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Theory Of Consumer Behaviour

Question

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When price of good is Rs 7 per unit a consumer buys 12 units. When price falls to Rs6 per unit he spends Rs 72 on the good. Calculate price elasticity of demand by using the percentage method. Comment on the likely shape of demand curve based on this measure of elasticity.

Solution

Price (Rs)	Quantity (Uts)	(Total Expenditure) (TE)
7	12	84
6	12	72

Elasticity of Demand by Percentage method:
E = % change in quantity demanded / % change in price.
% change in quantity demanded = (New quantity demanded - old quantity demanded)/ initial quantity*100
= (12-12)/12 = 0
% in price = (New price – old price)/ Initial price*100
= (6-7)/7 = -14.28
Ed = 0/-14.28 = 0
Hence demand is perfectly inelastic
As the demand is perfectly inelastic, so the demand curve is a vertical straight line parallel to the price-axis.

Some More Questions From Theory Of Consumer Behaviour Chapter

Starting from an initial situation of consumer's equilibrium, suppose that marginal utility of a rupee increases. Will it increase or decrease the quantity demanded of the product?

What are two approaches to attain the state of consumer's equilibrium?

Define indifference curve.

What is meant by marginal rate of substitution (MRS)?

Why is MRS always diminishing?

When does a consumer attain equilibrium according to indifference curve approach?

Give meaning of demand.

Name two determinants of demand.

List the factors that cause changes in demand.

What is law of demand?

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