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Question
The Genetron Electric Company provides electric power service to a three state region in the US. The annual demand for electric power in this region is Q = 4500 - 100P where quantity (Q) is measured in millions of kilowatt hours (kWh) and the price (P) is cents per kWh. The firm operates in a decreasing cost industry.a. If the firm's marginal cost curve crosses the demand curve at P = 4 (i.e., 4 cents per kWh), what is the quantity demanded at this price? Why wouldn't the firm want to operate under marginal cost pricing?
b. If the firm's average cost curve crosses the demand curve at P = 5, what is the quantity demanded at this price? What are the firm's profits under average cost pricing?
c. Suppose Genetron uses a block pricing scheme with prices P1 = 15, P2 = 10, and P3 = AC. What quantity levels are associated with the first, second, and third blocks of annual electricity demanded?
Answer
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