Chapter 2, Problem 9RQ

To determine

To discuss the preference of consumer with the change in the price of electricity after a certain unit of consumption

Explanation of Solution

Budget Constraint: It shows all the possible combination of two goods that a consumer can purchase, given the level of income of consumer and market prices.

The budget line rotates (inwards or outwards) with a change in the price of any of the two goods and the budget line shifts (inwards or outwards) with a change in the income of consumer.

On the consumption of the first 1,000 kilowatt units of electricity, the consumer is charged $0.10 per kilowatt.When the consumer consumes more than 1,000-kilowatt units, the consumer is charged $0.15 for each extra kilowatt.

This price change over 1,000 kilowatt makes use of electricity more expensive and makes the consumer budget line steeper after the consumption of 1,000 kilowatts of electricity.

This will change consumer preferences regarding consumption of electricity and consumer will try to consume up to 1,000 kilowatts to maximize his/her utility.

As shown in the below diagram the consumer is maximizing his utility at the consumption of 1,000 kilowatts of electricity.