Marginal rate of substitution and budget constraint
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:
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.
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