Consumer Behavior Theory
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Consumer Behavior Theory

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Questions and Answers

What does the theory of consumer behavior primarily study?

  • The marketing strategies of companies
  • The purchase, use, and disposal of goods and services (correct)
  • The impact of advertising on sales
  • The production processes in businesses

    • Which approach to consumer behavior suggests that utility can be measured and quantified?

  • Utility Ranking Approach
  • Marginal Utility Approach
  • Ordinal Approach
  • Cardinal Approach (correct)

    • Who introduced the Ordinal Approach to utility in consumer behavior?

  • Adam Smith
  • Jevon
  • Alfred Marshall
  • J.R. Hicks and R.G. Allen (correct)

    • What differentiates the concepts of utility as proposed by Jevon from those of Marshall?

    <p>Jevon described utility as subjective satisfaction, whereas Marshall quantified it.</p> Signup and view all the answers

    How is utility defined in economic terms?

    <p>The power of a commodity or service to satisfy human wants</p> Signup and view all the answers

    What is a key characteristic of utility as described in the content?

    <p>Utility varies from person to person and is subjective</p> Signup and view all the answers

    According to the content, how does the utility of a bottle of wine differ between a drinker and a non-drinker?

    <p>It has zero utility for the non-drinker and high utility for the drinker.</p> Signup and view all the answers

    Which of the following correctly describes the relationship between utility and pleasure?

    <p>Utility is subjective satisfaction, not simply pleasure or usefulness.</p> Signup and view all the answers

    What happens to total utility if a consumer is forced to consume a glass of water beyond the point of satiety?

    <p>Total utility will decline.</p> Signup and view all the answers

    At which glass of water does the marginal utility first become negative?

    <p>6th glass.</p> Signup and view all the answers

    What is the marginal utility of the 2nd glass of water?

    <p>12 units.</p> Signup and view all the answers

    What assumption is made about the consumer in the context of the law of diminishing marginal utility?

    <p>Consumers aim to maximize utility subject to their income.</p> Signup and view all the answers

    Which graphical relation depicts the behavior of marginal utility with the consumption of successive units of water?

    <p>Downward slope.</p> Signup and view all the answers

    What term is used for the point at which total utility does not increase with additional consumption of water?

    <p>Satiety point.</p> Signup and view all the answers

    What does total utility represent?

    <p>The overall satisfaction from consuming all units of a commodity over time</p> Signup and view all the answers

    How is marginal utility defined?

    <p>The change in total utility from consuming an additional unit</p> Signup and view all the answers

    What is the marginal utility of the 5th glass of water?

    <p>0 units.</p> Signup and view all the answers

    At what point does total utility reach its maximum according to the given information?

    <p>When marginal utility equals zero</p> Signup and view all the answers

    What assumption about money does the law of diminishing marginal utility rely on?

    <p>Marginal utility of money remains constant.</p> Signup and view all the answers

    In the example provided for apples, what is the marginal utility of consuming the second apple?

    <p>4</p> Signup and view all the answers

    What happens to marginal utility as more apples are consumed based on the provided data?

    <p>It consistently decreases</p> Signup and view all the answers

    What is the total utility when 3 apples are consumed, according to the table provided?

    <p>13</p> Signup and view all the answers

    What does a negative marginal utility indicate?

    <p>The consumer is dissatisfied with the current consumption level</p> Signup and view all the answers

    Which statement is true regarding the relationship between total utility and consumption based on the information provided?

    <p>Total utility initially increases, then decreases after a peak</p> Signup and view all the answers

    What does it mean for utility to be additive in consumer behavior theory?

    <p>Total utility is the sum of the utilities of each individual commodity.</p> Signup and view all the answers

    Which assumption allows the law of diminishing marginal utility to remain valid?

    <p>Character of the consumer remains unchanged.</p> Signup and view all the answers

    What happens when the consumption of a commodity is not continuous?

    <p>Marginal utility may increase for additional units consumed.</p> Signup and view all the answers

    What effect does a sudden change in fashion or customs have on the law of diminishing marginal utility?

    <p>It can make the law inoperative.</p> Signup and view all the answers

    In the context of intoxicants, how does the law of diminishing marginal utility apply?

    <p>More consumption initially increases utility, but may later decrease it.</p> Signup and view all the answers

    In which scenario does the marginal utility of a commodity not diminish?

    <p>In the case of extremely scarce resources, like rare diamonds.</p> Signup and view all the answers

    How does the law of diminishing marginal utility apply to money?

    <p>Marginal utility of money declines but never reaches zero.</p> Signup and view all the answers

    What is required for the law of diminishing marginal utility to hold true?

    <p>All factors affecting consumption must remain constant.</p> Signup and view all the answers

    What does the law of diminishing marginal utility state about the relationship between the quantity of a good consumed and the satisfaction derived from it?

    <p>The satisfaction from consuming each additional unit eventually decreases.</p> Signup and view all the answers

    How does the law of diminishing marginal utility affect consumer spending decisions?

    <p>Consumers allocate spending such that the marginal utility of goods is equal.</p> Signup and view all the answers

    What principle is the system of modern taxation based on, as derived from the law of diminishing marginal utility?

    <p>Progressive taxation where higher incomes are taxed at higher rates.</p> Signup and view all the answers

    At which unit does the law of diminishing marginal utility start applying if a consumer consumes 4 units of video games with utilities 40, 35, 30, and 25?

    <p>Second unit</p> Signup and view all the answers

    Which of the following is NOT a consequence of the law of diminishing marginal utility?

    <p>Reduction in the price of goods.</p> Signup and view all the answers

    Why might a finance minister impose a system of progressive taxation based on the law of diminishing marginal utility?

    <p>To ensure rich people pay a higher rate due to lower marginal utility of money.</p> Signup and view all the answers

    Study Notes

    Consumer Behavior Theory

    • Human wants are unlimited and resources are scarce, leading to choices in consumption.
    • Consumer behavior studies individuals, groups, and organizations in activities related to buying, using, and discarding goods and services.
    • Two main approaches to analyzing consumer behavior: Cardinal and Ordinal.

    Cardinal Approach

    • Utility can be measured and quantified.
    • Alfred Marshall proposed the cardinal utility approach.
    • Utility can be assigned numerical values like 1, 2, 3, 4.

    Ordinal Approach

    • Utility cannot be measured numerically but can be ranked and ordered.
    • J.R. Hicks and R.G. Allen introduced the ordinal approach in 1928.

    Concept of Utility

    • Introduced by Jevons in 1835.
    • Defined as the power of a commodity or service to satisfy human wants.
    • Subjective and differs from person to person.
    • Utility is not equal to pleasure or usefulness.

    Total Utility and Marginal Utility

    • Total Utility is the sum of satisfaction obtained from all units of a commodity consumed over a period of time.
    • Marginal Utility is the change in total utility resulting from a one-unit change in consumption.
    • Relationship between TU and MU: TU increases at a decreasing rate as MU diminishes.

    Law of Diminishing Marginal Utility

    • States that as consumption of a good increases, the marginal utility derived from each additional unit decreases.
    • Assumptions:
      • Rationality
      • Constant marginal utility of money
      • Diminishing marginal utility
      • Utility is additive
      • Continuous consumption
      • Suitable quantity
      • Unchanging character of the consumer
      • No change in fashion, taste, or price
    • Exceptions include intoxicants, rare collections, and money.
    • Practical Importance:
      • Foundation of the law of demand: Consumers purchase more of a good as price decreases because the marginal utility of each unit declines.
      • Basis of consumer surplus: Consumers gain surplus satisfaction.
      • Importance to consumer: Maximize satisfaction by allocating income to different goods.
      • Importance to finance minister: Progressive taxation based on the law of diminishing marginal utility.
    • Q.1 Calculate marginal utility for 7 units of apples with given total utilities.
    • Q.2 Determine the marginal utility of the 2nd unit of coffee with given total utilities.
    • Q.3 Identify the unit at which Diminishing Marginal Utility starts applying for video games with given total utilities.
    • Q.4 Determine the marginal utility of the 5th unit of a product with given total utilities.

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    Theory Of Consumer Behavior PDF

    Description

    Explore the foundations of consumer behavior theory, including the differences between cardinal and ordinal approaches to utility. Understand how human wants and scarce resources influence consumption choices and learn about historical contributions from key economists. This quiz will help reinforce your understanding of these critical concepts.

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