A consumer has a budget of $250 to spend on electricity and food. The price of food is $1. Initially, the price of electricity is 10¢/KwH (kilowatt hour). However, in order to discourage excessive use of electricity and promote conservation, the Public Service Commission imposes a 5¢/KwH surcharge for any quantity over 1000 KwHs; that is, the price for units above 1000 is 15¢/KwH.
a. Determine the consumer’s budget set in this case. (Hints: If the consumer would purchase less than 1000 KwHs, the budget set is unaffected. How much money must the consumer spend on electricity before the surcharge applies? How much money is left over? What is the maximum number of KwHs the consumer could buy?)
b. In separate diagrams, depict two scenarios (i.e., consumer’s equilibria): one in which the policy would be effective relative to the no surcharge case, and one in which it would be ineffective.