1. Consider a household that buys two things: electricity and everything else. a. What is the condition for the household to be maximizing its utility? Explain intuitively what this condition means. b. Suppose that the price of electricity rises. How will the household need to modify its consumption of electricity and everything else to continue maximizing its utility? (Be sure to explain both the substitution effect and the income effect of the price change.) c. If the prices of electricity and everything else both rise by 10%, how, if at all, will the household need to modify its consumption of electricity and everything else to continue maximizing its utility? d. Suppose the area where the household lives experiences an intense heatwave (which can be counteracted by using electric air conditioners). Compared to its consumption before the heatwave hit, how, if at all, will the household need to modify its consumption of electricity and everything else to continue maximizing its utility?

1. Consider a household that buys two things: electricity and everything else. a. What is the condition for the household to be maximizing its utility? Explain intuitively what this condition means. b. Suppose that the price of electricity rises. How will the household need to modify its consumption of electricity and everything else to continue maximizing its utility? (Be sure to explain both the substitution effect and the income effect of the price change.) c. If the prices of electricity and everything else both rise by 10%, how, if at all, will the household need to modify its consumption of electricity and everything else to continue maximizing its utility? d. Suppose the area where the household lives experiences an intense heatwave (which can be counteracted by using electric air conditioners). Compared to its consumption before the heatwave hit, how, if at all, will the household need to modify its consumption of electricity and everything else to continue maximizing its utility?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

explain your answers in detail and use graphs whenever appropriate

1. Consider a household that buys two things: electricity and everything else.
a. What is the condition for the household to be maximizing its utility? Explain intuitively
what this condition means.
b. Suppose that the price of electricity rises. How will the household need to modify its
consumption of electricity and everything else to continue maximizing its utility? (Be sure
to explain both the substitution effect and the income effect of the price change.)
c. If the prices of electricity and everything else both rise by 10%, how, if at all, will the
household need to modify its consumption of electricity and everything else to continue
maximizing its utility?
d. Suppose the area where the household lives experiences an intense heatwave (which can
be counteracted by using electric air conditioners). Compared to its consumption before
the heatwave hit, how, if at all, will the household need to modify its consumption of
electricity and everything else to continue maximizing its utility?

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