Very Short Answer Question

  1. Define utility.
    Ans:
    Utility is the satisfaction or benefit consumers derive from consuming goods and services.
  2. Define total utility (TU).
    Ans:
    Total utility (TU) is the overall satisfaction a consumer gets from consuming a specific quantity of a good or service.
  3. What is meant by marginal utility?
    Ans:
    Marginal utility refers to the additional satisfaction obtained from consuming one more unit of a good or service.
  4. State the law of diminishing marginal utility.
    Ans:
    The law of diminishing marginal utility asserts that as a consumer consumes more units of a good or service, the additional satisfaction from each additional unit decreases, all else being equal.
  5. Define law of substitution.
    Ans:
    The law of substitution states that consumers will replace a good or service with another if it provides greater utility per unit of cost, considering their budget constraints
  6. Define consumer’s surplus.
    Ans:
    Consumer’s surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price paid, representing their gain from the transaction.
  7. What is producer’s surplus?
    Ans:
    Producer’s surplus is the difference between the minimum price a producer is willing to accept for a good or service and the actual price received, indicating their gain from the transaction.

Short Answer Question :

1. Describe the concept of total utility and marginal utility by the help of a figure.

  • Total utility (TU) is the overall satisfaction derived from consuming a specific quantity of a good or service. It increases initially but at a decreasing rate due to diminishing marginal utility.
  • Marginal utility (MU) represents the additional satisfaction gained from consuming one more unit of the good or service. It is depicted as the slope of the Total Utility curve and decreases as more units are consumed.

2. Explain the law of diminishing marginal utility only by the help of a figure.

  • The law of diminishing marginal utility states that as a consumer consumes more units of a good or service, the additional satisfaction (MU) derived from each additional unit decreases. This is depicted by a downward-sloping Marginal Utility curve.
  • Initially, MU is high but it declines as consumption increases, reflecting the consumer’s decreasing willingness to pay more for additional units.

3. Describe the law of substitution only by the help of a figure.

  • The Law of Substitution states that consumers will substitute a good or service with another if it provides greater utility per unit of cost. This can be illustrated by comparing the Marginal Utility curves of two goods.
  • Consumers will switch from consuming Good A to Good B where the MU per dollar spent becomes equal, indicating substitution to maximize utility.

4. Explain the concept of consumer’s surplus only by the help of a figure.

  • Consumer’s surplus is the difference between what consumers are willing to pay for a good or service and what they actually pay. It is represented by the area between the demand curve (which shows the maximum price consumers are willing to pay) and the actual price paid (market price).
  • Consumer’s surplus measures the net benefit consumers gain from purchasing a good or service at a price lower than their maximum willingness to pay.

5. What are the exceptions or limitations of the law of diminishing Marginal Utility (MU)?

  • Luxury goods may defy the law as increased consumption often enhances prestige or status rather than diminishing satisfaction.
  • Goods with addictive qualities or habitual consumption patterns may exhibit sustained or increasing MU despite higher consumption levels, challenging the law’s universal applicability.

6. Discuss the nature of marginal utility curve.

Ans: The Marginal Utility (MU) curve is typically downward-sloping due to diminishing returns. It starts high and decreases as more units of a good or service are consumed, reflecting decreasing additional satisfaction with each additional unit.

7. Explain the importance of consumer’s surplus.

Ans: Consumer’s surplus measures the economic benefit consumers receive from purchasing goods or services at prices lower than their maximum willingness to pay. It influences consumer welfare, pricing decisions, and market efficiency by indicating how much value consumers derive from market transactions.

8. Explain the concept of producer’s surplus.

Ans: Producer’s surplus is the difference between the price at which producers are willing to sell a good or service (their reservation price) and the actual price they receive in the market. It represents the benefit to producers from participating in a market transaction, influencing production decisions and market equilibrium.

Long Answer Question

1. Explain the concept of total utility and marginal utility.

  • Total Utility (TU): Total utility refers to the overall satisfaction or benefit that a consumer derives from consuming a certain quantity of a good or service within a given period. It represents the total amount of utility obtained from consuming all units of a good. For example, if a consumer eats three slices of pizza, the total utility would be the combined satisfaction from all three slices.
  • Marginal Utility (MU): Marginal utility is the additional satisfaction or benefit that a consumer gains from consuming one more unit of a good or service. It focuses on the change in total utility when consuming an additional unit of the good. Using the pizza example, if the first slice provides a lot of satisfaction (high MU), subsequent slices may provide less additional satisfaction (lower MU), reflecting diminishing returns.

2. Define total utility and marginal utility. Explain the relationship between them.

  • Total Utility (TU): Total utility is the aggregate satisfaction or benefit a consumer obtains from consuming a particular quantity of a good or service. It is calculated by summing up the marginal utilities of each unit consumed up to that quantity. As more units are consumed, total utility increases but at a decreasing rate due to diminishing marginal utility.
  • Marginal Utility (MU): Marginal utility is the extra satisfaction gained from consuming one additional unit of a good or service. It influences total utility because as long as MU is positive, TU increases. However, as MU decreases (due to the law of diminishing marginal utility), TU increases at a decreasing rate until it reaches a maximum point where MU equals zero.
  • Relationship: Marginal utility plays a crucial role in determining total utility. When MU is positive and diminishing, TU increases but at a slower rate. The relationship between TU and MU is such that TU increases as long as MU is positive. MU reaches zero when TU is maximized, signaling that consuming additional units would provide no extra satisfaction.

3. Explain the law of diminishing marginal utility. What are its exceptions or limitations?

  • Law of Diminishing Marginal Utility: This law states that as a consumer consumes more units of a good or service within a given period, the additional satisfaction or utility (marginal utility) derived from each additional unit decreases.

Table

Units Consumed  Total Utility (TU)  Marginal Utility (MU)  
120
23515
34510
4505
5522

Exceptions or Limitations:

  • Luxury Goods: Consumption of luxury goods may not adhere strictly to this law as increased consumption often enhances satisfaction due to status or prestige.
  • Habitual Consumption: Goods like addictive substances or habitual items may not exhibit diminishing marginal utility since consumers may derive consistent satisfaction regardless of quantity consumed.
  • Seasonal or Novelty Items: Items that are seasonal or novel may exhibit fluctuating marginal utilities as consumer preferences change over time

.4. Explain the concept of consumer’s surplus. Point out its uses or importance.

Ans: Consumer’s Surplus: Consumer’s surplus is the difference between the maximum price a consumer is willing to pay for a good or service and the actual price paid. It measures the economic benefit consumers receive from purchasing goods at prices lower than their willingness to pay.

Uses or Importance:
Economic Welfare: Consumer’s surplus indicates consumer welfare and satisfaction derived from market transactions.
Price Determination: It helps in determining fair prices for goods based on consumer valuation.
Policy Evaluation: Governments use consumer’s surplus to evaluate the impact of policies affecting consumer prices and market efficiency.

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