Assume your local utility's rates are set by the State Public Utility Commission according to the equation pq = expenses + sB. Suppose that:

• the Commission assesses s = 4% as the fair market rate of return for the utility
• the utility has capital stock B = $15,000,000
• the expenses of the utility as a function of qkWh, determined by the engineering cost formula, are 400,000 + 0.04q
• the forecasted electricity sales associated with the price induced by s are q = 12,000,000

a) What price of electricity per kWh has the Commission set?

b) What would the price be if the Commission had instead set s = 6% and the resulting q is unchanged.

c) If the coefficient on q in the engineering cost formula for producing electricity increased from 0.04 to 0.08, in what direction would q have to change, and in what direction would p have to change, and why?

d) What is a plausible reason why this coefficient on the engineering cost function might increase?

Answer rating: 100% (QA)

a pq expenses sB pq 400000 004q 415000000 pq 400000 004q 600000 pq 1000000 004q p 25 per kWh b The n... View the full answer