Question

1. Consider the case of The Electric Company which produces electricity in New York State. The average monthly demand curve for the firm can be represented by P=65-Q where Q represents the quantity of electricity produced, in megawatt-hours (mwh) and P is measured in cents.  Their marginal costs can be represented by MC=5+0.5*Q.  Please provide graphs to accompany your analysis.
2. a. The firm has market power.  What price should they charge?  How much electricity will they produce?  

Answer 1

Answer : a) Given,

P = 65 - Q

TR (Total Revenue) = P * Q = (65 - Q) * Q

=> TR = 65Q - Q^2

MR (Marginal Revenue) = TR / Q

=> MR = 65 - 2Q

MC = 5 + 0.5Q [Given]

As here the firm has market power hence at equilibrium condition, MR = MC.

=> 65 - 2Q = 5 + 0.5Q

=> 65 - 5 = 0.5Q + 2Q

=> 60 = 2.5Q

=> Q = 60 / 2.5

=> Q = 24

Now, P = 65 - 24

=> P = 41

Therefore, the firm should charge $41 per mwh and the firm will produce 24 mwh of elasticity.

This result is shown by the following picture' diagram. In the following diagram D is market demand.