Econ 400 Spring 16 Assignment 4

# Econ 400 Spring 16 Assignment 4 - Elena Antoniadou Econ 400...

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Elena Antoniadou Econ 400 – Managerial Economics Assignment 4 Due Tuesday April 19 1. Consider a monopoly electric utility on an island. Generation capacity cost for providing electricity to the island is r=4 per kilowatt/hour. Suppose that there are no operating costs. The daytime and nighttime inverse demand function for electricity are given by p D =12-0.5q D and p N =24 -2q N . (a) Find the profit maximizing capacity and peak-load prices for the utility. (b) Find the profit maximizing capacity and price, if the utility is regulated to charge a uniform price for electricity throughout the day. (c) Suppose that the utility is subject to rate of return regulation so that it breaks even. Find the optimal peak-load prices. (d) Suppose that the rate of return regulated utility is also regulated to charge the same price throughout the day. Find its optimal price. (e) Find total welfare in each of the four previous scenarios and give the ordering of scenarios in terms of social welfare. (f) How does your answer to (c) change if day demand is p D =8-0.5q D ? 2. Epsilon Air, a small commuter airline, faces summer and winter demands for travel given by the following inverse demands: p s = 25 – 0.5 q s p w = 50 – 2 q w . (a) There are no fixed costs but the marginal capacity cost is \$4 and the marginal operating cost is \$10. Calculate the profit-maximizing prices, p s * and p w *, under peak-load pricing. (b) Suppose Epsilon Air faces an increased marginal capacity cost of \$10 and the same marginal operating cost of \$10. Calculate the profit-maximizing prices under this shifting peak scenario, p s ** and p w **.

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