Solution of Chapter 2. Theory of Consumer Behaviour (Introductory Microeconomics Book)

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

What is budget line?

Explain why the budget line is downward sloping.

A consumer wants to consume two goods. The prices of the two goods are Rs 4 and Rs 5 respectively. The consumer’s income is Rs 20.

(i) Write down the equation of the budget line.

(ii) How much of good 1 can the consumer consume if she spends her entire income on that good?

(iii) How much of good 2 can she consume if she spends her entire income on that good?

(iv) What is the slope of the budget line?

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

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?

What happens to the budget set if both the prices as well as the income double?

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?

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 all the bundles that are available to the consumer.

(ii) Among the bundles that are available to the consumer, identify those which cost her exactly Rs 40.

What do you mean by ‘monotonic preferences’?

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

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)?

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

Suppose there are two consumers in the market for a good 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 the market demand function.

Suppose there are 20 consumers for a good and they have identical demand functions:

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?

Consider a market where there are just two consumers and suppose their demands for the good are given as follows:

Calculate the market demand for the good.

What do you mean by a normal good?

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

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

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

Explain price elasticity of demand.

Consider the demand for a good. At price Rs 4, the demand for the good is 25 units. Suppose price of the good increases to Rs 5, and as a result, the demand for the good falls to 20 units. Calculate the price elasticity.

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

Suppose the price elasticity of demand for a good is – 0.2. If there is a 5 % increase in the price of the good, by what percentage will the demand for the good go down?

Suppose the price elasticity of demand for a good is – 0.2. How will the expenditure on the good be affected if there is a 10 % increase in the price of the good?

Suppose there was a 4 % decrease in the price of a good, and as a result, the expenditure on the good increased by 2 %. What can you say about the elasticity of demand?