Question

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q=50-P. Lake Wobegon Electric’s (LWE) cost of producing electricity is TC=500+Q.

A. If the regulators of LWE want to make sure that there is no deadweight loss in the market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWE’s profit with that price.

B. If regulators want to ensure that LWE doesn’t lose money, what is the lowest price they can impose? Calculate output, consumer surplus, and profit. Is there any deadweight loss?

C. Kristina knows that deadweight loss is something that this small town can do without. She suggests that each household be required to pay a fixed amount just to receive any electricity at all, and then a per-unit charge for electricity. Then LWE can break even while charging the price calculated in part a. Heat fixed amount would each household have to pay for Kristina’s plan to work? Why can you be sure that no household will choose instead to refuse the payment and go without electricity?

Answer 1