Explain two-tiered declining block method

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Reference no: EM13179262

In some communities water is priced according to a "two-tiered declining block method." According to this scheme, an individual pays an initial minimum charge, which entitles her to a specified quantity of water. After she exceeds this specified quantity of water, she is subject to "declining block pricing"-as more water is purchased, the price per gallon drops.

a. In a diagram with gallons of water on the horizontal axis and all of other goods on the vertical, sketch the budget constraint associated with this scheme. (You do not have enough information to know the exact slope and intercepts. Just sketch a constraint that is generally consistent with this scheme.)

b. Given that an individual has paid the initial minimum charge, do you expect her to consume less than the amount to which the minimum charge entitles her? To answer this question properly, you need to superimpose some indifference curves on the same diagram as the budget constraint. According to your diagram, can an amount less than that to which the minimum charge entitles the individual ever be part of a utility-maximizing bundle?

Reference no: EM13179262

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