Scottish Rower are a firm that provide a small amount of gas to the UK gas market. They aim to produce 30 terawatts per hour using the following production function: q = M0.7K 0.3 where q is their output of gas to final consumers, M is the amount of wholesale gas and K is the amount of capital. (a) The price of gas has recently increased from £150 terawatts per hour to £300 terawatts per hour. The rental rate has remained at £50. Use the Lagrangian method to find out the impact that the change in price has on the amounts of wholesale gas and capital that the firm uses. (b) Explain the intuition behind the result in (a). Explain the barriers to Scottish Rower being able to make this change. The UK Government are worried about the cost of gas to consumers. Scottish Rower have the follow short-run total cost function: TC 100+40q +0.2q0.2 If costs are non-sunk then what would Scottish Rower do if the UK Government imposed a price cap of £40 per terawatt hour?

Scottish Rower are a firm that provide a small amount of gas to the UK gas market. They aim to produce 30 terawatts per hour using the following production function: q = M0.7K 0.3 where q is their output of gas to final consumers, M is the amount of wholesale gas and K is the amount of capital. (a) The price of gas has recently increased from £150 terawatts per hour to £300 terawatts per hour. The rental rate has remained at £50. Use the Lagrangian method to find out the impact that the change in price has on the amounts of wholesale gas and capital that the firm uses. (b) Explain the intuition behind the result in (a). Explain the barriers to Scottish Rower being able to make this change. The UK Government are worried about the cost of gas to consumers. Scottish Rower have the follow short-run total cost function: TC 100+40q +0.2q0.2 If costs are non-sunk then what would Scottish Rower do if the UK Government imposed a price cap of £40 per terawatt hour?

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter4: Extent (how Much) Decisions

Section: Chapter Questions

Problem 3MC

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