How do you calculate perfect complements?
When two goods are perfect complements, they are consumed proportionately. The utility that gives rise to perfect complements is in the form u(x, y) = min {x, βy} for some constant β (the Greek letter “beta”). First observe that, with perfect complements, consumers will buy in such a way that x = βy.
What is the shape of an indifference curve for perfect complements?
Indifference curves are linear if the individual regards the two goods as perfect substitutes. They are L-shaped if the individual regards the two goods as perfect complements.
What is the equation for an indifference curve?
In algebraic terms, if we rewrite the equation of an indifference curve U(t, y)=c in the form y=g(t, c), then g(t, c) is a decreasing and convex function of t for given c.
Why is the indifference curve of complementary goods L shaped?
The defining criterion for perfect substitutes is that marginal rate of substitution (MRS) is constant. The example of complementary goods we saw before was right and left shoes. One has no use for one without the other. This fact causes the indifference curves to become L-shaped (see Figure 3.5).
Why are the indifference curves for perfect complements right angles?
Why are the indifference curves for perfect complements right angles? An additional unit of one good but not the other has no marginal value to the consumer. Indifference curves always illustrate the combinations of two goods that yield the same utility to a consumer.
What is the indifference curve for perfect substitute goods?
An indifference curve is a line showing all the combinations of two goods that give a consumer equal utility. Thus, the indifference curve of perfect substitute goods is a 45 degrees straight line. The indifference curves can also be seen in figures 1 and 2 (see the red-colored lines at the base of the plots).
Can the indifference curve be a straight line?
The degree of convexity of an indifference curve depends on the rate of fall in the marginal rate of substitution of X for Y. As stated above, when two goods are perfect substitutes of each other, the indifference curve is a straight line on which marginal rate of substitution remains constant .
What does the slope of the indifference curve reveal?
The magnitude of the slope of an indifference curve measures the marginal rate of substitution. That is, if the indifference curve is steep, then the marginal rate of substitution is high and a person would be willing to give up a very large amount of y to obtain very little of x.
What is the slope of an indifference curve?
The slope of an indifference curve at a particular point is known as the marginal rate of substitution (MRS). It measures the rate at which the consumer is just willing to substitute one commodity for the other.