NCERT Solutions for Class 12 Economics I Chapter 2 Theory of Consumer Behaviour

Ans : It refers to the set of consumption bundles that are available to or affordable by the consumer; while being aware of his/her income-level and the existing market prices.


 

Ans : A budget line represents the different combinations of two goods that are affordable and are available to a consumer; while being aware of his/her income-level and market prices of both the goods.
\(\begin{array}{l}{\text { Let } x_{1} \text { be the amount of good } 1 \text { . }} \\ {x_{2} \text { be the amount of good } 2 \text { . }} \\ {P_{1} \text { be the price of good } 1} \\ {P_{2} \text { be the price of good } 2 \text { . }}\end{array}\)
\(\begin{array}{l}{\mathrm{P}_{1} \mathrm{x}_{1}=\text { Total money spent on good } 1} \\ {\mathrm{P}_{1} \mathrm{x}_{2}=\text { Total money spent on good } 2} \\ {\text { Then, the budget line will be: }} \\ {\mathrm{P}_{1} \mathrm{x}_{1}+\mathrm{P}_{2} \mathrm{x}_{2}=\mathrm{M}}\end{array}\)
All the consumption bundles on the budget line cost the consumer exactly the equivalent of hi/her income. 

Ans : The budget line is a negatively downward sloping line. The slope of a budget line measures the amount of good 2 that must be sacrificed in order to get an additional unit of good 1, as the consumer’s income (M) is fixed. The budget line is downward sloping because, in order to increase the consumption of one good, the consumption of the other good must be reduced, with constant M.
The slope of the budget line is \(\frac{-P_{1}}{P_{2}}=\frac{\Delta x_{2}}{\Delta x_{1}}\), which implies the rate of exchange or the rate at which good 2 can be substituted for good 1. 

Ans : \(\begin{array}{l}{\text { (i) } P_{1}=\operatorname{Rs} 4} \\ {P_{2}=R s 5} \\ {M=R s 20} \\ {\text { Equation of the budget line }=P_{1} x_{1}+P_{2} x_{2}=M} \\ {4 x_{1}+5 x_{2}=20}\end{array}\)
(ii) If Rs 20 is entirely spent on good 1, then the amount of good 2 demanded will be zero i.e., x2 = 0 as the consumer has no income left to spend on good 2.
\(\begin{array}{l}{4 \mathrm{x}_{1}+5(0)=20} \\ {4 \mathrm{x}_{1}=20} \\ {x_{1}=\frac{20}{4}} \\ {x_{1}=5} \\ {\text { Amount of good 1 consumed }=5 \text { units }}\end{array}\)
(iii) If Rs 20 is entirely spent on good 2, then x1 = 0, as the consumer has no income left to spend on good 1.
\(\begin{array}{l}{4(0)+5\left(x_{2}\right)=20} \\ {5\left(x_{2}\right)=20} \\ {x_{2}=\frac{20}{5}} \\ {x_{2}=4 \text { units }} \\ {\text { Amount of good } 2 \text { consumed }=4 \text { units }}\end{array}\)
(iv) Slope of the budget line = 
\(\frac{-P_{1}}{P_{2}}\)
\(=\frac{-\text { Price of good } 1}{\text { Price of good } 2}=-\frac{4}{5}=-0.8\) 

Ans : \(\begin{array}{l}{\mathrm{M}_{2}=\mathrm{Rs} 40} \\ {\mathrm{P}_{1}=\mathrm{Rs} 4} \\ {\mathrm{P}_{2}=\mathrm{Rs} 5} \\ {\text { Initial equation of the budget line: }} \\ {4 \mathrm{x}_{1}+5 \mathrm{x}_{2}=20} \\ {\text { New equation of the budget line: }} \\ {4 \mathrm{x}_{1}+5 \mathrm{x}_{2}=40}\end{array}\)
As M has increased, the consumer can now purchase more of both the goods and the budget line will shift parallelly outwards to A’B’ from AB.
Horizontal intercept will be \(=\frac{M}{P_{2}}=\frac{40}{4}=10\)
Vertical intercept will be \(=\frac{M}{P_{2}}=\frac{40}{5}=8\)
The slope of the new budget line will be the same as that of the old budget line.
\(-\frac{P_{1}}{P_{2}}=\frac{4}{5}\)