ECON 204 hw1 - ECO 204 STUDY QUESTIONS Budget Constraint 1 Consider a family that lives in Southern California and has an income of $4,000 per

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ECO& 204 STUDY QUESTIONS Budget Constraint 1. Consider a family that lives in Southern California, and has an income of $4,000 per month, which it spends on electricity and other goods. Suppose that in 1999, the price of electricity was $40 per megawatt hour. (a) Draw this family’s 1999 budget constraint, depicting their monthly consumption of electricity ( g G ) and other goods ( g ± ). Label the axes, the intercepts and the slope of the budget line. (b) Suppose that the price of electricity rose to $100 per megawatt hour in the year 2000. Show the eFect of this price increase on the family’s budget. Clearly label the budget lines before and after the price change. Indicate the slope. (c) After the price increase, the local electric company decides to oFer a new option: for a flat fee of $400 per month, customers can purchase electricity for just $60 per megawatt hour. That is, if they pay $400, they can buy electricity at a price of $60. Sketch the family’s budget constraint, assuming
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This note was uploaded on 01/06/2010 for the course ECONOMICS econ204 taught by Professor Izakatiyas during the Spring '09 term at Sabancı University.

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