TWO EXTREME EXAMPLES OF INDIFFERENCE CURVES

The shape of an indifference curve tells us about the consumer’s willingness to trade one good for the other. When the goods are easy to substitute for each other, the indifference curves are less bowed when the goods are hard to substitute, the indifference curves are very bowed. To see why this is true, let’s consider the extreme cases.

Perfect Substitutes

Suppose that someone offered you bundles of nickels and dimes. How would you rank the different bundles? Most likely, you would care only about the total monetary value of each bundle. If so, you would judge a bundle based on the number of nickels plus twice the number of dimes. In other words, you would always be willing to trade 1 dime for 2 nickels, regardless of the number of nickels and dimes in the bundle. Your marginal rate of substitution between nickels and dimes would be a fixed number-2. We can represent your preferences over nickels and dimes with the indifference curves in panel (a) of Figure 5. Because the marginal rate of substitution is constant, the indifference curves are straight lines. In this extreme case of straight indifference curves, we say that the two goods are perfect substitutes.

Perfect Complements

Suppose now that someone offered you bundles of shoes. Some of the shoes fit your left foot, others your right foot. How would you rank these different bundles? In this case, you might care only about the number of pairs of shoes. In other words, you would judge a bundle based on the number of pairs you could assemble from it. A bundle of 5 left shoes and 7 right shoes yields only 5 pairs. Getting 1 more right shoe has no value if there is no left shoe to go with it. We can represent your preferences for right and left shoes with the indifference curves in panel (b) of Figure 5. In this case, a bundle with 5 left shoes and 5 right shoes is just as good as a bundle with 5 left shoes and 7 right shoes. It is also just as good as a bundle with 7 left shoes and 5 right shoes. The indifference curves, therefore, are right angles. In this extreme case of right-angle indifference curves, we say that the two goods are perfect complements. In the real world, of course, most goods are neither perfect substitutes (like nickels and dimes) nor perfect complements (like right shoes and left shoes). More typically, the indifference curves are bowed inward, but not so bowed as to become right angles.

Figure 5 Perfect Substitutes and Perfect Complements

When two goods are easily substitutable, such as nickels and dimes, the indifference curves are straight lines, as shown in panel (a). When two goods are stronqly complementary, such as left shoes and right shoes,  he indifference curves are right angles, as shown in panel (b).

TWO EXTREME EXAMPLES OF INDIFFERENCE CURVES

TWO EXTREME EXAMPLES OF INDIFFERENCE CURVES

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