Abstract Book of the 10th International Conference on Research in Management and Economics
Year: 2025
[PDF]
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