12th Economics Chapter 2 (Utility Analysis) Maharashtra Board – Free Solution

12th Economics Chapter 2 Maharashtra Board

12th Economics Chapter 2 Maharashtra Board

Chapter 2 – Utility Analysis

Q. 1. Complete the following statements by choosing the correct alternatives.

1) In the law of diminishing marginal utility, Alfred Marshall assumes that marginal utility of money _____.
a) increases
b) remains constant
c)decreases
d) rises and then falls

2) As per the law of diminishing marginal utility, measurement of utility is assumed to be _____.
a) ordinal
b) cardinal
c) both ordinal and cardinal
d) None of the above

3) MU of the commodity becomes negative when TU of a commodity is _____.
a) rising
b) constant
c) falling
d) zero

4) Point of Satiety means _____.
a) TU is rising and MU is falling
b) TU is falling and MU is negative
c) TU is maximum and MU is zero
d) MU is falling and TU is rising.

5) When MU is falling, TU is _____.
a) rising
b) falling
c) not changing
d) maximum

Q. 2. Choose the correct option

1)

AB
1) Time Utilitya) Transport
2) Place Utilityb) Blood Bank
3) Service Utilityc) Mobile Phone
4) Knowledge Utilityd) Doctor

Options: i) 1 – d, 2 – b, 3 – a, 4 – c
ii) 1 – b, 2 – a, 3 – d, 4 – c
iii) 1 – a, 2 – b, 3 – c, 4 – d
iv) 1 – b, 2 – c, 3 – d, 4 – a

2) Statements indicating consumer equilibrium :
a) MU is greater than price
b) MU is equal to price
c) MU is less than price
d) Price is less than one
Options:
i) a and b
ii) a, b, c, and d
iii) a, b and c
iv) Only b

Q. 3. Identify and explain the concepts from the given illustrations

1) Salma purchased a sweater for her father in the winter season.
Identified Concept
: Time Utility
Explanation: When the utility of a commodity is derived with a change in its time of utilization, it is called time utility.

2) Nilesh purchased ornaments for his sister.
Identified Concept: Possession Utility.
Explanation: Possession utility arises when the ownership of goods is transferred from one person to another. For example, transfer of goods from the sellers to the buyers.

3) Kavita consumed five units of oranges one after the other.
Identified Concept:
Continuity in consumption.
Explanation: All units of a commodity are consumed in quick succession without any lapse of time. It ios one of the important assumptions of the Law of DMU.

4) Bhushan refused to eat the fifth chapati after eating four chapatis.
Identified Concept:
Point of Satiety of the rational consumer.
Explanation: The point of satiety is the point where the marginal utility of any commodity is zero. From this point on, the marginal utility becomes negative. Expressed differently, the point of satiety reflects that point when the total utility has been maximized.

5) Lalita satisfied her want of writing an essay by using a pen and notebook.
Identified Concept:
Utility
Explanation: Utility refers to the capacity of a commodity to satisfy a human want.

Q. 4. Observe the given table and answer the questions:

Unit of a commodityTU UnitsMU Units
166
2115
3154
4150
514-1

1) Draw the total utility and marginal utility curve.

image 1

2) a) When total utility is maximum marginal utility is Zero
b) When total utility falls, marginal utility becomes Negative

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Q. 5. Answer in detail:

1) State and explain the law of diminishing marginal utility with exceptions.

Answer: The Law of DMU: This law was first proposed by Prof. Gossen but was discussed in detail by
Prof. Alfred Marshall in his book ‘Principles of Economics’ published in 1890.

Statement of the Law :
According to Prof. Alfred Marshall, “Other things remaining constant, the additional benefit which a person derives from a given increase in his stock of a thing, diminishes with every increase in the stock that he already has.” In short, the more of a thing you have, the less you want to have more of it.

The below table explains the Law of Diminishing Marginal Utility.

Units of Commodity xMarginal Utility (MU)
110
28
36
44
52
60
7-2

The table shows that marginal utility keeps on diminishing with an increase in consumption, further it becomes zero and then negative.

image 2

Explanation of the Diagram :
In the above diagram, units of commodity x are measured on X-axis and marginal utility is measured on Y-axis. Various points of MU are plotted on the graph as per the given schedule. When the locus of all the points is joined, the MU curve is derived. MU curve slopes downwards from left to right which shows that MU goes on diminishing with every successive increase in the consumption of a commodity. When MU becomes zero, the MU curve intercepts the X-axis. Further consumption of a commodity brings disutility (negative utility) which is shown by the shaded portion in the diagram.

Exceptions to the Law of Diminishing Marginal Utility :
Following are the exceptions to the law of diminishing marginal utility :
1) Hobbies: In certain hobbies like collection of various stamps and coins, rare paintings, music, reading, etc., the law does not hold true because every additional increase in the stock gives more pleasure. This increases
marginal utility. However, this violates the assumption of homogeneity and continuity.

2) Miser: In the case of a miser, every additional rupee gives him more and more satisfaction. The marginal utility of money tends to increase with an increase in his stock of money. However, this situation ignores the assumption of rationality.

3) Addictions: It is observed in the case of a drunkard that the level of intoxication increases with every additional unit of liquor consumed. So MU received by drunkard may increase. Actually it is only an illusion. This condition is similar to almost all addictions. However, this violates the assumption of rationality.

4) Power: This is an exception to the law because when a person acquires power, his lust for power increases. He desires to have more and more of it. However, this again violates the rationality assumption.

5) Money: It is said that the MU of money never becomes zero. It increases when the stock of money increases. This is because money is a medium of exchange that is used to satisfy various wants. However, according to some economists, this law is applicable to money too. For example, the marginal utility of money is more to a poor person than to a rich person.

Extra Questions

Distinguish Between:

1) Total Utility and Marginal Utility

Total UtilityMarginal Utility
It is an aggregate of utilities from all successive units of a commodity consumed.It is the addition made by the last unit of a commodity consumed.
In normal cases, the numerical value of total utility is always positive.The numerical value of marginal utility can be positive, zero, or negative.

2) Utility and Usefulness

UtilityUsefulness
Utility is the capacity of a commodity to satisfy human wants.Usefulness indicates value in use of the commodity.
For example, milk has both utility as well as usefulness to
a consumer.
For example, liquor has utility only to an addict, but has no usefulness.

3) Utility and Satisfaction

UtilitySatisfaction
Utility is the capacity of a commodity to satisfy human wants.Satisfaction is the feeling of pleasure that person experience after completing consumption.
Utility is a cause of consumption.satisfaction is the end result of consumption.

4) Form Utility and Time Utility

Form UtilityTime Utility
When utility is created due to a change in the shape or structure of existing material, it is called form utility.When the utility of a commodity increases with a change in its time of utilization, it is called time utility.
For example, toys made of clay, furniture from wood, etc.For example, a student has more utility for textbooks during examinations than in vacations.

5) Place Utility and Time Utility

Place UtilityTime Utility
When utility of commodity increases due to a change in its place, it is called place utilities.When the utility of a commodity increases with a change in its time of utilization, it is called time utility.
For example, woollen clothes have more utility in cold places than in warm places.For example, a student has more utility for textbooks during examinations than in vacations.

Answer the following questions:

I) Explain The features or characteristics of utility?

Answer:
Utility:
Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.

Following are the features of utility:
1) Relative concept:
Utility is related to time and place. It varies from time to time and place to place. For example, (i) woollen clothes have a greater utility in the winter. (ii) sand has greater utility at the construction site than at the seashore.

2) Subjective concept :
It is a psychological concept. Utility differs from person to person. This is due to differences in taste, preferences, likes, dislikes, nature, habits, profession, etc. For example, a stethoscope has utility to a doctor but not to a layman.

3) Ethically neutral concept :
The concept of utility has no ethical consideration. It is a morally colourless concept. The commodity should satisfy any want of a person without consideration of what is good or bad, desirable or undesirable. For example, a knife has utility to cut fruits and vegetables as well as it can be used to harm someone. Both wants are of different nature but are satisfied by the same commodity. Thus, utility is ethically neutral.

4) Utility differs from usefulness :
Utility is the capacity of a commodity to satisfy human wants, whereas usefulness indicates value in use of the commodity. For example, milk has both utility as well as usefulness to a consumer, while liquor has utility only to an addict, but has no usefulness.

5) Utility differs from pleasure :
A commodity may possess utility but it may not give any pleasure to the consumer. For example, injection for a patient has utility because it cures the ailment but it hardly gives any enjoyment or pleasure to him.

6) Utility differs from satisfaction :
Utility is a cause of consumption, satisfaction is the end result of consumption. They are interrelated but still different concepts. For example, a thirsty person drinks a glass of water since water has the capacity to satisfy thirst. Utility of water is the cause of consumption and the satisfaction derived is the end result of consumption.

7) Measurement of utility is hypothetical :
Utility is an abstract concept. Cardinal or numerical measurement of utility is not possible. For example, a thirsty person
after drinking water, may derive higher or lower level of utility. Thus, utility can only be experienced and found either positive, zero or negative. Negative utility is called disutility.

8) Utility is multi-purpose :
A commodity can satisfy the want of more than one person, it can also be put to several uses. For example, electricity can be used to serve many purposes and for many people at some point of time.

9) Utility depends on the intensity of want :
Utility depends on the intensity of a want. The more intense the want, the greater will be the utility. As and when the urgency of want declines, utility diminishes. For example, a hungry person finds more utility in food, than a person who is not hungry.

10) Utility is the basis of demand :
A person will demand a commodity only if it gives utility to him. For example, a sick person has utility in medicines hence, he demands medicines.

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II) Explain the types of utility?

Answer:
Utility:
Utility is the capacity of a commodity to satisfy human wants. In other words, utility is the want satisfying power of a good.

Following are some of the different types of utility:
1) Form Utility :
When utility is created due to a change in the shape or structure of existing material, it is called form utility.
For example, toys made of clay, furniture from wood etc.

2) Place Utility :
When utility of commodity increases due to a change in its place, it is called place utilities. For example, woollen
clothes have more utility in cold places than in warm places. Transport creates place utility.

3) Service Utility :
Service utility arises when personal services are rendered by various professionals. For example, services of
doctors, teachers, lawyers, etc.

4) Knowledge utility :
When a consumer acquires knowledge about a particular product, it is called knowledge uitility. For example, utility of a mobile phone or a computer increases when a person knows about its various functions.

5) Possession utility :
Possession utility arises when the ownership of goods is transferred from one person to another. For example, transfer of goods from the sellers to the buyers.

6) Time utility :
When the utility of a commodity increases with a change in its time of utilization, it is called time utility. For example, a student has more utility for textbooks during examinations than in vacations. Time utility is also observed when goods are stored and used at a time of scarcity. For example, Blood bank.

III) Explain the relationship between Total Utility and Marginal Utility. (Explain the Concept of utility)

Answer:
Following are the two main concepts of utility :
1) Total Utility (TU) :
Total utility refers to the aggregate of utility derived by the consumer from all units of a commodity consumed. It is an aggregate of utilities from all successive units of a commodity consumed.

2) Marginal Utility (MU) :
Marginal utility refers to the additional utility derived by a consumer from an additional unit of a commodity consumed. In other words, it is the addition made by the last unit of a commodity consumed.

Relationship between Total Utility and Marginal Utility:

Marginal utility derived from various units of a commodity and its total utility are interrelated. This can be easily followed from the hypothetical example is given in the table below.

Unit of a commodityTU UnitsMU Units
11010
2188
3246
4284
5302
6300
728-2

The above table explains the relationship between total utility and marginal utility.
On the basis of the table Total utility and Marginal Utility curves (TU and MU) can be derived with the following diagram.

image 3

TU Curve = Total Utility Curve
MU Curve = Marginal Utility Curve
The X-axis measures the units of the commodity consumed while Y-axis indicates the figures of total and marginal utility. The above Figure shows that the total utility curve slopes upwards whereas the marginal utility curve slopes downwards. The marginal utility curve shows zero and negative levels of marginal utility whereas
total utility curve shows maximum and constant total utility level.

1) Total utility and marginal utility of the very first unit of x consumed, are the same.

2) As the consumer consumes further units of x, the total utility increases at a diminishing rate and marginal utility goes on diminishing.

3) At a particular stage, total utility reaches its maximum and remains constant whereas marginal utility becomes zero. This is called the point of satiety. (TU highest, MU = 0)

4) After this point, any additional unit consumed further results in a decline in the total utility, while marginal utility becomes negative.

5) After reaching the point of satiety, a rational consumer should stop his consumption since the maximum limit of satisfaction is reached and there is no addition to total utility by any further increase in the stock
of a commodity.

6) Consumption beyond the point of satiety transforms satisfaction into dissatisfaction. In other words, a consumer starts experiencing the ill effects of consumption.

IV) State and explain the law of DMU and Explain its assumption.

Answer:
Refer to QNO 4 for the Law of DMU.
Following are the assumptions of the law of diminishing marginal utility :
1) Rationality:
Consumer is assumed to be rational. It means that his behaviour is normal and he tries to maximize his satisfaction.

2) Cardinal measurement:
The law assumes that utility can be cardinally or numerically measured. Hence, mathematical operations are easily possible to know and compare the utility derived from each unit of a commodity.

3) Homogeneity:
All units of a commodity consumed are exactly homogeneous or identical in size, shape, colour, taste, etc.

4) Continuity:
All units of a commodity are consumed in quick succession without any lapse of time.

5) Reasonability:
All the units of a commodity consumed are of reasonable size. They are neither too big nor too small.

6) Constancy:
All the related factors like income, tastes, habits, choices, likes, dislikes of a consumer should remain constant. Marginal utility of money is also assumed to be constant.

7) Divisibility:
The law assumes that the commodity consumed by the consumer is divisible so that it can be acquired in small
quantities.

8) Single want:
A given commodity can satisfy a single want of a person. The law assumes an experience of a single want
which is completely satiable at a given point of time.

V) What are the Limitations of the law of DMU? Or
Criticisms of the Law.

Answer:
The law of diminishing marginal utility is criticized on the following grounds.
1) Unrealistic assumptions:
The law of diminishing marginal utility is based upon various assumptions like homogeneity, continuity, constancy, rationality etc. but in reality, it is difficult to fulfil all these conditions at a point of time.

2) Cardinal measurement:
The law assumes that utility can be expressed cardinally so it can be added, compared and presented through a schedule. In reality, cardinal measurement of utility is not possible because utility is a psychological concept.

3) Indivisible goods:
The law is not applicable to indivisible and bulky goods like refrigerators, cars, TV sets, etc. which are
normally purchased in a single unit at a time.

4) Constant marginal utility of money:
The law assumes that MU of each unit of money remains constant. However, critics argue that MU of money differs from person to person. It is influenced by changes in prices, stock of money etc.

5) A single want:
The law is restricted to the satisfaction of a single want at a point of time. However, in reality, a man has to satisfy many wants at a point of time.

VI) Explain the importance of law of DMU? Or Significance of the Law.

Answer:
In spite of the criticisms, the law of diminishing marginal utility is a very popular and important law in Economics because of its universal application.
1) Usefulness to the consumers:
This law creates awareness among consumers. To obtain maximum utility from the limited resources, it is necessary to ‘diversify’ the consumption.

2) Useful to the government:
The law is useful to the government in framing various policies such as progressive tax policy, trade policy, pricing policy etc.

3) Basis of paradox of values:
The law of diminishing marginal utility helps us to understand the paradox of values. It includes goods that have more value-in-use and zero or less value-in-exchange such as air, water, sunshine, etc. as well as goods that have more value-in-exchange and less value-in-use such as gold, diamonds, etc.

4) Basis of law of demand:
The law of demand is based on the law of diminishing marginal utility. According to the law of demand, the quantity demanded of a good rises with a fall in price and falls with an increase in price. When a consumer purchases more and more units of a good, its marginal utility steadily declines. Hence, he would buy additional units of a commodity only
at a lower price.

VII) Explain the relationship between Marginal Utility and Price.

Answer:
Let us discuss the relationship between marginal utility and price in order to understand how the law of diminishing marginal utility forms the basis of law of demand. It is a perfect example of the practical application of the law of
Diminishing Marginal Utility (DMU).
To understand the relation, it is essential to convert marginal utility in terms of money so that it can be compared with market price. Let us assume: One unit of marginal utility = Rs 10.
Market price per unit of x = Rs 50.

No of UnitsMU/Units of xMU in terms of money
1 Unit = Rs 10
Market price/unit
of x = Rs 50
Comparison between
MU and price
110100 (10 X Rs 10)Rs 50100 MU>RS 50
2880 (8 X Rs 10)Rs 5080 MU>RS 50
3770 (7 X Rs 10)Rs 5070 MU>RS 50
4550 (5 X Rs 10)Rs 5050 MU=RS 50
5330 (3 X Rs 10)Rs 5030 MU<RS 50
6110 (1 X Rs 10)Rs 5010 MU<RS 50

From the above table, it can be observed that,
1) For the first three units consumed, it is found that marginal utility in terms of money is greater than the price paid. A rational consumer will willingly buy these units since the benefit derived is more than the price paid.

2) Units that a consumer willingly buys because MU is greater than price are called “Intra-marginal units” (MUx > Px).

3) At the 4th unit marginal utility and price become equal. So the consumer can also think of buying the 4th unit.

4) Unit at which MU becomes equal with market price is “marginal unit”. (MUx=Px) = Consumer’s equilibrium

5) In the case of 5th and 6th units, the marginal utility derived is less than the market price paid. A rational consumer will not buy further once the equality between marginal utility and price is established.

6) Units that a rational consumer is not willing to buy and consume where he has to pay more than the MU are called “Extra-marginal units.” (MUx<Px)

7) Thus, a rational consumer attains equilibrium where MUx=Px. This relationship between marginal utility and price paved way for law of demand.

Solution of all Chapters of Economics

Chapter Name Solution Link
1) Introduction to Micro and Macro EconomicsClick Here
2) Utility AnalysisClick Here
3A) Demand AnalysisClick Here
3B) Elasticity of DemandClick Here
4) Supply AnalysisClick Here
5) Forms of MarketClick Here
6) Index NumbersClick Here
7) National IncomeClick Here
8) Public Finance in IndiaClick Here
9) Money Market and Capital Market in IndiaClick Here
10) Foreign Trade of IndiaClick Here

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