def. Elasticity of Substitution. The EoS of good of asks “how much % are you willing to give up to get one more % of “?

⇒ MRS is the Marginal Rate of Substitution (MRS) of good Higher elasticity of substitution (EoS) means the following things:

Taste and elasticity

  • Homothetic tastes when MRS depends on alone:
    • i.e.

Elasticity & Indifference Curve Shapes

Cobb-Douglas EOS

⇒ Then we observe:

⇒ We also can see that it is homogenous and thus homothetic: