Question

2. Suppose that an electric company charges consumers $.10 per kilowatt hour for electricity for the first 1,000 kilowatt hours used in a month but $.15 for each extra kilowatt hour after that. Draw the budget constraint for a consumer facing this price schedule, and discuss why many individuals may choose to consume exactly 1,000 kilowatt hours.

Answer 1

Given that, That an electric company changes consumers = $0.10 per kilowatt hour for electricity for the first = 1000 kilowatt hours used in a month but = $1.5 for each extra kilowatt hour. The consumer consume at most 1000 kilowatt hours of electricity per month charged at $0.10 per kilowatt hour along usual the budget constraint. But if consumption of electricity exceeds 1000 kilowatt hours, it costs 0.15 per kilowatt hour. This would make the budget line steeper It can be seen that the constraint has a at 1000 units, that is, at point A. The indifference curve for this budget constraint is tangent to it only at the . This implies that consumers utility is maximized only if they consume exactly 1000 kilowatt hours of electricity per month.