NEW HORIZON GURUKUL
Answer key
Class: XI Subject: ECONOMICS (030)
Q1. Who is a consumer?
Ans- A consumer is a person or group that buys or uses goods and services for personal use.
Consumers are the final users of products, and their choices affect market trends.
Q2. What is utility?
Ans- In economics, utility is the satisfaction or benefit a person gets from consuming a product
or service. It is a measure of how useful or valuable something is.
Q3. What is a budget constraint or budget set?
Ans- A "budget constraint" or "budget set" in economics refers to the limit on what a consumer
can afford to buy, based on their income and the prices of goods, essentially representing all
possible combinations of goods they can purchase within their available funds; it visually
shows the boundary between what is affordable and what is not, considering the prices of
different items and the total amount of money available to spend.
Q 4. Name the approaches to study consumer behavior.
Ans- Cardinal Utility:
Assumes that utility (satisfaction) can be measured in numerical terms, allowing for direct
comparisons between different combinations of goods.
Ordinal Utility:
Considers that consumers can only rank their preferences for different combinations of goods,
without specifying the exact level of satisfaction for each.
Q5. What is cardinal utility approach?
Ans- Cardinal Utility approach was given by neo-classical economists, who said that
satisfaction gained after using a certain commodity can be termed as Utility. Also, they
assumed that cardinal utility can be measured in quantitative terms (or money), like 1,2,3,4
and so on.
Cardinal utility theory explains that there are two basic concepts that explain it all together
which are as follows –
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Total utility (TU)
Marginal utility (MU)
Q6. What is ordinal utility approach?
Ans- The ordinal utility approach is an economic theory that ranks consumer preferences for
goods and services instead of measuring satisfaction numerically. It's also known as the
indifference curve approach.
Q7. What is total utility at zero level of consumption?
Ans- When no units of a commodity is consumed then marginal utility is maximum after which
it diminishes on consumption and total utility is zero as there is no consumption of any
commodity.
Q8. Derive MU from TU schedule given below:
Solution-
UNITS TOTAL UTILITY MARGINAL UTILITY
1 40 -
2 70 30
3 90 20
4 100 10
5 100 0
6 80 -20
Q9. Discuss the characteristics of utility.
Ans- 1) Utility is a subjective concept: It is a psychological concept. It is the mental assessment
of a commodity. So utility differs from person to person because of difference in taste,
preference, likes and dislikes of a person. E.g., chalks have more utility to a teacher than a
student.
(2) Utility is a relative term: It is related to time and place. With change in time and place, utility
of the same commodity changes. Cold drinks have more utility during summer than winter.
Woolen clothes have more utility in Kashmir than Mumbai.
(3) Utility depends on the intensity of want: More urgent or intense the want, more will be the
utility. E.g. Books have more utility to students just before the exams.
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(4) Utility differs from usefulness: Utility indicates the power of a good to satisfy human wants
irrespective of whether it is good or bad or harmful. While usefulness means that the
commodity is beneficial or desirable. A commodity may have utility but may not be useful. E.g.,
cigarette is injurious to health, it is not useful but it has utility to a smoker.
(5) Utility cannot be measured: Utility is psychological and subjective. It is intangible. So it
cannot be measured cardinally or numerically. It can only be expressed ordinally. Eg., first
slice of bread will have very high utility for a very hungry person than the 2nd
slice. But Marshall assumes that utility can be cardinally measured.
Q10. An individual's MU schedule is given below.Derive TU from it.
Solution-
UNITS MARGINAL UTILITY TOTAL UTILITY
1 16 16
2 12 28
3 10 38
4 8 46
5 0 46
6 -4 44
Q11. Explain consumer equilibrium using indifference curve analysis.
Ans- Consumer's equilibrium is the amount of goods the consumer can buy in the market given his/her
current level of income. There are two conditions for consumers equilibrium:
• The first is that the budget line should tangent to the indifference curve or the marginal
rate of substitution of good X for Good Y (MRSxy) must be equal to the price ratio. i.e
MRSxy = Px/Py.
• The indifference curve should be convex to the origin at the point of tangency.
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Q 12. What is consumer Budget?
Ans- A consumer budget is the amount of money a consumer has to spend on goods and
services. It's also the consumer's purchasing power, or the ability to buy a combination of
goods at current market prices.
Q 13. Explain Indifference curve analysis with its properties.
ANS- An indifference curve is a graphical representation that illustrates various
combinations of two goods that provide equal satisfaction to a consumer. For instance, if a
person enjoys apples and oranges, an indifference curve could show different combinations
of apples and oranges that they would enjoy equally. The consumer’s preference remains
constant along the curve.
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Properties of Indifference Curves
Indifference curves possess several distinct properties that help in understanding consumer
behavior:
• Downward Sloping: As mentioned earlier, indifference curves slope downwards. This
reflects the trade-off that consumers make: to obtain more of one good, they must
sacrifice some quantity of the other good.
• Convex Shape: The shape of the indifference curve is typically convex to the origin.
This indicates the principle of diminishing marginal rate of substitution, meaning that
as a consumer continues to substitute one good for another, they require increasingly
higher amounts of the second good to maintain the same level of utility.
• Higher Curves Indicate Higher Utility: Indifference curves further away from the origin
represent combinations that provide greater satisfaction, illustrating that higher
quantities of both goods lead to increased utility.
• No Intersection: Indifference curves cannot intersect. If they did, it would imply
contradictory levels of satisfaction, which is illogical in consumer theory.
Q 14 Which of the following indifference maps most closely resembles the average
consumer’s preference for right and left shoes?
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ANS- A is the correct map
a.
b
c
