Simultaneous Substitution and Utility Maximization: An MRS Analysis with A Fixed Budget

Abstract Book of the 10th International Conference on Research in Management and Economics

Year: 2025

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Simultaneous Substitution and Utility Maximization: An MRS Analysis with A Fixed Budget

Dr. Bijan Latif

 

ABSTRACT:

This paper models consumer choice, allowing simultaneous buying and selling of two goods. Unlike standard models, consumers endogenously determine their trading position. A fixed budget component represents savings or borrowing. Using a Cobb-Douglas utility function, we show optimal consumption requires equating the Marginal Rate of Substitution (MRS) with an effective price ratio, incorporating buy/sell decisions. Deviations from this condition drive simultaneous substitution, increasing utility. The model highlights how consumers actively reshape their consumption bundles through trade, offering a more realistic perspective than traditional approaches.

Keywords: Simultaneous substitution, endogenous determination, Cobb-Douglas utility function, marginal rate of substitution, pre-committed expenditure