Perfect Substitutes And Complementary Goods

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Indifference Curves for Perfect Substitutes and Complementary Goods

An example of (almost) perfect substitutes we have already seen is green and blue pens. Perfect substitutes have the property that, instead of decreasing marginal rate of substitution (MRS), they have constant marginal rate of substitution (MRS). This means that they have the same slope everywhere, i.e. they are straight lines sloping downwards to the right (see Figure 3.5). In the case of the pens we have that MRS = 1/1 = 1 (where we have dropped the minus sign), but marginal rate of substitution (MRS) could be any number. The defining criterion for perfect substitutes is that marginal rate of substitution (MRS) is constant.

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The example of complementary goods we saw before was right and left shoes. One has no use for one without the other. This fact causes the indifference curves to become L-shaped (see Figure 3.5). Assume we have two left shoes and two right shoes. Even if we get many more right shoes, we will still have the same utility as before. The indifference curves are therefore vertical along q2 and horizontal along q1, and the only way to reach a higher level of utility is to get more of both good 1 and good 2.

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