Utility companies often charge a higher price for the first few units of consump
ID: 1247979 • Letter: U
Question
Utility companies often charge a higher price for the first few units of consumption to alimit and then a lower price for all additional consumption. For example, water charges
might be $2.00 per cubic meter for the first 100 cubic meters and $1.50 per cubic meter for additional consumption. Conservationists often criticize this because it encourages water consumption – the more you consume, the lower average price you pay. Present the marginal utility model of consumer choice and assess this criticism.
Explanation / Answer
The law of diminishing marginal utility says that as you have more of a product, you will want less of it. For example, if I take a shower, I am less inclined to take another shower later in the day. Once I reach that point where I've used enough water to get the $.50 discount, it seems like I would be encouraged to consume more water however, I've already taken a shower today and another shower would cost me money and would be bad for my skin so I probably am not going to take another one regardless of price. This is because water is a product of inelastic demand.
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