Question

Question 8

Consider your sets of indifference curves for (i) Coke and chips, and (ii) Coke and Pepsi.

8.1 Explain why these sets of indifference curves are likely to look different.

8.2 Illustrate with a diagram.

8.3 What does this difference imply about the magnitude of the substitution effects in response to changes in the price of Coke?

Answer 1

8.1 these sets of indifference curves are likely to look different because coke and chips are complementary goods while coke and pepsi are substitute goods

complementary goods demand for it increases when price of its complement decreases

substitute good demand for it fall when price of its substitute falls.

8.2

in indifference curve utility is same at every point indifference curve of complementary goods is L shaped because utility of left shoe would be zero without right shoe and vice versa so every combination would give same utility

if two goods are perfect substitutes like coke and pepsi then indifference curve would be constant slope since consumer willing to switch between two goods in a fixed ratio so marginal rate of substitution between substitute goods is constant.

8.3 if price of coke increases in first case then demand for chips falls as they are complementary goods and vice versa but if price of coke increases in second case then demand for pepsi increases as they are substitute goods if one is expensive then people switch to other good.

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