CHSE Odisha Class 12 Economics Solutions Chapter 3 Laws of Consumption

Odisha State Board CHSE Odisha Class 12 Economics Solutions Chapter 3 Laws of Consumption Questions and Answers.

CHSE Odisha 12th Class Economics Chapter 3 Question Answer Laws of Consumption

Group – A

Short type Questions with Answers
I. Answer within Two/Three sentence.

Question 1.
What is Consumption ?
Answer:
Consumption refers to the use of goods & services for the satisfaction of human wants. So when a good is consumed its wants satisfying power (utility) is destroyed.

Question 2.
What happens to Total Utility when marginal Utility is zero ?
Answer:
Marginal utility is the additional utility derived from an extra unit consumed. So when the additional units are continuously consumed, the marginal utility goes on diminishing but the total utility goes on increasing at an diminfshing rate. Hence, when marginal utility becomes zero, total utility is maximum.

Question 3.
What happens to Total Utility when marginal utility is negative ?
Answer:
Marginal utility is the addition made to the total utility caused an one extra unit of a good consumed. When marginal utility is negative, it does not add to the total utility rather subtracts it from total utility. So total utility diminishes.

Question 4.
What is Total utility ?
Answer:
Marginal utility is the additional utility derived from the successive units of a good. With continuous consumption, the additional utility (Marginal utility) derived goes on diminishing which is added to the total utility. Thus total utility is the sum of marginal utilities.

Question 5.
What is the nature of Marginal utility ?
Answer:
On account of increase in level of consumption, the intensity of wants for that goods diminises. So the marginal utility diminishes.

Question 6.
What is the slope of Marginal utility curve ?
Answer:
Marginal utility goes on diminishing withincrease in consumption of additional units of a goods. So marginal utility curve slopes downward.

Question 7.
What happens to total utility becomes when marginal utility is zero ?
Ans. The marginal utility derived from a goods becomes zero when he consumes the required units of that good to maximise his satisfaction. So total utility becomes maximum when MU is zero.

Question 8.
Explain the Marginal utility of money.
Answer:
Money is not a commodity rather it represents a bundle of goods & also having generalised purchasing power. So MU of money can never be zero.

Question 9.
Describe the relationship between price of a commodity and Marginal Utility.
Answer:
A consumer prefers to pay the price on the basis of wants satisfying power of a commodity. So price of a commodity is equal to MU.

Question 10.
What is Marginal Utility ?
Answer:
Marginal utility refers to the addition made to the total utility caused by an increase in one additional unit of a good consumed. It is the utility derived from the extra unit of a good consumed. Marginal utility is otherwise expressed as the rate of change of total utility caused by an extra unit consumed. So MUn = TU_n – TU_n-1

Question 11.
Marginal Utility of Money.
Answer:
Money represents a bundle of commodities Hence, the basic nature of marginal utility does not apply to money. It implies that marginal utility derived from the possession of additional unit of money does not diminish as it possesses a generalised, purchasing power.

II. Answer within Five/Six sentence:

Question 1.
What is Marginal utility?
Answer:
Marginal Utility refers to the addition made to the total utility caused by an increase of one additional unit of a commodity consumed. Thus, marginal utility indicates the rate of change of total utility on account of the consumption of one additional unit of a commodity.
i. e. MU_n = TU_n – TU_n-1
Where, MU_n → Marginal utility derived from n’th units of a goods.
TU_n → Total utility derived from n’th unit of a goods,
n → No. of Units of goods consumed.
Marginal utility derived from various units of a goods goes on diminishing with every increase in the additional units consumed. Thus marginal utility curve bears a negative slope.

Question 2.
What is Total Utility ?
Answer:
Total Utility refers to the sum of utilities derived from all the units of a goods consumed. In other words, it is nothing but the sum of marginal utilities derived from different units of a particular goods.
i. e. TU_n = Σ₁MU_n
The very nature of total utility reflects that it increases with the increase in the number of units consumed but at a diminishing rate. Total utility becomes maximum when marginal utility is found to be zero and it starts diminishing when marginal utility is negative.

Question 3.
What is the relationship between Marginal Utility and Total Utility ?
Answer:
Marginal Utility derived from a goods goes on diminishing when the consumer increases the level of consumption of that goods. But in this case, the total utility increases at a diminishing rate. Secondly, total utility derived from a goods is maximum when marginal utility derived from that goods becomes zero. Thirdly, total utility derived from a goods starts diminishing if the marginal utility from such goods becomes negative. Lastly, the marginal utility derived from a goods may be positive or negative but the total utility may not be negative.

Question 4.
State the relationship between Marginal Utility and Price.
Answer:
The Law of Diminishing Marginal Utility reveals that the consumer will derive less and less satisfaction (utility) from the consumption of successive units of a commodity. In other words, the marginal utility of a commodity diminishes with the increase in the stock of a commodity. On the other hand, the price to be paid for a commodity measures the utility. As such, the consumer shall be reluctant to pay the same price for all the units purchased or consumed due to the declining nature of the marginal utility. So the consumer prepares to purchase the various units of a particular commodity by comparing the utility derived and the price paid for it. So long as the price in the market is less than the utility derived, the consumer has a gain over it and at best, he will go on purchasing the various units of that commodity till the marginal utility derived is equal to its price. At this point the consumer prefers to stop purchasing.

Question 5.
Law of Diminishing Marginal Utility is not applicable to money. Explain.
Answer:
Money represents generalised purchasing power. It does not represent a particular commodity; rather it has a command over a bundle of commodities. This is the reason why the law of diminishing marginal utility is of slow application in case of money. In other words, the marginal utility diminishes comparatively slowly in case of money. But in practical field, one can realise the application of law of diminishing marginal utility in case of money, A man having more stock of money (rich man) is not cautious of spending the money as in case of poor man. But in case of a poor man, a unit of money has greater importance. Thus, for poor man having less stock of money, marginal utility seems to be greater in comparison to that of the rich man with more stock of money.

Question 6.
Explain the relationship between Marginal Utility and Total Utility.
Answer:
Marginal Utility refers to the addition made to the total utility caused by an increase in one more unit consumed. Total utility, on the other hand, is the sum of marginal utilities derived form the consumption of all the units. As the person consumes more and more units of a particular commodity, the marginal utility declines while the total utility increases at a diminishing rate. When marginal utility is found to be zero, total utility becomes maximum. When marginal utility is negative, total utility diminishes.

Question 7.
Total Utility increases at a diminishing rate if consumption of a good increases.
Answer:
The law of diminishing marginal utility is based on the characteristic of human wants, that is, a particular want is satiable. When a person goes on consuming more and more units of a particular commodity, the satisfaction derived from the successive units goes on diminishing. The successive units yield less and less satisfaction. Total utility is the aggregate of marginal utilities derived from the consumption of all the units. Therefore, total utilities increases at a diminishing rate.

Question 8.
‘Law of Equi-marginal Utility’ is otherwise called ‘Law of Substitution’. Why ?
Answer:
As per the law of equi-marginal utility, the consumer attains equilibrium when the marginal utility derived from the last rupee spent on each commodity is equal. If the marginal utility derived from goods Aand B is MUA and MUB respectively and the price of A and B is PA and PB, then law of equi-marginal utility is reflected as
\(\frac{\mathrm{MU}_{\mathrm{A}}}{\mathrm{P}_{\mathrm{A}}}\) = \(\frac{\mathrm{MU}_{\mathrm{B}}}{\mathrm{P}_{\mathrm{B}}}\)
If the fraction deviates from each other i.e., \(\frac{\mathrm{MU}_{\mathrm{A}}}{\mathrm{P}_{\mathrm{A}}}\) = \(\frac{\mathrm{MU}_{\mathrm{B}}}{\mathrm{P}_{\mathrm{B}}}\) the consumer will then substitute goods A for B in order to restore the above equality. That’s why, the law is otherwise called as law of substitution

Question 9.
Consumers, Equilibrium.
Answer:
Equilibrium is general sense refers to the “state of balance” & hence it is free from fluctuation. In this sense, a consumer attains equilibrium when he does not have any tendency either to increase or to decrease the level of consumption. Thus, a consumer shall be in equilibrium when he derives maximum satisfaction from the existing level of consumption. According to law of Equi-marginal utility, a consumer is in equilibrium or derives maximum satisfaction when marginal utility derived from various goods stall be equal or marginal utility derived from various goods shall be proportional to its price.

Question 10.
Consumption.
Answer:
Consumption is the initial process for the satisfaction of human wants. Consumption refers to the use of goods & services for the satisfaction of human wants. A consumer consumes a good because of its utility which is destroyed in the process of consumption. Thus, the destruction of utility is the result of consumption. Hence, consumption is viewed as the destruction of utility.

Question 11.
Marginal Utility & Total Utility.
Answer:

• Marginal utility is the addition made to the total utility caused by an increase in one extra unit possessed. Total utility is the sum of utilities derived from all the successive units.
• Marginal utility is the rate of change of total utility due to the consumption of one additional unit. Total utility is the sum of marginal utilities.
• At the intial stage, both the marginal & total utility are found to be equal.
• When marginal utility is zero, total utility is maximum.
• When marginal utility is negative, total utility declines.
• Marginal utility declines with the increase in the level of consumption but total utility increases at a diminishing rate.

Group – B

Long Type Questions With Answers

Question 1.
What is consumption in Economics ? Point out its importance.
Answer:
Meaning of consumption- Consumption is the pivot of all economic activities. In economic sense satisfaction of want through use of goods and services is called consumption. In order to have goods and services man has to make efforts. The urge to work comes from wants. In this sense the want for food is satisfied by having food-stuff for production of which effort is necessary. Consumption is of two types-consumption of goods and consumption of services. When consumption takes place the utilities contained in the commodities are used up and wants are satisfied. Some people observing this loss of utility in a commodity as a result of consumption define consumption as destruction of utility. But this conception of consumption is not correct always. Consumption may cause using up utilities at the point of consumption or it may take place gradually.

Consultation is of great relevance in the study of Economics. Consumption leads to production. The producers produce such things which consumers like. In this sense the consumer is treated as the king in the market. The producer decides the volume of production basing upon the consumer’s preference. The volume of consumption in our economy is an indicator of the degree of human welfare and the state of development of a country. In developed countries the standard of living is high which implies a high level of consumption and production. In under-developed countries the standard of living is low because of low level of consumption.

Consumption may be direct and indirect. Goods and services which are used directly to satisfy wants are called direct consumption. Indirect consumption refers to use of goods for further production. The former type of goods are called consumer goods and the latter type is known as investment goods. Consumption may be productive and unproductive. Productive consumption leads to increase in productivity. Unproductive consumption refers to consumption of luxuries which is wasteful.

Question 2.
State & explain the law of diminishing marginal utility with its exception ? Or, Make an analysis of law of diminishing marginal utility.
Answer:
The law of diminishing marginal utility is one of the fundamental & important laws of consumption. This law which is intially propounded by Gossen, a French engineer has been developed by Alfred Marshall later on. So this is called Gossen’s first law. This law serves as a basis for the analysis of demand.

The law of diminishing marginal utility explains an important tendency in the consumption of every commodity. When a consumer consumes the additional units of a particular goods, the marginal utility derived from those successive units goes on progressively diminishing. That’s why this law is commonly called as “Law of Diminishing marginal utility.” According to Marshall, “the additional benefit which a person derives from the given increase of his stock of a thing diminishes with every in the stock that he already has.”

This law is based on of a fundamental feature of human wants i.e. a particular want is satiable. It simply shows that when a consumer goes on consuming various units of a particular goods, the intensity of his wants for that goods gradually declines. It tells that the marginal utility derived from the additional units of a particular goods gradually falls & ultimately it becomes zero. Second fact speaks that the goods which are consumed are not perfect substitutes for each other. If so happens, one goods can satisfy a number of wants & hence the law will not operate. As the goods are not perfect substitutes for the satisfaction of various wants the law of diminishing marginal utility operates.
Illustration : The law can better be illustrated with the help of a numerical analysis.

Suppose, a consumer starts consuming different units of apples. When he consumes the first unit of the apple, he is supposed to get 30 units of utilities when he proceeds to consume second units of it, he will get 20 units of utility. Similarly, when he consumes 3rd, 4th, 5th & 6th units of the apple, he will get 15 units, 10 units, 5 units and 2 units of utility respectively. Ultimately, after consuming 7th units the marginal utility becomes zero. It simply shows that the gradual and progressive consumption of additional units of apple, the intensity of wants of the consumer towards apples is progressively declining. Furthermore, if the consumer is biased to consume the eighth units of apple, he will confront with the negative satisfaction and the marginal utility become negative (-2). This numerical notion is reflected in the following table :

Units of apple	Marginal Utility (in units)	Total Utility (in units)
1	30	30
2	20	50
3	15	65
4	10	75
5	5	80
6	2	82
7	0	82
8	-2	80

The table just reflects the theoretical illustration as mentioned above. This table reflects that the marginal utility derived from the successive units of apple goes on diminishing progressively but the total utility goes on increasing at a diminishing rate with the increase in the level of consumption. Secondly, the total utility is found to be the sum of the marginal utilities derived from the different units of the apples consumed.

Graphical Illustration : The law of diminishing marginal utility can also be graphically presented in the following manner :

The above figure measures units of the goods on OX-axis & marginal utility derived from OY-axis.
It is observed that the consumer derives 30 units of utilities by consuming 1st unit of the apple. Similarly by consuming 2nd, 3rd, 4th, 5th, and 6th.units of apple, the consumer gets 20,15, 10, 5,2 units of utilities respectively. Furthermore, the consumer gets zero utility by consuming 7th unit of apple and utility becomes -ve (-2) after the consumer consumes the 8units.

The marginal utility curve shows a diminishing trend throughout the period of consumption & it touches the OX-axis at point ‘7’ which shows that the marginal utility derived from the seventh unit is zero & by consuming the 8th unit the consumer gets -ve utility (-2) for which the curve crosses the OX-axis. Above all, the marginal utility curve slopes downward from left to right reflecting the diminishing nature of marginal utility.

Assumptions:
The law of diminishing marginal utility is based on several assumptions. For the operation of this law, the following conditions are to be taken into consideration.
(i) Homogeneous Units : The unitsjof the goods consumed should be identical in all respect. These units must be similar in quality, quantity, size etc for the operation of the law. If the units of the goods are not homogenous, the law of diminishing marginal utility may not operate. .

(ii) Continuous Consumption : The law of diminishing marginal utility stands valid in case of continuous consumption. There should not be any time gap between the consumption of successive units. The consumption should be continuous and regular so that the law will effectively operate.

(iii) Suitable quantity or size to be consumed : The units of the goods which are consumed should be of suitable size or quantity should be suitable. The units should not be so small or quantity should not so little.

(iv) No change in taste habit, fashion etc: The taste, habit, fashion etc should remain unchanged during the period of consumption. The operation of law depends on the constancy of such factors.

(v) Mental condition of the consumers : The consumer is assumed to be rational. His mental condition should be sound & this condition should remain unchanged during the period of consumption.

(vi) No change in the price of goods : The price of the goods should remain constant. If the price of the goods falls, the consumer may consume more of it by reducing the consumption as its substitutes and as such, the law becomes invalid.

(vii) No change in the income of the consumer : The income of the consumer is assumed to be constant. If the income of the consumer changes during the period of consumption, it may influence the consumer’s-behaviour and the law may not operate

Exceptions /Limitations:
The law of diminishing marginal utility suffers from a number of exceptions or limitations. Some of the limitations are. mentioned below :

• Measurability, of Utility : The law presumes that the utility is measurable in cardinal terms. Being a subjective concept, it is impracticable to measure utility in numerical terms.
• Rare and Curious things : The law does not operate in case of the collection of rare and curious things like old coins, old stamps, rare ancient goods, painting etc. In such case, the marginal utility is never felt to be diminishing.
• Conspicuous Consumption : The consumption of those luxurious goods which displays the social status, aristocracy and social prestige of the consumer is termed as conspicuous consumption. In case of such consumption, the law does not operate.
• Indivisible goods : The operation of the law is not felt in case of the consumption of indivisible goods.
• Abnormal Persons : The law is exclusively for the rational consumers. It is not applicable to the misers, mad persons & other abnormal persons.
• Change in taste, fashion and habits : In case of the change in taste, fashion and habit, the law does not operate.
• Initial Consumption : The law does not operate in case of initial consumption. In other words, the operation of law is not realised the stage of initial consumption.

In spite of these limitations, the law of diminishing marginal utility carries tremendous significance. It acts as a basis for the analysis of demand, theory of value, consumers surplus, taxation & other fields of consumption.

Question 2.
What is law of equi-marginal utility ? Explain it with diagram.
Or, How does the consumer attain equilibrium ? Explain the Principle of equilibrium.
Or, Explain the law of substitution ? Why is the law so named ?
Answer:
The law of equimarginal utility occupies an important place in the theory of consumptioti. This law is otherwise called “Gossen’s Second Law” which states the principle for attaining equilibrium in the field of consumption. This fundamental law of consumption describes the rules and principles for getting maximum satisfaction from the consumption of various goods with limited resources.

Admittedly, a consumer confronts with unlimited wants. But he possesses limited resources by which he can satisfy these wants. So he pursues to satisfy these wants with the limited resources in such a manner that he can get maximum satisfaction. In other words, the consumer tries to be in equilibrium while satisfying his unlimited wants with limited resources. Equilibrium is a situation in which the consumer has no tendency either to increase or to decrease the level of consumption. It is only possible if he derives maximum satisfaction. So the consumer is said to be in equilibrium when he gets maximum satisfaction in the field of consumption.

In the context of consumers equilibrium, the law of equi-marginal utility states that a consumer will be in equilibrium or a consumer derives maximum satisfaction when the marginal utilities derived from the different commodities are equal. Suppose a consumer consumes two goods X & Y„ he will be in equilibrium when marginal utility derived from X becomes equal to marginal utility derived from Y i.e.,
i.e. MUx = MUy
It is quite obvious from the law of diminishing marginal utility that a consumer shall go on consuming various units of a particular goods till marginal utility derived from it will be equal to price paid for it. Incase of good X, the consumer stops his consumption when marginal utility derived from it is equal to its price i.e.
i-e MUx = Px
As such, he will start the consumption of Y after this point is achieved & will continue till marginal utility derived from good Y is.equal to its price. i-e MUy = Py
As the marginal utilities are derived from the different goods are .equal, the prices of those goods must be equal. The equality of price of various goods in real market is quite imaginary. So, if the prices are found to be unequal, the law of equi-margnial utility states that a consumer will be in equilibrium when marginal utility derived from a good is proportional to its price. So this law is otherwise called “law of proportionality”. In this case, the consumer derives maximum satisfaction when the utility derived from the last rupee spent on each commodity will be equal. In our example, it is expressed as
\(\frac{\mathrm{MU}_{\mathrm{X}}}{\mathrm{P}_{\mathrm{X}}}\) = \(\frac{\mathrm{MU}_{\mathrm{Y}}}{\mathrm{P}_{\mathrm{Y}}}\)

The equality between the marginal utilities or the equality between \(\frac{MU}{P}\) for two goods may heppen at different level of consumption. But the most feasible combination is that which can be purchased with the given money income. Hence, the equality of \(\frac{MU}{P}\) for various goods must be equal to marginal utility of money which is asumed to be constant. In our example,
\(\frac{\mathrm{MU}_{\mathrm{X}}}{\mathrm{P}_{\mathrm{X}}}\) = \(\frac{\mathrm{MU}_{\mathrm{X}}}{\mathrm{P}_{\mathrm{X}}}\) = MUm
Where MUm represents marginal utility of money, or MUx = MUy = MUm.

If the \(\frac{\mathrm{MU}_{\mathrm{X}}}{\mathrm{P}_{\mathrm{X}}}\) becomes greater than \(\frac{\mathrm{MU}_{\mathrm{Y}}}{\mathrm{P}_{\mathrm{Y}}}\) the consumer shall prefer to substitute good X for Y so that the equality between the two will be restored & the consumer will get maximum satisfaction. For this, the law is called “law of substitution”.
Numercial Analysis.
This notion can be explained with the help of a numerical analysis which is as follows :

Units of. commodities in terms of Money	Marginal Utility X	Marginal Utility Y
1	20	18
2	18	16
3	15	14
4	12	12
5	9	10

In the numerical analysis, it is observed that the marginal utility of goods is equal to marginal utility of good Y when he consumes 4th unit of X and 4th unit of Y. Let the consumer has Rs.20 to spend on these two goods. Suppose, the price of X & price of Y is Rs 2 & Rs 3 respectively. With this a consumer shall be in equilibrium when he purchases 4 units of X & 4 units of Y. No other combinations can give him more satisfaction than this.
Graphical Analysis : The graphical analysis of the law can make this presumption more clear.

This figure measures unit of money on GX-axis which also represents the units of commodities in terms of money & OY-axis measures marginal utility.
The figure shows marginal utility curve for good X & Y which slope downward. It is obvious from the figure that MUx is equal to MUy when 4units of X & 4 units of Y are consumed. Any deviation of it will make the consumer a looser. To establish this let the consumer reduces his consumption of X & now consumer 3 units of X. To compensate this loss, the consumer may perfer to consume one more unit of Y i.e. 5 unit. In this circumstances, it is clear from the figure that the loss due to the reduction of the consumption of X is more than the gain due to increase in one additional unit of X. So, the consumer’s equilibrium is not assured. Thus, the previous combintaion is construed as real combintaion that ensures maximum satisfaction. ,

Limitations:

• Measurability of Utility : The law presumes measurability of utility. But the utility is a subjective concept which can not be measured in cardinal or numerical terms.
• In applicable to free goods : The law does not operate in case of free good as no payment is involved.
• Not applicable to indivisible goods : The law is ineffective for indivisible goods like Car, T.V. Because the marginal utility of car not be compared with that of pen.
• Taste, fashion, Custom, Habit: If the consumer is biased by the taste, fashion, habit, custom, the law will lose its significance.
• Not applicable to irrational man: The law may operate if the consumer is rational. In case of irrational or ignorant consumer, the law does not operate. Through the law suffers from these demerits, it has got practical significance in case of production, distribution publlic finance, planning etc.

Group – C

Objective type Questions with Answers
I. Multiple Choice Questions with Answers :

Question 1.
What hapens to utility of a goods, if it is consumed ?
(i) increases
(ii) decreases
(iii) remains same
(iv) destroyed
Answer:
(iv) destroyed

Question 2.
Which of the following determines the price of a goods ?
(i) utility
(ii) marginal utility
(iii) Demand
(iv) supply
Answer:
(ii) marginal utility

Question 3.
Diamond is more costly because its
(i) Marginal utility is more
(ii) Total utility is more
(iii) Demand is more
(iv) All of the above
Answer:
(i) Marginal utlity is more

Question 4.
For which MU can never be zero ?
(i) Water
(ii) Apple
(iii) Money
(iv) All of these
Answer:
(iii) Money

Question 5.
Which law guides the consumer to gain maximum satisfaction ?
(i) Law of demand
(ii) Law of dimenshing MU
(iii) Law of supply
(iv) Law of Equi-marginal utility
Answer:
(iv) Law of Equi-marginal utility

Question 6.
Which is not an assumption of Law of Diminishing MU ?
(i) Homegeneous units
(ii) Short time interval
(iii) Unchanged Taste and Preference
(iv) Marginal utility of money should by zero
Answer:
(iv) Marginal utility of money should by zero

Question 7.
Which is derived from Law of Dimenshing Marginal Utility ?
(i) Mu of money is zero
(ii) MU = Price
(iii) MU > Price
(iv) MU < Price
Answer:
(ii) MU = Price

Question 8.
For which the law of diminishing MU is not applicable ?
(i) Consumers goods
(ii) Material goods
(iii) Indivigible goods
(iv) Private goods
Answer:
(ii) Material goods

Question 9.
For which the practical importance of Law of equi-marginal utility is felt ?
(i) Production
(ii) Consumption
(iii) Distribution
(iv) All of the above
Answer:
(ii) Consumption

Question 10.
Which is the meaning of consumption ?
(i) creation of utility
(ii) destruction of utility
(iii) creation of satisfaction
(iv) All of the above
Answer:
(ii) destruction of utility

Question 11.
If a consumer goes on consuming the additional units of a goods, the wants satisfying power of the good
(i) increases
(ii) diminishes
(iii) first increases & then decreases
(iv) remain unchanged
Answer:
(ii) diminishes

Question 12.
If a consumer consumes a good, the total utility
(i) decreases
(ii) increases
(iii) remains some
(iv) can not say
Answer:
(ii) increases

Question 13.
The satisfaction derived from the consumption of additional units of a good goes on
(i) increasing
(ii) diminishing
(iii) remains unchanged
(iv) None of the above
Answer:
(ii) diminishing

Question 14.
As per the law of diminishing marginal utility, the increase in level of consumption cause a
(i) increase in MU
(ii) increase in TU
(iii) decrease in MU
(iv) decrease in TU
Answer:
(iii) decrease in MU

Question 15.
Marginal utility curve generally takes the shape of
(i) vertical straight line
(ii) horizontal straight line
(iii) upward sloping
(iv) downward sloping
Answer:
(iv) downward sloping

Question 16.
When marginal utility is zero, the TU becomes
(i) zero
(ii) minimum
(iii) maximum
(iv) negative
Answer:
(iii) maximum

Question 17.
With increase in level of consumption, total utility derived from the goods goes on
(i) increasing at an increasing rate
(ii) diminishing
(iii) increasing at a diminishing rate
(iv) increasing
Answer:
(iii) increasing at a diminishing rate

Question 18.
When marginal utility is negative, the total utility
(i) remains unaffected
(ii) diminishes
(iii) increases
(iv) first increases & then decreases
Answer:
(ii) diminishes

Question 19.
Which is the assumption of law of diminishing marginal utility ?
(i) Income of the consumer should remain constant
(ii) consumption must be continuous
(iii) Goods must be homogeneous
(iv) All of the above
Answer:
(iv) All of the above

Question 20.
For the operation of the law of diminishing marginal utility, the units of the good must be
(i) big in size
(ii) identical
(iii) very small
(iv) no specific size is required
Answer:
(ii) identical

Question 21.
Law of diminishing marginal utility does not operate in case of
(i) drunkard
(ii) rational man
(iii) consumer
(iv) producer
Answer:
(i) drunkard

Question 22.
Which law provides a base for consumers equilibrium ?
(i) Law of diminishing marginal utility
(ii) Law of Equi-marginal utility
(iii) Law of demand
(iv) All of the above
Answer:
(ii) Law of Equi-marginal utility

Question 23.
Which is not the other name of the law of equi-marginal utility ?
(i) Law of maximum happiness
(ii) Law of substitution
(iii) Law of maximum satisfaction
(iv) Law of maximum utility
Answer:
(iii) Law of maximum satisfaction

Question 24.
In order to get maximum satisfaction, the marginal utilities derived from various goods should be
(i) maximum (ii) equal
(iii) unequal
(iv) Both (i) and (ii)
Answer:
(ii) equal

Question 25.
According to law of equi-marginal utility, the marginal utility derived from a good must be
(i) proportional to its price
(ii) equal to its price
(iii) equal to MU of money
(iv) All of the above
Answer:
(i) proportional to its price

Question 26.
While purchasing goods with fixed income a rational consumer is guided by;
(i) Law of demand
(ii) Law of supply
(iii) Law of Equi-marginal utility
(iv) Law of diminishing marginal utility
Answer:
(iii) Law of Equi-marginal utility

Question 27.
Law of equi-marginal utility does not operate in ease of
(i) Divisible of goods
(ii) rational consumer
(iii) unlimited resources
(iv) All of the above
Answer:
(iii) unlimited resources

Question 28.
Law of eqi-marginal utility is based on
(i) Wants are competitive
(ii) A particular want is satiable
(iii) Wants are complementary
(iv) All of the above
Answer:
(i) Wants are competitive

Question 29.
The Most important assumptions of ‘Law of Diminishing Marginal Utility’ is :
(i) Commodity must be homogenous
(ii) Consumption must be continuous
(iii) Sufficient quantity is to be consumed
(iv) All of the above
Answer:
(iv) All of the above

Question 30.
The most important limitations of Law of Diminishing Marginal Utility is
(i) Abnormal Person
(ii) Indivisible goods
(iii) Gififen goods
(iv) Both (i) and (ii)
Answer:
(iv) Both (i) and (ii)

Question 31.
A consumer will attain equlibrium when :
(i) \(\frac{\text { M.U.x }}{\text { Px }}\) = \(\frac{\text { M.U.y }}{\text { Py }}\)
(ii) MUx = MUy
(iii) \(\frac{\text { M.U.x }}{\text { Py }}\) = \(\frac{\text { M.U.y }}{\text { Px }}\)
(iv) None of the above
Answer:
(iii) \(\frac{\text { M.U.x }}{\text { Py }}\) = \(\frac{\text { M.U.y }}{\text { Px }}\)

Question 32.
The most important assumptions of Law of Equi-marginalutility are:
(i) Utility of a commodity is cardinally measurable.
(ii) Marginal utility of money remains constant.
(iii) Income of the consumer is constant.
(iv) Both (i) and (ii)
Answer:
(iv) Both (i) and (ii)

Question 33.
In which of the following cases the law of Diminishing Marginal Utility is not applicable ?
(i) Love
(ii) Money
(iii) Stamp collection
(iv) All of the above
Answer:
(iv) All of the above

Question 34.
The relationship between marginal utility and total utility is :
(i) Total utility increases at an increasing rate after a point.
(ii) When marginal utility becomes zero, total utility becomes maximum.
(iii) Total utility starts falling when marginal utility becomes negative.
(iv) Both (ii) and (iii)
Answer:
(iv) Both (ii) and (iii)

Question 35.
Marginal Utility is
(i) Want satisfying power of a commodity.
(ii) The sum of utilities of all successive units of a commodity.
(iii) The addition to the total utility caused by an increase of one commodity possessed.
(iv) None of the above.
Answer:
(iii) The addition to the total utility caused by an increase of one commodity possessed.

Question 36.
When marginal utility is zero, the total utility is:
(i) Zero
(ii) Negative
(ii) Maximum
(iv) None of the above.
Answer:
(iii) Maximum

Question 37.
Marginal Utility of money can be:
(i) Zero
(ii) Negative
(iii) Neither zero nor negative
(iv) None of the above.
Answer:
(iii) Neither zero nor negative.

Question 38.
The law of equi-rnarginal utility is also known as:
(i) Law of substitution.
(ii) Law of maximum satisfaction.
(iii) Law of proportionality
(iv) All of the above.
Answer:
(iv) All of the above.

II. Fill in the blanks :

Question 1.
Consumption refers to the ____ of utility.
Answer:
Destruction

Question 2.
As the quantity of commodity consumed increases, total utility also increases at a ____
Answer:
Diminishing rate.

Question 3.
____ is the rate of change of total utility.
Answer:
Marginal utility

Question 4.
Price of a commodity is always equal to ____ utility.
Answer:
marginal

Question 5.
Total utility becomes ____ when marginal utility is zero.
Answer:
maximum

Question 6.
____ utility can never be negative.
Answer:
Total

Question 7.
Total utility may ____ when marginal utility is negative.
Answer:
diminish

Question 8.
Marginal utility curve has a ____
Answer:
Diminish

Question 9.
While consuming, a consumer stops his consumption when marginal utility derived from a commodity is equal to ____
Answer:
Price

Question 10.
Utility is a ____ concept.
Answer:
Subjective

Question 11.
According to Marshall marginal utility of money remains ____
Answer:
Constant

Question 12.
Price of a commodity reflects ____ utility.
Answer:
Marginal

Question 13.
Marginal utility of liquor in case of a drunkard ____ instead of felling.
Answer:
Rises

Question 14.
The consumer is in equlibrium when marginal utility derived from different commodities is ____
Answer:
equal.

Question 15.
Law of ____ guides the consumer for deriving maximum satisfaction.
Answer:
equi-marginal utility

III. Correct the Sentences:
Correct them, if necessary, without changing the words underlined.

Question 1.
Consumption is the creation of utility.
Answer:
Incorrect
Correct: Consumption is the destruction of utility.

Question 2.
Utility is an objective concept.
Answer:
Incorrect
Correct: Utility is a subjective concept

Question 3.
Utility is assumed to be a cardinal concept.
Answer:
Correct

Question 4.
Marginal utility is the sum of utilities.
Answer:
Incorrect
Correct; Total utility is the sum of utilities.

Question 5.
Rate of change of total utility is the marginal utility.
Answer:
Correct.

Question 6.
When a consumer consumes the additional units of a goods, marginal utility increases but total utility decreases at a diminishing rate.
Answer:
Incorrect
Correct: When a consumer consumes the additional unite of a goods, margina utility decreases. but total utility increases at a diminishing rate.

Question 7.
Total utility is the additional utility derived from the consumption of an extra units of a goods.
Answer:
Incorrect
Correct: Marginal utility is the additional utility derived from the consumption of an extra units of a goods.

Question 8.
When marginal utility is zero, total utility is zero.
Answer:
Incorrect
Correct: When marginal utility is zero, total utility is maximum.

Question 9.
Marginal utility can never be negative.
Answer:
Incorrect
Correct: Total utility can never be neeative.

Question 10.
Total utility goes on increasing even if marginal utility is negative.
Answer:
Incorrect
Correct: Total utility declines when marginal utility is negative.

Question 11.
Marginal utility is a static concept.
Answer:
Incorrect
Correct: Marginal utility is a moving concept.

Question 12.
Marginal utility tends to be equal to price.
Answer:
Correct

Question 13.
Utility derived from the last unit is the marginal utility.
Answer:
Incorrect
Correct: Utility derived from the additional unit is the marginal utility.

Question 14.
Marginal utility curve has a positive slope.
Answer:
Incorrect
Correct: Marginal utility curve has a negative slope.

Question 15.
Total utility of a goods determines the price.
Answer:
Incorrect
Correct: Marginal utility of a goods determines the price.

Question 16.
Consumer is in equilibrium when total utility derived from different goods are equal.
Answer:
Incorrect
Correct: Consumer is in equilibrium, when marginal utility derived from different goods are equal.

Question 17.
Marginal utility is inversely related to price.
Answer:
Incorrect
Correct: Marginal utility is directly related to price.

Question 18.
Law of equi-marginal utility is called “Law of substitution”.
Answer:
Correct

Question 19.
In law of equi-marginal utility, marginal utility is equal to its price.
Answer:
Incorrect
Correct: In law of equi-marginal utility, marginal utility is proportional to its price.

Question 20.
Law of equi-marginal utility is called law of proportionality
Answer:
Correct

IV. Answer the following questions in one word/one sentence :

Question 1.
What is meaning of consumption ?
Answer:
Consumption refers to the use of goods & services for the satisfaction of human wants.

Question 2.
Who is called as a rational consumer ?
Answer:
A rational consumer is one who tries to maximise his utility.

Question 3.
Who is the consuming unit ?
Answer:
Consumer is the consuming unit.

Question 4.
What is utility ?
Answer:
Utility is the wants satisfying power of a commodity.

Question 5.
What is Total Utility ?
Answer:
Total utility is the sum of utilities derived from all the successive units consumed.

Question 6.
What is marginal utility ?
Answer:
Marginal utility is the addition made to the total utility caused by an increase in one additional unit of a good consumed.

Question 7.
What happens to total utility when the units of goods consumed increases ?
Answer:
When the units of goods consumed increase, the total utility increases at a diminishing rate.

Question 8.
What is the nature of marginal utility ?
Answer:
Marginal utility derived from a goods diminishes with every increase in the units of that goods consumed.

Question 9.
What happens to total utility’ when marginal utility is zero ?
Answer:
When marginal utility is zero, the total utility is maximum.

Question 10.
What happens to total utility when marginal utility is negative ?
Answer:
Total utility decreases when marginal utility is -ve.

Question 11.
When marginal utility becomes equal to total utility ?
Answer:
At the initial stage of consumption, marginal utility is equal to total utility.

Question 12.
Who propounded the law of diminishing marginal utility ?
Answer:
Alfred Marshall.

Question 13.
What is law of diminishing marginal utility ?
Answer:
According to Marshall, “the additional benefit what a person derives from the given increase of his stock of a thing diminishes with every increase in the stock that he already has.”

Question 14.
What does the law of diminishing marginal utility show ?
Answer:
The law of diminishing marginal utility shows the relationship between marginal utility derived from various units of a goods & the quantity of it consumed.

Question 15.
To what extent a consumer goes on consuming various units of a goods ?
Answer:
A consumer goes on consuming various units of a goods till marginal utility derived is equal to its price.

Question 16.
What should be the nature of commodity for the operation of law of diminishing marginal utility ?
Answer:
The units of the commodity must be homogeneous.

Question 17.
Does marginal utility of money become zero ?
Answer:
No, marginal utility of money can never be zero.

Question 18.
Why does marginal utility of money not become zero ?
Answer:
Marginal utility of money does not become zero because money is not a commodity rather it represents a bundle of commodities.

Question 19.
What is the relationship between marginal utility & price ?
Answer:
Marginal utility derived from a goods should be equal to its price.

Question 20.
Which law is called “Gossen’s first law.”
Answer:
Law of diminishing marginal utility is called to “Gossen’s first law”.

Question 21.
State two exceptions of law of diminishing marginal utility.
Answer:
The law does not operate in case of indivisible goods & rare collections.

Question 22.
What is equilibrium ?
Answer:
Equilibrium is a state of balance.

Question 23.
When does consumer attain equilibrium ?
Answer:
Consumer is said to be in equilibrium when he has no tendency either to increase or to decrease the level of consumption.

Question 24.
What happens to utility when consumer attains equilibrium ?
Answer:
Utility is maximised when consumer attains equilibrium.

Question 25.
Which law explains the consumers equilibrium ?
Answer:
Law of equi-marginal utility explains the consumers’ equilibrium.

Question 26.
Which law is called “Gossen’s second law” ?
Answer:
Law of equimarginal utility is called Gossen’s second law.

Question 27.
What does the law of equi-marginal utility state ?
Answer:
Law of equi-marginal utility states that a consumer will be in equilibrium when the marginal utility derived from different goods are equal.

Question 28.
What relationship between marginal utility & price exists in case of consumer’s equilibrium ?
Answer:
The marginal Utility is proportional to its price in case of consumer’s equilibrium.

Question 29.
How can be the marginal utility of money measured ?
Answer:
Marginal utility of money can be measured by dividing marginal utility of a commodity by its price.

Question 30.
Which law is called the “Law of substitution”.
Answer:
Law of equi-marginal utility.