Suppose that a public utility supplies a service, whose demand varies with the time of day. For
Question:
The objective is to determine outputs yi(and hence prices pi) and production capacity Y to maximize social welfare as measured by total consumer and producer surplus. In any period i, total surplus is measured by the area between the demand and cost curves, that is,
So aggregate surplus is
The optimization problem is to choose nonnegative yi and Y so as to maximize (79) subject to the constraints
yi Show that it is optimal to price at marginal cost during o¨-peak periods, and extract a premium during peak periods, where the total premium is equal to the marginal cost of capacity c0. Furthermore, under this pricing rule, the enterprise will break even. Note that
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Question Posted: