Tag: UGC NET Economics study material

UGC NET Economics Unit-1 Theory of Consumer Behaviour MCQs-1

1.

The Indifference Curve technique assumes:
A) Utility is measurable in cardinal numbers.
B) Consumer behaviour is inconsistent.
C) Utility is comparable only in order of preference.
D) Marginal utility of money is diminishing.
Answer: C

2.

According to the Ordinal Utility approach, consumer equilibrium is obtained when:
A) The consumer attains maximum utility subject to income constraint.
B) Marginal utilities of goods are equal.
C) Price of one good equals its marginal utility.
D) Income equals total expenditure.
Answer: A

3.

Which of the following is not an assumption of the Indifference Curve analysis?
A) Rationality of the consumer
B) Constant income
C) Interdependence of utilities
D) Transitivity of preferences
Answer: C

4.

The Law of Equi-Marginal Utility can be expressed as:
A) $M U_{x} = M U_{y} = M U_{z}$
B) $M U_{x} / P_{x} = M U_{y} / P_{y} = M U_{z} / P_{z}$
C) $M U_{x} \times P_{x} = M U_{y} \times P_{y}$
D) $M U_{x} / M U_{y} = P_{x} / P_{y}$
Answer: B

5.

The slope of the Indifference Curve equals:
A) Marginal Rate of Substitution
B) Ratio of total utilities
C) Price ratio of goods
D) Marginal utilities of income
Answer: A

6.

If the price of good X falls and all else remains constant, the new equilibrium point will:
A) Move upward along the indifference map
B) Move downward along the same curve
C) Shift to a higher indifference curve
D) Remain unchanged
Answer: C

7.

Under Revealed Preference theory, a consumer reveals preference for bundle A over B when:
A) Bundle A is cheaper than B.
B) Both bundles yield equal utility.
C) A is chosen even when B was affordable.
D) Prices of goods remain constant.
Answer: C

8.

The Diminishing Marginal Rate of Substitution implies that:
A) Indifference curves are convex to the origin.
B) Indifference curves are straight lines.
C) Consumer preferences are inconsistent.
D) Goods are perfect complements.
Answer: A

9.

Which of the following combinations depicts consumer equilibrium under the Ordinal Utility approach?
A) $M R S_{x y} = M U_{x} / M U_{y}$
B) $M R S_{x y} = P_{x} / P_{y}$
C) $M U_{x} / P_{x} = M U_{y} / P_{y}$
D) $M U_{x} = M U_{y} = 0$
Answer: B

10.

The substitution effect shows:
A) Change in consumption due to change in real income.
B) Change due to change in relative prices of goods.
C) Change in total utility.
D) Shift in budget line parallelly outward.
Answer: B

11.

When two goods are perfect substitutes, the indifference curves will be:
A) Concave to the origin.
B) Convex to the origin.
C) L-shaped.
D) Straight lines.
Answer: D

12.

In Marshall’s concept of Consumer Surplus, utility is:
A) Ordinal
B) Cardinal and measurable in money terms
C) Relative
D) Socially determined
Answer: B

13.

Hicksian measurement of consumer surplus is based on:
A) Compensating and Equivalent Variations.
B) Law of Diminishing Marginal Utility.
C) Demand function only.
D) Revealed preferences.
Answer: A

14.

In the Indifference Curve analysis, the consumer’s budget line shifts parallelly outward when:
A) Prices fall in the same proportion.
B) Income increases.
C) Prices rise in the same proportion.
D) Income decreases.
Answer: B

15.

The Revealed Preference approach assumes that consumer behaviour is:
A) Irrational but measurable.
B) Consistent and transitive.
C) Random and unpredictable.
D) Dependent only on income.
Answer: B

16.

The equilibrium between marginal utilities and prices in the Cardinal approach indicates:
A) Maximization of satisfaction.
B) Minimization of expenditure.
C) Constant total utility.
D) Equality of total utilities.
Answer: A

17.

Which one of the following correctly expresses consumer equilibrium in the Cardinal Utility approach?
A) $M U_{x} / M U_{y} = P_{x} / P_{y}$
B) $M U_{x} / P_{x} = M U_{y} / P_{y} = M U_{m}$
C) $M U_{x} = P_{x} = M U_{y} = P_{y}$
D) $M U_{x} + M U_{y} = M U_{m}$
Answer: B

18.

The Slutsky Equation divides the price effect into:
A) Income effect + Substitution effect
B) Price effect + Utility effect
C) Income effect + Wealth effect
D) Price effect + Demand effect
Answer: A

19.

If two indifference curves intersect, the assumption violated is:
A) Rationality
B) Transitivity of preferences
C) Diminishing MRS
D) Completeness of choice
Answer: B

20.

The Law of Demand under Revealed Preference Theory can be derived because:
A) Utility is measurable.
B) Consumers behave inconsistently.
C) Price-quantity relationship is observable.
D) Consumers’ income remains fixed.
Answer: C

21.

Under Cardinal Utility theory, the marginal utility of money is assumed to be:
A) Constant
B) Increasing
C) Decreasing
D) Negative
Answer: A

22.

A rightward rotation of the budget line around the Y-axis indicates:
A) Fall in price of good X.
B) Increase in price of good Y.
C) Rise in consumer income.
D) Fall in income.
Answer: A

23.

In case of Giffen goods:
A) Both income and substitution effects reinforce each other.
B) Negative income effect outweighs substitution effect.
C) Substitution effect dominates income effect.
D) Price effect is positive.
Answer: B

24.

Consumer equilibrium changes to a higher indifference curve when:
A) Income decreases.
B) Price of one good rises.
C) Income increases or price falls.
D) Budget line becomes steeper.
Answer: C

25.

The Indifference Map represents:
A) All combinations giving different levels of satisfaction.
B) Combinations yielding the same utility.
C) Price combinations of goods.
D) Income levels at equilibrium.
Answer: A

26.

An upward-sloping indifference curve would indicate:
A) Normal goods.
B) Inferior goods.
C) Giffen goods.
D) Both goods are ‘bads’.
Answer: D

27.

In consumer theory, the substitution effect is always:
A) Negative
B) Positive
C) Neutral
D) Equal to price effect
Answer: B

28.

If the income effect is zero, the good must be:
A) Normal
B) Inferior
C) Neutral
D) Giffen
Answer: C

29.

The convexity of indifference curves reflects:
A) Diminishing MRS
B) Increasing MRS
C) Constant MRS
D) Increasing marginal utility
Answer: A

30.

According to Hicks, the main advantage of the Ordinal approach over the Cardinal one is:
A) It does not require utility measurement.
B) It eliminates the need for demand theory.
C) It measures satisfaction in monetary terms.
D) It assumes increasing marginal utility.
Answer: A

October 30, 2025

UGC NET Economics Unit 1-Theory of Consumer Behaviour

1. Introduction

The Theory of Consumer Behaviour deals with how consumers allocate their limited income among various goods and services to maximize satisfaction (utility). It forms the foundation of microeconomic analysis and demand theory.

The central question it addresses is:

“Given income and prices, what combination of goods will a rational consumer choose to maximize satisfaction?”

2. Approaches to the Theory of Consumer Behaviour

A. Cardinal Utility Approach (Marshallian Approach)

Assumptions

Measurable Utility: Utility can be measured in cardinal numbers like 1, 2, 3… (Utils).
Rational Consumer: The consumer aims to maximize total utility.
Diminishing Marginal Utility: As more of a good is consumed, the additional utility derived from each extra unit declines.
Independent Utilities: The utility of one commodity is independent of others.
Constant Marginal Utility of Money: The marginal utility of money remains unchanged.

Law of Diminishing Marginal Utility (DMU)

“As more units of a good are consumed, the additional satisfaction from each successive unit decreases.”

Mathematically:

$M U_{x} = \frac{Δ T U}{Δ Q_{x}}$

where $M U_{x}$ = Marginal Utility of good X, $Δ T U$ = change in total utility, $Δ Q_{x}$ = change in quantity consumed.

Consumer’s Equilibrium under Cardinal Utility

A consumer attains equilibrium when:

$\frac{M U_{x}}{P_{x}} = \frac{M U_{y}}{P_{y}} = M U_{m}$

where $M U_{m}$ is the marginal utility of money.

B. Ordinal Utility Approach (Indifference Curve Analysis)

Key Contributors

Vilfredo Pareto (1906), further developed by Hicks and Allen (1934) in Value and Capital.

Core Concept

Utility cannot be measured; it can only be ranked (ordered). Consumers can indicate preferences between bundles, not the exact level of satisfaction.

Assumptions

Rationality: Consumer seeks to maximize satisfaction.
Ordinal Utility: Preferences can be ordered (A preferred to B, etc.).
Transitivity: If A > B and B > C, then A > C.
Non-satiation: More of a good gives higher satisfaction.
Diminishing Marginal Rate of Substitution (DMRS): As a consumer substitutes X for Y, the amount of Y he gives up for one more unit of X decreases.

3. Indifference Curve Analysis

Indifference Curve (IC)

An IC shows combinations of two goods that provide equal satisfaction to the consumer.
Thus, the consumer is indifferent among all combinations on the same IC.

Properties of Indifference Curves

Negatively Sloped: More of one good means less of the other to maintain same utility.
Convex to the Origin: Due to the law of diminishing MRS.
Non-Intersecting: Two ICs cannot cross each other.
Higher ICs Indicate Higher Utility: IC3 > IC2 > IC1.

Marginal Rate of Substitution (MRS)

The rate at which the consumer is willing to give up Y for one more unit of X, keeping satisfaction constant.

$M R S_{x y} = - \frac{Δ Y}{Δ X}$

Diminishing MRS: As more of X is consumed, less of Y is sacrificed — hence IC is convex.

Budget Line

Represents all possible combinations of two goods that a consumer can buy with given income (M) and prices $P_{x}, P_{y}$ .

$P_{x} X + P_{y} Y = M$

Slope of the budget line: $- \frac{P_{x}}{P_{y}}$

Shifts:

Increase in income → Parallel outward shift.
Increase in price of one good → Rotation of line.

Consumer’s Equilibrium (Hicksian Equilibrium)

Occurs where Indifference Curve is tangent to the Budget Line:

$\frac{M U_{x}}{M U_{y}} = \frac{P_{x}}{P_{y}}$

At this point, MRS = Price Ratio. The consumer maximizes satisfaction given constraints.

4. Revealed Preference Theory (Samuelson, 1947)

This theory avoids the unobservable concept of utility. Instead, it relies on observed choices.

Assumptions

Rationality: Consumer prefers more to less.
Consistency: If A is preferred to B, B cannot be preferred to A.
Transitivity: If A > B and B > C, then A > C.
Stable Preferences: Preferences remain unchanged during analysis.

Axiom of Revealed Preference

If a consumer chooses bundle A over B when both are affordable, A is revealed preferred to B.

Implications

Law of Demand can be derived without measuring utility.
Indifference curves can be deduced from observed behaviour.

5. Theory of Consumer Surplus

Origin:

Introduced by A.J. Dupuit (1844) and later formalized by Alfred Marshall.

Meaning:

The difference between what a consumer is willing to pay and what he actually pays.

Mathematically:

$C S = T U - (P \times Q)$

Hicksian Measurement (Indifference Curve Method):

Hicks redefined consumer surplus in ordinal terms using indifference curves and budget constraints — a superior alternative to Marshall’s cardinal concept.

6. Criticisms and Limitations

Theory	Key Limitations
Cardinal Utility	Unrealistic measurability of utility; constant MU of money assumption.
Indifference Curve	Complex for more than two goods; assumes stable preferences.
Revealed Preference	Ignores psychological motives; assumes consistency.
Consumer Surplus	Cannot be precisely measured; not applicable to necessities.

7. Modern Developments in Consumer Behaviour

Behavioral Economics: Challenges the assumption of rationality (bounded rationality, heuristics, biases).
Expected Utility and Risk: Consumers make choices under uncertainty using probability-weighted utilities.
Intertemporal Choice: Examines consumption decisions over time (Fisher model).

8. Key Diagrams for UGC NET

Indifference Curve and Budget Line (Consumer Equilibrium)
Diminishing Marginal Rate of Substitution
Revealed Preference and Budget Constraint
Hicksian Consumer Surplus Measurement

9. Summary Points

The theory of consumer behaviour explains how consumers make choices under constraints.
Ordinal utility replaces cardinal measurement for realistic analysis.
Indifference curve analysis is central to modern microeconomics.
Revealed preference theory provides a scientific basis using observed choices.
Consumer surplus measures welfare from consumption.

10. Suggested Readings

Hicks, J.R. Value and Capital
Samuelson, P.A. Foundations of Economic Analysis
Dwivedi, D.N. Principles of Economics
Mankiw, G.N. Principles of Microeconomics
Koutsoyiannis, A. Modern Microeconomics

October 30, 2025

Tag: UGC NET Economics study material

UGC NET Economics Unit-1 Theory of Consumer Behaviour MCQs-1

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UGC NET Economics Unit 1-Theory of Consumer Behaviour

1. Introduction

2. Approaches to the Theory of Consumer Behaviour

A. Cardinal Utility Approach (Marshallian Approach)

Assumptions

Law of Diminishing Marginal Utility (DMU)

MUx=ΔTUΔQx

Consumer’s Equilibrium under Cardinal Utility

MUxPx=MUyPy=MUm

B. Ordinal Utility Approach (Indifference Curve Analysis)

Key Contributors

Core Concept

Assumptions

3. Indifference Curve Analysis

Indifference Curve (IC)

Properties of Indifference Curves

Marginal Rate of Substitution (MRS)

MRSxy=−ΔYΔX

Budget Line

PxX+PyY=M

Consumer’s Equilibrium (Hicksian Equilibrium)

MUxMUy=PxPy

4. Revealed Preference Theory (Samuelson, 1947)

Assumptions

Axiom of Revealed Preference

Implications

5. Theory of Consumer Surplus

Origin:

Meaning:

CS=TU−(P×Q)

Hicksian Measurement (Indifference Curve Method):

6. Criticisms and Limitations

7. Modern Developments in Consumer Behaviour

8. Key Diagrams for UGC NET

9. Summary Points

10. Suggested Readings

$M U_{x} = \frac{Δ T U}{Δ Q_{x}}$

$\frac{M U_{x}}{P_{x}} = \frac{M U_{y}}{P_{y}} = M U_{m}$

$M R S_{x y} = - \frac{Δ Y}{Δ X}$

$P_{x} X + P_{y} Y = M$

$\frac{M U_{x}}{M U_{y}} = \frac{P_{x}}{P_{y}}$

$C S = T U - (P \times Q)$