CBSE Sample Paper – Theory of Consumer Behaviour (50 Marks)
Economics Class 12 | With Answers
Section A – Very Short Answer Questions (1 Mark each)
1. Define utility. [1]
Utility refers to the satisfaction obtained from consuming a good or service.
2. What is Marginal Utility? [1]
Marginal Utility (MU) is the additional satisfaction from consuming one extra unit of a good: MU = ΔTU / Δx
3. State the Law of Diminishing Marginal Utility. [1]
As consumption of a good increases, marginal utility derived from each additional unit falls, ceteris paribus.
4. What is an Indifference Curve? [1]
An Indifference Curve shows all combinations of two goods that provide the same level of satisfaction to the consumer.
5. Write the equation of the Budget Line. [1]
Pxx + Pyy = Y
Section B – Short Answer Questions (3 Marks each)
6. Explain the concept of Marginal Rate of Substitution (MRS). [3]
MRS is the rate at which the consumer is willing to sacrifice one good (y) for another (x) while keeping satisfaction constant.
MRSxy = Δy / Δx |utility constant
MRS diminishes as more of x and less of y are consumed.
MRSxy = Δy / Δx |utility constant
MRS diminishes as more of x and less of y are consumed.
7. Distinguish between Normal Goods and Inferior Goods. [3]
- Normal Goods: Demand increases as income rises (positive income effect).
- Inferior Goods: Demand decreases as income rises (negative income effect).
- Example: Bread (normal), coarse cereals (inferior).
8. What causes a shift in the Demand Curve? [3]
Shifts occur due to factors other than own price:
- Change in income.
- Change in price of related goods.
- Change in taste, population, or expectations.
Section C – Long Answer Questions (5 Marks each)
9. Explain the Law of Demand and its exceptions. [5]
Law: When price of a good rises, quantity demanded falls, other things remaining constant.
Reasons: Substitution and income effects.
Exceptions:
Reasons: Substitution and income effects.
Exceptions:
- Giffen goods (inferior goods with strong income effect).
- Veblen goods (prestige/luxury goods).
- Future expectations of price rise.
10. Explain consumer equilibrium with the help of Indifference Curve and Budget Line. [5]
Condition: Consumer equilibrium occurs when MRS equals price ratio:
MRSxy = Px / Py
Graphically: The highest attainable Indifference Curve is tangent to the Budget Line.
At equilibrium: Budget is fully spent and satisfaction is maximized.
MRSxy = Px / Py
Graphically: The highest attainable Indifference Curve is tangent to the Budget Line.
At equilibrium: Budget is fully spent and satisfaction is maximized.
11. Differentiate between Cardinal and Ordinal Utility approaches. [5]
- Cardinal: Assumes utility is measurable in utils; uses MU and TU concepts.
- Ordinal: Assumes utility is comparable but not measurable; uses Indifference Curves and MRS.
- Cardinal focuses on equalizing MU per rupee; Ordinal focuses on tangency (MRS = Px/Py).
12. Explain Price Elasticity of Demand and its importance. [5]
Formula: ε = (ΔQ / ΔP) × (P / Q)
Importance:
Importance:
- Helps firms in pricing decisions.
- Assists government in taxation policy.
- Useful in forecasting and revenue analysis.
- Determines impact of price changes on total expenditure.
Section D – Case Study / Application Questions (8 Marks)
13. Case Study:
A consumer has a monthly income of ₹600, to be spent on goods X and Y. Prices are Px=₹30, Py=₹20.
a) Write the equation of the budget line. [2]
30x + 20y = 600
b) What are the intercepts on the axes? [2]
- x-intercept = 600 / 30 = 20 units of X
- y-intercept = 600 / 20 = 30 units of Y
c) If the price of X falls to ₹20, what happens to the budget line? [2]
It pivots outward on X-axis, showing more X can be bought; slope becomes flatter.
d) Explain how the consumer’s equilibrium changes. [2]
Lower price of X increases affordable combinations; equilibrium moves to a higher Indifference Curve with greater consumption of X.