Suppose the Addams family monthly demand for water is similar to that of 80% of

Question

Suppose the Addams family monthly demand for water is similar to that of 80% of the population of Erehwon. However, for 20% of the population, there is a need for much more water use. A typical family in this group is the Waterson family, whose demand is given by:

P = 40 - Q

Suppose there are a total of a 1000 families in Erehwon, so that there are 800 families with demand same as the Addams family, and 200 with demand the same as the Waterson family. What is the effect at the city-level of the switch from the $6 per month single-tier price, to the tiered price ($6 per thousand for the first 7 thousand, and $20 per thousand for all remaining consumption per month) plus fixed monthly fee (of $5 per month)? (You can assume that for all families, the family income is much higher than the monthly fixed utility fee, so that their demand curve is not altered by the introduction of the fixed fee.) (Pick the single best/correct answer.)

Explanation / Answer

A reduction of total city monthly consumption from 11.6million gallon to 3.8million gallon

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