Which of the following statements are correct?
(A). Consumer's preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle.
(B). The tendency for the MRS to fall with increase in quantity of goods is known as the Law of Diminishing Marginal Rate of Substitution.
(C). A decrease in income causes a parallel outward shift of the budget line.
(D). The budget set is the collection of all bundles that the consumer can buy with their income at the prevailing market prices.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A), (B) and (D) only
(A) Consumer's preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle. — Correct. A bundle with more of one good and no less of the other gives more satisfaction. Monotonic preferences mean that the consumer always picks such a bundle.
(B) The tendency for the MRS to fall with increase in quantity of goods is known as the Law of Diminishing Marginal Rate of Substitution. — Correct. The marginal rate of substitution (MRS) is the amount of one good given up for one more unit of another. As a consumer gets more bananas, she gives up smaller and smaller amounts of mangoes for each extra banana.
(C) A decrease in income causes a parallel outward shift of the budget line. — Incorrect. When income goes down, both intercepts of the budget line decrease, so there is a parallel inward shift. An outward shift comes from a rise in income.
(D) The budget set is the collection of all bundles that the consumer can buy with their income at the prevailing market prices. — Correct. A bundle is in the budget set when its cost is not more than the consumer’s income.
NCERT (2026-27): “2.1.2 Ordinal Utility Analysis … So, with increase in the number of bananas, the consumer will feel the inclination to sacrifice small and smaller amounts of mangoes. This tendency for the MRS to fall with increase in quantity of bananas is known as Law of Diminishing Marginal Rate of Substitution.… Monotonic Preferences Consumer’s preferences are assumed to be such that between any two bundles (x1, x2) and (y1, y2), if (x1, x2) has more of at least one of the goods and no less of the other good compared to (y1, y2), then the consumer prefers (x1, x2) to (y1, y2). Preferences of this kind are called monotonic preferences. Thus, a consumer’s preferences are monotonic if and only if between any two bundles, the consumer prefers the bundle which has more of at least one of the goods and no less of the other good as compared to the other bundle. 2.2.1 Budget Set and Budget Line …The set of bundles available to the consumer is called the budget set. The budget set is thus the collection of all bundles that the consumer can buy with her income at the prevailing market prices. 2.2.2 Changes in the Budget Set …Similarly, if the income goes down, i.e. if M' < M, both intercepts decrease, and hence, there is a parallel inward shift of the budget line. If income goes down, the availability of goods goes down.…” |