A recent MPA graduate looking is looking for an apartment in the Washington area. She would like to have a spacious apartment but also plans to use enough heating and air-conditioning to be comfortable in winter and summer. She knows from experience that she will use one kilowatt-hour (kwh) of electricity, on average, per square foot of floor space per month. Rents in the neighborhood where she would like to live are $0.90 per square foot per month, and electricity costs $0.10 per kwh.
a. Assuming she has $1000 a month to spend on rent and utilities, draw her budget constraint and a couple of her indifference curves. Show her equilibrium and calculate how many square feet of apartment space and kwh of electricity she consumes.
b. Now suppose she gets a promotion and can afford to spend $1500 on rent and utilities. Show her new equilibrium and calculate her consumption of each good.