Question

In: Economics

explain how an indifference curve with constant marginal rate of substitution (e.i. good x and good...

explain how an indifference curve with constant marginal rate of substitution (e.i. good x and good y are perfect substitutes) will lead to the consumer purchasing only good x and good y. under what practical condition would the consumer only purchasing good x good y. draw a diagram and solution

Expert Solution

Perfect substitute goods are those where MRS is constant.

Utility function of good x and y is U= aX+bY

So indifference curve will be a straight line.

Also tangency condition cannot be applied here since both BL and IC are straight lines. But the optimal point will be where the two lines meet at the highest IC.

Since the consumer considers these two goods as perfect substitutes, consumer would prefer to consume only that good which is cheaper.

MRS=MUx/MUy=Px/Py

There are 3 possibilities-

Case 1. Py<Px

Slope of budget line is more than slope of indifference curve

Good y is cheaper. So conaumer will only buy good y. And no good x.

Optimal point A.

Case 2. Px<Py

Slope of budget line is less than sloep of indifference curve.

Good X is cheaper. So only good X will be brought. Optimal point B.

Case 3. Px=Py

Slope of budget line is equal to the sloep of indifference curve.

Consumer can purchase at any point on the indifference curve.

Optimal line is AB.

AB is the budget line.

Rahul Sunny answered 2 months ago

1) a)Explain what is meant by the terms indifference curve, the marginal substitution fraction and the...

1) a)Explain what is meant by the terms indifference curve, the marginal substitution fraction and the budget condition in consumer theory. b) The benefit to a consumer depends on the benefits x1 and x2 . Explain why the consumer optimal choice of goods will not change if the prices of the two goods double, if the income at the same time also doubles. c) A consumer has a utility function that depends on the goods x1 and x2. The goods...

The marginal rate of substitution measures the distance between one indifference curve and the next one.

Is the following statement true or false? Briefly explain your answer. " The marginal rate of substitution measures the distance between one indifference curve and the next one."

The substitution effect of a price decrease for a good with a normal indifference curve pattern is graphed by?

The substitution effect of a price decrease for a good with a normal indifference curve pattern is graphed by?A. drawing a new budget line tangent to the indifference curve attained at the new price.B. drawing a new budget line tangent to the original indifference curve but at the slope of the new price of the good.C. drawing a new budget line parallel to the initial budget line but tangent to the indifferent curve attained at the new price.D. doing none...

Good X is a normal good. Use indifference curves and budget lines to show the substitution...

Good X is a normal good. Use indifference curves and budget lines to show the substitution and income effects of a price decrease for Good X. Put “expenditures on other goods” on the Y-axis, and clearly label all lines and curves. Make sure your diagram clearly shows the income effect and the substitution effect, and that you indicate which is the income effect and which is the substitution effect. b. Give a short one or two sentence explanation of what...

問題 1 The marginal rate of substitution is the slope of the utility curve. the slope...

問題 1 The marginal rate of substitution is the slope of the utility curve. the slope of the contract curve. the slope of the utility possibilities curve. none of the above. 10 分問題 2 The Edgeworth Box should lie inside the PPF. lie partially inside the PPF. lie completely outside of the PPF. never touch the PPF. 10 分問題 3 The Second Fundamental Theorem of Welfare Economics requires that indifference curves be convex to the origin....

When the indifference curve with Good A on the vertical axis and Good B on the...

When the indifference curve with Good A on the vertical axis and Good B on the horizontal axis is tangential to the budget line, then at that point, the marginal rate of substitution of Good A for Good B is equal to the ratio of the price of Good A and Good B (PA/PB) True False The rate at which one input can be exchanged for another input without altering the level of output is called the Marginal product curve...

If marginal rate of substitution between wine and cheese is -1 and the marginal rate of...

If marginal rate of substitution between wine and cheese is -1 and the marginal rate of the product transformation between two goods is -2, what should be done in this economy to increase consumers’ utility? Support your answer by a graph.

4. The indifference curve between a good and garbage is positively sloped. True or false? Explain.

assumption of diminishing marginal rate of substitution means that

1. The marginal rate of substitution is ________________ (Select all that apply)

1. The marginal rate of substitution is ________________ (Select all that apply)a. Equal to the slope of the budget line at an optimal point if the optimal point is not at a corner.b. How much of each good a consumer can afford.c. The amount of one good an individual would be willing to trade for a different good and be just as well off.d. The slope of the indifference curve.e. Equal to the price ratio at an optimal point if...