People derive utility in their lives from consuming goods, g, and clean air, a (measured as the number of particulates removed per m3). Suppose a representative consumer’s utility function over these two goods is U (g, a( = g.6a.4
Suppose the price of consumer goods equals $20 and the price of clean air (aka the abatement cost) is calculated to be $60. Income equals $1,500.
Sketch the consumer’s budget constraint and the indifference curve that shows to the optimal utility with clean air on the x-axis and all other goods on the y-axis. Make sure to write out the budget constraint intercepts and label the optimal bundle.
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