Jason lives in a polluted city. His welfare depends on private consumption good X and indoor air quality Q. His utility function is U(X, Q) = XQ. Suppose the price of consumption good is 1. Jason could invest in defensive expenditures such as air filters, which helps improve indoor air quality: D(P, Q) = 3P2. D is higher if the external environment is more polluted (high P) and if Jason demands higher indoor air quality Q. Jason's total income Y=30. (1) Construct Jason's budget constraint as a function of income Y, private consumption X and indoor air quality Q. (2) Solve for the optimal defensive expenditures (D) and resulting indoor air quality (Q) with external air pollution taking the values of P=1 and P=2, respectively. (3) Suppose you are invited to evaluate the cost-effectiveness of a new abatement technology that could reduce surrounding air pollution level from 2 to 1 at a cost of 1. Is it cost effective to adopt this technology using a valuation method based on avoidance expenditures?

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1 Construct Jasons budget constraint Jasons total income Y is 30 Since the price of the consumption ... View the full answer