Economics Class- XII

Economics- XII

CHAPTER 2
UTILITY ANALYSIS
Q.1 A) CHOOSE THE CORRECT OPTION(S): (1mark each)
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

________.
a) ordinal b) cardinal

c) Both ordinal & 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

6) Match the column A with Column B

A B
1) Time utility a) Transport
2) Place utility b) Blood Bank
3) Service utility c) Mobile phone
4) Knowledge utility d) 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

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7) Statement 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

B) COMPLETE THE CORELATION: (1 mark each)
1) Utility differs from time to time: Relative concept :: Utility differs from person
to person: Subjective concept.
2) Utility of a computer : Knowledge utility :: Utility of woollen cloths : Place
utility
3) Toys of clay: Form utility:: Service of a teacher: Service utility
4) Aggregate units: Total utility :: Additional utility: Marginal utility
5) Rationality: Assumption :: Misers: Exception

C) GIVE ECONOMIC TERMS: (1m each)

1) Utility created due to change in the shape or structure of existing material.
Ans: Form utility
2) Utility derived by a consumer after consuming all units of a commodity.
Ans: Total utility
3) Utility arised when personal services are rendered by professionals.
Ans: Service utility
4) A situation where the marginal utility becomes equal to market price.
Ans: Consumer equilibrium
5) The end result of consumption
Ans: Satisfaction
Q2 A) IDENTIFY AND EXPLAIN THE CONCEPTS: (2m each)
1) Salma purchased sweater for her father in winter season.
Ans: Time utility-When the utility of a commodity increases with the change in
its time of utilization, it is called time utility. In this example salma has
purchased a sweater in winter season as sweaters have more utility in winter
seasins.
2) Nilesh purchased ornaments for his sister.
Ans: Form utility- When utility is created due to change in the shape or
structure of an existing material, it is called form utility. As in this example
ornaments made of metals like gold and silver etc have more utility than that
raw metal.

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3) Kavita consumed five units of oranges one after the other.

Ans: Marginal utility- It is 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.
4) Bhushan refused to eat fifth chapati after eating four chapatis
Ans: Point of Satiety- At a particular stage, total utility reaches to its maximum
and remains constant where is marginal utility become zero. This is called the
point of satiety. Here the total utility is highest and marginal utility is zero.
5) Lalita satisfied her want of writing on essay by using pen and notebook.
Ans: Utility- It is the want satisfying capacity of a commodity or the power of
a commodity to satisfy human wants. Here pen and notebook have satisfied
lalitha's want of writing an essay.
B) DISTINGUISH BETWEEN: (2 mark each)
1) Utility and Satisfaction
Utility Satisfaction
1. Utility is the want satisfying power 1. Satisfaction is a mental state of the
of a commodity. consumer.
2. Utility is related with the 2. Satisfaction is experienced by a
commodity. person.
3. Utility is anticipated satisfaction. 3. Satisfaction is the actual realization.
4. A commodity possesses utility. 4. Commodity gives satisfaction.
5. Utility is the starting point of 5. Satisfaction is the end result of
consumption. consumption.
2) Utility and Usefulness
Utility Usefulness
1. Utility is the want satisfying power 1. Usefulness refers to the benefits
of a commodity. received by a consumer.
2. Utility express level of satisfaction. 2. Usefulness indicates use value of a
commodity.
3. As long as a commodity satisfies a 3. Such commodities like liquor, opium
want, it has utility. The commodity , cigarettes are not useful as they are
may be good or bad, harmful and injurious to health.
injurious to health.
4. Utility is a neutral between ends. It 4. Usefulness of a commodity is more
is used in economies without any rational and significant.
rational significance.

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3) Marginal utility and Total utility

Marginal utility Total utility
1. MU is the additional utility 1. TU is the total amount of satisfaction
derived by the consumption of one derived by the consumer from
more unit or the last unit of a different units of a commodity.
commodity.
2. MU goes on diminishing 2. TU goes on increasing at a
continuously as more units are diminishing rate up to a point as more
consumed. units are consumed.
3. MU will be minimum when TU 3. TU reaches a maximum when MU is
reaches maximum. minimum.
4. MU will be zero when TU is 4. Finally, TU remains constant at which
constant. MU will be zero.
4) Place utility and time utility:
Place utility Time utility
1. When utility of a commodity 1. When utility of a commodity increases
increases due to the change in the with a change in the time of
place of utilization, it is called as utilization, it is called as time utility.
place utility.
2. Place utility is created when goods 2. Time utility takes place when some
are transported from one place to goods are used during certain periods.
another.
3. When food grains are transported to 3. During rainy season, raincoats,
the city markets from farms, place umbrellas and during winter, woollen
utility is created. Place utility is also clothes have more utility called time
created when goods are transported utility.
to the wholesale and retail markets.
Q.3) Answer the following questions. (4 marks each)
1) What are the features/characteristics of utility?
Ans:
1. Relative concept: Utility of a commodity varies in different situation in relation
to time and place. It is possible that for the same commodity utility can be
higher or lower at different times and at different places.
For example: ice creams have more utility during summer season than in winter
season.
Similarly, woollen clothes have more utility in Kashmir than in Mumbai.

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2. Subjective concept: Utility of a commodity may differ from person to person

due to difference in taste, preferences, choices, likings etc.
For example: cigarettes have greater utility for smokers than non-smokers.
3. Ethically neutral: Utility has no ethical or moral significance. This means that
a commodity which satisfies want, whether moral or immoral, socially desirable
or undesirable has utility.
For example: knife has utility for a killer to stab somebody whereas the same is
used by a housewife to cut vegetables.
4. Utility and usefulness are not same: Usefulness is the benefit derived by the
consumer by using a particular commodity whereas utility is the want satisfying
power of a commodity. A commodity may have utility but it may not be useful
to the consumer.
5. Not same as pleasure: A commodity possessing utility may not always give
pleasure or happiness to the consumer.
For example: An injection, gives no pleasure, but it is necessary for the patient.
Bitter
Medicines have utility but they do not give any kind of pleasure to the patient.
6. Utility differs from satisfaction: Utility and satisfaction, though inter- related,
are not the same in a strict sense. Satisfaction is the feeling of happiness
realized by the consumer whereas utility is the capacity of a commodity to
satisfy human wants. Utility is an anticipation and satisfaction is it’s actual
realization.
For example: for a thirsty person, a glass of water has utility but he derives
satisfaction only after drinking it.
7. Not easily measurable: Utility being a subjective phenomenon or feeling of a
consumer cannot be expressed or measured cardinally or numerically. However,
cardinal measurement of utility is not possible.
For example: the level of satisfaction achieved by a hungry person after
consuming food cannot be expressed cardinally.
8. Depends on the intensity of want: Utility of a commodity depends upon the
intensity or urgency of a want. The more urgent or intense the want is greater
will be the utility for the commodity. As the urgency of the want declines,
utility also diminishes.
For example: utility of food is high for a hungry person and it diminishes with
the satisfaction of hunger.
9. It is basis of demand: Consumers demand goods and services, because they
give utility to them. If a commodity does not give any utility, a consumer may
not demand it. Thus, utility forms the basis of demand.
For example: demand for chalk increases as it gives higher utility to the
teachers.

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2) Explain the relationship between TU and MU.

Ans: Total utility refers to the sum total of utilities derived by a consumer from the
consumption of all units of a commodity while marginal utility refers to the
additional utility derived by a consumer from the additional unit of a commodity
consumed.
The relationship between TU and MU can be explained with the help of the
following diagram and schedule.

TU and MU schedule

Units of mango Total utility Marginal utility

1 10 10
2 18 8
3 24 6
4 28 4
5 30 2
6 30 0
7 28 -2

From the above schedule the following observation is made:

1. Initially as the consumer consumes units of mango one after the other in quick
succession the total utility goes on increasing from 10 to 18 to 24 and so on at the
diminishing rate of MU. But marginal utility goes on diminishing from 10 to 8 to 6
to 4 to 2 to -2 and so on. This shows that stock of commodity increases, total
utility also increases, so there is a direct relation of stock and TU. But marginal
utility and stock of commodities are inversely related hence MU diminishes with
every increase in the stock of goods. This is because the urgency of wants falls or
the intensity of want diminishes with the increase in the stock of goods.
2. When the consumer consumes the 6th unit, the TU remains constant at 30 utilities
and MU becomes zero. This unit of mango gives maximum satisfaction. Here the
consumer is fully satisfied. It is called ‘POINT OF SATIETY’.
3. Further as the consumer continues consumption the TU declines to 28 utilities and
MU becomes negative i.e. -2. Here the consumer experiences dissatisfaction or
disutility.

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MU

The above diagram explains that:

i) In the beginning, TU and MU are equal.
ii) From the consumption of the 2nd unit, TU increases at a diminishing rate and MU
goes on decreasing. Hence, TU curve slopes upward and MU curve slopes
downward.
iii) When TU is maximum, MU is zero. It is the point of satiety that i.e. maximum
satisfaction. At this point, TU curve reaches the highest level and MU curve
touches the X- axis.
iv) After the point of satiety, TU declines and MU intersects the ‘X’ axis and becomes
negative. It shows dissatisfaction of a consumer.
v) Thus, TU is always positive but MU can be positive, zero or negative.

Q.4) SATE WITH REASONS WHETHER YOU AGREE WITH THE

FOLLOWING STATEMENTS: (4 marks each)
1) There are no real exceptions to the law of diminishing marginal utility.

Ans: I agree with the given statement.

1. Rare collections and hobbies: It is sometimes pointed out that collection of
stamps, antiques, old coins, rare paintings etc. are exceptions to the law. This is
because the MU tends to rise with additional unit of such collections. But a
moment’s reflection will make it clear that the individuals are not interested in
collecting more units of the same variety. Instead, they acquire different types of
stamps or specimens. In other words, the homogeneity condition of the law is
violated in such cases.
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2. Misers: A miser is also considered as an exception to the law because of his

passion for the acquisition of wealth. But, even in the case of this extraordinary
person, law applies as he spends some of his income on food. He is irrational and
thus it violates the rationality assumption.
3. Drunkards: As drunkards enjoys the taste of liquor, he may have higher MU for
quite some time. The level of intoxication increases with every additional unit of
liquor consumed. Hence, MU received by drunkard may increase. Here, rationality
condition gets violated.
4. Music: Some people like music very much. Repeat hearing of song gives more
and more satisfaction. This increases MU of music. But this does not fulfil
assumptions of homogeneity and continuity.
5. Reading: It is said that the knowledge of a scholar expands as he reads more and
more books. As the stock of books increases, the stock of knowledge also
increases. Thus, the law is not applicable to reading. But, here the conditions of
homogeneity and continuity are not satisfied.
6. Power: It is said that power is an exception to the law. The reason is that when a
person acquires power, he desires for more power. He would want to have more of
it. However, it violates rationality condition.
7. Money: Money commands an endless variety of goods and services. There can be
no end to the desire of an individual to have more money. In view of this, it is said
that the law does not apply to money. In fact, the law equally applies to money.
Rich people are likely to attach less importance to money when its stock increases.
In simple words, the MU of money diminishes when its stock increases. It may be
noted that unlike the commodity, the TU of money will never be constant.
Therefore, the MU of money will never be zero or negative. But it definitely
diminishes as the stock increases and vice – versa.
Therefore, above are the exceptions to the law of demand
Thus, it has exceptions which does not totally apply under the law of DMU.

2) Law of Diminishing Marginal Utility is important in practice.

Ans: I agree with the given statement.

1. To the producers: Producers can decide their price and sales policy with the help
of the law. This helps to maximize profits. As this law enables producer to take up
decisions as per the utility of consumers.
2. To the consumers: It helps consumer to plan their budget. Hence, the consumer
can achieve maximum satisfaction from the resources available. It helps the
consumer to achieve the knowledge of the utility from the commodity.

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3. To the monopolist: It helps monopolist to practise price discrimination. Price

discrimination means charging different prices to different consumers for same
product.
4. To the government: The law helps the government to implement different
economic policies such as public distributed system, social justice, etc. It helps in
welfare of the society and people.
5. To the finance minister: It helps finance minister to frame progressive taxation
policy. It also helps to reduce economic inequality. The law is helpful to economic
experts, bankers and modern economist.
6. To understanding paradox of value: The law shows difference between value in
use and value in exchange and explains value paradox. Value in use means
usefulness of a commodity. Value in exchange means rate of exchange of one
commodity in terms of another. Some commodities have high value in use but low
exchange value or vice-versa. Higher TU determines greater value in use. Higher
MU determines greater value in exchange.

3) When MU is zero, TU diminishes.

Ans: I disagree with this statement.

Explanation: Refer Q4. (2) – Relation between TU and MU.

Q.5) OBSERVE THE GIVEN TABLE AND ANSWER THE QUESTIONS:

Unit of a TU MU
commodity units units
1 6 6
2 11 5
3 15 4
4 15 0
5 14 –1

1) Draw total utility curve and marginal utility curve. (Refer Q.3- sub Q. 2)
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.6) Answer in detail: (8 marks each)

1) State and explain the law of diminishing marginal utility with exceptions.
Ans:
A. Introduction :
This law was first proposed by Prof. Gossen, so it is also known as Gossen’s first
law but was discussed in detail by Prof. Alfred Marshall in his book ‘Principles of
Economics’ published in 1890. It is based on the common consumer behaviour
that utility derived diminishes with the reduction in the intensity of a want.
B. Statement of 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 other words, marginal utility that any consumer derives from successive units of
a particular commodity goes on diminishing as his or her total consumption of that
commodity increases.
C. Explanation of the law with schedule:
Marginal Utility Schedule
Units of commodity (x) Marginal utility (MU)
1 10
2 8
3 6
4 4
5 2
6 0
7 -2

i. It is observed that when the consumer consumes the first unit of commodity x he
derives maximum satisfaction (utility) i.e, 10 utils as the want is urgent.
ii. As he consumes the subsequent units in quick succession the MU starts
diminishing from 8 utils to 6 to 4 utils and so on. This shows that the intensity of
want diminishes.
iii. When he consumes the 6th unit of commodity x, the MU becomes zero. This is
called point of satiety, where the consumers want is fully satisfied.
iv. Further when he consumes the 7th unit the utility derived is negative i.e. -2; it
indicates dissatisfaction or disutility due to excessive consumption.

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D. Graphical representation of the MU schedule:

When the above schedule is plotted on a graph measuring MU on Y axis and units
of commodity x on X axis, we derive a MU curve.

Y
MU MU = Marginal Utility Curve
10

MU 6

2
0 1 2 3 4 5 6 7 X
-2 Disutility MU

` Units of commodity ‘x’

1. MU curve in the diagram slopes downwards from left to right indicating the
MU goes on diminishing as consumer stock of commodity x increases.
2. The MU curve intersects the x axis at point of satiety where MU = 0.
3. Thereafter, the MU curve enters the negative quadrant; it indicates disutility as
shown by the shaded area.

E. Exceptions to the Law

Following are the exceptions to the law of diminishing marginal utility:

i. 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.
ii. Miser: In the case of a miser, every additional rupee gives him more and more
satisfaction. Marginal utility of money tends to increase with an increase in his
stock of money. However, this situation ignores the assumption of rationality.
iii. Addictions: It is observed in 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.
iv. 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.

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v. 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
which is used to satisfy various wants. However, according to some
economists, this law is applicable to money too. For example, marginal utility
of money is more to a poor person than to a rich person.

2) Explain the relationship between marginal utility and price.*

Ans:

1) 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.
2) 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 practical application of the law of
Diminishing Marginal Utility (DMU).
3) 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.
4. The following table explains the relationship between marginal utility (MU)
and price.

No of MU/ MU in terms of Market Comparison

units units of money 1unit = Rs. price/unit of x between MU and
x 10 = Rs. 50 price
1 10 100 (10 × Rs.10 ) Rs. 50 100 MU > Rs. 50
2 8 80 (8 × Rs. 10 ) Rs. 50 80 MU > Rs. 50
3 7 70 (7 × Rs. 10 ) Rs. 50 70 MU > Rs. 50
4 5 50 (5 × Rs. 10 ) Rs. 50 50 MU = Rs. 50
5 3 30 (3 × Rs. 10 ) Rs. 50 30 MU < Rs. 50
6 1 10 (1 × Rs. 10 ) Rs. 50 10 MU < Rs. 50

5. The table shows that a consumer starts buying units of commodity x for his
consumption, one after the other. Marginal utility which is added to his stock
goes on diminishing with every further unit consumed. When MU is converted
in terms of money, one can easily compare it with market price which is shown
in the column 5 of the table.
6. 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

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these units since the benefit derived is more than the price paid. At the 4th unit
marginal utility and price become equal. So the consumer can also think of
buying the 4th unit. In the case of 5th and 6th units, 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.
7. From the given table, following inferences can be made with reference to
marginal utility and price :
i. Units which a consumer willingly buys because MU is greater than price
are called “Intra-marginal units” (MUx > Px)
ii. Unit at which MU becomes equal with market price is “marginal
unit”. (MUx = Px) = Consumer’s equilibrium
iii. Units which 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)
8. Thus, a rational consumer attains equilibrium where MUx = Px. This
relationship between marginal utility and price paved way for law of demand.

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