Agriculture and Forestry University's first semester Economics past questions with answers are given here.
YEAR 2076
a) Describe the law of diminishing marginal utility with example. Discuss the basic assumption and limitation made.
“With every increase in the stock that a person already has, the additional advantage that he obtains from a given increase in his stock of anything reduces.” :- Marsal's law of diminishing marginal utility,
The following table and graph explains the law.
| Units of apple consumed | Total utility | Marginal utility |
| 1 | 20 | 20 |
| 2 | 35 | 15 |
| 3 | 45 | 10 |
| 4 | 50 | 50 |
| 5 | 50 | 0 |
| 6 | 45 | -5 |
As we can see the marginal utility goes on decreasing as more units of apple are consumed and even becomes zero( at point b) and negative.
a) The process of consumption should be continuous
b) Each unit of commodity consumed by consumer should be homogenous in terms of size, taste, color and other all characteristics.
c) There should be no change in the taste, habit and preference of consumer.
d) The behavior of consumer should be normal and rational.
e) The price of the commodity and its substitute should remain the same during the consumption period.
f) Units of commodity should be of normal standard units.
Limitations
a) In case of a miser or greedy person, each additional unit of money will yield more level of satisfaction.
b) Similarly, as a person's hobby collections (e.g., stamps, coins, works of art, etc.) grow, he or she gains more and greater happiness.
c) Consumption of each additional unit of a good that the person is addicted to give more and more level of satisfaction.
YEAR 2075
1) Discuss the property of indifference curve for complementary and substitutes.
Indifference curve is a graph representing combination of two goods that give equal level of satisfaction to consumer or among which the consumer is indifferent.
The shape and properties of the indifference curve depend upon the relationship between two commodity. They may be
a) Complementary goods.
These are those type of goods that must be purchased together in a fixed ratio. Utility or satisfaction only increases when both goods are purchased in the needed ratio. For example: left shoe and right shoe.
The indifference curve is L shaped.
The indifference curve is not convex to origin.
2) Substitute
These are the alternate goods that can be used for the same purpose. There are two types of substitute on the basis of how efficiently they can substitute each other/
a) Perfect substitute.
These are the alternate goods that can substitute each other perfectly. Meaning the consumer is indifferent among the two goods. For example: A consumer indifferent to green and blue color will be indifferent to blue and green shirt which are similar to each other in every other aspect.
The indifference curve is not convex to origin.
The indifference curve is a straight line.
The marginal rate of substitution is always constant throughout the curve.
b) Imperfect substitute
These are goods that can substitute each other but not perfectly. Most of the goods that we consume have this type of relationship. For example : Pizza and cold drink.
The indifference curve is convex to origin.
The marginal rate of substitution goes on decreasing as the amount of one good consumed goes on increasing.
YEAR 2074
1) Explain the law of equi marginal utility and with graphical example.
The law of equi marginal utility is based on law of diminishing utility. The principle of equality states that the consumer maximizes his overall utility by distributing his fixed monetary income.
Suppose a consumer consumes two goods X and Y whose respective price per unit is PX and PY . The amount of money which he can spend is MN.
Then the point where the consumer is able to maximize his or her total utility is at the point where
(MUX/PX )=(MUY/PY).
Now the graph of marginal utility per price against quantity of goods purchased will be
Now superimposing the two figures shown above we get a new graph in which we measure the available income of the consumer MM'
If our consumer spends MC on good X and CN on good Y then MUX/PX will exceed MUY/ PY by the distance AB. This will force consumers to buy more X and less Y. As a result, MUX/PX will fall, while MUY/PY will rise until equality is restored at point E and at this point where marginal utility per price for both goods are equal the consumer will have the greatest utility and satisfaction.
2) Define indifference curve and enlist the charateristcs of IC curve with examples.
Indifference curve is a locus of points representing a combination of goods between which the consumer is indifferent or each of those combinations gives equal level of satisfaction to them.
Characteristics of indifference curve has been mentioned below in which the goods in consideration are banana and apple.
1) Every indifference curve to the right represents higher level of satisfaction and more bundles of goods than that of preceding one.
Combination Q is more preferable than combination P as Q has more amount of good meaning more utility and satisfaction.
2) They Slope Negatively or Slope Downwards from the Left to the Right:
If the total satisfaction is to remain the same, the consumer must part with a diminishing number of bananas as he gets as increasing stock of oranges. The loss of satisfaction to the consumer on account of the downward movement must be made up by the gain through the rightward movement. As such the Indifference Curve must slope downwards to the right.
3) They are convex to the origin of the axes
This is due to the law of diminishing marginal rate of substitution. As the consumer consumes more of the apple , the amount of apple substituted for banana goes on decreasing because his intensity of desire for additional units of apple goes on decreasing.
4) The indifference curve never touch axes.
One of the important assumption of indifference curve is that consumer considers combination of two goods and touching any of the axis means that consumer is satisfied with consuming only one good which is contradictory to the assumption.
5) Two indifference curve never intersect each other and they do not need to be parallel to each other.
Since points A and B lie on IC1, they give the same satisfaction level to an individual. Similarly, points A and C give the same satisfaction level, as they lie on IC2. Therefore, we can imply that B and C offer the same level of satisfaction, which is logically absurd.
3) Justify the following statement
a) marginal utility = price of commodity
The above equation represents the consumer equilibrium when he is consuming only one commodity. A consumer will consume that much quantity of good where MUX = PX.
EXTRA EXPLANATION( NOT NECESSARY FOR EXAM)
| QUANTITY CONSUMED | Price per unit | Marginal utility |
| 1 | 20 | 40 |
| 2 | 20 | 30 |
| 3 | 20 | 20 |
| 4 | 20 | 10 |
in the above for 1st and 2nd unit the MU>P so the consumer will consume them and at 3rd unit MU = P where the consumer is in equilibrium. But at 4th unit Mu<P, so the consumer will cut out the consumption to stay in equilibrium.
YEAR 2072
1)Write short notes on
a) marginal utility
b) budget line
2) State the law of diminishing marginal utility and the assumption made.
ANSWERS
1)Write short notes on
a) marginal utility
Marginal utility is the added satisfaction or utility that a consumer gains after consuming one additional unit of the commodity. Marginal utility is a concept used by the economist to determine how the satisfaction level affects the consumer decision and equilibrium.
In most of the cases with some few exception , Marginal utility goes on decreasing as the consumer consumes more of that commodity which is what law of diminishing marginal utility is all about.
If the marginal utility outweigh the cost or investment then the consumer is likely to consume one more additional unit of the commodity and vice versa.
b) budget line
Budget line represent all the combination of two commodities( X and Y) that the consumer can purchase with his or her given level of income.
Budget line depends upon the price of the price of the commodites and consumer given level of income(M).
The slope of budget line is equal to the ratio of price of the commodities(Px/PY). Budget line is very important to determine point of consumer's equilibrium.
Consumer equilibrium :- slope of indifference curve = slope of budget line.
2) State the law of diminishing marginal utility and the assumption made.
“The additional benefit which a person derives from a given increase in his stock of anything diminishes, other things being equal with every increase in the stock that he already has.” :- Law of diminishing marginal utility, Marshal.
The more one consumes of one commodity during any period of time the less satisfaction one gets from consuming an additional unit of it i.e. the marginal utility goes on decreasing with each additional unit consumed.
The assumptions made have been mentioned below.
a) The process of consumption should be continuous( no time gap between the consumption of successive unit of commodity, consume one unit in morning and another in afternoon does diminish marginal utility)
b) Each unit of commodity consumed by consumer should be homogenous in terms of size, taste, color and other all characteristics. ( if one apple is sour and another is sweet, this law does not work)
c) There should be no change in the taste, habit and preference of consumer.
d) The behavior of consumer should be normal and rational and he seeks to obtain maximum satisfaction.
e) The price of the commodity and its substitute should remain the same and should not change during the consumption period.
f) Units of commodity should be of normal standard units. ( milk should be served in glass not in spoon)
YEAR 2071
1) Justify the following statement.
a) indifference curve never intersect each other.
2) Explain the following
a) MU<0
3) Graphically explain the price consumption curve and the income consumption curve.
ANSWERS
1) Justify the following statement.
a) indifference curve never intersect each other.
This can be explained by two basic assumption of indifference curve
a) each point on a indifference curve represent the same level of satisfaction.
b) Two different indifference curve will never give the same level of satisfaction.
Since points A and B lie on IC1, they give the same satisfaction level to an individual. Similarly, points A and C give the same satisfaction level, as they lie on IC2. Therefore, we can imply that B and C offer the same level of satisfaction, which is logically absurd as it contradicts assumption no b.
2) Explain the following
a) MU<0
This indicates a situation where the consumption of each additional unit of a commodity results in a decrease in the total utility of a consumer.
YEAR 2070
1) write a brief note on
a) law of equimarginal utility
2) Explain the following
a) MU= 0
b) MUX=0
c) MRTSXY= (PX/PY)
ANSWERS
1) write a brief note on
a) law of equimarginal utility
The equi-marginal principle states that a consumer will be maximizing his total utility when he allocates his fixed money income in such a way that the utility derived from the last unit of money spent on each good is equal. The law of equi marginal utility is based on law of diminishing utility
Suppose a consumer consumes two goods X and Y whose respective price per unit is PX and PY . The amount of money which he can spend is MN.
Then the point where the consumer is able to maximize his or her total utility is at the point where
(MUX/PX )=(MUY/PY).
b) marginal rate of substitution
Suppose the consumer consumes two goods labeled X and Y in combination. Marginal rate of substitution X for Y (MRS)XY is the amount of Y that the consumer is willing to give up for additional amount of X to maintain the same level of satisfaction.
The (MRS)XY is in fact the slope of the curve at a point on the indifference curve. So,
(MRS)XY= (ΔY/ΔX)
The table below will illustrate the meaning.
| Combination | Commodity X | Commodity Y | MRS X for Y |
| 1 | 1 | 18 | - |
| 2 | 2 | 13 | 5:1 |
| 3 | 3 | 9 | 4:1 |
| 4 | 4 | 6 | 3:1 |
To have the second combination and yet to be at the same level of satisfaction, the consumer is prepared to forgo 5 units of Y for obtaining an extra unit of X. The marginal rate of substitution of X for Y is 5:1.
As the consumer proceeds to have additional units of X, he is willing to give away less and less units of Y so that the marginal rate of substitution falls from 5:1 to 3:1. So, MRS goes on decreasing as more unit of X is substituted for X. This is known as diminishing marginal rate of substitution and is responsible for the negative slope and convex nature of indifference curve.
2) Explain the following
a) MU= 0
It is the point where the consumer gets maximum level of satisfaction( highest value of Total utility) after consuming multiple units of a good.
b) MUx= Px
In this case, the utility has been given a monetary value. The above equation represent the optimum level of consumption of a consumer when he is consuming only one good. ( There is no meaning in paying 70p for a extra cake when it gives only 50p worth of utility)
c) MRTSXY= (Px/PY)
This represents the consumer equilibrium point when the consumer is consuming two goods. It is the point where the slope of indifference curve is equal to the slope of price line.