Question

A dry spell in Kenya reduced the water level at the Ndakaini Dam in Kenya by 75% of its capacity in April 2017, resulting in water rationing in Nairobi and calls for the public to use water sparingly. A typical resident of Nairobi normally uses about 1.5 cubic meters of water per week. Suppose that, due to the dry spell, the government orders every resident to restrict their water use to 0.75 cubic meters per week. Use an indifference curve- budget line diagram, with water on the horizontal axis and all other goods on the vertical axis, to show how imposing such a restriction would affect the optimal bundle for a typical resident. If Mbaruku typically uses 0. 7 5 cubic meters of water per week, would his optimal bundle be affected by the water restriction?

Answer 1

Due to decrease in water level, water usage in Nairobi decreases. In the diagram, water is marked as X and all other goods are marked as Y. The budget line for water and all other goods rotates inward to BL₂ keeping the intercept on the vertical axis same. A typical resident of Nairobi initially consumes 1.5 cubic meters of water per week , i.e bundle (X₁, Y₁). As government restricts the water usage, this resident is compelled to move to a lower IC , ie, IC₂. On the IC₂ , the resident consumes 0.75 cubic meters of water per week and Y₂ amount of other goods substituting water assuming water is normal good. The diagram 1 shows the change in the optimal bundle from P to R due to water usage restriction for a typical resident.

Figure 1

If Mbaruku typically uses 0.75 cubic meter, he is already on the budget line BL₂, hence, his utility remains the same at R before and after the water restriction imposed by the government. His optimal bundle would remain unchanged.