Theory of Consumer Behaviour – CBSE NCERT Study Resources

An outward parallel shift in the budget line indicates a rise in income, keeping prices constant. The consumer can now afford higher combinations of goods.

• The new equilibrium occurs where the higher IC is tangent to the new budget line, indicating increased satisfaction.
• Example 1: A salary hike allows purchasing more of both groceries and electronics.
• Example 2: A student’s increased allowance enables buying more books and leisure items.

This assumes normal goods. For inferior goods, the outcome may differ, requiring deeper analysis.

A price fall increases purchasing power, splitting into substitution effect (preferring cheaper Good X) and income effect (higher real income).

• For normal goods, both effects boost demand (e.g., smartphones).
• For Giffen goods (e.g., low-quality rice), the income effect dominates, reducing demand despite lower price.

Our textbook shows Giffen goods violate the Law of Demand, highlighting exceptions to theoretical predictions.

The DMU states that marginal utility declines with each additional unit consumed, eventually reaching zero or negative utility.

Example: Eating slices of pizza—satisfaction decreases after the 3rd slice.

This rationalizes consumer stopping points but assumes constant preferences, which may not hold in dynamic scenarios.

MRS_EM = 2 means the consumer sacrifices 2M for 1E, indicating higher preference for Education.

• A subsidy reduces E’s effective price, pivoting the budget line outward along E-axis.
• New equilibrium shifts to higher E and possibly higher M (e.g., subsidized online courses freeing income for movies).

While subsidies promote welfare, over-subsidization may distort opportunity costs, requiring balanced policy.

An outward parallel shift in the budget line indicates a rise in income with constant prices. For normal goods, demand increases with income.

• Higher income allows the consumer to afford more of both goods, shifting the optimal bundle to a higher indifference curve.
• The new tangency point reflects increased quantities of both goods, assuming neither is inferior.

Example: If a consumer buys more books and movies after a salary hike, both are normal goods. However, if one good is inferior, the result differs.

The law states that marginal utility declines with each additional unit consumed, reducing satisfaction.

• A consumer stops when marginal utility equals zero, as further consumption yields disutility.
• Even free goods have an opportunity cost (e.g., time).

Example: Free samples at a store. Initially, they provide high utility, but after a few, the consumer declines more due to satiety.

For Giffen goods, the income effect outweighs the substitution effect, leading to perverse demand behavior.

• Price fall increases real income, but consumers buy less of the Giffen good (e.g., staple food) as they switch to superior alternatives.
• [Diagram: Downward-sloping demand curve for Giffen goods]

Example: During a potato price drop in Ireland, poor households consumed fewer potatoes and more meat.

MRS of 2:1 means the consumer sacrifices 2 teas for 1 coffee to maintain utility.

• Cheaper coffee reduces its opportunity cost, making the consumer prefer more coffee.
• MRS adjusts until it equals the new price ratio.

Example: If coffee price drops from ₹20 to ₹10, the consumer may shift from tea-heavy bundles to balance utility.

A parallel outward shift in the budget line indicates a rise in income without price changes. For normal goods, demand increases with income.

• Higher income shifts the budget line outward, enabling higher utility.
• The new optimal bundle lies where the new budget line is tangent to a higher IC.

Example: If a consumer buys more organic food (normal good) after a salary hike, their IC shifts right. However, inferior goods (like cheap staples) may see reduced demand.

DMU states utility declines with each additional unit consumed. Free goods still follow DMU.

• At zero price, consumption continues until MU=0 (saturation).
• Digital goods (e.g., free apps) defy DMU as storage costs replace monetary prices.

Example: Eating free ice cream stops when satisfaction plateaus. Streaming services, however, leverage near-zero marginal cost to bypass DMU constraints.

MRS=2:1 implies the consumer sacrifices 2 teas for 1 coffee. Price drop makes coffee relatively cheaper.

• Budget line pivots outward on the coffee axis.
• New equilibrium has higher coffee consumption and lower MRS (flatter IC slope).

Example: If coffee price halves, a student may switch from tea. However, taste preferences (indifference curves) limit substitution.

Traditional theory assumes logical choices, but behavioral economics highlights cognitive biases.

• Impulse buying (e.g., checkout aisle snacks) violates utility maximization.
• Anchoring (e.g., high MRP discounts) skews perceived value.

Example: Black Friday sales exploit urgency over rationality. Our textbook shows such biases require revised models like bounded rationality.

To determine if Rahul is maximizing satisfaction, we apply the Law of Equi-Marginal Utility, which states that a consumer achieves equilibrium when the ratio of Marginal Utility (MU) to price (P) is equal for all goods.

Step 1: Calculate MU/P for both goods
For Books: MU_Books/P_Books = 40/200 = 0.2 utils/₹
For Movies: MU_Movies/P_Movies = 100/500 = 0.2 utils/₹

Step 2: Compare ratios
Since both ratios are equal (0.2 = 0.2), Rahul is already in Consumer Equilibrium and maximizing his satisfaction. No reallocation is needed.

Additional Insight: If the ratios were unequal, Rahul should shift expenditure toward the good with the higher MU/P until equilibrium is achieved.

Step 1: Initial Equilibrium
Priya's initial budget line equation: 10T + 5B = 50, where T = Tea and B = Biscuits.
At equilibrium, her Marginal Rate of Substitution (MRS) equals the price ratio (P_Tea/P_Biscuits = 10/5 = 2).

Step 2: After Price Rise
New budget line: 10T + 10B = 50.
The price ratio becomes 10/10 = 1, making Biscuits relatively more expensive.

Effect on Equilibrium:

• Substitution Effect: Priya will consume less Biscuits (now costlier) and more Tea.
• Income Effect: Her purchasing power decreases, reducing consumption of both goods if they are normal.

To maximize satisfaction, Rahul should allocate his income such that the marginal utility per rupee (MU/P) is equal for both goods. Here’s the step-by-step solution:

Step 1: Calculate MU/P for Pizza and Burgers:

For Pizza (Price = ₹200):

• 1st slice: MU/P = 40/200 = 0.2
• 2nd slice: MU/P = 32/200 = 0.16
• 3rd slice: MU/P = 24/200 = 0.12

For Burgers (Price = ₹100):

• 1st burger: MU/P = 30/100 = 0.3
• 2nd burger: MU/P = 24/100 = 0.24
• 3rd burger: MU/P = 18/100 = 0.18

Step 2: Allocate income to equalize MU/P:

Rahul should spend in the order of highest MU/P first:

• 1st Burger (MU/P = 0.3) → ₹100 spent, ₹9,900 left
• 1st Pizza (MU/P = 0.2) → ₹200 spent, ₹9,700 left
• 2nd Burger (MU/P = 0.24) → ₹100 spent, ₹9,600 left
• 2nd Pizza (MU/P = 0.16) → ₹200 spent, ₹9,400 left
• 3rd Burger (MU/P = 0.18) → ₹100 spent, ₹9,300 left

Optimal Bundle: 2 Pizzas (₹400) + 3 Burgers (₹300) = ₹700 (within ₹10,000).

Note: Further allocation would make MU/P unequal, reducing total utility.

(a) Calculating MRS at Equilibrium:

The MRS is the slope of the indifference curve (dy/dx). Given XY = 100:

Differentiating implicitly: Y + X(dY/dX) = 0 → MRS = dY/dX = −Y/X.

At equilibrium, MRS = Price Ratio (Px/Py):

Here, Px/Py = 5/10 = 0.5. Thus, −Y/X = −0.5 → Y = 0.5X.

(b) Optimal Quantities:

Substitute Y = 0.5X into the budget line 5X + 10Y = 100:

5X + 10(0.5X) = 100 → 5X + 5X = 100 → X = 10.

Then, Y = 0.5(10) = 5.

Verification: XY = 10 × 5 = 50 (Note: This contradicts the original IC equation XY = 100, implying a possible typo in the question. Assuming the correct IC is XY = 50, the solution holds.)

Key Insight: Equilibrium occurs where the budget line is tangent to the indifference curve, ensuring maximum utility within the budget constraint.

To determine the consumer equilibrium, Rahul must maximize his total utility within his budget constraint (₹10,000). The budget constraint equation is:

200P + 100B = 10,000, where P = slices of pizza and B = burgers.

We check each combination:

• Combination A: (10 × 200) + (80 × 100) = 2,000 + 8,000 = ₹10,000. Total Utility = 1,200 utils.
• Combination B: (20 × 200) + (60 × 100) = 4,000 + 6,000 = ₹10,000. Total Utility = 1,400 utils.
• Combination C: (30 × 200) + (40 × 100) = 6,000 + 4,000 = ₹10,000. Total Utility = 1,500 utils (highest).
• Combination D: (40 × 200) + (20 × 100) = 8,000 + 2,000 = ₹10,000. Total Utility = 1,300 utils.

Combination C is the equilibrium point as it provides the maximum utility (1,500 utils) within the budget. The law of diminishing marginal utility ensures no other combination yields higher satisfaction.

According to the law of equi-marginal utility, Priya will achieve equilibrium when:

MU_Books / Price_Books = MU_Coffee / Price_Coffee, and total expenditure = ₹2,000.

We calculate the MU per rupee for both goods:

• 1st Book: MU/P = 50/500 = 0.1 | 1st Coffee: MU/P = 10/50 = 0.2
• 2nd Book: MU/P = 40/500 = 0.08 | 2nd Coffee: MU/P = 8/50 = 0.16
• 3rd Book: MU/P = 30/500 = 0.06 | 3rd Coffee: MU/P = 6/50 = 0.12
• 4th Book: MU/P = 20/500 = 0.04 | 4th Coffee: MU/P = 4/50 = 0.08

To maximize satisfaction, Rahul should allocate his income in a way that the Marginal Utility (MU) per rupee spent is equal across all goods. Here's how:

The Law of Diminishing Marginal Utility states that as Rahul consumes more of a good, the additional satisfaction (MU) derived from each additional unit decreases. Hence, he should balance his spending to avoid overconsumption of any single good.

To find Priya's optimal bundle, we apply the Consumer Equilibrium condition: MU_Books / P_Books = MU_Coffee / P_Coffee.

Thus, Priya should buy 1 Book and 5 Coffees to maximize utility. This satisfies both the equilibrium condition and budget constraint.

When Rahul's income increases from ₹10,000 to ₹15,000, his budget line will shift parallelly outward, indicating an increase in his purchasing power. Here's the analysis:

• Initial Budget Line Equation: If food (F) and clothing (C) are the two goods, the equation is: 6000F + 2000C = 10,000.
• New Budget Line Equation: With increased income, it becomes: 6000F + 2000C = 15,000, allowing Rahul to consume more of both goods.

The indifference curve will shift to a higher level, representing a higher utility due to increased consumption. Rahul may now choose a new combination of food and clothing that maximizes his satisfaction, possibly increasing both but prioritizing one based on his preferences (e.g., more food if it's a necessity).

Value-added insight: The shift in the indifference curve also reflects the income effect, where higher income enables higher utility without altering prices.

When Priya's Marginal Rate of Substitution (MRS) is 2, it means she is willing to give up 2 units of good Y to gain 1 additional unit of good X while maintaining the same level of satisfaction. This reflects her subjective trade-off between the two goods.

Effect of Price Change: If the price of good X decreases:

• Her budget line pivots outward along the X-axis, as she can now buy more of X with the same income.
• The new equilibrium will occur where the new budget line is tangent to a higher indifference curve, indicating increased utility.
• Her MRS will adjust to equal the new price ratio (P_X/P_Y), which is lower due to the fall in P_X.

Diagram Description: The initial equilibrium (E₁) is where the budget line touches IC₁. After the price drop, the flatter budget line touches IC₂ at E₂, showing higher consumption of X (substitution effect) and possibly Y (income effect).

Key Insight: The adjustment highlights the substitution effect (more X as it becomes cheaper) and income effect (higher purchasing power).