Question

Consider the market for wholesale electricity. What would you expect to happen to the price and quantity of electricity given a large decrease in the price of coal (38% of electricity is generated by burning coal)?

Electricity prices would increase and the amount sold decrease

Electricity prices would decrease and the amount of electricity sold would increase

Both electricity prices and quantity would increase

Both electricity prices and quantity would decrease.

Answer 1

Option C.

• When the price of coal which is used as an intermediate good to generate electricity decreases, both the electricity price and quantity would Increase.
• This is because, according to the law of supply, the prices and quantity supplied are directly proportional to each other.
• When the price of coal decreases, the producers of electricity have more incentive to increase the price of the supplied electricity.
• The quantity of electricity supplied in a market increases as price goes up because the suppliers have an increased interest in producing electricity to generate higher amounts of revenue.