Brian consumes units of electricity (E) and a composite good (Y), whose price is always $1. He
Question:
Brian consumes units of electricity (E) and a composite good (Y), whose price is always $1. He likes both goods. In period 1 the power company sets the price of electricity at $7 per unit, for all units of electricity consumed. Brian consumes his optimal basket, 20 units of electricity and 70 units of the composite good. In period 2 the power company then revises its pricing plan, charging $10 per unit for the first 5 units and $4 per unit for each additional unit. Brian's income is unchanged. Brian's optimal basket with this plan includes 30 units of electricity and 60 units of the composite good. In period 3 the power company allows the consumer to choose either the pricing plan in period 1 or the plan in period 2. Brian's income is unchanged. Which pricing plan will he choose? Illustrate your answer with a clearly labeled graph.
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Brians income is I 720 170 210 His initial budget line is the s...View the full answer
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