Question 2 Suppose there are 100 households whose demand for electricity is given by Q =...

 

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Question 2 Suppose there are 100 households whose demand for electricity is given by Q = 40 - P. The local power company has a constant marginal cost of 2, and a fixed cost of 10,000. (a) Suppose the power company charges a price per unit of electricity that maxi- mizes profits. Determine the price, the demand of each household, and the company's profit (Recall that you must use aggregate demand of all 100 households. Q = 40-P is the demand of a single household). (b) Now suppose that the power company uses two part pricing. It selects a price P per unit and a fixed fee F that maximizes profit. Determine P. F, and the firm's profit (Now you must use individual demand Q = 40-P to determine P and F. Of course, in order to determine profits you must use the fact that there are a total of 100 such households.) (e) Determine the efficiency gain from using two-part pricing instead of a price per unit. This efficiency gain is measured by the sum of the following: (a) the change of firm profits; (b) the change of consumer utility (see your class- notes). (d) Now suppose that the government wants to regulate the power company. In particular, the government wants (a) production to be efficient and (b) firm profits to be zero. This objective can be achieved by charging a fixed fee F in addition to a price per unit P. Determine F and P. Question 2 Suppose there are 100 households whose demand for electricity is given by Q = 40 - P. The local power company has a constant marginal cost of 2, and a fixed cost of 10,000. (a) Suppose the power company charges a price per unit of electricity that maxi- mizes profits. Determine the price, the demand of each household, and the company's profit (Recall that you must use aggregate demand of all 100 households. Q = 40-P is the demand of a single household). (b) Now suppose that the power company uses two part pricing. It selects a price P per unit and a fixed fee F that maximizes profit. Determine P. F, and the firm's profit (Now you must use individual demand Q = 40-P to determine P and F. Of course, in order to determine profits you must use the fact that there are a total of 100 such households.) (e) Determine the efficiency gain from using two-part pricing instead of a price per unit. This efficiency gain is measured by the sum of the following: (a) the change of firm profits; (b) the change of consumer utility (see your class- notes). (d) Now suppose that the government wants to regulate the power company. In particular, the government wants (a) production to be efficient and (b) firm profits to be zero. This objective can be achieved by charging a fixed fee F in addition to a price per unit P. Determine F and P.

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