Lucas chooses between water and all other goods. If he spends all his money on water, he can buy 15 thousand gallons per week. At current prices, his optimal bundle is e1, where he buys both types of goods. Show e1 in a diagram. During a drought, the government limits the number of gallons per week that he may purchase to 10 thousand. Using diagrams, discuss under which conditions his new optimal bundle, e2, will be the same as e1. If the two bundles differ, can you state where e2 must be located relative to e1?

  • CreatedNovember 13, 2014
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