We showed an example in which the consumer has preferences for consumption with the perfect complement...

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Economics

We showed an example in which the consumer has preferences forconsumption with the perfect complement property. Suppose,alternatively, that leisure and consumption goods are perfectsubstitutes. In this case, an indifference curve is described bythe equation:
u=al+bC
where a and b are positive constants and u is the level ofutility. That is, a given indifference curve has a particular valuefor u, with higher indifference curves having higher values foru.
a) Show what the consumerâ€™s indifference curveslook like when consumption and leisure are perfect substitutes, anddetermine graphically and algebraically what consumption bundle theconsumer will choose. Show that the consumption bundle the consumerchooses depends on the relationship between a/b andw, and explain why.
b) Do you think it likely that any consumerwould treat consumption goods and leisure as perfectsubstitutes?
c) Given perfect substitutes, is more preferredto less? Do preferences satisfy thediminishing-marginal-rate-of-substitution property?

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4.1 Ratings (873 Votes)

AnswerStepbystep solutionStep 1 of 6aIt is given that leisure and consumption are perfect substitutesand an indifference curve is given by the equationwhere a and b are positive constantsl stands for hours of leisure Cstands forconsumption and u stands for utilityTo find out how indifference curves look calculate the slope ofan indifference curveSince the slope of indifference curves is negative we know thatthe indifference curves are downward sloping Since the slope ofthe indifference curves is constant we know that indifferencecurves are straight linesThe indifference curves are downward sloping straight See Answer

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