Question

Suppose, alternatively, that leisure and consumption goods are perfect substitutes. In this case, an indiference curve is described by the equation i = al + bC, where a and b are positive constants, and u is the level of utility. That is, a given indiference curve has a particular value for u, with higher indiference curves having higher values for u. (a) Show what the consumer’s indiference curves look like when consumption and leisure are perfect substitutes, and determine graphically and algebraically what consumption bundle the consumer chooses. Show that the consumption bundle the consumer chooses depends on the relationship between a/b and w, and explain why. (b) Do you think it likely that any consumer would treat consumption goods and leisure as perfect substitutes?

Answer 1

(a) In case of perfecf substitute goods the Indifference curve will be at a constant slope. The marginal rate of substitution will be stable or constant. The consumer will be struck between the two goods at a fixed ratio. Because he/she will have the willingness for both the good at fixed rate.

The MRS will either be zero or infinite.

(b) It would have least changes because the consumer's first priority would be consumption goods. It may rare chance of being a perfect substitute because they both gove different level of satisfaction depending on the income of the consumer.