How do you calculate perfect substitutes?
Suppose, for example, that the consumer substitutes 1 unit of good X for 2 units of good Y. Here a and b are positive numbers, the MRSx.y = a/b = constant, the slope of an IC would be – a/b = constant.
How do you graph perfect substitutes?
If two goods X and Y are perfect substitutes, the indifference curve is a straight line with negative slope, as shown in Figure 41 because the MRSXY is constant. The value of this slope is throughout minus 1, and MRSXY = 1. In the figure, ab of Y = bc of X, and cd of Y = de of X.
What is perfect substitution?
A perfect substitute can be used in exactly the same way as the good or service it replaces. This is where the utility of the product or service is pretty much identical. For example, a one-dollar bill is a perfect substitute for another dollar bill.
What are the examples of perfect substitutes?
A perfect substitute is a situation where two goods are viewed as identical….7 Examples of a Perfect Substitute
- Gold. Gold from two different mines.
- Wheat. Wheat from two different countries.
- Butter. Butter from two different producers.
- Labor.
- Electricity.
- Materials.
- Capital.
What is the example of perfect substitutes?
For example, a one-dollar bill is a perfect substitute for another dollar bill. And butter from two different producers are also considered perfect substitutes; the producer may be different, but their purpose and usage are the same.
What kind of curve is the Engel curve?
If we hold the prices of goods 1 and 2 fixed and look at how demand changes as we change income, we generate a curve known as the Engel curve. The Engel curve is a graph of the demand for one of the goods as a function of income, with all prices being held constant.
What does utility function u mean in Engel curve?
Here the utility function u = log x 1 + log x 2 indicates that the two commodities are perfect substitutes of each other. The consumer will buy both of them if their prices are the same, i.e., p 1 = p 2. This is indeed the case here. Otherwise the consumer will buy the one whose price is lower than that of the other.
When does the Engel curve bend towards the income axis?
Lastly, if the commodity concerned is an inferior good, then the Engel curve for the group, like the individual curve, would eventually bend towards the income-axis. Therefore, the Engel curve for a group of consumers would assume the same types of shape as the individual curve.
How is the preference for a perfect substitute represented?
In general, preferences for perfect substitutes can be represented by a utility function of the form: U (x,y) = ax + by Here a and b are positive numbers, the MRS x.y = a/b = constant, the slope of an IC would be – a/b = constant.