases by a rupee but the price of good 1 and the consumer’s income remain unchanged?

Answer If the price of good 2 decreases and the price of good 1 and income of consumer remain unchanged, then the budget line will be In above figure. budget line shift to the right from AB to A1 B only on Y-axis but unchanged on X-axis (because there is no change in the price of
good).

Question 7. What happens to the budget set, if both the prices as well as the income double?

Answer There will be no change in the budget set. Explanation by Example  Let.
Price of good 1 (X) = Rs 2
price of good 2 (y) =Rs 4
Income of consumer = Rs 50
Budget line will be  2X+4Y = 50

if prices as well as the income doubles, then new budget line will be

4X+8Y =100

2(2X+4Y)=2 (50)

2X+4Y= 50

Therefore, there will be no change in the budget set

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

Good 1 =X, Good 2 = Y
Price of X = Px Price of Y = Pyy
Income = M
Budget line is PxX+PyY=M
After the putting value, we get
6×6+8×8 =M
Income (M) = 100
Where, X=6 units, Px= Rs6, Y= 8 units, Py= Rs8

Question 9. Suppose a consumer wants to consume two goods which are available only in integer units. The two goods are equally priced at Rs 10 and the consumer’s income is Rs 40.
(i) Write down aUthe bundles that are available to the consumer.
(ii) Amongthe bundles that are available to the consumer, identify those which cost her exactly Rs 40.

Price of goods (Px) and good 2 = Rs 10
Income of consumer = Rs 40
The bundles are available to the consumer –
First option – (0,0), (0,1), (0,2), (0,3), (0.4)
Second option – (1,0), (1,1), (1,2), (1,3)
Third option – (2,0), (2,1), (2,2)
Fourth option – (3,0), (3,1)
Fifth option – (4,0)
(ii) The exactly cost of Rs 40, the bundles are (0.4), (1,3), (2,2), (3,1) and (4,0)

Explanation
(a) First bundle (0,4)
Cost = 0 x 10+ 4 x 10 = Rs 40
(b) Second bundle (1,3)
Cost = 1 x 10+ 3 x 10
=10+ 30 =t 40
(c) Fifth bundle (4,0)
Cost = 4 x 10+ 0 x 10 = Rs 40

Question 10. What do you mean by ‘monotonic preferences’?

Answer It means greater consumption of a commodity by the consumer gives higher level of satisfaction

Question 11. If a consumer has monotonic preferences, can she be indifferent between the bundles (10,8) and (8,6)?

Answer The bundle (10,8) should be preferred Instead of bundle (8,6) because bundle (10,8) has more of both goods.

Question 12. Suppose a consumer’s preferences are monotonic. What can you say about her preference ranking over the bundles (10,10), (10,9) and (9,9)?

Answer A consumer’s preferences will rank as

Rank 1st – (10,10)
Rank 2nd – (10,9)
Rank 3rd – (9,9)
Rank based on monotonic preferences.

Question 13. Suppose your friend is indifferent to the bundles (5,6) and (6,6). Are preferences of your friend monotonic?

Answer The preferences is monotonic because his bundles shows the more goods to less goods and monotonic preference implies more and more consumption of two sets of goods to get maximum satisfaction.

Question 14. Suppose there are two consumers in the market for a goods and their demand functions are as follows
d1(p) = 20 – P for any price less than or equal to 20 and
d1(p) = 0 at any price greater than 20
d2(p) = 30 – 2p for any price less than or equal to 15 and
d1(P) = 0 at any price greater than 15.
Find out is the market demand function.

Answer In the given demand functions, both the consumers do not want to demand the goods for any price above f 15. Both of them demand only
at a price less than or equal to ~ 15. Therefore,market demand will be

(P) = d1(P)+ d2(P)
(P) = 20 – p + 30 – 2p
(P)=50-3p
For any price less than or equal to 15 and market demand (p) = 0 at any price greater than 15.

Question 15. Suppose there are 20 consumers for a good they have identical demand d (p) =10 – 3p for any price less than or equal to 10/3 and d1(P) = 0 at any price greater than 10/3 what is the market demand function?

Answer In the given demand function if the consumers demand only when price is either less than or equal to 10 /3 Therefore. market demand will be
(d) Market demand

(P) = 20 [0(P)]
(P)=20(10-3p)
(P) = 200 – 60p
For any price less than or equal to 10 and market (p) = 0 at any price greater than 10/3

Question 16. Considera market where there are just two consumers and suppose their demands for goods are given as follows for the good are given as follows.

 P d1 d2 1 9 24 2 8 20 3 7 18 4 6 16 5 5 14 6 4 12

 P d1 d2 Market Demand 1 9 24 33 2 8 20 28 3 7 18 25 4 6 16 22 5 5 14 19 6 4 12 16

Question 17. What do you mean by a normal good?

Answer Normal goods refer to those goods whose demand increases with an increase in income. e.g.,When income increases, the demand of “Sugar” is also increases. Thus “Sugar” is a normal good.

Question 18. What do you mean by an ‘inferior good’? Give some examples.

Answer Inferior goods refer to those goods whose demand decreases with an increase in income. e g., If demand of Jaggery decreases with increase in income. then Jaggery is an Inferior good.

Question 19. What do you mean by substituties? Give examples of two goods which are substitutes of each other.

Answer Substitutes refer to those goods which can be used in place of another good for satisfaction of a particular want. e.g., Pepsi and Coke, Coffee and Tea.

Question 20. What do mean by complements? Give examples of two goods which are complements of each other.

Answer Complements refer to those goods which are used together to satisfy a particular want. e.g., Tea and Sugar, Car and Petrol.

Question 21. Explain price elasticity of demand.
Answer Price elasticity of demand refers to the percentage change in quantity demanded with reference to percentage change in price. It is measured in Ratio as
ed % Change in Quantity demanded/% Change in price
where, ed =Price Elasticity of Demand

Question 22. Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of good increases to Rs5 and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

P0=4 q0=25
P1=5 q1=20
Δp=1 Δq=-5
ed=- (Δq/Δp x P0/q0)
= 5/1 x 4/25
= 0.8

Question 23. Consider the demand curve D(p)=10-3p. What is the elasticity at price 5/3?

Answer Given, Demand curve D(P) = 10 – 3p , Price (P) = 5/3
ed =-bp/a-bp

(-3×5/3) / (10-3×5/3)= -5/5

ed =-1

Question 24. Suppose the price elasticity of demand for a good is -0.2. If there is a 5’1’0 increase in the price of good, by what percentage will the demand for the good go down?

Change in price (increase) = 5 %
Elasticity of Demand (ed) = – 0.2
ed= % change in quantity demanded / % change in price

(-) 0.2 = % Change in Quantity demanded /5

% Change in quantity demanded = -1 % (decrease)

Question 25. Suppose the price elasticity of demand for a good is -0.2. Howwill the expenditure on the good be affected if there is a 10% increase in the price of the goods?

Answer Total expenditure will rise if there is a 10 % rise in the price of goods, since its demand is inelastic, i.e., ed = – 0.2

Question 26. Suppose there was a 4% derease in the price of a good and as a result, the expenditure on the good increased by 20/0. What can you say about the elesticity of demand?

Answer The expenditure increases with a decrease in the price of good,this is the opposite change. Thus, the elasticity of demand is more than unit
elastic i.e., (ed >1).

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