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 e 1 ,  where he buys both types of goods. Show e 1  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, e 2 ,  will be the same as two bundles differ, can you state where e 1 .  If the e 2  must be located relative to e 1 ?

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The marginal rate of substitution is the rate at which the consumer is willing to trade one good for ... View the full answer