Question

Josh has a monthly income of $2000. He spends this income on natural gas (G) and "other goods" (X). The first 1000 m3 of gas always cost $0.4 per m3. When buying more than 1000 m3, a reduc- tion of $0.2 per m3 is given for the amount above 1000 m3. The unit price of the "other goods" is $ 0.2. 1. Draw the budget set (= the set of all bundles that Josh can afford on a monthly basis given is income and the price structure). 2. Determine Josh’s optimal bundle given that his preferences can be represented by the utility function U(G,X) = GX. Illustrate graphically. √ 3. Suppose instead that Josh’s utility function is V (G, X ) = your answer to subquestion 2? Explain. GX + 7. How would that change your answer to subquestion 2? Explain.

Answer 1