Non-linear pricing in water utilities: You are the manager of water utilities, and you are trying to determine how different water pricing schemes will affect consumption. One option for pricing is called decreasing block pricing, where the marginal price paid decreases with quantity paid. In particular, you are considering a decreasing block schedule where consumers pay $0.20 per gallon for the first 20 gallons consumed, and then $0.10 per gallon for any additional gallons consumed. For this decreasing block pricing scheme, draw the budget constraint for a consumer that has $10 of income, where the composite good is the good on the y-axis. Another option for pricing is called increasing block pricing, where the marginal price paid increases with the quantity paid. In particular, you are considering an increasing block schedule where consumers pay $0.20 per gallon for the first 20 gallons consumed, and then $0.40 per gallon for any additional gallons consumed. For this increasing block pricing scheme, draw the budget constraint for a consumer that has $10 of income, where the composite good is the good on the y-axis. Do you think that it would be more likely that consumers will buy exactly 20 gallons of water under the decreasing block pricing scheme in (a) or the increasing block pricing scheme in (b)? Explain why. Hint: Think about the convex shape of indifference curve

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Non-linear pricing in water utilities: You are the manager of water utilities, and you are trying to determine how different water pricing schemes will affect consumption.

1. One option for pricing is called decreasing block pricing, where the marginal price paid decreases with quantity paid. In particular, you are considering a decreasing block schedule where consumers pay $0.20 per gallon for the first 20 gallons consumed, and then $0.10 per gallon for any additional gallons consumed. For this decreasing block pricing scheme, draw the budget constraint for a consumer that has $10 of income, where the composite good is the good on the y-axis.
2. Another option for pricing is called increasing block pricing, where the marginal price paid increases with the quantity paid. In particular, you are considering an increasing block schedule where consumers pay $0.20 per gallon for the first 20 gallons consumed, and then $0.40 per gallon for any additional gallons consumed. For this increasing block pricing scheme, draw the budget constraint for a consumer that has $10 of income, where the composite good is the good on the y-axis.
3. Do you think that it would be more likely that consumers will buy exactly 20 gallons of water under the decreasing block pricing scheme in (a) or the increasing block pricing scheme in (b)? Explain why. Hint: Think about the convex shape of indifference curves.

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