Question

DTE Energy, an electricity company decides to implement a novel pricing policy. Previously, it charged the same price for each kilowatt-hour of energy, regardless of how much energy the consumer purchased.

Now, they still charge the original constant price for the first 100 kilowatt-hours, and then charge a higher “surcharge” price for all units above 100 kilowatt-hours.

(1) Show how the surcharge system changes the consumer’s budget constraint. (electricity on the x-axis and “other goods” on the y-axis)

Use indifference curves to show:

a) some consumers may be unaffected by the surcharge

b) some may consume exactly up to the quantity where the surcharge starts

c) others may consume more than the quantity at which the surcharge starts.

Answer 1