According to the Ordinal Utility Theory, the consumer reaches equilibrium where the budget line is tangent to the highest attainable indifference curve. At this point, the consumer achieves the maximum possible satisfaction while fully utilizing the available budget.

A point below the budget line is inferior because a better affordable bundle exists on the budget line. A point above the budget line is not affordable. The tangency point represents the consumer's optimum bundle. Any other point on the budget line is affordable but provides lower satisfaction than the tangency point.

When MRS > Price Ratio, the consumer is willing to sacrifice more of the second good than the market requires to obtain one extra unit of the first good. Therefore, the consumer benefits by purchasing more of the first good until MRS becomes equal to the price ratio.

If MRS < Price Ratio, the consumer is willing to give up fewer units of the second good than the market requires. Therefore, the consumer prefers consuming less of the first good and more of the second good. This adjustment continues until MRS equals the market price ratio, where equilibrium is reached.

With monotonic preferences, consumers always prefer bundles containing more of at least one good without having less of the other. Every point below the budget line has another affordable point on the budget line that provides more of at least one good. Hence, a rational consumer never chooses a bundle strictly below the budget line.

A rational consumer has well-defined preferences over available bundles and ranks them accordingly. She chooses the bundle that provides maximum satisfaction within her budget. Simply minimizing expenditure without considering utility does not lead to consumer equilibrium.

Price of the good is the primary variable used while deriving the demand curve. Consumer's income determines purchasing power. Tastes and preferences determine the ranking of consumption bundles. Prices of related goods affect demand through substitute and complementary relationships.

Demand exists only when a consumer is both willing and able to afford a commodity. A person may desire a product, but unless they have sufficient purchasing power, it is not considered effective demand.

In economics, the demand curve is conventionally drawn with price on the vertical axis and quantity demanded on the horizontal axis, even though price is the independent variable. However, in standard mathematics, the independent variable is normally plotted on the horizontal axis. Therefore, the Assertion is true but the Reason is false.

To derive the demand function, other determinants such as income and preferences are first held constant. Then a particular price (P) is selected. The demand function f is applied to determine the corresponding quantity demanded (X). This sequence correctly represents the mathematical relationship X = f(P).

According to the Law of Diminishing Marginal Utility, each additional unit of a commodity provides less satisfaction than the previous one. Therefore, consumers are willing to buy additional units only if the price falls. This explains the negative relationship between price and quantity demanded, which is the basis of the Law of Demand.

Under the Law of Demand: An increase in price leads to a fall in demand. A decrease in price leads to a rise in demand. Changes in income shift the entire demand curve. The law assumes other factors such as income, preferences, and prices of related goods remain constant (ceteris paribus).

When income increases, the budget line shifts parallel outward because prices remain unchanged. This allows the consumer to purchase more goods and attain a higher indifference curve, indicating a higher level of satisfaction. Consequently, the consumer's equilibrium and demand may change.

To derive the demand curve: First identify the initial equilibrium where the budget line is tangent to an indifference curve. Plot the corresponding price and quantity on the demand graph. Reduce the commodity's price, causing the budget line to pivot outward. Find the new equilibrium on a higher indifference curve and plot the new price-quantity combination. Joining these points gives the demand curve.

When the price of a normal good falls, the consumer's real purchasing power increases. This creates a positive income effect, enabling the consumer to buy more of the commodity. Hence, the income effect reinforces the increase in demand caused by the substitution effect.

The substitution effect occurs when the price of a commodity falls relative to other goods. The consumer substitutes the now cheaper commodity for relatively expensive goods in order to maximize satisfaction. Therefore, Statements 1 and 2 are correct, whereas Statement 3 is incorrect because the substitution effect increases, rather than decreases, the demand for the cheaper good.

The linear demand function is: d(p) = a - bp When price (P) = 0, d(0) = a - b(0) = a Thus, the consumer's demand equals a units, which represents the horizontal intercept of the demand curve.

For the linear demand equation d(p) = a − bp: a represents the horizontal intercept, i.e., the maximum demand when price is zero. −b is the slope of the demand curve, showing how demand changes with price. a/b is the price intercept, where demand becomes zero. d(p) represents the quantity demanded at a given price.

For a normal good, demand increases when income rises and decreases when income falls. Therefore, a significant fall in income reduces demand at every price, causing the entire demand curve to shift leftward rather than causing movement along the same demand curve.

A change in income shifts the demand curve. For normal goods, an increase in income shifts demand rightward, while a decrease shifts it leftward. For inferior goods, the opposite occurs. Thus, the demand curves for normal and inferior goods shift in opposite directions for the same income change.