Question

Reagan has preferences over electricity (E) and solar power (S) represented by ?(S, E) = (? 1 2 + ? 1 2) 2 . Her income is $120, the price of a unit of electricity is $2, and the price of a unit of solar power is $4. a. Suppose the government offers a per unit subsidy for solar power. Specifically, for every unit of solar power Reagan now buys, she receives $2.00 from the government. (This effectively lowers the price Reagan pays for solar power to $2.) Use the Lagrangian method to derive Regan’s optimal bundle given this subsidy. Circle your final answers. (10 points) b. Now suppose instead that the government simply gives Reagan a lump sum of $60 to be spent as she sees fit. (This effectively raises her income to $180.) What bundle will she now choose? You are not required to use the Lagrangian method for this part. Circle your final answers (10 points) c. On one graph, depict Reagan’s utility maximizing bundles in parts (a) and (b). Clearly illustrate which bundle she prefers. (5 po

Answer 1

original budget constraint passing from 60,60

New constraint passes from 90,45