Cherise considers movies and concerts to be perfect substitutes. When Cherise maximizes her utility, what will...

Cherise considers movies and concerts to be perfect substitutes. When Cherise maximizes her utility, what will the optimal bundle of movies and concerts probably look like? Explain your reasoning by drawing a graph that includes her indifference curves and a hypothetical budget constraint.

Expert Solution

Perfect substitutes are two goods that can be used in place of each other.An IC is the graphical representation of different pairs two goods that can be consumed using given income and all these pairs provide the same satisfaction.The shape of an IC depends upon the Marginal Rate of Substitution.i.e.MRS.This depicts the amount of any good that the consumer is willing to sacrifice for consuming one more unit of the other good.

In case of two goods,being perfect substitutes,the MRS is constant and the slope would also be constant as the consumer would be willing to switch between both goods at a fixed ratio.so if two goods are perfect substitutes,then the indifference curve is a straight line with negative slope.At equilibrium in such cases,the IC would overlap or coincide the budget line .The utility function would also be similar to the budget line in such cases.This has been shown below-

Rahul Sunny answered 2 years ago

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