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Theory of Consumer Behaviour

NCERT Class 11 · Economics Based on NCERT Class 11 Economics textbook · Free CBSE study kit

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Chapter Notes

Overview
This chapter explains how an individual consumer decides what to buy given limited income and fixed prices. It introduces two approaches: Cardinal Utility Analysis, which measures satisfaction in numbers, and Ordinal Utility Analysis, which ranks preferences using indifference curves. The central idea is that a rational consumer chooses the bundle that gives maximum satisfaction within her budget constraint, leading to the derivation of the demand curve and the Law of Demand.
Key Concepts (20)
Utility
Utility of a commodity is its want-satisfying capacity.
e.g. A chocolate gives higher utility to someone who likes chocolates than to someone who does not.
Total Utility
Total utility of a fixed quantity of a commodity is the total satisfaction derived from consuming the given amount of some commodity x.
e.g. If 4 bananas give 28 units of utility, the total utility from 4 bananas is 28 units.
Marginal Utility
Marginal utility is the change in total utility due to consumption of one additional unit of a commodity.
e.g. If 4 bananas give 28 units and 5 bananas give 30 units, MU of the 5th banana is 2 units.
Law of Diminishing Marginal Utility
Law of Diminishing Marginal Utility states that marginal utility from consuming each additional unit of a commodity declines as its consumption increases, while keeping consumption of other commodities constant.
e.g. The first banana gives 12 units of utility, the second gives 6, the third gives 4, and so on.
Demand
The quantity of a commodity that a consumer is willing to buy and is able to afford, given prices of goods and income of the consumer, is called demand for that commodity.
e.g. A consumer with Rs 20 who buys 4 bananas at Rs 5 each has a demand of 4 bananas.
Demand Curve
Demand curve is a graphic presentation of various quantities of a commodity that a consumer is willing to buy at different prices of the same commodity, while holding constant prices of other related commodities and income of the consumer.
e.g. A downward-sloping line showing that at Rs 40, demand is 5 units; at Rs 30, demand is 6 units.
Law of Demand
Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price.
e.g. When price of bananas falls, the consumer buys more bananas.
Indifference Curve
An indifference curve is a curve joining all points representing bundles among which the consumer is indifferent.
e.g. Points A (1 banana, 15 mangoes), B (2 bananas, 12 mangoes), C (3 bananas, 10 mangoes) all give the same satisfaction.
Marginal Rate of Substitution (MRS)
MRS is the rate at which the consumer will substitute bananas for mangoes, so that her total utility remains constant.
e.g. Moving from A to B, the consumer sacrifices 3 mangoes for 1 banana, so MRS = 3.
Law of Diminishing Marginal Rate of Substitution
This tendency for the MRS to fall with increase in quantity of bananas is known as Law of Diminishing Marginal Rate of Substitution.
e.g. From A to B, MRS = 3; from B to C, MRS = 2; from C to D, MRS = 1.
Monotonic Preferences
A consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.
e.g. Bundle (2,10) is preferred to (1,10) because it has more bananas and same mangoes.
Budget Set
The budget set is the collection of all bundles that the consumer can buy with her income at the prevailing market prices.
e.g. With Rs 20 and both goods at Rs 5, the budget set includes (0,0), (0,1), (1,1), (2,2), etc.
Budget Line
The budget line consists of all bundles which cost exactly equal to M.
e.g. The line p1x1 + p2x2 = M, e.g., 5x1 + 5x2 = 20.
Normal Goods
For most goods, the quantity that a consumer chooses, increases as the consumer’s income increases and decreases as the consumer’s income decreases. Such goods are called normal goods.
e.g. Higher quality cereals, branded clothing.
Inferior Goods
There are some goods the demands for which move in the opposite direction of the income of the consumer. Such goods are called inferior goods.
e.g. Low quality food items like coarse cereals.
Complementary Goods
Goods which are consumed together are called complementary goods.
e.g. Tea and sugar, shoes and socks, pen and ink.
Substitute Goods
Goods like tea and coffee are not consumed together. In fact, they are substitutes for each other.
e.g. Tea and coffee.
Giffen Good
If the income effect is stronger than the substitution effect, the demand for the good would be positively related to its price. Such a good is called a Giffen good.
e.g. A staple food like bread for very poor households.
Perfect Substitutes
Perfect substitutes are the goods which can be used in place of each other, and provide exactly the same level of utility to the consumer.
e.g. A five rupee coin and a five rupee note.
Indifference Map
The consumer’s preferences over all the bundles can be represented by a family of indifference curves. This is called an indifference map of the consumer.
e.g. Multiple non-intersecting indifference curves, each representing a different level of satisfaction.
Formulas & Equations (9)
MUn = TUn – TUn-1
Reads as: Marginal utility of the nth unit equals total utility of n units minus total utility of n minus 1 units
Variables: MU = marginal utility (units), TU = total utility (units), n = unit number
Use when: Calculating marginal utility from total utility data
⚠ Students forget that MU is the change from the previous total, not the total itself.
TUn = MU1 + MU2 + … + MUn-1 + MUn
Reads as: Total utility of n units equals the sum of marginal utilities of all units from 1 to n
Variables: TU = total utility (units), MU = marginal utility (units), n = number of units
Use when: Deriving total utility from marginal utility values
⚠ Students add MU of the nth unit to TU of n-1 instead of summing all MUs.
MRS = |ΔY/ΔX|
Reads as: Marginal rate of substitution equals the absolute value of change in Y divided by change in X
Variables: MRS = marginal rate of substitution (no unit), ΔY = change in quantity of mangoes (units), ΔX = change in quantity of bananas (units)
Use when: Calculating the rate at which a consumer substitutes one good for another along an indifference curve
⚠ Students forget to take absolute value and write a negative MRS.
p1x1 + p2x2 ≤ M
Reads as: Price of good 1 times quantity of good 1 plus price of good 2 times quantity of good 2 is less than or equal to income
Variables: p1 = price of bananas (Rs per unit), x1 = quantity of bananas (units), p2 = price of mangoes (Rs per unit), x2 = quantity of mangoes (units), M = income (Rs)
Use when: Writing the budget constraint for a consumer with two goods
⚠ Students write equality instead of inequality, forgetting that bundles costing less than income are also affordable.
p1x1 + p2x2 = M
Reads as: Price of good 1 times quantity of good 1 plus price of good 2 times quantity of good 2 equals income
Variables: p1 = price of bananas (Rs per unit), x1 = quantity of bananas (units), p2 = price of mangoes (Rs per unit), x2 = quantity of mangoes (units), M = income (Rs)
Use when: Writing the equation of the budget line
⚠ Students confuse this with the budget set inequality.
x2 = M/p2 – (p1/p2)x1
Reads as: Quantity of mangoes equals income divided by price of mangoes minus the price ratio times quantity of bananas
Variables: x2 = quantity of mangoes (units), M = income (Rs), p2 = price of mangoes (Rs per unit), p1 = price of bananas (Rs per unit), x1 = quantity of bananas (units)
Use when: Expressing the budget line in slope-intercept form
⚠ Students forget the negative sign and write a positive slope.
Slope of budget line = –p1/p2
Reads as: Slope of the budget line equals negative of price of good 1 divided by price of good 2
Variables: p1 = price of bananas (Rs per unit), p2 = price of mangoes (Rs per unit)
Use when: Finding the rate at which the market allows substitution between two goods
⚠ Students write p2/p1 instead of p1/p2.
Δx2/Δx1 = –p1/p2
Reads as: Change in mangoes over change in bananas equals negative price ratio
Variables: Δx2 = change in quantity of mangoes (units), Δx1 = change in quantity of bananas (units), p1 = price of bananas (Rs per unit), p2 = price of mangoes (Rs per unit)
Use when: Deriving the slope of the budget line from two points on it
⚠ Students forget the negative sign.
d(p) = a – bp; 0 ≤ p ≤ a/b; = 0; p > a/b
Reads as: Demand as a function of price equals a minus b times p for price between 0 and a over b, and zero for price greater than a over b
Variables: d(p) = quantity demanded (units), a = vertical intercept (units), b = slope (units per rupee), p = price (Rs)
Use when: Representing a linear demand curve
⚠ Students forget the piecewise definition and write only d(p) = a – bp.
How It Works
Derivation of Demand Curve using Cardinal Utility Analysis (Law of Diminishing Marginal Utility)
  1. Step 1: Assume the consumer experiences diminishing marginal utility from each additional unit of a commodity.
  2. Step 2: The consumer is willing to pay a price equal to the marginal utility of the last unit consumed.
  3. Step 3: As more units are consumed, marginal utility falls, so the consumer is willing to pay a lower price for additional units.
  4. Step 4: Plot price on the vertical axis and quantity on the horizontal axis; the resulting downward-sloping curve is the demand curve.
💡 The law of diminishing marginal utility explains why demand curves have a negative slope.
Derivation of Demand Curve using Indifference Curves and Budget Constraints (Ordinal Utility Analysis)
  1. Step 1: Start with a consumer's equilibrium at a given price of bananas (P1') and mangoes (P2') and income M. Plot the equilibrium point (X1', X2') where the budget line is tangent to an indifference curve.
  2. Step 2: In panel (b), plot P1' against X1' to get the first point on the demand curve for bananas.
  3. Step 3: Reduce the price of bananas to P1 (lower than P1'), keeping P2' and M constant. The budget line pivots outward. The new equilibrium is at point D with higher quantity of bananas (X1 > X1').
  4. Step 4: Plot P1 against X1 in panel (b) to get the second point on the demand curve.
  5. Step 5: Further reduce the price of bananas to P1^, resulting in even higher consumption X1^. Plot P1^ against X1^ to get the third point.
  6. Step 6: Join all points in panel (b) to get the downward-sloping demand curve.
💡 The demand curve is derived by changing only the price of the good and observing the optimal quantity chosen at each price.
Consumer's Optimum Choice
  1. Step 1: The consumer has a budget set defined by income and prices.
  2. Step 2: The consumer has well-defined preferences represented by an indifference map.
  3. Step 3: The rational consumer chooses the bundle on the highest possible indifference curve that is affordable.
  4. Step 4: The optimum bundle is located on the budget line at the point where the budget line is tangent to an indifference curve.
  5. Step 5: At the tangency point, the MRS (slope of indifference curve) equals the price ratio (slope of budget line).
💡 A point below the budget line cannot be optimal because a point on the budget line with more of at least one good is preferred (monotonic preferences).
Effect of Change in Income on Budget Line
  1. Step 1: If income increases from M to M' (M' > M) with prices unchanged, the budget line shifts outward parallel.
  2. Step 2: Both vertical intercept (M'/p2) and horizontal intercept (M'/p1) increase.
  3. Step 3: If income decreases (M' < M), the budget line shifts inward parallel.
💡 The slope of the budget line remains unchanged because prices are constant.
Effect of Change in Price of One Good on Budget Line
  1. Step 1: If price of bananas increases from p1 to p1' (p1' > p1), with p2 and M constant, the budget line becomes steeper (pivots inward around the vertical intercept).
  2. Step 2: The horizontal intercept decreases (M/p1' < M/p1).
  3. Step 3: If price of bananas decreases (p1' < p1), the budget line becomes flatter (pivots outward around the vertical intercept), and the horizontal intercept increases.
💡 The vertical intercept (M/p2) remains unchanged because the price of mangoes and income are constant.
Exam Traps — Don't Make These Mistakes
⚠ Confusing Total Utility and Marginal Utility
✗ Total utility is the satisfaction from the last unit consumed.
→ Total utility is the total satisfaction from all units consumed, not just the last unit. Marginal utility is the satisfaction from the last unit.
✓ Total utility is the total satisfaction derived from consuming the given amount of a commodity. Marginal utility is the change in total utility due to consumption of one additional unit.
⚠ Writing MRS without absolute value
✗ MRS = ΔY/ΔX
→ ΔY/ΔX is negative because Y decreases as X increases along an indifference curve. MRS is defined as the absolute value (magnitude) of this ratio.
✓ MRS = |ΔY/ΔX|, which equals –ΔY/ΔX when ΔY/ΔX is negative.
⚠ Stating that two indifference curves can intersect
✗ Indifference curves can intersect if the consumer's preferences change.
→ Intersecting indifference curves lead to contradictory results: points on different curves would imply the same utility, which violates transitivity and monotonicity.
✓ Two indifference curves never intersect each other because that would imply conflicting levels of satisfaction.
⚠ Confusing budget set with budget line
✗ The budget set is the line showing all bundles that cost exactly the consumer's income.
→ The budget set includes all bundles that cost less than or equal to income (the area on or below the line). The budget line is only the boundary where expenditure equals income.
✓ The budget set is the collection of all bundles that the consumer can buy with her income at prevailing prices. The budget line is the set of bundles that cost exactly equal to her income.
⚠ Assuming all goods are normal goods
✗ When income increases, demand for all goods increases.
→ For inferior goods, demand decreases as income increases. Examples include low-quality food items like coarse cereals.
✓ For normal goods, demand increases with income. For inferior goods, demand decreases with income.
⚠ Misstating the Law of Demand
✗ Law of Demand states that price and quantity demanded are inversely related.
→ This is incomplete. The Law of Demand holds only when 'other things remain the same' (ceteris paribus), including income, prices of other goods, and tastes.
✓ Law of Demand states that other things being equal, there is a negative relation between demand for a commodity and its price.
Compare & Contrast
Measurement of utility
Cardinal Utility Analysis
Ordinal Utility Analysis
Cardinal utility assumes utility can be measured in numbers (e.g., 50 units), while ordinal utility assumes only ranking of bundles is possible (e.g., bundle A is preferred to bundle B).
Response to change in consumer's income
Normal Goods
Inferior Goods
Demand for normal goods increases when income increases, while demand for inferior goods decreases when income increases.
Relationship between goods
Substitute Goods
Complementary Goods
Substitutes are goods that can replace each other (e.g., tea and coffee); an increase in price of one increases demand for the other. Complements are goods consumed together (e.g., tea and sugar); an increase in price of one decreases demand for the other.
Exam Focus
Marks pattern: 2 MCQs (1 mark each), 1 SA (3 marks), 1 LA (5 marks) — total 10 marks
Most asked: Law of Diminishing Marginal Utility and derivation of demand curve · Indifference curve analysis: properties, MRS, and consumer equilibrium · Budget line: slope, shifts due to price and income changes · Law of Demand · Normal vs Inferior goods, Substitutes vs Complements
Don't skip: Derive the demand curve using indifference curves and budget constraints (5 marks); Explain the conditions of consumer's optimum with the help of a diagram (5 marks); State and explain the Law of Diminishing Marginal Utility and its role in deriving the demand curve (3 marks)
One-Line Revision (read aloud before the exam)
  1. Utility is the want-satisfying capacity of a commodity.
  2. Total utility is the total satisfaction from consuming a given quantity of a commodity.
  3. Marginal utility is the change in total utility from consuming one additional unit.
  4. Law of Diminishing Marginal Utility states that MU declines as consumption of a commodity increases.
  5. Demand is the quantity of a commodity a consumer is willing and able to buy at given prices and income.
  6. Law of Demand states that other things being equal, price and quantity demanded are inversely related.
  7. An indifference curve joins all bundles that give the consumer equal satisfaction.
  8. Marginal Rate of Substitution (MRS) is the rate at which a consumer substitutes one good for another while staying on the same indifference curve.
  9. Law of Diminishing MRS states that MRS falls as more of one good is consumed.
  10. Indifference curves are downward sloping, convex to the origin, and never intersect.
  11. Monotonic preferences mean a consumer always prefers more of at least one good and no less of another.
  12. The budget set includes all bundles a consumer can afford given income and prices.
  13. The budget line shows all bundles that cost exactly the consumer's income.
  14. The slope of the budget line equals –p1/p2.
  15. Consumer optimum occurs where the budget line is tangent to the highest possible indifference curve.
  16. At optimum, MRS equals the price ratio (p1/p2).
  17. Normal goods have demand that increases with income; inferior goods have demand that decreases with income.
  18. Substitutes are goods that can replace each other; complements are goods consumed together.
  19. A Giffen good has a positively sloped demand curve due to a strong income effect.
  20. Perfect substitutes have straight-line indifference curves with constant MRS.

MCQs — 10 Questions with Answers

Q1. Which of the following correctly defines utility?

  • A. The total quantity of a commodity consumed by a consumer
  • B. The want-satisfying capacity of a commodity ✓
  • C. The price consumers are willing to pay for a good
  • D. The total expenditure on a bundle of goods

Answer: B — Utility refers to the satisfaction or want-satisfying capacity a consumer derives from a commodity, not the quantity, price, or expenditure.

Q2. If consumption of 4 units gives TU = 32 and 5 units gives TU = 38, what is MU of the 5th unit?

  • A. 6 units ✓
  • B. 38 units
  • C. 32 units
  • D. 7.6 units

Answer: A — Marginal Utility of 5th unit = TU5 − TU4 = 38 − 32 = 6 units (change in total utility from one additional unit).

Q3. State which of the following is correct regarding the Law of Diminishing Marginal Utility.

  • A. Total Utility always decreases as consumption increases
  • B. Marginal Utility increases as consumption increases
  • C. Marginal Utility from each additional unit declines while consumption increases ✓
  • D. Total Utility becomes negative after the first unit

Answer: C — The law states that MU declines as consumption increases, not that TU declines; TU continues rising as long as MU remains positive.

Q4. A consumer derives the following utility: 1st unit TU = 10, 2nd unit TU = 18, 3rd unit TU = 24, 4th unit TU = 24. At which unit does the consumer reach satiation?

  • A. 2nd unit
  • B. 3rd unit
  • C. 4th unit ✓
  • D. Beyond 4th unit

Answer: C — Satiation occurs when MU = 0, meaning TU stops increasing. At 4th unit, TU = 24 (same as 3rd unit), so MU4 = 0, indicating satiation.

Q5. Which is NOT a correct statement about Total Utility and Marginal Utility?

  • A. Total Utility can continue to rise even when Marginal Utility is falling
  • B. Marginal Utility becomes negative when additional consumption reduces satisfaction
  • C. Total Utility equals the sum of all Marginal Utilities
  • D. Marginal Utility rises continuously as consumption increases ✓

Answer: D — Marginal Utility does NOT rise continuously; by the law of diminishing MU, it declines as consumption increases, though TU may still rise.

Q6. Why does the demand curve slope downward according to cardinal utility analysis?

  • A. Because income of consumers decreases
  • B. Because each additional unit gives lower satisfaction, consumers pay less for it ✓
  • C. Because firms reduce supply at lower prices
  • D. Because the cost of production increases

Answer: B — Diminishing MU means additional units provide less satisfaction; consumers are willing to pay lower prices for units with lower marginal utility, creating a downward-sloping demand curve.

Q7. A consumer's consumption bundle is (8, 12), which means:

  • A. 8 units of good 2 and 12 units of good 1
  • B. 8 units of good 1 and 12 units of good 2 ✓
  • C. Total expenditure is Rs. 20
  • D. Marginal utility of the bundle is 8

Answer: B — Bundle notation (x1, x2) means x1 units of the first good and x2 units of the second good; (8, 12) = 8 units of good 1 and 12 units of good 2.

Q8. If a consumer consumes 10 units of a good and TU = 100, and after consuming 11 units TU = 108, which statement is true? (A) MU11 = 8 and the consumer should continue buying (B) MU11 = 108 and demand curve is upward-sloping (C) MU11 = 8 but this violates the law of diminishing MU if MU10 was greater (D) MU11 = 100 and Total Utility will start falling

  • A. Only the marginal utility value is correct but demand implications are wrong
  • B. The calculation is correct and violates diminishing MU only if previous MU was higher ✓
  • C. Both the MU value and TU direction are impossible
  • D. The MU is incorrectly calculated

Answer: B — MU11 = TU11 − TU10 = 108 − 100 = 8 is correct; diminishing MU is violated only if MU10 (11th unit's previous MU) was greater than 8, which is consistent with the law.

Q9. Assertion: Utility is cardinal in nature because it can always be measured in exact numbers. Reason: Modern economists prefer ordinal utility because it only ranks satisfaction without assigning specific numerical values. Which is correct?

  • A. Both assertion and reason are correct and related
  • B. Assertion is correct but reason is not related
  • C. Assertion is incorrect; utility can be ordinal (ranking only), not always cardinal (numerical) ✓
  • D. Reason is correct but assertion is not based on modern economics

Answer: C — While cardinal analysis assumes numbers can measure utility, utility is actually ordinal in practice; consumers rank bundles without needing exact numerical values, making the assertion incorrect.

Q10. A person derives utility from chocolates as shown: 1st = 20, 2nd = 38, 3rd = 52, 4th = 62. If price of chocolate is Rs. 2 per unit and the consumer buys 3 units, what is the total marginal utility from the 3rd unit, and should they buy a 4th unit at this price? (Show working: MU3 = TU3 − TU2; compare satisfaction gain to price)

  • A. MU3 = 14 units; yes, buy 4th because MU4 = 10 > 0
  • B. MU3 = 52 units; no, stop because TU is falling
  • C. MU3 = 14 units; decision depends on whether MU4 (10 units) justifies Rs. 2 price ✓
  • D. MU3 = 38 units; yes, always buy more because TU keeps rising

Answer: C — MU3 = 52 − 38 = 14 units; MU4 = 62 − 52 = 10 units; rational purchase depends on whether the satisfaction gain (10 units) justifies the price paid (Rs. 2), requiring value comparison.

Flashcards

What is utility in economics?

Utility is the want-satisfying capacity of a commodity; it is subjective and varies across individuals and time.

Define Total Utility (TU) with an example.

Total Utility is the total satisfaction derived from consuming a given quantity of a commodity; for example, 5 bananas together give 30 units of satisfaction.

What is Marginal Utility (MU) and how is it calculated?

Marginal Utility is the additional satisfaction from consuming one more unit; it is calculated as MUn = TUn − TUn−1.

State the Law of Diminishing Marginal Utility.

As consumption of a commodity increases, holding other goods constant, the marginal utility from each additional unit decreases.

What does it mean when MU becomes zero?

When MU = 0, Total Utility reaches its maximum and the consumer experiences satiation; consuming further units will decrease TU.

Why does a demand curve slope downward?

Due to diminishing marginal utility, consumers are willing to pay less for each additional unit, so quantity demanded increases only at lower prices.

How is Total Utility related to Marginal Utility?

Total Utility of n units equals the sum of marginal utilities of all units: TUn = MU1 + MU2 + … + MUn.

Why is utility described as subjective?

Different individuals derive different levels of utility from the same commodity depending on their preferences, place, and time.

What is the difference between TU rising and MU rising?

TU rises as long as MU is positive; MU rises during the initial units but always declines after, even while TU continues to increase.

Can negative marginal utility occur in practice?

Yes, when consumption becomes excessive (e.g., overeating), additional units reduce total satisfaction, making MU negative.

Important Board Questions

Define Total Utility (TU) and Marginal Utility (MU). Give one example to show how MU is calculated from TU data. [2 marks]

TU = total satisfaction from n units; MU = change in TU for one additional unit (MUn = TUn − TUn−1). Example: If TU3 = 30 and TU4 = 35, then MU4 = 5 units.

Explain the Law of Diminishing Marginal Utility with numerical example. How does this law explain why demand curve slopes downward? [5 marks]

State the law clearly: MU declines as consumption increases. Example: MU1 = 20, MU2 = 15, MU3 = 10 (falling). Link to demand: lower MU means consumer values next unit less, so will only buy at lower price, creating inverse P-Q relationship and downward slope.

A consumer's utility data for a commodity is given: Units 1, 2, 3, 4, 5; TU 10, 22, 33, 42, 48. (a) Calculate MU for each unit. (b) Identify the satiation point. (c) At what unit does TU stop rising at a normal rate? (d) Explain how this data supports the Law of Diminishing Marginal Utility and how it relates to market demand behaviour. (Show all calculations and reasoning.) [6 marks]

Calculate each MU using MUn = TUn − TUn−1; satiation is where MU = 0 (check if it occurs); identify where MU declines most sharply (MU1=10, MU2=12, MU3=11, MU4=9, MU5=6 trend). Explain: MU falls consistently proving law; connect declining MU to declining willingness to pay, hence downward demand curve; discuss practical implication for consumer spending and market equilibrium.

Assertion-Reason Questions for Theory of Consumer Behaviour

Q1. Assertion (A):

Marginal utility of a commodity measures the satisfaction derived from consuming one additional unit.

Reason (R):

Marginal utility is defined as MUₙ = TUₙ − TUₙ₋₁, representing the change in total utility from the nth unit.

Answer: A — Both A and R are true, and R is the correct explanation of A — Both the assertion and reason are true, and the reason correctly explains the assertion by providing the mathematical definition of MU. The reason directly supports why MU measures satisfaction from an additional unit.

Q2. Assertion (A):

Total utility reaches its maximum point when marginal utility equals zero.

Reason (R):

At this point, the consumer has achieved saturation and no additional consumption is needed.

Answer: B — Both A and R are true, but R is NOT the correct explanation of A — The assertion is true — when MU = 0, TU is at maximum (no further increase). However, the reason, while true, does not correctly explain WHY TU is maximum at MU = 0. The mathematical reason is that MU is the rate of change of TU; when the rate of change = 0, TU is at an extremum (maximum). The reason about saturation is motivational but not the logical explanation.

Q3. Assertion (A):

The demand curve slopes downward because utility is subjective and varies among individuals.

Reason (R):

The Law of Diminishing Marginal Utility explains why individuals are willing to buy more at lower prices.

Answer: C — A is true but R is false — The assertion is true — demand curve is downward sloping. However, the reason is false in this context. The reason for the individual's downward sloping demand curve is NOT that utility is subjective (which applies across people), but because ONE individual's marginal utility from each unit DIMINISHES as they consume more (DMU). Subjectivity doesn't directly explain one person's demand curve slope.

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Case-Based Questions (CBQ) for Theory of Consumer Behaviour

Case Study:

Rahul, a college student in Delhi, loves tea and biscuits. On Monday, he consumed 1 cup of tea (TU = 40), 2 cups (TU = 70), 3 cups (TU = 90), 4 cups (TU = 100), and 5 cups (TU = 100). For biscuits, 1 biscuit gave TU = 20, 2 biscuits gave TU = 38, 3 biscuits gave TU = 52, and 4 biscuits gave TU = 62. Rahul's income allows him to consume either 4 cups of tea or 3 biscuits with the same expenditure.

Q1. What is the marginal utility of the 4th cup of tea?

  • A. 10 units ✓
  • B. 25 units
  • C. 30 units
  • D. 100 units

Answer: A

Q2. At which point does Rahul's satisfaction from tea reach maximum?

  • A. After 3 cups
  • B. After 4 cups
  • C. After 5 cups ✓
  • D. Cannot be determined from the data

Answer: C

Q3. Which demonstrates the Law of Diminishing Marginal Utility?

  • A. Rahul's TU for biscuits: 20, 38, 52, 62
  • B. Rahul's MU for tea: approximately 40, 30, 20, 10, 0 ✓
  • C. Rahul's income constraint with same expenditure for both items
  • D. Rahul's preference for tea over biscuits

Answer: B

Q4. The marginal utility of the 3rd biscuit is:

  • A. 14 units ✓
  • B. 52 units
  • C. 38 units
  • D. 90 units

Answer: A

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