Match List - I with List - II. Choose the correct answer from the options given below :List - I
(Term)List - II
(Description) A. Law of Diminishing Marginal Utility I. On each successive unit consumed, the utility derived goes on falling B. Consumer Surplus II. The rate at which consumer is ready to compromise goods X for another goods Y, holding the level of satisfaction constant C. Marginal Rate of Substitution III. Difference between what a consumer is ready to pay for a commodity and what he actually pays for it D. Budget Line IV. All those combinations of two goods which consumer can buy spending his given money income and their given prices.
A-I, B-III, C-II, D-IV
The correct matching is A-I, B-III, C-II, D-IV — option 3.
| Term | Description | Note |
|---|---|---|
| A. Law of Diminishing Marginal Utility | I — each successive unit yields less utility | Gossen’s first law. As more of a commodity is consumed, the satisfaction from each additional unit falls; it is the reason the demand curve slopes downward |
| B. Consumer Surplus | III — the gap between what he would pay and what he does pay | A concept of Alfred Marshall. Measured as the area under the demand curve and above the price line; it is the basis of welfare analysis and of price discrimination, which seeks to capture it |
| C. Marginal Rate of Substitution | II — the rate at which X is given up for Y at constant satisfaction | The slope of the indifference curve. It diminishes as one moves along the curve, which is why indifference curves are convex to the origin |
| D. Budget Line | IV — all combinations affordable at given income and prices | Also called the price line or consumption possibility line; its slope is the ratio of the two prices, Px/Py |
How the last two fit together. The MRS and the budget line are the two halves of consumer equilibrium under the indifference-curve approach. The consumer maximises satisfaction where the budget line is tangent to the highest attainable indifference curve, that is where
\(MRS_{xy}=\dfrac{P_{x}}{P_{y}}\)
— the rate at which he is willing to trade equals the rate at which the market lets him trade.
The two approaches to consumer behaviour that these terms come from :
| Approach | Utility is | Equilibrium condition |
|---|---|---|
| Cardinal (Marshall) | Measurable in units — utils | Equi-marginal principle: MUx/Px = MUy/Py |
| Ordinal (Hicks and Allen) | Only rankable, not measurable | MRS = price ratio, at the tangency |
The ordinal approach was developed precisely because measuring utility cardinally is impossible; A and B belong to the older tradition, C and D to the newer.
Hence, the answer is A-I, B-III, C-II, D-IV.
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