The fourth chapter of our economics learning course is “Theory of Consumer Behavior.” In this article, we’ll learn the 30 most important “theory of consumer behavior” questions and their answers.
These simple questions and answers will help you quickly understand the basic ideas of consumer behavior, such as what utilities are, their features, assumptions, different types, applications, limits, consumer equilibrium, the indifference curve, the budget line, and much more.
By reading this post, you can quickly prepare for economics courses as well as other competitive exams such as Vivas, job interviews, and school and college exams.
So let’s get started.
Theory of Consumer Behavior Questions and Answers
The 30 most important “theory of consumer behavior” questions and answers are as follows:
Question 01: What is utility?
Answer: In general, “utility” refers to a product’s usefulness. However, in economics, the word “utility” has a specific meaning. In economics, utility is defined as a product’s or service’s ability to meet a human need. For example, food, houses, clothes, education, etc. are all utilities.
Question 02: What are the characteristics of a utility?
Answer: The following are the key characteristics of a utility:
- Utility is a psychological concept. How useful or satisfying a product or service is to a customer depends a lot on how much experience they have with it. because it cannot be measured accurately with money or anything else.
- The utility of a good varies from consumer to consumer. This is due to the fact that different consumers may feel the same want at varying intensities.
- The application of the same product varies greatly depending on location and timing. For example, some warm clothes are useful in the winter but not in the summer.
- People’s tastes, behaviors, and income all affect utility. A consumer’s income, preferences, and habits all influence how useful a product is to him or her.
- Even for the same consumer, the utility of goods changes due to changes in the intensity of the want(s) to be satisfied by their use. This change may happen because the consumer’s situation has changed, or it may happen as the want is being satisfied.
Question 03: Why is it important to define and measure utility?
Answer: With the help of utility measurement, we can learn more about how consumers and, by extension, the market as a whole make decisions about what to buy.
Question 04: Which two economic approaches apply to utility?
Answer: The two economic approaches that apply to utility are as follows:
- Cardinal Utility
- Ordinal Utility
Question 05: What is the cardinal utility approach?
Answer: According to the cardinal utility approach to consumer behavior, the utility can be calculated using definite numbers like 1, 2, 3, and so on. Cardinal numbers are those exact numbers that can be added to or subtracted from.
Question 06: What are the assumptions of the cardinal utility approach?
Answer: The cardinal utility approach is predicated on a number of assumptions. These are the following:
- The consumer is assumed to be smart, and his goal is to get the most out of his money while getting the most out of his needs.
- The utility can be measured and quantified in definite numbers.
- The only thing that affects the utility that a consumer gets from good is how much of that good they buy. It means that a consumer’s utility from one good is not affected by how much they use other goods.
- It is assumed that changes in a consumer’s income won’t change how he thinks about the value of an extra dollar. In other words, the marginal utility of money does not change depending on how much money a person owns.
- People think that as a consumer buys more of the same good, the marginal utility he or she gets from buying one more unit of the good goes down.
Question 07: What are the limitations of the cardinal utility approach?
Answer: The limitations of the cardinal utility approach are as follows:
- The assumption that the goods on which the consumer spends his money are perfectly divisible, that is, that goods can be purchased in extremely small quantities, does not always hold true.
- The law presupposes that product utility schedules are independent. It means that the amount of another good bought doesn’t change how useful the first good is. But in reality, many products are related to one another because they can be used in place of or in addition to one another.
- The cardinal utility approach also has an unrealistic assumption about the constant utility of money. The marginal utility of money changes as an individual’s stock of money changes.
- The law makes the dubious assumption that the consumer can accurately calculate the marginal utility schedules of all goods.
Question 08: What are the three basic concepts of utilities?
Answer: The three basic concepts of utilities are as follows:
- Total utility
- Average utility
- Marginal utility
Question 09: What is the total utility?
Answer: “Total utility” is the sum of all the benefits a consumer gets from using different amounts of a good at the same time. In other words, when a person buys different amounts of a good, he gets different amounts of use out of each unit. The total utility of a product is the sum of the utilities that each unit provides.
For example: At a certain time, a consumer or buyer buys four apples from the market. He gets 8 units, 6 units, 4 units, and 3 units of utility from the 1st, 2nd, 3rd, and 4th apples, respectively. In this case, the consumer’s total utility from four apples will be eight units plus six units plus four units plus three units, for a total of 21 units.
Question 10: What is the average utility?
Answer: The average utility is found by dividing the total utility a consumer gets from a good or service by the number of units of that good or service that the consumer uses.
Average utility = TUx/Nx
Here,
TUx is the total utility gained from consuming good X.
Nx is the quantity of good X that was consumed.
Question 11: What is marginal utility?
Answer: Marginal utility is the change in total consumption that happens when one more unit of a good is consumed at a certain time. That is, marginal utility is the amount of benefit that comes from one more use of a good.
Question 12: What is positive marginal utility?
Answer: If the extra use of one unit of a good makes the total utility go up, then the marginal utility of that extra unit of the good will be positive.
Question 13: What is “zero marginal utility”?
Answer: If getting an extra unit of good has no effect on the total utility, then the marginal utility of that extra unit is equal to zero.
Question 14: What is negative marginal utility?
Answer: When using an extra unit of a good makes the total utility go down, the marginal utility of that extra unit is negative.
Question 15: What is the relationship between the total and marginal utilities?
Answer: So the relationship between total utility and marginal utility is as follows:
- Total utility is the sum of the utilities of all units consumed, and marginal utility is the utility derived from the extra unit. So marginal utility is a part of total utility.
- Marginal utility is the rate at which total utility goes up as the amount of a good that is consumed goes up. So marginal utility is the rate of change of total utility.
- As the consumption of a good increase, total utility increases at a decreasing rate; but marginal utility decreases gradually.
- The total utility continues to increase until the marginal utility becomes zero.
- Total utility is maximized when marginal utility is zero.
- If the good is still used after the marginal utility is zero, the total utility goes down. As a result, marginal utility is negative in this situation.
Question 16: What are the laws of cardinal utility analysis?
Answer: The two basic laws of cardinal utility analysis are as follows:
- Law of diminishing marginal utility
- Law of equi-marginal utility
Question 17: What is the law of diminishing marginal utility?
Answer: In general, human scarcity is enormous. However, any commodity’s scarcity at any given time is finite. This rule is derived from the characteristic of scarcity. When a person keeps buying the same thing, the marginal utility of that thing goes down over time. This utility law is known as the “Law of Diminishing Marginal Utility.”
This rule was first talked about by the German economist Hermann Heinrich Gossen. In 1890, the famous economist Alfred Marshall gave a clear explanation of what it meant.
Question 18: What are the assumptions underlying the law of diminishing marginal utility?
Answer: The law of diminishing marginal utility is established based on several assumptions. The assumptions are as follows:
- The utility can be quantified numerically.
- Consumer tastes, income, and preferences remain constant.
- Money can be used to express utility.
- Money has a constant marginal utility.
- A fixed period is taken into account.
- Each product unit is homogeneous and sufficient.
- The price and marginal utility will be the same.
- The utility of one commodity is completely independent of the utility of another.
- Consumer behavior is normal.
Question 19: What are the applications of the law of diminishing marginal utility?
Answer: The law of diminishing marginal utility is used in the following ways:
- The law of diminishing marginal utility is the foundation of the law of demand.
- The law of diminishing marginal utility also forms the foundation of the notion of consumer surplus.
- The law of diminishing marginal utility is also used to explain the difference between value-in-use and value-in-exchange.
- The basis for progressive taxation is the law of diminishing utility.
Question 20: What are the limitations of the law of diminishing marginal utility?
Answer: Since the law of diminishing marginal utility is based on a number of assumptions, it doesn’t always work. The main limitations of this law are explained below.
- If the unit of product is not correct, then this rule will not be applicable. For example, giving a teaspoon of water to a thirsty person may increase his thirst instead of quenching it.
- This rule does not apply if the consumer’s habits and tastes change. Because tastes and habits change, the value of an extra unit might go up instead of down. For example, the more music a music lover listens to, the more addictive it may become.
- The rule relates to a specific period of time. That is, the rule may not be effective if the time gap between different single consumptions of the product is large. For example, if a consumer eats a second orange a few hours after consuming the first orange, the addiction may increase rather than diminish.
- This rule does not apply to the collection of hobby goods. E.g., stamps, old coins, statues, etc. The utility of these products never diminishes. The more people collect them, the more they want to collect them.
- The utility of a commodity does not depend only on its supply. It also depends on the substitute or complementary product of the product. For example, if the price of coffee decreases, the consumption of tea may increase. Again, if the price of gasoline increases too much, the utility of the car may decrease.
- This rule may not apply if the income of the consumer increases. Because when income increases, the consumer’s tendency to buy more goods increases.
- The rule does not apply to scarce commodities. because people’s desire for these products does not decrease but increases.
- In the case of the same product of lower quality initially and later of higher quality, marginal utility increases rather than diminishes.
- The rule will not apply if the consumer is not a reasonable or natural person.
Question 21: What is the law of equi–marginal utility?
Answer: The law of equal-marginal utility shows how a consumer can buy a variety of goods to get the most use out of them all.
This law says that a rational person spends their limited income so that the last unit of money spent on different goods gives them the same amount of marginal utility. This helps them get the most out of their money.
Question 22: What are the assumptions underlying the law of equi–marginal utility?
Answer: The law of equi–marginal utility is established based on several assumptions. The assumptions are as follows:
- The consumer’s income is predetermined and steady.
- Each commodity is subject to the law of diminishing marginal utility, and its marginal utility schedule is well understood.
- The commodity’s price remains constant.
- A commodity can be divided into small units. As a result, the consumer can spend his money in small amounts.
- Consumer tastes and preferences remain constant.
Question 23: What is consumer equilibrium?
Answer: Consumer equilibrium is when a person buys something at a certain price with a certain amount of money and feels most satisfied with the purchase.
Question 24: What are the assumptions underlying consumer equilibrium?
Answer: The following are the assumptions underlying consumer equilibrium:
- The consumer’s scale of preferences for various pairings of the two goods X and Y is displayed on an indifference map that is given to him.
- He can only spend a certain amount of money on the two items. He is required to purchase the two items with his allotted income.
- Prices for the two items are known to him and consistent. By purchasing more or less of the goods, he cannot change their prices.
Question 25: What is the ordinal utility approach or indifference curve analysis?
Answer: The indifference curve analysis is an improvement on utility analysis because it tries to fix the problems with cardinal utility analysis and gives a better analysis of demand or consumer behavior from a technical point of view.
The ordinal utility approach is based on the idea that a consumer might not be able to say exactly how many utilities he gets from a good or group of goods. But he can tell if the satisfaction he gets from a good or a group of goods is higher, lower, or the same as that from another.
Question 26: What is the indifference curve?
Answer: An indifference curve shows how different combinations of two goods can give the consumer the same amount of satisfaction.
Question 27: What is the marginal rate of substitution (MRS)?
Answer: The marginal rate of substitution (MRS) is a way to figure out how much it costs to get one good by giving up another good.
Question 28: What are the assumptions underlying the indifference curve?
Answer: The indifference curve is established based on several assumptions. The assumptions are as follows:
- It is assumed that the consumer is rational.
- The consumer is thought to be able to rank his preferences based on how satisfied he is with each basket. He does not need to know the exact amount of satisfaction. It is sufficient that he expresses his preference for the various commodity bundles.
- As people switch between the two, they give up less and less of one good for every extra unit of the other.
- The amount of goods a consumer buys determines how much utility he or she provides as a whole.
- It is assumed that the consumer makes consistent choices; that is, if he chooses bundle A over bundle B in one period, he will not choose B over A in another period if both bundles are available to him.
Question 29: What are the characteristics of the indifference curve?
Answer: The key characteristics of the indifference curve are as follows:
- The direction of indifference curves is downward from left to right.
- Indifference curves are always convex in the direction of the origin.
- If the indifference curve goes up, it means that the person is happier than if it goes down.
- Indifference curves will never intersect.
.Question 30: What is the budget line?
Answer: The budget line shows all of the possible combinations of two products that a consumer could buy if he spent all of his money on them at their listed prices.
I hope you have a good understanding of the “theory of consumer behavior“ chapter by the end of this post.
If you read these 30 important “theory of consumer behavior” questions and answers on a regular basis, you will gain a better understanding of the chapter.
Don’t forget to leave a comment for us if you have any questions or if you would like to find out more information.
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