Consider once again the dilemma facing Consolidated Edisons system operator. To keep things simple, we focus on

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Consider once again the dilemma facing Consolidated Edison’s system operator. To keep things simple, we focus on one of the decisions before him: to shed or not to shed load. Suppose his choices are to shed 50 percent of the load (which will “solve” the problem at the cost of blacking out 50 percent of New York City) or maintain full load (risking the chance of a total blackout).
a. The operator envisions three possible scenarios by which the system might weather the demand–supply imbalance at full load. The first scenario he considers “improbable,” the second is a “long shot,” and the third is “somewhat likely.” How might he translate these verbal assessments into a round-number estimate of the probability that 100 percent load can be maintained? What probability estimate would you use?
b. Consider the three outcomes: 100 percent power, 50 percent power, and 0 percent power (i.e., a total blackout). It is generally agreed that 0 percent power is “more than twice as bad” as 50 percent power. (With 50 percent power, some semblance of essential services, police, fire, hospitals, and subways, can be maintained; moreover, with a deliberate 50 percent blackout, it is much easier to restore power later.) What does this imply about the utility associated with 50 percent power? (For convenience, assign 100 percent power a utility of 100 and 0 percent power a utility of 0.)
c. Construct a decision tree incorporating your probability estimate from part (a) and your utility values from part (b). What is the operator’s best course of action? Explain.

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Managerial economics

ISBN: 978-1118041581

7th edition

Authors: william f. samuelson stephen g. marks

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