Unit notes and practice questions

Grade 11 Economics unit 1: Theory of consumer behavior and demand

Everything here is for unit 1 of the Grade 11 Economics textbook: what the chapter covers, the short notes, practice questions with their answers, and the lesson video where one exists.

5
Cards: 10
Practice questions on unit 1: 2–34
The textbook pages for unit 1

What unit 1 covers

1.Review of the Cardinal Utility Approach
2.The Ordinal Utility Theory and Preferences
3.Indifference Curve, Set and Map
4.Properties of Indifference Curves
5.The Marginal Rate of Substitution (MRS)
6.Marginal Utility and MRS
7.Special Types of Indifference Curves
8.The Budget Line or the Price line
9.Slope of the Budget Line
10.Factors Affecting the Budget Line
11.Effects of Changes in Income
12.Effects of Changes in Price of the Commodities
13.Optimum of the Consumer
14.Effects of Changes in Income and Prices on Consumer's Equilibrium
15.Price Consumption Curve and Deriving the Demand Curve

Short notes for unit 1

The cards filed under this chapter on the Grade 11 Economics page. Open one at a time.

Budget Line EquationFormula

M = P_X X + P_Y Y

M = P_X X + P_Y Y

$M$: Consumer money income $\text{Birr}$
$P_X$: Price of good X $\text{Birr}$
$X$: Quantity of good X $\text{units}$
$P_Y$: Price of good Y $\text{Birr}$
$Y$: Quantity of good Y $\text{units}$

When you use it

Use to set up the boundary of all attainable commodity bundles when the consumer spends all income.

Watch out

Income changes shift the line parallel without changing slope, but a single price change rotates the line by altering its slope.

Drafted from Grade 11 Economics, pages 2-34, then checked twice before it went up

Cardinal Utility Consumer OptimumFormula

\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}

\frac{MU_X}{P_X} = \frac{MU_Y}{P_Y}

$MU_X$: Marginal utility of good X $\text{utils per unit}$
$MU_Y$: Marginal utility of good Y $\text{utils per unit}$
$P_X$: Price of good X $\text{Birr}$
$P_Y$: Price of good Y $\text{Birr}$

When you use it

Use when finding the utility maximizing bundle under cardinal utility theory where satisfaction is measured in utils.

Watch out

Equating the marginal utility per Birr across goods is not enough by itself. The entire money income must also be spent.

Drafted from Grade 11 Economics, pages 2-34, then checked twice before it went up

Marginal Rate of SubstitutionFormula

MRS_{X,Y} = \frac{MU_X}{MU_Y}

MRS_{X,Y} = \frac{MU_X}{MU_Y}

$MRS_{X,Y}$: Marginal rate of substitution of good X for good Y $\text{units of Y per unit of X}$
$MU_X$: Marginal utility of good X $\text{utils per unit}$
$MU_Y$: Marginal utility of good Y $\text{utils per unit}$

When you use it

Use to determine the rate at which a consumer gives up units of good Y to gain one more unit of good X while maintaining the same utility.

Watch out

In the derivative ratio, change in Y is in the numerator, but in the marginal utility ratio, MU_X is in the numerator.

Drafted from Grade 11 Economics, pages 2-34, then checked twice before it went up

Ordinal Utility Consumer OptimumFormula

MRS_{X,Y} = \frac{P_X}{P_Y}

MRS_{X,Y} = \frac{P_X}{P_Y}

$MRS_{X,Y}$: Marginal rate of substitution $\text{units of Y per unit of X}$
$P_X$: Price of good X $\text{Birr}$
$P_Y$: Price of good Y $\text{Birr}$

When you use it

Use to determine consumer equilibrium under ordinal utility where the budget line is tangent to the highest indifference curve.

Watch out

This tangency condition holds for standard convex indifference curves and requires income to be fully exhausted.

Drafted from Grade 11 Economics, pages 2-34, then checked twice before it went up

Types of Indifference CurvesReference tableStandard Goods · Perfect Substitutes · Perfect Complements

Good Type	Indifference Curve Shape	MRS Behavior	Utility Function
Standard Goods	Convex to origin	Diminishing	$U = f(X, Y)$
Perfect Substitutes	Downward sloping straight line	Constant	$U = aX + bY$
Perfect Complements	L shaped right angle	Zero	$U = \min(aX, bY)$

When you use it

Use to identify curve geometry, substitutability, and algebraic form based on the relationship between two goods.

Watch out

Perfect complements have an MRS of zero because additional units of one good alone yield no extra utility.

Drafted from Grade 11 Economics, pages 2-34, then checked twice before it went up

Practice questions on unit 1

10 multiple-choice questions written against this chapter, each with its answer and the reason. Try one before you open the answer.

Question 1

According to cardinal utility theory, how is consumer satisfaction measured?

A.In absolute numbers using units called utils
B.Only by ranking bundles as 1st, 2nd, and 3rd
C.By calculating the slope of the demand curve
D.Using the marginal rate of substitution

Show the answer and why

Answer: A In absolute numbers using units called utils

Why

Cardinal utility theory assumes that satisfaction or happiness is measurable in absolute numbers, and the unit of measurement is called utils.

Question 2

What is an indifference curve?

A.A line showing combinations of goods that cost the exact same amount of money
B.A curve showing combinations of two goods that yield the same level of satisfaction
C.A curve that shows how marginal utility rises as consumption rises
D.A line that shows the relationship between income and total spending

Show the answer and why

Answer: B A curve showing combinations of two goods that yield the same level of satisfaction

Why

An indifference curve is an iso-utility curve. It is the locus of points showing alternative combinations of two goods that provide the consumer with the same level of utility.

Question 3

What is the shape of an indifference curve for two goods that are perfect complements, such as a left shoe and a right shoe?

A.A downward sloping straight line
B.An upward sloping curve
C.An L-shaped (right angle) line
D.A circular curve

Show the answer and why

Answer: C An L-shaped (right angle) line

Why

For goods that are perfect complements and consumed jointly in fixed proportions, the indifference curve takes the shape of a right angle, or an L-shape.

Question 4

Any consumption bundle that lies inside or on the consumer's budget line represents which type of expenditure area?

A.Unattainable area
B.Feasible area
C.Non-feasible area
D.Satiated area

Show the answer and why

Answer: B Feasible area

Why

The area inside or on the budget line represents the feasible (achievable) area because the total cost does not exceed the consumer's income.

Question 5

Fenet increases her consumption of tea from 4 cups to 5 cups. Her total utility increases from 40 utils to 50 utils. What is the marginal utility of the 5th cup of tea?

A.2 utils
B.8 utils
C.10 utils
D.50 utils

Show the answer and why

Answer: C 10 utils

Why

Marginal utility is the extra utility gained from consuming one more unit. Here, MU = 50 - 40 = 10 utils.

Question 6

Bereket has a monthly pocket money of 60 Birr to spend on tea (good X) and coffee (good Y). The price of tea is 3 Birr per cup and the price of coffee is 6 Birr per cup. What is the maximum amount of tea Bereket can buy if he spends all his money on tea?

A.10 cups
B.20 cups
C.30 cups
D.60 cups

Show the answer and why

Answer: B 20 cups

Why

The maximum amount of good X the consumer can buy is given by the horizontal intercept formula: X = M / P_X = 60 / 3 = 20 cups.

Question 7

If the marginal utility of teff (good X) is 12 utils and the marginal utility of wheat (good Y) is 4 utils, what is the marginal rate of substitution of teff for wheat (MRS_X,Y)?

A.0.33
B.3
C.8
D.48

Show the answer and why

Answer: B 3

Why

The marginal rate of substitution is calculated as MRS_X,Y = MU_X / MU_Y = 12 / 4 = 3.

Question 8

Why is it impossible for two indifference curves to intersect each other?

A.Because prices of goods are fixed in the market
B.Because intersecting curves violate the transitivity assumption of preferences
C.Because money income is always limited
D.Because the slope of the budget line is negative

Show the answer and why

Answer: B Because intersecting curves violate the transitivity assumption of preferences

Why

If two indifference curves intersected, a single basket would denote two different satisfaction levels. This violates the transitivity (consistency) rule of ordinal utility theory.

Question 9

A consumer in Addis Ababa allocates income between bread (good X) at 4 Birr per loaf and sugar (good Y) at 20 Birr per packet. At the consumer optimum, what must the marginal rate of substitution (MRS_X,Y) be?

A.0.2
B.5.0
C.16.0
D.80.0

Show the answer and why

Answer: A 0.2

Why

At the point of consumer optimum, MRS_X,Y = P_X / P_Y. Therefore, MRS_X,Y = 4 / 20 = 0.2.

Question 10

What happens to a consumer's budget line if the price of good X increases, while income and the price of good Y remain constant?

A.It shifts outward parallel to the original budget line
B.It shifts downward parallel to the original budget line
C.It pivots inward on the X-axis while the Y-intercept remains constant
D.It pivots outward on the Y-axis while the X-intercept remains constant

Show the answer and why

Answer: C It pivots inward on the X-axis while the Y-intercept remains constant

Why

Since the price of good Y and money income do not change, the Y-intercept (M / P_Y) stays fixed. An increase in the price of X reduces the maximum X that can be bought (M / P_X), pivoting the budget line inward along the X-axis.

The app holds 12 questions on this unit, marked as you go. These are the first 10.