Answer to Question #67407 in Macroeconomics for aziz

Question

Briefly explain two exceptions to the definition of an indifference curve

Answer 1

1)The case of perfect substitutes:
For perfect substitutes the nature of the indifference curve is such that it’s a straight line with a constant slope implying that the marginal rate of substitution is constant i.e. MRS = 1. In this case, the goods being consumed are mutually exclusive in consumption such that either of them can be exclusively consumed (without the other) while the consumer derives the same level of satisfaction.
2) Complementary goods are those goods used together or jointly such that no satisfaction can be derived by exclusively consuming either of them, that is, satisfaction can only be obtained by way of combination. Such goods are related in such a way that an increase in price of one (e.g. vehicles) causes a decrease in the quantity demanded of the other