Marginal rate of substitution and budget constraint

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Marginal rate of substitution and budget constraint

Saggio marginale di sostituzione e vincolo di bilancio

The marginal rate of substitution is essentially how much you need to vary the amount of a fine to compensate for the change in the amount of another asset to maintain the same utility.

SMS = marginal rate of substitution

= lower X 2 / decrease X 1

Graphically the marginal rate of substitution is the slope at a point on the curve of indifference.

However if the replaced goods are perfect goods (Exchange in the same proportion for example 1 well to : 2 well B) the marginal rate of substitution is constant.

Here is an example of a chart with defined goods and constant ratio:

Saggio marginale di sostituzione e vincolo di bilancio

 

 

 

 

 

 

 

 

If the goods are perfect complements ,that is consumed in the same propporzione have a ’ unit in more than one well does not increase customer satisfaction.

Evidently the assumptions of this theory are based on a level of income limitatomdel consumer and that the consumer purchases only 2 goods.

Budget constraint

The budget constraint is the locus of all combinations of goods that consumers can purchase spending all your income.

The budget constraint is defined according to the report:

M = P1 x Q1 + P2 x Q2

Legend: M = budget constraint P1 = price right 1 Q1 = amount well 2 P2 = fare well 2 Q2 = quantity right 2

The slope of the budget constraint is the relationship of two items, that's P1/P2

Saggio marginale di sostituzione e vincolo di bilancio

 

 

 

 

 

 

Saggio marginale di sostituzione e vincolo di bilancio

 

 

 

 

 

 

 

As you can see in the chart above when the price of the goods 1 is reduced and the consumer enjoys greater power d ’ purchase increases the quantity purchased ( the consumer can purchase baskets, which are sets of goods, that before were not accessible). The choice of optimal basket will fall and then the second point (the bigger one).

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