The city of Detroit charges its residents 50 cents for the each of the first 100 gallons of water. For each gallon over 100, and under 200 gallons, the city charges $1.00 per gallon. For each gallon over 200 gallons, the city charges $2.00 per gallon.
a. Darryl consumes all-other-goods (AOG) and water. The price of AOG is $1.00 per unit. Darryl has $200 to spend on water and all other goods. Draw Darryl’s budget constraint, making sure to label all axes and intercepts.
b. Suppose that instead, Detroit charged the $1.00 per gallon for any number of gallons. Draw this new budget constraint on the same graph as in part a.
c. Are the consumers better off with pricing scheme a. or b.? Explain briefly.