# NCERT Solutions for Class 12 Micro Economics Chapter-2 Consumer Equilibrium

Here you will find NCERT Solution Questions for Class 12 Economics with Answers PDF Free Download based on the important concepts and topics given in the textbook as per CBSE new exam pattern. This may assist you to understand and check your knowledge about the chapters. These Solution Questions Answers are selected supported by the newest exam pattern as announced by CBSE.

## NCERT TEXTBOOK QUESTIONS SOLVED

Q1. What do you mean by the budget set of a consumer?
Or
Define Budget Set. [CBSE 2011, 13] [1 Mark]

Answer: Budget set is the collection of all bundles of goods that a consumer can buy with his income at the prevailing market prices.

Q2. 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.

Q3. Explain why budget line is downward sloping?
Or
Why is budget line negatively sloped? [CBSE 2011 C][l Mark]

Answer: ‘Budget line is downward sloping because if a consumer wants to buy more of one commodity, he has to buy less of other goods, given money income.

Q4. 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.

## Questions 5, 6 and 7 are related to question 4,

Q5. How does the budget line change if the consumer’s income increases to ?40 but the prices remain unchanged? [1 Mark]

Answer: If consumer’s income increases to Rs 40, the consumer can buy more pieces/quantities of both the goods X and Y. There will be parallel rightward shift in the budget line AB to A1B1.

Q6. 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
part a q6

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).

Q7. What happens to the budget set if both the prices as well as the income double? [ 1 Mark]

Answer: There will be no change in the budget line. Let us understand this with the help of an example: Suppose,the price of goods 1 rises from Rs 4 to Rs 8 and that of goods 2 rises from Rs 5 to Rs 10. Income also rises from Rs 20 to Rs 40. With double increase in prices and income, intercepts on both X-axis and Y-axis will remain unchanged at 5 units (goods 1) and 4 units (goods 2) respectively. Slope of budget line will also remain the same. Therefore, there will be no change in the budget set and the budget line.

Q8. 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?

Answer: Assume
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

Q9. 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.

Write down all the bundles that are available to the consumer.
Among the bundles that are available to the consumer’s. Identify those which cost her exactly 40.[3-4 Marks]

Answer: Let Px = Py = Rs 10
Money Income = 40

Bundles available to consumer are:1. (0,0), (0,1), (0,2), (0,3), (0,4), (1,0), (1,1), (1,2), (1,3), (2,0), (2,1), (2,2), (3,0), (3,1) and (4, 0).

1. (0,4), (1,3), (2,2), (3,1) and (4,0) cost exactly Rs 40. All the other bundles cost less than Rs 40.

Q10. What do you mean by ‘monotonic preferences’?

Answe:r It means greater consumption of a commodity by the consumer gives higher level of satisfaction

Q11. If a consumer has monotonic preferences, can she be indifferent between the bundles (10, 8) and (8, 6)? [1 Mark]

Answer: No, if a consumer has monotonic preferences, bundle (10, 8) is preferred to bundle (8, 6) as bundle (10, 8) has more units of both the goods.

Q12. 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.

Q13. Suppose your friend is indifferent to the bundles (5, 6) and (6, 6). Are the preferences of your friend monotonic? [I Mark]

Answer: No, the preferences of my friend are not monotonic since bundle (6, 6) should be monotonically preferred to bundle (5, 6).

Q14. 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.

Q15. 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

Q16. 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.

Answer:

Q17. 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.

Q18. 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.

Q19. 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.

Q20. 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.

Q21. 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

Q22. 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.

Answer:
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

Q23. 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

Q24. 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?

Answer: Given,
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)

Q25. 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 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

Q26. 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).

## Multiple Choice Questions (1 Mark)

Q1. Total utility is maximum when

(a) Marginal utility is zero.
(b) Marginal utility is at its highest point.
(c) Marginal utility is equal to average utility.
(d) Average utility is maximum.

Answer: (a)

Q2. Which of the shaded area in the diagrams below represent total utility? [CBSE Sample Paper 2014]

Answer: (c)

Q3. What does the area under the marginal utility curve depict? [CBSE Sample Paper 2014]

(a) Average Utility
(b) Total Utility
(c) Indifference Curve
(d) Consumer Equilibrium

Answer: (b)

Q4. Which one of the following is not an assumption of the theory of demand based on analysis of indifference curve?

(a) Given scale of preferences as between different combinations of two goods.
(b) Diminishing marginal rate of substitution.
(c) Constant marginal utility of money.
(d) Consumers would always prefer more of a particular piece of goods to less of it, other things remaining the same.

Answer: (c)

Q5. The consumer is in equilibrium at a point where the budget line—

(a) Is above an indifference curve.
(b) Is below an indifference curve.
(c) Is tangent to an indifference curve.
(d) Cuts an indifference curve.

Answer: (c)

Q6. An indifference curve slopes down towards right since more of one commodity and less of another result in—

(a) Same satisfaction.
(b) Greater satisfaction.
(c) Maximum satisfaction.
(d) Decreasing expenditure.

Answer: (a)

Q7. The second glass of lemonade gives lesser satisfaction to a thirsty boy. This is a clear case of

(a) Law of demand.
(b) Law of diminishing returns.
(c) Law of diminishing utility.
(d) Law of supply.

Answer: (c)

Q8. The consumer is in equilibrium when the following condition is satisfied:

(a)(\frac { M{ U }{ x } }{ M{ U }{ y } } >\frac { { P }{ x } }{ { P }{ y } } )
(b)(\frac { M{ U }{ x } }{ M{ U }{ y } } <\frac { { P }{ x } }{ { P }{ y } } )
(c)(\frac { M{ U }{ x } }{ M{ U }{ y } } =\frac { { P }{ x } }{ { P }{ y } })
(d)None of these.

Answer: (c)

Q9. Which of the following options is a property of an indifference curve?

(a) It is convex to the origin.
(b) The marginal rate of substitution is constant as you move along an indifference curve.
(c) Marginal utility is constant as you move along an indifference curve.
(d) Total utility is the greatest where the 45 degrees line cuts the indifference curve.

Answer: (a)

Q10. When economists speak of the utility of a certain good, they are referring to-

(a) The demand for the good.
(b) The usefulness of the good in consumption.
(c) The satisfaction gained from consuming the good.
(d) The rate at which consumers are willing to exchange one unit of good for an other one.

Answer: (c)

Q11. Budget set is—

(a) Right angled triangle formed by the budget line with the axes.
(b) All points on the budget line.
(c) Points inside the budget line.
(d) Points on Y-axis from where budget line starts and the point on X-axis where budget line ends.

Answer: (a)

Q12. If indifference curve is straight line downward sloping,

(a) MRS is increasing
(b) MRS is decreasing
(c) MRS is constant
(d) MRS is zero

Answer: (c)

Q13. If X and Y are two commodities, indifference curve shows—

(a) X and Y are equally preferred
(b) Y is preferred to X
(c) X is preferred to Y
(d) None of these.

Answer: (a)

Q14. If Marginal Rate of Substitution is constant throughout, the Indifference curve will be: [CBSE 2015]

(a) Parallel to the x-axis.
(b) Downward sloping concave.
(c) Downward sloping convex.
(d) Downward sloping straight line.

Answer: (d)

Q15. If Marginal Rate of Substitution
is increasing throughout, the Indifference curve will be: [AI 2015]

(a) Downward sloping convex.
(b) Downward’ sloping concave.
(c) Downward sloping straight line.
(d) Upward sloping convex.

Answer:(b)

Q16. Which of the can be referred to as ‘point of satiety’?

(a) Marginal Utility is negative
(b) Marginal utility is zero
(c) Total Utility is rising
(d) Total Utility is falling
[CBSE Sample Paper 2016]

Answer: (b)

## True Or False

Giving reasons, state whether the following statements are true or false.

Q1. Total utility increases as long as marginal utility is positive (+).

Answer: True: Because TU is the sum of marginal utilities and MU is positive.

Q2. TU starts declining when MU starts declining.

Answer: False: Because TU starts declining only when diminishing MU becomes negative.

Q3. An indifference curve (IC) is convex to the origin because of increasing MRSxy.

Answer: False: An IC is convex to the origin because of diminishing MRS .

Q4. A consumer is in equilibrium if he earns the maximum profit.

Answer: False: Because consumer should get the maximum satisfaction from his purchases in the state of equilibrium.

Q5. Marginal utility of the first unit is equal to Total Utility.

Answer: True: MU = TUn – TUn-1 = TU1 – TU0= TU1

Q6. In case of single commodity, consumer will be in equilibrium when M.U. = Income.

Answer: False: A consumer is in equilibrium when MU = Price.

Q7. If there are two commodities, consumer is in equilibrium if (\frac { M{ U }{ x } }{ Income } =\frac { M{ U }{ y } }{ Income } ).

Answer: False: A consumer is in equilibrium only when ( \frac { M{ U }{ x } }{ { P }{ x } } =\frac { M{ U }{ y } }{ { P }{ y } } ).Because here consumer1 behaviour matches with the market behaviour.

Q8. If TU remains the same; MU may be negative or positive.

Answer: False: TU decreases if MU is negative, ‘ and TU increases if MU is positive.
It is constant and maximum only if MU = 0.

Q9. In case of indifference curve consumer is in equilibrium if ( MR{ S }{ xy }=\frac { { P }{ x } }{ { P }_{ y } } ).

Answer: True: Here consumer’s behaviour and market behaviour match with each other.

Q10. A consumer is in equilibrium where indifference curve equals budget line?

Answer: False: Consumer will be in equilibrium where IC is tangent to the budget line.

Q11. All points on the budget line give equal satisfaction to the consumer.

Answer: False: All points on an IC give equal satisfaction.

Q12. All combinations on an IC are achievable by a consumer.

Answer: False: All the combinations on a budget line are achievable and not points on IC.
Note: As per CBSE guidelines, no marks will be given if reason to the answer is not explained.

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