When two goods are perfect substitute for each other : a) : indifferen...
Perfect Substitutes and Indifference Curves
Perfect substitutes refer to two goods that can be used interchangeably to satisfy a particular want or need. In other words, they have a one-to-one relationship in terms of their utility. For instance, margarine and butter are perfect substitutes for each other in terms of their use in cooking.
Indifference Curves for Perfect Substitutes
The concept of indifference curves is used to represent the relationship between two goods in terms of their utility. For perfect substitutes, the indifference curve is characterized by the following:
- The indifference curve is a straight parallel line with a constant slope along the curve. This implies that the marginal rate of substitution (MRS) is constant.
- The slope of the indifference curve represents the MRS, which is the rate at which a consumer is willing to trade one good for another while still maintaining the same level of satisfaction.
- The MRS for perfect substitutes is equal to the ratio of the prices of the two goods.
Concavity of Indifference Curves
The concavity of an indifference curve represents the diminishing marginal rate of substitution, which means that as a consumer consumes more of one good, they need to receive more of the other good to maintain the same level of satisfaction. For perfect substitutes, the MRS is constant, and therefore, the indifference curve is linear and not concave.
Conclusion
In summary, for perfect substitutes, the indifference curve is a straight parallel line with a constant slope along the curve, indicating that the MRS is constant. The MRS for perfect substitutes is equal to the ratio of the prices of the two goods. The indifference curve for perfect substitutes is not concave since the MRS is constant.
When two goods are perfect substitute for each other : a) : indifferen...
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