Many public utilities sell their products on multi-part tariffs. The consumer must pay a connection charge for the right to consume (say) electricity, irrespective of the amount consumed. The price paid for the first n units will exceed the price paid for any units consumed in excess of n. Draw the feasible set for the consumer, with electricity on one axis and a consumption good on the other. Distinguish between the average and marginal prices of electricity and investigate the effects of changes in the connection charge and the price of electricity.
Added by Nathaniel G.
Step 1
Drawing the feasible set: On the x-axis, we have the quantity of electricity consumed, and on the y-axis, we have the quantity of other consumption goods. The feasible set is a downward sloping line, starting from a point on the y-axis that represents the Show more…
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