Understanding Marginal Rate of Substitution (MRS): Price Reduction of Good X with Indifference Curve

University:
Elon University
Course:
ECO 1000 | Economics
Academic year:

2024
Views:

189

Pages:

1
Author:

Masadepan C.

Understanding Marginal Rate of Substitution (MRS): Price Reduction of Good X with Indifference Curve Consumer behavior analysis using the IC approach with Py and M ceteris paribus, Px down: Px = 6; M = 80; Py = 8 Y1 = 5. 5M/Py = 10 X1 = 3. 6M/Px = 8 Y2 = 5.2M/P 'x = 13.3 X2 = 6,4 y 10 5,5 5,2 x 3, 66, 4813 ,3 Explanation: From the curve above, it can be seen that a decrease in Px results in a change in the consumption power of X and Y. Initially, the consumption of good X is 3.6 and the consumption of good Y is 5.5. Then, the consumption of good X changes to 6.4 and the consumption of good Y to 5.2. This happens because of a change in the price of good X, the incident is in accordance with the law of demand, namely if the price drops, the demand increases. From this case, the quantity of good X increases due to a decrease in price, while the quantity of good Y decreases due to the influence of the price of good X. The budget line also changes when Px drops. From the curve above, it is known that IC 2 is located above IC 1, which means that the satisfaction of IC 2 is higher than the satisfaction of IC 1. So, if Px is lowered, it can result in increased satisfaction and increased purchases of good X.