Consumer Behaviour and Demand Test - 8

MU is addition to TU when an MU becomes -ive TU falls.

First rises till MU is positive, then  reaches its maximum when MU=0,then starts falling when MU becomes negitive.

TU,  First rises till MU is positive, then  reaches its maximum when MU=0,then starts falling when MU becomes negitive.

slope of price line is given by ratio of the prices of two goods, i.e. Px/Py, which is constant.

Which of the following is not true?

Indifference curves cannot intersect each other

Two indifference curve can be tangent to each other

Indifference curves are convex to the origin

Indifference curves slopes downward to the right

Explanation:

The  indifference curves cannot intersect  each other. It is because at the point of tangency, the higher  curve  will give as much as of the  two  commodities as is given by the lower  indifference curve. This is absurd and impossible.

Approch is for an individual consumer, market has nothing to do with it.

The theory of  consumer 's surplus is based  on the law of diminishing marginal utility. The law of diminishing marginal utility claims that as you  consumer  more of a commodity, the marginal utility derived from it decreases eventually.a

The correct option is D.

Total utility refers to the total satisfaction obtained from the consumption of all  possible units of a commodity. Marginal utility is the additional utility derived from the consumption of one more unit of the given commodity. MU=TUn-TUn-1.So when TU is increasing at an increases this means utility derived from each unit is increasing. This means marginal utility is increasing. 

Saturation Point:  The point where the desire to consume the same product anymore becomes zero.

hence additional consumption will not give any satisfaction to consumer,MU = 0

MU is the rate of change of TU.

When the MU decreases, TU increases at decreasing rate.

When MU becomes zero, TU is maximum. It is a saturation point.

When MU becomes negative, TU declines

The  ordinal utility theory or the indifference curve analysis  is based on four main assumptions.

Rational behavior of the consumer.

Utility is ordinal.

Diminishing marginal rate of substitution.

Consistency in choice. 

At point of tagency MRE=MRS.

Consumer substitutes one good for other along IC in order to keep satisfaction level constant.

The law of diminishing  marginal utility  states that  marginal utility  declines as consumption increases. Because  demand  price depends on the  marginal utilityobtained from a good, price also declines as consumption increases, meaning price and quantity demanded are inversely related, which is the law of  demand.

An  indifference curve  is a graph showing combination of two goods that give the consumer equal satisfaction and utility. Each point on an  indifference curveindicates that a consumer is indifferent between the two and all points give him the same utility.