Suppose regulators are deciding how the local electric company is allowed to set prices. Demand for electricity is given by P = 40-Q, where Q is millions of megawatt hours demanded annually. The electric company is allowed to operate as a monopoly. The marginal cost of the company is $2, while the fixed cost is $150 million annually. (a) If the price of the electric company was not regulated, what price would it set? What would be its profits and the deadweight loss? (b) Knowing the fixed cost, demand curve, and marginal cost of the utility, the regulator decides to set a linear price that allows the electric utility to break even. What is this price? What would be the deadweight loss? (c) Suppose that demand for electricity varies over the course of the day and is most inelastic in the middle of the day. Illustrate how the regulator could use this information to improve on the outcome in (b)? Would there be any challenges that would prevent regulators from using the prices you describe?

Suppose regulators are deciding how the local electric company is allowed to set prices. Demand for electricity is given by P = 40-Q, where Q is millions of megawatt hours demanded annually. The electric company is allowed to operate as a monopoly. The marginal cost of the company is $2, while the fixed cost is $150 million annually. (a) If the price of the electric company was not regulated, what price would it set? What would be its profits and the deadweight loss? (b) Knowing the fixed cost, demand curve, and marginal cost of the utility, the regulator decides to set a linear price that allows the electric utility to break even. What is this price? What would be the deadweight loss? (c) Suppose that demand for electricity varies over the course of the day and is most inelastic in the middle of the day. Illustrate how the regulator could use this information to improve on the outcome in (b)? Would there be any challenges that would prevent regulators from using the prices you describe?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The average cost for a typical electric-power-production firm is AC = 100 - 10Q + Q2 where Q is measured in billion kilowatt hours per day. At the current regulated price, consumers demand 4 billion kilowatt hours per day. Is this market a natural monopoly? If demand increases to 10 billion kilowatt hours, is this market a natural monopoly? Explain.
A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer’s demand for the product is Qd = 70 - 0.25P, and the marginal cost of production is $100.a. Determine the optimal number of units to put in a package. unitsb. How much should the firm charge for this package?$
Can you help with parts d,e, and f please? Assume the following equations describe the conditions for a monopoly: Qd = 2,000 - 100P TC = 3,500 + 5q + .005q2 Where Qd is the quantity demanded, P is the commodity's price in dollars, TC is the firm's total cost in dollars and q is the quantity of output produced. Based upon these equations, answer the following questions:a. What is the firm's equation for total revenue expressed as a function of quantity? b. What is the firm's equation for marginal revenue expressed as a function of quantity? What is the firm's equation for marginal cost expressed as a function of quantity? c. What is the firm's profit maximizing quantity of output? d. What price will the firm charge for the commodity? e. What would be the socially optimal quantity of output? f. What price would regulators have to establish in order to have the firm produce the socially optimal quantity of output?
A monopoly is considering selling several units of a homogeneous product as a single package. Analysts at your firm have determined that a typical consumer’s demand for the product is Qd = 100 − 0.25P, and the marginal cost of production is $140. a. Determine the optimal number of units to put in a package. b. How much should the firm charge for this package?
A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer's demand for the product is Qd=90-0.5P, and the marginal cost of production is $110. a. Determine the optimal number of units to put in a package. b. How much should the firm charge for this package?
A monopoly is considering selling several units of a homogeneous product as a single package. A typical consumer’s demand for the product is Qd = 100 - 0.25P, and the marginal cost of production is $140.a. Determine the optimal number of units to put in a package. unitsb. How much should the firm charge for this package?$
Monopoly: Work It Out Earlier we mentioned the special case of a monopoly where MC = 0. Let’s find the firm’s best choice when more goods can be produced at no extra cost. Since so much e‑commerce is close to this model—where the fixed cost of inventing the product and satisfying government regulators is the only cost that matters—the MC = 0 case will be more important in the future than it was in the past. For each demand curve, calculate the profit-maximizing level of output and price as well as the monopolist's profit. a. ?=200−?P=200−Q, fixed cost = 1,000. Profit‑maximizing output Q = Profit‑maximizing price P = $ Monopolist's profit: $ b. ?=4,000−?P=4,000−Q, fixed cost = 900,000 (Driving the point home from part a) Profit‑maximizing output Q = Profit‑maximizing price P = $ Monopolist's profit: $ c. ?=120−12?P=120−12Q, fixed cost = 1,000…
Gas Light, Inc. is currently the only natural gas supplier in a region. The company maximizes its profit when it sells 10 billion m³ of gas at $0.60 per m³. Gas Light's marginal cost is constant at $0.30 per m³. If the market was perfectly competitive, it would supply 20 billion m³ of gas at $0.30 per m³. What is the deadweight loss resulting from the monopoly? $ A billion.
What are the main barriers to entry in the electricity supply market, and how Electricity Company got the status of Monopoly power? also,explain why a monopoly firm (Electricity Company for example) choose not to produce at its full capacity?
A monopoly is considering selling several units of a homogeneous product as a single package. Analysts at your firm have determined that a typical consumer’s demand for the product is Qd = 50 − 0.25P, and the marginal cost of production is $120. a. Determine the optimal number of units to put in a package. units b. How much should the firm charge for this package? $
Describe the two problems that arise when regulators tell a natural monopoly that it must set a price equal to marginal cost.
Dear tutor, please solve these True/False Questions. Thank You! A monopoly always operates in the inelastic portion of its demand curve. The less elastic is the demand for a firm's product, the greater is that firm's market power.