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