Question: 7. Molvania is a small country which has a competitive electricity industry, with the generating plants owned by many different companies. Electricity demand in

7. Molvania is a small country which has a competitive electricity industry, with the generating plants owned by many different companies. Electricity demand in Molvania in 2006 was 300 million MWH (megawatt-hours). The electricity industry's production capacity is described in the table below. Fuel is the major component of electricity generating cost for simplicity, assume it is the only variable cost. Capital cost represents an allocation of annual capital cost across the number of megawatt hours of annual capacity. Like the US, Molvania has experienced a significant change in the costs of various forms of energy over the last few years with the discovery of shale gas. Fuel Number of Plants Yearly output capacity per plant (MWH) 2006 fuel cost per MWH 2006 fuel price (S per 2011 fuel price (S per Capital cost per MWH Natural Gas 20 8 million $36 $6 $3 $10 Coal 20 7.5 million $16 $1.6 $2.4 $32 Wind 10 3 million $0 $0 $0 $53 a. b. What was the price of electricity in 2006? Assume that demand for electricity is completely inelastic with respect to price. What was the price of electricity in 2011?

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