Indifference Curve: The graph that shows all those combinations of goods that provide the same level of satisfaction is known as the indifference curve. They are downward slopping curve and convex to the origin. The two indifference curve lines never intersect each other. Perfect Substitute Good: all those goods which are substitute for each other that can be used to one another. Example tea and coffee. Marginal Rate of Substitution: It is defined as the quantity of goods sacrificed for an additional unit of another good. The formula for it is: Here, is the marginal rate of substitution of and is the marginal utility of is the marginal utility of Optimality Rule: According to the indifference curve approach, the consumer achieves its optimum bundle at a appoint where Here, is the quantity of good X. is the quantity of good Y. is the total income. is the price of good X. is the price of good Y However, in the case of a perfect substitute good, the optimal consumption rule is slightly different, in such a situation we have three conditions: If MRS is greater than the price ratio then optimal consumption is If MRS is less than the price ratio then optimal consumption is If MRS is equal to the price ratio then optimal consumption is

Question

Want to see the full answer?

Answer 1

Question

Chapter 10.A, Problem 9P

To determine

Indifference Curve: The graph that shows all those combinations of goods that provide the same level of satisfaction is known as the indifference curve. They are downward slopping curve and convex to the origin. The two indifference curve lines never intersect each other.

Perfect Substitute Good: all those goods which are substitute for each other that can be used to one another. Example tea and coffee.

Marginal Rate of Substitution: It is defined as the quantity of goods sacrificed for an additional unit of another good. The formula for it is:

Here,

is the marginal rate of substitution of and

is the marginal utility of

is the marginal utility of

Optimality Rule: According to the indifference curve approach, the consumer achieves its optimum bundle at a appoint where

Here,

is the quantity of good X.

is the quantity of good Y.

is the total income.

is the price of good X.

is the price of good Y

However, in the case of a perfect substitute good, the optimal consumption rule is slightly different, in such a situation we have three conditions:

If MRS is greater than the price ratio then optimal consumption is

If MRS is less than the price ratio then optimal consumption is

If MRS is equal to the price ratio then optimal consumption is

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

See solution

Students have asked these similar questions

Where can I go to get my own wax supplies?

Problem 2. If the consumer preference can be represented by a CES function with δ = 0.5, i.e. u(x, y) = x0.5 + y0.5. Let the prices and income be (px, py, w). 1. Set up the Lagrangian expression.2. Take the first-order conditions.3. Substitute into budget constraint to derive the optimal consumption bundles.

1. A town relies on four different sources for its non-drinking water needs: dam water, reclaimed water, rain water, and desalinated water. The different sources carry different risks and costs. For instance, desalinated water is fully reliable due to abundant sea water, but it is more expensive than other options. Reclaimed water also has relatively lower risk than rain or dam water since a certain amount can be obtained, even during the dry. season, by the treatment of daily generated waste water. Using any of the four options requires an investment in that resource. The return on a particular water source is defined as the amount of water generated by the source per dollar of investment in it. The expected returns and standard deviations of those returns for the four water sources are described in the following table: Water resource Expected return St. Deviation Dam water 2.7481 0.2732 Reclaimed water 1.6005 0.0330 Rain water 0.5477 0.2865 Desalinated water 0.3277 0.0000 Higher…