Chapter 2 Utility Analysis

 

Chapter 2

Utility Analysis

Sr. No.	Name of Chapter
1.	Introduction to Micro and Macro Economics
2.	Utility Analysis
3 A	Demand Analysis
3 B	Elasticity of Demand
4	Supply Analysis
5	Form of Markets
6	Index Numbers
7	National Income
8	Public Financial in India
9	Money Market and Capital Market in India
10	FOREIGN TRADE OF INDIA

Q. 1. A) Complete the following statements by choosing the correct alternatives.

1) In the law of diminishing marginal utility, Alfred Marshall assumes that marginal utility of money……….

a) increases b) remains constant c) decreases d) rises and then falls

Ans: c) decreases

2) As per the law of diminishing marginal utility, measurement of utility is assumed to be ……….

a) ordinal b) cardinal c) both ordinal and cardinal d) none of the above

Ans: a) ordinal

3) MU of the commodity becomes negative when TU of a commodity is ………

a) rising b) constant c) falling d) zero

Ans: c) falling

4) Point of Satiety means ……….

a) TU is rising and MU is falling         b) TU is falling and MU is negative

c) TU is maximum and MU is zero     d) MU is falling and TU is rising.

Ans: c) TU is maximum and MU is zero

5) When MU is falling, TU is……….

a) rising     b) falling     c) not changing     d) maximum

Ans: a) rising

Q. 2. Choose the correct option :

 1)                A                                    B

1) Time utility                 a) Transport

2) Place utility                b) Blood Bank

3) Service utility    c) Mobile phone

4) Knowledge utility       d) Doctor

Options : i) 1-d, 2-b, 3-a, 4-c    ii) 1-b, 2-a, 3-d, 4-c

iii) 1-a, 2-b, 3-c, 4-d        iv) 1-b, 2-c, 3-d, 4-a

Ans:

The correct option is: ii) 1-b, 2-a, 3-d, 4-c

1) Time utility - b) Blood Bank

2) Place utility - a) Transport

3) Service utility - d) Doctor

4) Knowledge utility - c) Mobile phone

2) Statements indicating consumer equilibrium :

a) MU is greater than price

b) MU is equal to price

c) MU is less than price

d) Price is less than one

Options : i) a and b ii) a, b, c and d iii) a, b and c iv) only b

Ans: The correct option is:     iii) a, b and c

Statements indicating consumer equilibrium include:

a) MU (Marginal Utility) is greater than price

b) MU is equal to price

c) MU is less than price

These statements reflect different scenarios of consumer equilibrium. In option (ii), "Price is less than one" is not necessarily related to consumer equilibrium and is not included in the statements that indicate consumer equilibrium. Therefore, the correct option is iii) a, b, and c.

Q. 3. Identify and explain the concepts from the given illustration :

1) Salma purchased sweater for her father in winter season.

Ans: (A) Identified concepts : Time Utility

(B) Explanation of concepts : When the utility of a commodity increases with a change in its time of utilization, it is called time utility.

2) Nilesh purchased ornaments for his sister.

Ans: (A) Identified concepts : Possession utility

(B) Explanation concepts : Possession utility arises when the ownership of goods is transferred from one person to another

3) Kavita consumed five units of oranges one after the other.

Ans: (A) Identified concepts : Continuity in Consumption

(B) Explanation concepts : Continuity in Consumption is a type of consumption in which various units of a commodity are consumed in quick succession. one after another (i.e. without any time gap). Continuity in Consumption is one of the important assumptions of Law of DMU.

4) Bhushan refused to eat fifth chapati after eating four chapatis.

Ans: (A) Identified concepts : Point of Satiety of a rational consumer 

(B) Explanation concepts : The various unit of a commodity consumed in quick succession leads to decrease in intensity of want and increase int he satisfaction. At a particular point, consumer's want gets fully satisfied. This point is called as a point of satiety. A rational consumer refuses to consume the next unit of consumption after the point of satiety.

5) Lalita satisfied her want of writing on essay by using pen and notebook.

Ans: (A) Identified concepts : Utility.

(B) Explanation concepts : Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.

Q. 4. Observe the given table and answer the questions:

Unit of a commodity	TU Units	MU Units
1	6	6
2	11	5
3	15	4
4	15	0
5	14	-1

 1) Draw total utility curve and marginal utility curve.

2) a) When total utility is maximum marginal utility is

Ans: Zero

b) When total utility falls, marginal utility becomes.

Ans: Negative

To draw the total utility curve and marginal utility curve, we can use the given table:

Unit of a commodity	TU Units	MU Units
1	6	6
2	11	5
3	15	4
4	15	0
5	14	-1

1) Drawing the total utility curve:

We plot the units of a commodity on the x-axis and the corresponding total utility on the y-axis. Connecting the plotted points gives us the total utility curve.

Unit of a commodity	TU Units
1	6
2	11
3	15
4	15
5	14

 The above graph represents the total utility curve.

 2) a) When total utility is maximum, marginal utility is zero.

From the table, we can see that the total utility is maximum at the 3rd unit of the commodity (15 units). At this point, the marginal utility is 0 units. So, when the total utility is maximum, the marginal utility is zero.

 b) When total utility falls, marginal utility becomes negative.

We can observe this from the given table. As we move from the 3rd unit to the 4th and 5th unit of the commodity, the total utility decreases while the marginal utility becomes negative. This indicates that the additional units are providing less satisfaction, leading to a decrease in total utility and negative marginal utility.

 Note: The plotted points on the total utility curve and marginal utility curve would coincide at the respective units in this particular case.

Q. 5. Answer in detail :

1) State and explain the law of diminishing marginal utility with exceptions.

Ans:  Exceptions to the law of diminishing marginal utility include the following:

 1) Hobbies : In certain hobbies like collection of various stamps and coins, rare paintings, music, reading etc., the law does not hold true because every additional increase in the stock gives more pleasure. This increases marginal utility. However, this violates the assumption of homogeneity and continuity. 

 2) Miser : In the case of a miser, every additional rupee gives him more and more satisfaction. Marginal utility of money tends to increase with an increase in his stock of money. However, this situation ignores the assumption of rationality. 

 3) Addictions : It is observed in case of a drunkard that the level of intoxication increases with every additional unit of liquor consumed. So MU received by drunkard may increase. Actually it is only an illusion. This condition is similar to almost all addictions. However, this violates the assumption of rationality. 

 4) Power : This is an exception to the law because when a person acquires power, his lust for power increases. He desires to have more and more of it. However, this again violates the rationality assumption. 

 5) Money : It is said that the MU of money never becomes zero. It increases when the stock of money increases. This is because money is a medium of exchange which is used to satisfy various wants. However, according to some economists, this law is applicable to money too. For example, marginal utility of money is more to a poor person than to a rich person.

However, these, exceptions are only apparent. Since they violate some or the other assumptions of the law and hence, they are not real exceptions.