Question 2: Suppose NAWEC charges D5 for every kilowatt hour of electricity for the first 1000 used in a month and D7.5 for each extra. Kilowatt hour after that. Draw the budget constraint for George...

Question 2:

Suppose NAWEC charges D5 for every kilowatt hour of electricity for the first 1000 used in a month and D7.5 for each extra. Kilowatt hour after that. Draw the budget constraint for George who face this price schedule. Discuss why many Gambian may choose to consume exactly 1,000 kilowatt hour.

Question 3

Suppose an individual consumes three items: steak, lettuce, and tomatoes. If we were interested only in examining this person’s steak purchases, we might group lettuce and tomatoes into a single composite good called ‘‘salad.’’ Suppose also that this person always makes salad by combining two units of lettuce with one unit of tomato.

1. How would you define a unit of ‘‘salad’’ to show (along with steak) on a two-good graph?


2. How does the price of salad (PS) relate to the price of lettuce (PL) and the price of tomatoes (PT)?


3. What is this person’s budget constraint for steak and salad?


4. Would a doubling of the price of steak, the price of lettuce, the price of tomatoes, and this person’s income shift the budget constraint described in part c?


5. Suppose instead that the way in which this person made salad depended on the relative prices of lettuce and tomatoes. Now could you express this person’s choice problem as involving only two goods? Explain.