20 Multiple choice on consumer buying behaviour

Latest Consumer behaviour MCQ Objective Questions

Consumer behaviour MCQ Question 1:

Exceptions to law of diminishing marginal utility include

1. Reading
2. Money
3. Acquiring knowledge
4. All of the above

Answer (Detailed Solution Below)

Option 4 : All of the above

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The correct answer is All of the above.

Key PointsMarginal utility - It is the additional utility derived from the consumption of an additional unit of a commodity. Marginal utility is also known as Marginal Satiety.

MU = Change in TU/Change in Quantity

MU= TUn - TUn-1 

Also, Marginal Utility is the additional utility made to be TU by the addition consumption of one more unit of a commodity.

Important PointsLaw of diminishing marginal utility -  

• According to the Law of Diminishing Marginal Utility, the additional utility derived from increasing consumption declines with each additional increase in consumption level. 
• It enables us to comprehend why consumers are becoming less and less satisfied with each new good unit.
• The ordinal utility theory serves as the foundation for the law, which is subject to certain presumptions.

Exceptions to the law of diminishing marginal utility - 

1. Hobbies/Addictions - In the case of addictions, this law is not applicable. For an alcoholic, the marginal benefit of consuming one more drink does not diminish. Similar to this, someone who enjoys painting would not encounter diminishing marginal utility when creating a new work of art.
2. Rare Items - Additionally, it is not applicable to rare things. It is particularly true for enthusiasts who pursue and are passionate about such topics. For instance, a watch collector who already owns a lot of watches would find considerably greater satisfaction in purchasing a limited-edition timepiece.
3. Unrealistic Assumptions - This legislation makes assumptions that sometimes do not hold true. Occasionally, a customer could make an irrational choice.

Hence, reading (hobby), money and acquiring knowledge (hobbies) are exceptions to law of diminishing marginal utility.

Consumer behaviour MCQ Question 2:

A point below the budget line of a consumer

1. Represents a combination of goods which costs the whole of consumer's income
2. Represents a combination of goods which costs less than the consumer's income.
3. Represents a combination of goods which is unattainable to consumer given his/her money income
4. Represents a combination of goods which costs more than consumer's income

Answer (Detailed Solution Below)

Option 2 : Represents a combination of goods which costs less than the consumer's income.

The correct answer is 

Key PointsConsumer Budget - A consumer's real purchasing power, given two commodities' costs, is determined by his or her budget.  

Important Points

Budget Line - The budget line in a consumer budget is the graphic representation of best bundles that cost the consumer exactly his income in money. Therefore, the budget line's equation is:

P1.X1 + P2.X2 = Income.

Thus, a point below the budget line of a consumer represents a combination of goods which costs less than the consumer's income.

Consumer behaviour MCQ Question 3:

Which of the following statements is true?

1. When the total utility is maximum, marginal utility is zero.
2. When total utility decreases, marginal utility remains constant.
3. Total utility and marginal utility are not inter related.
4. All of the above

Answer (Detailed Solution Below)

Option 1 : When the total utility is maximum, marginal utility is zero.

The correct answer is When the total utility is maximum, marginal utility is zero.

Key Points

• When the total utility is maximum, marginal utility is zero, this statement is true because unit of goods are consumed till saturation point and after it MU becomes negative.
• When total utility decreases, marginal utility remains constant, this statement is false because once When TU curve is falling, the MU curve becomes negative.
• Total utility and marginal utility are not inter related, this statement is false because both TU and MU are inter related.

Important PointsRelationship between Total Utility and Marginal Utility

• The TU curve begins from the origin, increases at a decreasing rate, reaches a maximum, and then starts falling.
• MU curve is the slope of the TU curve and given by MU= change in  TU/Change in Q .
• When TU is maximum, MU is zero. It is referred to as the saturation point. It indicates that units of the good are consumed till the saturation point.
• Once When TU curve is falling, the MU curve becomes negative.
• The falling part of the MU curve demonstrates the law of diminishing marginal utility.

Consumer behaviour MCQ Question 4:

The law of diminishing marginal utility was propagated by:

1. H. H. Gossen
2. Alfred Marshall
3. Gossen and Marshall
4. None of these

Answer (Detailed Solution Below)

Option 1 : H. H. Gossen

The correct answer is H. H. Gossen.

Key Points

• HH Gossen formulated the Law of Diminishing Marginal Utility (DMU).
  • He formulated this law in 1854.

Important Points

• Marginal Utility is the change in total utility due to a one-unit change in the level of consumption.
• Law of Diminishing Marginal Utility
  • It states that as a person consumes an item or a product, the satisfaction or utility that they derive from the product declines as they consume more and more of that product.
  • In other words, the additional utility gained from an increase in consumption decreases with each subsequent increase in the level of consumption.
• Demand curves are downward-sloping in microeconomic models since each additional unit of a good or service is put toward a less valuable use.
• Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell.

Consumer behaviour MCQ Question 5:

Utility derived from consumption of an additional unit of a good is called

1. Total utility
2. Marginal utility
3. Additional utility
4. Derived utility

Answer (Detailed Solution Below)

Option 2 : Marginal utility

The correct answer is Marginal utility.

Key PointsUtility - Utility is the want satisfying capacity of a commodity. It is subjective entity and vary from person to person.

Important PointsMarginal utility - It is the additional utility derived from the consumption of an additional unit of a commodity. Marginal utility is also known as Marginal Satiety.

MU = Change in TU/Change in Quantity

MU= TUn - TUn-1 

Also, Marginal Utility is the additional utility made to be TU by the addition consumption of one more unit of a commodity.

Additional Information Total utility - It is the sum of utility derived from different units of commodity consumed by consumer. It is also sum of all MU.

Top Consumer behaviour MCQ Objective Questions

The essence of the law of diminishing returns is

1. inelastic production
2. negative marginal production
3. declining total production
4. declining average production

Answer (Detailed Solution Below)

Option 2 : negative marginal production

The essence of the law of diminishing returns is negative marginal production.

Explanation:

1. Law Of Diminishing Returns states that as one variable input is increased, with all others remaining fixed, a point will be reached beyond which the marginal physical product of the variable factor will begin to decrease.
2. Still, if additional variable input is added, it will lead to negative marginal production. 
3. For example, if a factory employs workers to manufacture its products, at some point, the company will operate at an optimal level; with all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations as the size of the factory and equipment will remain as it is but workers will increase resulting in the chaos which will reduce efficiency. 

On which of the following assumptions, the theory of consumer behaviour on cardinal utility approach is NOT based? 

1. Consumer is rational

2. Limited money income of the consumer

3. Maximization of total satisfaction

4. Diminishing marginal utility of money 

1. 1
2. 2
3. 3
4. 4

Answer (Detailed Solution Below)

Option 4 : 4

Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer's demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.

The analysis of consumer behavior seeks to answer two questions.

1. Firstly, how does a consumer decide the optimum quantity of a good that he/she selects to consume?
2. Secondly, how the disposable income is allocated by the consumer for different goods so that he/she maximizes the utility?

The cardinal utility approach answers these two questions on the basis of the following assumptions:

1. Rationality:

• Assumes that a consumer is rational and satisfies his/her wants in order of his/her preferences. Therefore, he/she firstly prefers to purchase those goods which yield the highest utility and lastly those that provide the lowest utility.

2. Limited Money Income:

• Refers to one of the important assumptions of the cardinal utility approach. According to this approach, a consumer has a limited amount of income to be expended on goods selected by him/her for consumption. Therefore, in such a case when there is an objective of utility maximization along with limited income, he/she selects those goods whose consumption is unavoidable.

3. Maximization of Satisfaction:

• This implies that every rational consumer strives to maximize his/her satisfaction from the limited income.

4. Utility is Measurable:

• Assumes that utility is cardinally measurable. Therefore, the utility of one unit of good equals the units of money that a consumer is willing to pay, which means that 1 util = 1 unit of money.

5. Diminishing Marginal Utility:

• Constitutes the basis for consumer behavior analysis. The utility gained falls as more and more units of a good are consumed.

6. Constant Marginal Utility of Money:

• Implies that whatever the level of income, the MU of money remains the same. According to this assumption, money is used as a measure of utility.

7. Utility is Additive:

• Implies that utility is not only cardinally measurable but can be added together to obtain the total utility. For instance, a consumer consumes X1, X2, and X3 units of good X and derives U1, U2, and U3 utils, respectively.

Therefore, from the above explanation, diminishing marginal utility of money is not the appropriate assumption considered under the theory of consumer behavior on the cardinal utility approach.

Which type of studies would be most appropriate to use in order to measure changed opinions of consumers repeatedly?

1. Focus group studies
2. Shadowing studies
3. Longitudinal studies
4. Experimental studies

Answer (Detailed Solution Below)

Option 3 : Longitudinal studies

Longitudinal studies:

• A longitudinal study is a research design that involves repeated observations of the same variables i.e. people over a short or long period of time.
• It is a type of observational study, although they can be structured as longitudinal randomized experiments. 
• The huge disadvantage of any longitudinal study is the time, as it typically takes a substantial time to collect the data that is required.
• Example: The 1970 British Cohort Study, which has collected data on the lives of 17,000 Brits since their birth in 1970, is one of the most well-known longitudinal studies.

Therefore, Longitudinal studies would be most appropriate to use in order to measure the changed opinions of consumers repeatedly.

Focus group studies:

• The focus group involves a small number of demographically similar individuals.
• It is a form of qualitative research where a group of people is asked about their opinions, beliefs, perceptions, and attitudes towards a product, service, advertisement, idea, concept, or packaging.
• The reaction of this group of people to specific research-posed questions are studied. 

Shadowing studies:

• Shadowing is a qualitative research technique that is conducted on a small scale where the researcher acts as an observer.
• There are three types of shadowing:
  • Natural - where the researcher only observes the subject for a set period of time without any interference.
  • Controlled - where the researcher designs a task and only observes it being carried out.
  • Participatory - where the researcher performs the activity being observed to gain a first-hand perspective.

Experimental studies:

• Experimental studies are the ones where the researcher introduces an intervention and then studies the effects.
• It is commonly used in scientific research designs and is the primary approach used to study the causal (cause and effect) relationship and investigate the relationship between one variable and the other.
• It is mostly done in a controlled environment.

The law of variable proportions assumes

1. When marginal cost falls, total production will decrease
2. Utility is maximised when marginal production falls
3. Some factors of production are fixed
4. When marginal production falls, total production is maximum

Answer (Detailed Solution Below)

Option 3 : Some factors of production are fixed

The correct answer is Some factors of production are fixed

Key PointsLaw of Variable Proportion:

According to the law of variable proportion states that when the quantity of one factor of production is increased, while keeping all other factors constant, it will result in the decline of the marginal product of that factor.

Important Points

Example:

Increasing Returns - Stage 1

• Average output rises in the first stage as fixed factors and increasing amounts of labour and capital are used (land).
• The total, average, and marginal products all show growth, although the average and marginal products rise by up to 40 units.
• Later, both begin to decline because the ratio of employees to land was adequate, and the land was not being utilised efficiently.
• The first stage ends.

Decreasing Returns - Stage 2

• Where the first stage ends, or where AP=MP, is where the second stage begins. Average and marginal products begin to decline at this point.
• We should be aware that marginal product declines more quickly than average product.
• Here, the rate of growth of the overall product is decreasing.
• Additionally, the marginal product reaches 0 at 7 units of labour, while the average product never reaches zero
• At this point MP is 0 and TP is maximum

Negative Returns:

• Where the second stage ends, the third stage starts.
• This begins in the eighth unit.
• Here, the average product is still positive even though the marginal product is negative and the total product decreases.
• Any additional dose at this point results in positive annoyance since it decreases the marginal product.

Suppose a customer who purchases only two goods is making a utility-maximizing choice and then the price of one of the goods decreases. What will happen?

A. The consumer's purchasing power will increase

B. The consumer's total utility will increase

C. The consumer's money income will increase

Choose the most appropriate answer from the options given below:

1. A and C only
2. A and B only
3. B and C only
4. A, B and C only

Answer (Detailed Solution Below)

Option 2 : A and B only

Utility maximization refers to the concept that individuals and firms seek to get the highest satisfaction from their economic decisions.

The change in a consumer’s consumption of a good in response to an income-compensated price change is called the substitution effect. The substitution effect always involves a change in consumption in a direction opposite that of the price change.

• When a consumer is maximizing utility, the ratio of marginal utility to price is the same for all goods.
• For a consumer who purchases only two goods, price reduction increases the extra utility per rupee available from the good whose price has fallen; a consumer's purchasing power will increase and thus purchase more of it.
• An income-compensated price increase reduces the extra utility per rupee from the good; the consumer will purchase less of it.
• In other words, when the price of a good falls, people react to the lower price by substituting or switching toward that good, buying more of it and less of other goods, if we artificially hold the consumer’s ability to buy goods constantly.
• Total utility is the aggregate summation of satisfaction that a consumer receives through the consumption of goods or services.
• When the price of goods decreases, the rate of consumption will increase i.e. the consumer's total utility will increase as well.

Therefore, Statements A and B only are correct.

Cardinal utility analysis of consumer's behaviour is based on which combination of the following assumptions:

(i) Utility is measurable in terms of cardinal number.

(ii) Constancy of the marginal utility of money

(iii) Utilities of different goods are interdependent

(iv) Gossen's first law of consumption

Choose the correct answer from the code given below:

1. Only (i) and (ii)
2. Only (i), (ii) and (iv)
3. Only (ii), (iii) and (iv)
4. Only (iii) and (iv)

Answer (Detailed Solution Below)

Option 2 : Only (i), (ii) and (iv)

Cardinal utility analysis is the oldest theory of demand which provides an explanation of consumer’s demand for a product and derives the law of demand which establishes an inverse relationship between price and quantity demanded of a product.

Assumptions of Cardinal Utility Analysis:

1. Rationality: Consumer behaves normally i.e, if goods are available he will purchase that or if goods become cheaper he will go in for the same. He will not make impulsive purchases.
2. Limited income: Limited income of a man will force him to make choice – i.e., to purchase one commodity another to be forgone.
3. Constant marginal utility of money: If the marginal utility of money changes with a change in income, then it cannot be used as a measuring rod. So it is assumed constant.
4. Measurability: The utility of each commodity is measurable. The quantity of money a consumer is ready to spend on buying any unit of a commodity is the utility of that unit to him.
5. The hypothesis of independent utility : It means an independent unit has independent utility & it ignores complementarity between goods.

On the basis of these assumptions, Prof. Alfred Marshall has shown that the additional benefit which a person derives from a given increase of his stock of anything diminishes with the growth of the stock that he has, known as the Law of diminishing marginal utility. 

Gossen's First Law:

In other words, the law tells that the marginal utility of a good for a person diminishes with every increase in the stock that he already has. Gossen's First Law is the "law" of diminishing marginal utility: that marginal utilities are diminishing across the ranges relevant to decision-making.

Therefore, the Utilities of different goods are interdependent is not an assumption of Cardinal utility analysis of consumer's behavior.

Which of the following statements is true?

1. When the total utility is maximum, marginal utility is zero.
2. When total utility decreases, marginal utility remains constant.
3. Total utility and marginal utility are not inter related.
4. All of the above

Answer (Detailed Solution Below)

Option 1 : When the total utility is maximum, marginal utility is zero.

The correct answer is When the total utility is maximum, marginal utility is zero.

Key Points

• When the total utility is maximum, marginal utility is zero, this statement is true because unit of goods are consumed till saturation point and after it MU becomes negative.
• When total utility decreases, marginal utility remains constant, this statement is false because once When TU curve is falling, the MU curve becomes negative.
• Total utility and marginal utility are not inter related, this statement is false because both TU and MU are inter related.

Important PointsRelationship between Total Utility and Marginal Utility

• The TU curve begins from the origin, increases at a decreasing rate, reaches a maximum, and then starts falling.
• MU curve is the slope of the TU curve and given by MU= change in  TU/Change in Q .
• When TU is maximum, MU is zero. It is referred to as the saturation point. It indicates that units of the good are consumed till the saturation point.
• Once When TU curve is falling, the MU curve becomes negative.
• The falling part of the MU curve demonstrates the law of diminishing marginal utility.

When a consumer increases units of X-commodity by giving up some units of Y-commodity and even to attain the same level of satisfaction, the marginal rate of substitution will be calculated by

1. ​Change in X-commodity          
   Marginal utility of Y-commodity
2.  Change in Y-commodity           
   Marginal utility of X-commodity
3.  Change in X-commodity
   Change in Y-commodity
4.  Change in Y-commodity
   Change in X-commodity

Answer (Detailed Solution Below)

Option 4 :  

Change in Y-commodity

Change in X-commodity

The Correct Answer is \(\text {Change in Y-commodity }\over \text{Change in X-commodity}\)

Key PointsMarginal Rate of Substitution

• MRS is used to know how much of one commodity is substituted for another commodity.
• It shows the rate at which a consumer is willing to substitute one commodity for another.
• Formula to calculate MRS is \(\text {Change in Y-commodity }\over \text{Change in X-commodity}\)

 

Which of the following explains the declining slope of indifference curves? 

(A) Diminishing marginal utility 

(B) Diminishing Marginal Rate of substitutions between the commodities

(C) Diminishing Marginal Rate of technical substitution

(D) Ordinal measurement of utilities

(E) Diminishing Marginal utility of money 

Choose the most appropriate answer from the options given below:

1. (A) and (D) only
2. (B) and (D) only
3. (C) and (D) only
4. (A) and (E) only

Answer (Detailed Solution Below)

Option 2 : (B) and (D) only

Indifference Curve:

• An indifference curve shows a combination of two goods that give a consumer equal satisfaction and utility thereby making the consumer indifferent.
• Along the curve, the consumer has an equal preference for the combinations of goods shown—i.e. is indifferent about any combination of goods on the curve.
• Typically, indifference curves are shown convex to the origin, and no two indifference curves ever intersect.

1. Indifference curves slope downward because, if the utility is to remain the same at all points along the curve, a reduction in the quantity of the good on the vertical axis must be counterbalanced by an increase in the quantity of the good on the horizontal axis (or vice versa). 
2. Thus, the slope of the indifference curve is called the marginal rate of substitution, which declines as the quantity of X increases relative to the quantity of Y.

Here is an example to understand the indifference curve better. Peter has 1 unit of food and 12 units of clothing. Now, we ask Peter how many units of clothing is he willing to give up in exchange for an additional unit of food so that his level of satisfaction remains unchanged.

Peter agrees to give up 6 units of clothing for an additional unit of food. Hence, we have two combinations of food and clothing giving equal satisfaction to Peter as follows:

1. 1 unit of food and 12 units of clothing
2. 2 units of food and 6 units of clothing

By asking him similar questions, we get various combinations as follows:

Combination	Food	Clothing
A	1	12
B	2	6
C	3	4
D	4	3

Graphical Representation:

• Another reason for the declining slope of the indifference curve is the ordinal measurement of utilities.
• The concept of ordinal utility implies that the consumer cannot go beyond stating his preference or indifference.
• In other words, if a consumer prefers X to Y, he can not tell by ‘how much’ he prefers X to Y.
• The consumer cannot state the ‘quantitative differences’ between various levels of satisfaction; he can simply compare them ‘qualitatively’, that is, he can merely judge whether one level of satisfaction is higher than, lower than, or equal to another.

Thus, option 2 is the correct answer.

Consumer behaviour does NOT consist which of the following activities?

1. Obtaining
2. Consuming
3. Disposition
4. Producing

Answer (Detailed Solution Below)

Option 4 : Producing

Consumer behaviour does NOT consist of Producing.

Explanation:

1. “Consumer behaviour may be defined as the behaviour that consumers display in searching for, purchasing, suing, evaluating and disposing of produces, services and ideas which they expect will satisfy their needs.” Schiffman and Kanuk.
2. Thus, the study of consumer behaviour is the study of how individuals make decisions to spend their available resources-money, time and effort-on consumption-related items.
3. However, it may be noted that consumer behaviour research today goes for beyond “what, why, how, when, where and how often” facets of consumer behaviour and also considers the uses which consumers make use of the goods they buy and evaluations of these goods after use.
4. Since consumers are not involved in the production of goods and services therefore, Consumer behaviour does NOT consist of the activity of Producing.

In the case consumers equilibrium to be explained through an ordinal approach, when there are two commodities with their prices given and with limited income of the consumer, the following information is required: 

a) Price line / budget line

b) Indifference map

c) Point of tangency between IC and budget line

d) Equality of the slopes of IC and budget line 

Arrange the information required in the correct sequence and choose the right option from those below 

1. b)  → d) → a) → c) 
2. b) → a) → d) → c)
3. a) → d) → b) → c)
4. a) → b) → c) → d)

Answer (Detailed Solution Below)

Option 2 : b) → a) → d) → c)

In the case consumers equilibrium to be explained through an ordinal approach, when there are two commodities with their prices given and with limited income of the consumer, the following information is required in the correct sequence:

1. Indifference Map:

• J.R Hicks used the concept of the Indifference curve to analyze consumer behaviour. A consumer-facing choice between a large number of bundles of two goods tries to maximise his satisfaction by choosing a combination which gives him maximum utility.
• An indifference schedule is a table which represents various combinations of two goods, which yield equal satisfaction to consumer. 
• The graphical presentation of the Indifference schedule is known as the Indifference curve. 
• A diagram showing different indifference curves corresponding to different indifference schedules of the consumer is an indifference map. In other words, a set or family of indifference curves is an indifference map. 

2. Price line/budget line:

• The budget line is a graphical delineation of all feasible combinations of two commodities that can be bought with provided income and cost so that the price of each of these combinations is equivalent to the monetary earnings of the customer.
• In economics, a budget constraint represents all the combinations of goods and services that a consumer may purchase given current prices within his or her given income.
• Consumer theory uses the concepts of a budget constraint and a preference map to analyze consumer choices.

3. Equality of the slopes of IC and budget line:

• Note that the equilibrium quantities are those for which the slope of the indifference curve equals the slope of the budget line---that is, where the marginal rate of substitution equals the price ratio.
• Now suppose that the level of the individual's income increases without any change in prices. More of both commodities can now be consumed and the price ratio does not change, so the budget line shifts outward with the new budget line being parallel to the original one.
• The level of utility increases from  U0  to  U1  and the individual's consumption of the two goods increases to  X1  and  Y1 .
• At this point we must keep in mind that the indifference map below Figure assumes that both X and Y are normal goods---that is, that indifference curve  U1  is tangent to the new higher budget line at a point to the right of output level  X0. 
• In the case where X is an inferior good, this tangency would be to the left of output level  X0  and the quantity demanded of commodity X would decline as a result of the increase in income.

Therefore, the correct sequence is b) → a) → d) → c).

Characteristics constituting the core of consumer's rationality includes:

(A) Homogeneous expectations

(B) Non-satiation

(C) Selfish motive

(D) Clarity of preferences

(E) Possession of information

Choose the correct answer from the options given below:

1. A, B and C only
2. B, C and D only
3. A, B, C and D only
4. B, C, D and E only

Answer (Detailed Solution Below)

Option 4 : B, C, D and E only

The correct answer is B, C, D and E only

Key Points A Rational Consumer:

• A rational consumer is an economic notion that assumes that while making a decision, people will always prioritise maximising their own personal gains.
• When making a selection, rational consumers choose the alternative that will provide them with the maximum utility and satisfaction.

Example: Consider the situation when a person has to choose between purchasing a more expensive car A or a less expensive car B. If the cars are identical, sensible consumers will choose car B since it will provide the maximum value for their money.

Important Points Assumptions of consumer rationality:

• Non-Satiation: The assumption that a consumer will always benefit from additional consumption. The demand for some goods may have a finite limit, but it is likely that there is some good or service a consumer would benefit from having more of.
• Clarity Of Preferences: This assumption states that, logically, selections between goods are rational because of the transitivity statement, which posits that people always prefer goods in the following order: A is preferred to B, and B is preferred to C, so A is preferred to C.
• Economic Selfish Motive: The notion that human behaviour is governed by selfishness as an ultimate motive – without altruism (selflessness) and group selection.
• Possession Of Information: The assumption states that a consumer has perfect and complete information, and he makes choices based on this information.

Consumer rationality in business economics is collective manifestation of which of the following assumptions? 

(A) Non-Satiation

(B) Clarity of preferences

(C) Divisibility of goods and Services 

(D) Economic selfish motive

(E) Possession of information 

Choose the most appropriate answer from the options given below:

1. (A), (B) and (D) only
2. (A), (C) and (E) only
3. (A), (B), (C) and (D) only
4. (A), (B), (D) and (E) only

Answer (Detailed Solution Below)

Option 4 : (A), (B), (D) and (E) only

The term "economic man" (also referred to as "homo economicus") refers to an idealized person who acts rationally, with perfect knowledge, and who seeks to maximize personal utility or satisfaction. 

Consumer rationality in business economics is a collective manifestation of the following assumptions:

1. Non-Satiation: The assumption that a consumer will always benefit from additional consumption. The demand for some goods may have a finite limit, but it is likely that there is some good or service a consumer would benefit from having more of.
2. Clarity Of Preferences: This assumption states that, logically, selections between goods are rational because of the transitivity statement, which posits that people always prefer goods in the following order: A is preferred to B, and B is preferred to C, so A is preferred to C.
3. Economic Selfish Motive: The notion that human behavior is governed by selfishness as an ultimate motive – without altruism (selflessness) and group selection.
4. Possession Of Information: The assumption states that a consumer has perfect and complete information and he makes choices based on this information.

Divisibility Of Goods And Services is not an assumption of consumer rationality. Thus, option 4 is the correct answer.

The tangible goods for which a consumer wants to compare quality, price and perhaps style in several stores before making a purchase are called :

1. Convenience Goods
2. Shopping Goods
3. Speciality Goods
4. Unsought Goods

Answer (Detailed Solution Below)

Option 2 : Shopping Goods

The tangible goods are physical goods that can be touched, seen, and compared before making a purchase.

Shopping Goods:

• A tangible product for which consumers want to compare quality, price, and perhaps style in several stores before making a purchase is considered a shopping good.
• These products need search efforts and special visits to central markets, there are not urgent purchases and buyers can postpone buying according to their convenience.
• They need not have numerous retail outlets. Buyers want to shop around and select goods after comparing quality, terms, style, price, services and so on.
• Examples of shopping goods are furniture, jewelry, fashion goods, appliances, automobiles.
• As fewer retailers are required and retail stores typically buy shopping goods in large quantities, it is common for manufacturers to use shorts channels of distribution. Usually, they sell directly to retailers.

Therefore, Shopping Goods are tangible goods for which a consumer wants to compare quality, price, and perhaps style in several stores before making a purchase.

1) Convenience Goods:

• Convenience goods are items consumers buy often and easily without putting much thought into them.
• These include newspapers, magazines, most grocery items, and petrol.
• Since consumers have a good sense of how much these items cost, they don't consider their price unless it falls outside their expectations.

2) Speciality Goods:

• Goods that have unique characteristics or features for which consumers will be willing to make a special purchasing effort are known as Speciality Goods.
• Example: Luxury watches and cars, high-fashion clothing, professional camera lens, etc. 

3) Unsought Goods:

• Goods about which consumers don't usually have the knowledge or are not that interested in knowing of is known as Unsought goods.
• Example: Funeral plans, disability insurance, accident, and life insurance, etc.

34% of the customers who fall in one of the categories of diffusion process who are deliberate customers to accept an innovation just before the average adopter in a social system. Such customers who are above average in social and economic measures, rely quite a bit on advertisements and salesmen are known as :

1. Early Adopters
2. Early Majority
3. Late Majority
4. Late Adopters

Answer (Detailed Solution Below)

Option 2 : Early Majority

Early majority:

• They represent 34% of the customers who are deliberate and cautious to accept innovation.
• They are middle-class customers who are slightly above average adopters in the social system with just above average education and income i.e. social and economic measures.
• They rely quite a bit on advertisements, salesmen, and other marketing activities. 
• When they adopt the product, that particular product is no longer perceived as new or different.

Therefore, 34% of the customers who fall in one of the categories of diffusion process who are deliberate customers to accept an innovation just before the average adopter in a social system. Such customers who are above average in social and economic measures rely quite a bit on advertisements and salesmen are known as the Early Majority. 

Innovators:

• They represent 2.5% of the customers who are extremely adventuresome.
• They are the first customer to try a new product in the market and they are willing to take the risk to do so.
• They are well educated with a good financial condition and especially of a younger age.

Early Adopters:

• They represent 13.5% of the customers who buy new products after innovators.
• They have a greater concern for social acceptance and are heavy media users.
• As they are the opinion leaders who influence others, they are targeted by the advertisers for new products.

Late Majority:

• They represent 34% of the customers who are more conservative in nature following the Early Majority of customers.
• They have a lower than average level of social and economic status i.e. lower level of education and income.
• They will try a new product when it is no longer risky or when there is peer pressure to adopt it.
• Usually, marketers drop prices to attract the late majority of people.

Late Adopters/Laggards:

• They represent the last 16% of the customers who adopt a new product.
• They belong to a lower social class.
• By the time they adopt a new product, it may be already superseded by other innovations. 

Type of Customer	% of Population
Innovator	2.5%
Early Adopter	13.5%
Early Majority	34%
Late Majority	34%
Laggards	16%
Total	100%

Assertion A): U-shaped long-run average cost curve is based on the assumption that economies of scale prevails at small levels of production and diseconomies of scale prevails at larger level of production.

Reason R): Decreasing returns to scale arises primarily because as the scale of operation increases, it becomes even more difficult to manage the firm effectively.

In the context of the above two statements, which one of the following codes is correct?

1. Both A) and R) are correct and R) is the right explanation of A)
2. Both A) and R) are correct and R) is not the right explanation of A)
3. A) is correct and R) is not incorrect
4. Both A) and R) are incorrect

Answer (Detailed Solution Below)

Option 2 : Both A) and R) are correct and R) is not the right explanation of A)

Assertion A): U-shaped long-run average cost curve is based on the assumption that economies of scale prevail at small levels of production and diseconomies of scale prevails at larger levels of production.

Explanation:

1. The long-run cost curves are U-shaped due to economies of scale and diseconomies of scale.
2. If a firm has high fixed costs, the increasing output will lead to lower average costs.
3. This will result in economies of scale. However, after a certain output, a firm may experience diseconomies of scale.
4. This occurs where increased output leads to higher average costs.
5. For example, in a big firm, it is more difficult to communicate and coordinate workers. Thus, economies of scale prevail at small levels of production, and diseconomies of scale prevail at a larger level of production. In the long-run, three returns to scale operate i.e. Increasing Returns to Scale, Constant Returns to Scale, and Diminishing Returns to Scale which is also one of the reasons because of which the Long Run Average Curve is U-shaped.

Therefore, the Assertion (A) is correct.

Reason R): Decreasing returns to scale arises primarily because as the scale of operation increases, it becomes even more difficult to manage the firm effectively.

Explanation:

1. Diminishing returns to scale ensure that the size of the productive firms cannot be infinitely large.
2. Generally, after a limit when the quantity of the factors of the production is increased in such a way that the proportion of the factors remain unchanged, output increases in a smaller proportion as compared to increases in the amounts of the factors of production.
3. This might be because when the scale of operation increases, it becomes difficult to handle large units of labor and co-ordination is at stake which results in decreasing overall efficiency.

Therefore, Reason (R) is the correct statement but  R) is not the right explanation of A as the Long-Run Average Cost Curve is U-shaped not only because of Decreasing Returns but also because of Increasing and Constant Returns To Scale.

The law of diminishing marginal utility was propagated by:

1. H. H. Gossen
2. Alfred Marshall
3. Gossen and Marshall
4. None of these

Answer (Detailed Solution Below)

Option 1 : H. H. Gossen

The correct answer is H. H. Gossen.

Key Points

• HH Gossen formulated the Law of Diminishing Marginal Utility (DMU).
  • He formulated this law in 1854.

Important Points

• Marginal Utility is the change in total utility due to a one-unit change in the level of consumption.
• Law of Diminishing Marginal Utility
  • It states that as a person consumes an item or a product, the satisfaction or utility that they derive from the product declines as they consume more and more of that product.
  • In other words, the additional utility gained from an increase in consumption decreases with each subsequent increase in the level of consumption.
• Demand curves are downward-sloping in microeconomic models since each additional unit of a good or service is put toward a less valuable use.
• Marketers use the law of diminishing marginal utility because they want to keep marginal utility high for products that they sell.

Utility derived from consumption of an additional unit of a good is called

1. Total utility
2. Marginal utility
3. Additional utility
4. Derived utility

Answer (Detailed Solution Below)

Option 2 : Marginal utility

The correct answer is Marginal utility.

Key PointsUtility - Utility is the want satisfying capacity of a commodity. It is subjective entity and vary from person to person.

Important PointsMarginal utility - It is the additional utility derived from the consumption of an additional unit of a commodity. Marginal utility is also known as Marginal Satiety.

MU = Change in TU/Change in Quantity

MU= TUn - TUn-1 

Also, Marginal Utility is the additional utility made to be TU by the addition consumption of one more unit of a commodity.

Additional Information Total utility - It is the sum of utility derived from different units of commodity consumed by consumer. It is also sum of all MU.

Which one of the following is true for consumers?

1. Consumers are rational and think in a linear manner
2. Culture and society have relationship to consumers' thoughts and feelings
3. Consumers can be motivated to believe and internalise messages the way the marketer desires
4. Consumers can explain their thought and behaviour

Answer (Detailed Solution Below)

Option 2 : Culture and society have relationship to consumers' thoughts and feelings

The correct answer is Culture and society have relationship to consumers' thoughts and feelings

Key Points Consumer Behaviour: The study of customer purchasing behaviour is known as consumer behaviour. Consumer behaviour enables us to comprehend why and why not a person acquires goods and services from a market.

Important Points Cultural Factors affecting Consumer Behaviour:

• Cultural factors comprise set of values and ideologies of a particular community or group of individuals. 
• It is the culture of an individual which decides the way he/she behaves.
• Cultural factors have a significant effect on an individual’s buying decision.
• Every individual has different sets of habits, beliefs and principles which he/she develops from his family status and background.
• What they see from their childhood becomes their culture. 

Example - Females staying in West Bengal or Assam would prefer buying sarees as compared to Westerns. Similarly, a male consumer would prefer a Dhoti Kurta during auspicious ceremonies in Eastern India as this is what their culture is. Girls in South India wear skirts and blouses as compared to girls in north India who are more into Salwar Kameez.

Hence, from the given option, option (b) is true. Culture and society have relationship to consumers' thoughts and feelings

Who sells directly to a consumer?

1. Retailers
2. Middlemen
3. Wholesalers
4. Distributor

Answer (Detailed Solution Below)

Option 1 : Retailers

The correct answer is Retailers.

Key Points

• A supply chain typically features various middlemen between the manufacturer and the consumer.
  • The most common in the supply chain are distributors, wholesalers, and retailers. 
• A middleman plays the role of an intermediary in a distribution or transaction chain that facilitates interaction between the involved parties.
  • They enable manufacturers to concentrate on the primary function of production by handling the ancillary functions of warehousing, distribution, advertising, insurance, etc.
• A distributor works closely with a manufacturer in order to sell more goods and gain better visibility on these goods. They sell the products to wholesalers and sometimes directly to retailers when requested.
• Wholesalers: They are the people who buy in bulk from the producers or distributors and sell in small quantities to the retailers.
• Retailers: They are the people who buy in small quantities from the wholesalers and sell to the ultimate consumers.