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Consider a market for electricity with 18MW of generation capacity available at MC = 4 and...

Consider a market for electricity with 18MW of generation capacity available at MC = 4 and 20MW of generation capacity available at MC = 16. The off-peak demand is given by Q = 20−P, and the peak demand is given by Q = 32 − P.

a. Construct the supply curve and draw a graph of it.

b. If the market is competitive, what are the peak and off-peak equilibrium prices and quantities?

c. At those prices, what is the total revenue being earned across all of the firms in this market?

d. Now suppose that this is a regulated market and all supply is provided by a single firm. Regulation requires that they charge a single weighted-average price in the two markets. What is that price?

e. At that price, what is the firm’s revenue? What does that imply that the firm’s fixed cost must be if the firm is earning a normal rate of return?

f. What is the deadweight loss associated with using averaged pricing rather than peak-load pricing?

g. Draw a graph of your answers.

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