Gigawatt Power Company charges $0.05/k Wh for the first 1000 k Wh of power purch

Question

Gigawatt Power Company charges $0.05/k Wh for the first 1000 k Wh of power purchased by a pose residential consumer each month, but $0.10/kWh each for all additional kilowatt-hours. For a residential consumer with a monthly income of $400, graph the budget constraint for electric power and the composite good. What would happen to the budget constraint if the rate jumps to $0.10/k Wh for all kilowatt-hours if power consumption in a month exceeds 1000 kWh (where the higher rate applies to all, not just the additional, kilowatt-hours)? x 1000 0.10 el$400 nfier 1000, Sope of the budGet livre increas as price increar 50 4500 Electricity (kWh/mo) 1000

Explanation / Answer

The Budget constraint includes the Power supply(x) and all the other goods as Composite goods(y).

the total budget is equal to $400

let x be the unit of Electricity consumed.

For x less than or equal to 1000, the price charged is $0.05

For x more than 1000, the price charged is $0.10

If the price of the composite good is P2=1

When x= 0, y= 400

when Y=0, i.e complete $400 is spend on x then x=

For the first 1000 units  $0.05 is charged that means $50 is spent remaining $350

$350 at  $0.10 can purchase 3500 more x units

Therefore total x units are 1000+3500= 4500

So, After consuming 1000 units the slope of budget line increases as the price rises from  $0.05 to  $0.10.

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