REVISION OF THEORY OF CONSUMER BEHAVIOR ALONG WITH OBJECTIVE QUESTIONS

•   REVISION OF THEORY OF CONSUMER BEHAVIOR
THEORY PLUS OBJECTIVE QUESTIONS
CA FOUNDATION

COMPETITIVE EXAM

•    THEORY OF CONSUMER BEHAVIOR

1.       ARE CONCERNED WITH THE DECISION MAKING BEHAVIOR OF THE CONSUMER

2.       EACH CONSUMER HAS DEMAND CURVE THAT CAN BE PLOTTED AGAINST PRICE OF ANY COMMODITY

3.       A DEMAND CURVE GIVES A SIMPLE INFORMATION AS TO HOW MUCH COULD BE HAD AT CERTAIN PRICE AND VICE VERSA

4.       BUT STILL SOME QUESTIONS STILL REMAIN LIKE WHY DOES A REDUCTION IN THE PRICE OF A CAUSES ONE TO CUT DOWN A LITTLE BIT ON ONE’S B PURCHASE

5.       THE FUNDAMENTAL POSTULATES OF THE CONSUMPTION THEORY IS THAT A CONSUMER AN INDIVIDUAL OR HOUSEHOLD IS AN UTILIZING MAXIMIZING ENTITY

6.       THE CONSUMER WANTS TO GET MAXIMUM TOTAL UTILITY GIVEN HIS RESOURCES AND MARKET CONDITIONS

7.       ALFRED MARSHALL WAS THE MAIN EXPONENT OF THIS UTILITY THEORY

•    BASIC ASSUMPTIONS

1.       CONSUMER IS RATIONAL AND WANTS TO GET MAXIMUM UTILITY WITH THE LIMITED RESOURCES

2.       SUBJECTIVE CONCEPT BASED ON CARDINAL NUMBER OF SYSTEM

3.       LAW OF DIMINISHING MARGINAL UTILITY IS UNIVERSAL LAW EXCEPT IN THE CASE OF MONEY(MU OF MONEY REMAINS CONSTANT)

4.       NO CHANGE IN INCOME,PRICES OF THE COMMODITY AND THEIR SUBSTITUTE,FASHION,CUSTOMS ETC

5.       UNITS OF THE COMMODITY ARE DIVISIBLE

•    TOTAL UTILITY AND MARGINAL UTILITY

1.       TOTAL UTILITY IS THE SUM OF THE MARGINAL UTILITY ASSOCIATED WITH THE CONSUMPTION OF THE SUCCESSIVE UNITS AND MARGINAL UTILITY CAN BE DEFINED AS THE ADDITION IN TOTAL UTILITY WITH THE CONSUMPTION OF AN ADDITIONAL UTILITY

2.       MU OF A UNIT= TOTAL UTILITY OF N UNITS-TOTAL UTILITY OF (N-1)

3.       MU= ADDITION IN TOTAL UTILITY/ADDITION IN QUANTITY

4.       du/dq

•    LAW OF DIMINISHING MARGINAL UTILITY

•    THE LAW EXPLAINS THE RELATIONSHIP BETWEEN THE CHANGE IN THE QUANTITY CONSUMED AND THE CHANGE IN MARGINAL UTILITY.

•    THE LAW STATES THAT AS THE QUANTITY CONSUMED OF A COMMODITY INCREASES PER UNIT OF TIME.THE UTILITY DERIVED FROM EACH SUCCESSIVE UNIT DECREASES,CONSUMPTION OF ALL OTHER COMMODITIES REMAINING THE SAME.

•    ASSUMPTIONS:-

1.       CONSUMER BEHAVES RATIONALLY

2.       THE UNITS OF THE CONSUMER GOODS MUST BE STANDARD

3.       CONTINUITY OF THE CONSUMPTION

4.       THE MENTAL CONDITION OF THE CONSUMER REMAINS NORMAL DURING THE PERIOD OF CONSUMPTION

•    LAW OF EQUI MARGINAL UTILITY

•    FIRST GIVEN BY A FRENCH ENGINEER H.H GOSSEN. ALSO KNOWN AS “ GOSSEN’S SECOND LAW” THE LAW STATES THAT IN ORDER TO GET MAXIMUM SATISFACTION, A CONSUMER SHOULD SPEND HIS LIMITED INCOME ON DIFFERENT COMMODITIES IN SUCH A WAY THAT THE LAST RUPEE SPENT ON EACH COMMODITY YIELDS HIM EQUAL MARGINAL UTILITY.

•    DEFINITION

1.       DR. MARSHALL “ IF A PERSON HAS A THING WHICH HE CAN PUT TO SEVERAL USES, HE WILL DISTRIBUTE IT AMONG THESE USES IN SUCH A WAY, THAT HE HAS THE SAME MARGINAL UTILITY IN ALL.”

2.       MODERN ECONOMIST ALSO CALL IT AS “ LAW OF PROPORTIONALITY". ACCORDING TO THEM A PERSON GETS MAXIMUM SATISFACTION WHEN THE WEIGHED UTILITIES ARE EQUAL. IN OTHER WORDS, WHEN THE MARGINAL UTILITY OF ONE COMMODITY DIVIDED BY ITS PRICE AND MARGINAL UTILITY OF THE OTHER COMMODITY DIVIDED BY ITS PRICE ARE EQUAL.

3.       (MU OF GOOD A)/PRICE OF A = ( MU OF GOOD B)/PRICE OF B=

4.       =MU OF GOOD C/PRICE OF C -------AND SO ON

•    EQUILIBIRIUM OF THE CONSUMER

•    MEANING

•    REFERS TO A SITUATION WHEREIN A CONSUMER GETS MAXIMUM SATISFACTION OUT OF HIS LIMITED INCOME AND HE HAS NO TENDENCY TO MAKE ANY CHANGES IN HIS EXISTING BEHAVIOUR.

•    ACCORDING TO TIBER SCITOVOSKY ,”A CONSUMER IS IN EQUILIBRIUM WHEN HE REGARDS HIS ACTUAL BEHAVIOR AS THE BEST POSSIBLE UNDER THE CIRCUMSTANCES AND FEELS NO URGE TO CHANGE HIS BEHAVIOR AS LONG AS THE CIRCUMSTANCES REMAIN CHANGED.

•    DETERMINATION OF CONSUMER’S EQUILIBIRUM

•    A SINGLE COMMODITY WITH SINGLE USE:- WHEN A CONSUMER IS PURCHASING A COMMODITY HAVING ONE USE ONLY, HE WILL BE IN EQUILIBRIUM POSITION AT A POINT WHERE MARGINAL UTILITY OF THE COMMODITY IS EQUAL TO ITS PRICE OR WHERE THE CONDITION IS FULFILLED:-

•    MU =P

•    A COMMODITY WITH SEVERAL USES

•    MU OF USE A = MU OF USE B  = MU OF USE =C AND SO ON

•    SEVERAL COMMODITIES

•    MUA/PA =MUB/PB =MU/PC --------SO ON

•    CRITICISM OF MARSHALL’S ANALYSIS

•    BASED ON UNREALISTIC ASSUMPTIONS

1.       MARGINAL UTILITY OF THE MONEY REMAINS CONSTANT

2.       NO CHANGE IN HABITS,FASHION AND TASTES

3.       UTILITY CAN NOT BE MEASURED

4.       SUBJECTIVE

•    OBJECTIVE TYPE QUESTIONS

•    THE ECONOMIC ANALYSIS EXPECTS THE CONSUMER TO BEHAVE IN  MANNER WHICH IS

1.       IRRATIONAL

2.       RATIONAL RIGHT ANSWER

3.       EMOTIONAL

4.       INDIFFERENT

•    CONSUMPTION CAN BE DEFINED AS:-

1.       THE USE OF GOODS AND SERVICES TO SATISFY CURRENT WANTS

2.       ANY ACTIVITY DIRECTED TO THE SAISFACTION OF WANTS RIGHT ANSWER

3.       THE USE OF GOODS FOR SATISFACTION OF WANTS IN FUTURE

4.       MAKING ADDITIONS TO THE STOCK OF ASSETS

•    UTILITY MAY BE DEFINED AS

1.       THE POWER OF THE COMMODITY TO SATISFY THE WANTS RIGHT ANSWER

2.       THE USEFULNESS OF A COMMODITY

3.       THE LEVEL OF SATISFACTION GIVEN BY A COMMODITY

4.       THE DESIRE FOR COMMODITY

•    THE AIM OF THE CONSUMER IN ALLOCATING HIS INCOME IS TO

1.       MAXIMUM TOTAL UTILITY RIGHT ANSWER

2.       TO BUY THOSE GOODS WHICH PRICE HAVE FALLEN

3.       TO BUY THE GOODS HE WANTS MOST WHATEVER THE PRICE

4.       TO BUY THE GOODS HE EXPECTS TO BE SHORTEST IN SUPPLY

•    WHICH OF THE FOLLOWING STATEMENTS IS WRONG:

1.       A UTILITY FUNCTION REFERS TO A PARTICULAR INDIVIDUAL AND REFLECT THE TASTE OF THIS INDIVIDUAL

2.       WHEN THE TASTES OF AN INDIVIDUAL CHANGES,THE UTILITY FUNCTION CHANGES

3.       DIFFERENT INDIVIDUALS USUALLY HAVE  DIFFERENT TASTES AND THUS HAVE DIFFERENT UTILITY FUNCIONS

4.       DIFFERENT INDIVIDUALS HAVE THE SAME TASTE AND THUS HAVE THE UTILITY FUNCION RIGHT ANSWER

•    AFTER REACHING THE SATURATION POINT CONSUMPTION OF ADDITIONAL UNITS OF THE COMMODITY CAUSE:-

1.       TOTAL UTILITY TO FALL AND MARGINAL UTILITY TO INCREASE

2.       TOTAL UTILITY AND MARGINAL UTILITY BOTH TO INCREASE

3.       TOTAL UTILITY TO FALL AND MARGINAL UTILITY TO BECOME NEGATIVE RIGHT ANSWER

4.       TOTAL UTILITY TO BECOME NEGATIVE AND MARGINAL UTILITY TO FALL

•    THE SHAPE OF MARGINAL UTILITY CURVE FOR A NORMAL GOOD AND A RATIONAL CONSUMER

1.       UPWARD SLOPING

2.       HORIZONTAL

3.       DOWNWARD SLOPING RIGHT ANSWER

4.       VERTICAL

§ THE TOTAL UTILITY IS MAXIMUM:-

1.       M.U IS ZERO RIGHT ANSWER

2.       M.U IS THE HIGHEST

3.       M.U IA EQUAL TO A.U

4.       A.U IS THE HIGHEST

•    MARGINAL UTILITY APPROACH WAS FINALIZED BY

1.       J.R HICKS

2.       ALFRED MARSHALL THE RIGHT ANSWER

3.       J.S MILL

4.       A.C PIGOU

•    THE LAW OF DIMINISHING MARGINAL UTILITY STATES THAT AS THE AMOUNT OF A GOOD INCREASES,THE MARGINAL UTILITY OF THAT GOODS

1.       INCREASE

2.       DECREASE RIGHT ANSWER

3.       REMAIN CONSTANT

4.       BECOME CAPABLE OF PRECISE ASCERTAINMENT

•    ONE OF THE FOLLOWING IS THE ODD ONE OUT:

1.       LAW OF SUBSTITUTION

2.       THEORY OF DIMINISHING MARGINAL UTILITY

3.       INDIFFERENCE CURVE ANALYSIS

4.       LAW OF VARIABLE PROPORTIONS RIGHT ANSWER

•    THE TERM MARGINAL UTILITY OF MONEY REFERS TO

1.       THE SATISFACTION DERIVED BY A RATIONAL CONSUMER FROM SPENDING MONEY EARNING

2.       THE INCREASE IN TOTAL UTILITY RESULTING FROM THE SPENDING OF AN ADDITIONAL UNIT OF MONEY RIGHT ANSWER

3.       THE DECREASE IN TOTAL UTILITY RESULTING FROM A CHANGE IN THE GENERAL LEVEL OF PRICES

4.       THE CHANGES IN MARGINAL UTILITY RESULTING FROM INCREASED REAL INCOME