Question

Why is the​ off-peak price unaffected by the marginal cost of expanding​ capacity?

A.

The​ off-peak demand determines capacity. During the​ off-peak period, the marginal cost of expanding capacity is irrelevant as the​ off-peak price is determined by the average total cost.

B.

The peak demand determines capacity. During the​ off-peak period, the marginal cost of expanding capacity is irrelevant as there is excess capacity.

C.

The​ off-peak demand determines capacity. During the​ off-peak period, the marginal cost of expanding capacity is irrelevant as the capacity is exactly equal to the demand.

D.

The peak demand determines capacity. During the​ off-peak period, the marginal cost of expanding capacity is irrelevant as it always exceeds the​ off-peak price.

Answer 1

In off peak periods quantity is not used uptil capacity or beyond capacity whereas in peak period demand is extremely high such that it reaches the maximum capacity level at times. Thus only peak period determines the capacity.

Also in off peak period since capacity level is not reached marginal cost of expanding capacity is irrelevant as there is no need to expand without high demand and there is already excess of capacity ahead.

Thus option b is the correct answer.