Regulation and Antitrust Policy (Econ 180) Drake University, Spring 2011 William M. Boal Course page: www.drake.edu/cbpa/econ/boal/180 Blackboard: bb.drake.edu Email: william.boal@drake.edu

Regulation of Electric Power

### Version A

I. Multiple choice [2 pts each: 18 pts total]

(1)d. (2)e. (3)c. (4)c. (5)c. (6)d. (7)b. (8)a. (9)d.

II. Problems

1. 70 thousand kilowatt hours is the capacity of the generating system.
2. \$0.14 per kWh.
3. 70 thousand kWh.
4. \$0.04 per kWh.
5. 60 thousand kWh.
6. 80 thousand kWh.
7. 20 thousand kWh.
8. increase.
9. 10 thousand kWh.
10. \$1.7 thousand. (This is the sum of areas of two triangles, because too little electricity is supplied in the off-peak period and too much is supplied in the peak period. The first triangle is bounded by SRMC, off-peak demand, and a vertical line at 20 thousand kWh. The second triangle is bounded by LRMC, peak demand, and a vertical line at 80 thousand kWh.)

(2) [Wholesale power markets, economic dispatch: 20 pts]

1. Demand and supply "curves" should be stairsteps. Demand is plotted from highest bids to lowest bids. Supply is plotted from lowest asks to highest asks.
2. Generator A: 30 megawatt-hours.
Generator B: 0 megawatt-hours.
Generator C: 30 megawatt-hours.
Generator D: 50 megawatt-hours.
3. \$60 per megawatt-hour
4. Generator C.

(3) [Sources of market power: 16 pts--2 pts each box]

1. 3.7.
2. 0.270.
3. decreases, increases.
4. decreases, increases.
5. increases, decreases.

III. Challenge question [6 pts]

1. Drake classrooms are a joint cost for regular-term and summer-term courses. The number of classrooms needed depends on the maximum of regular-term and summer-term courses. Holding the number of classrooms constant there is no continuous tradeoff between the regular-term and summer-term courses--the opportunity cost of summer-term courses (in terms of foregone regular-term courses) is zero. (Full credit requires a graph of a rectangular production-possibility curve.)
2. If Drake wants to set tuition so as to price courses at marginal cost, then the cost of classrooms ("capacity") should be included in regular-term courses only. The regular term is the "peak" period when classrooms are almost constantly in use, so the short-run marginal cost is vertical in the regular term. The summer-term is the "off-peak" period when classrooms are mostly empty, so the short-run marginal cost is low and horizontal and does not include the cost of capacity.

### Version B

I. Multiple choice [2 pts each: 18 pts total]

(1)b. (2)e. (3)b. (4)a. (5)d. (6)a. (7)a. (8)c. (9)b.

II. Problems

1. 90 thousand kilowatt hours is the capacity of the generating system.
2. \$0.14 per kWh.
3. 90 thousand kWh.
4. \$0.02 per kWh.
5. 70 thousand kWh.
6. 100 thousand kWh.
7. 20 thousand kWh.
8. increase.
9. 10 thousand kWh.
10. \$2.6 thousand. (This is the sum of areas of two triangles, because too little electricity is supplied in the off-peak period and too much is supplied in the peak period. The first triangle is bounded by SRMC, off-peak demand, and a vertical line at 20 thousand kWh. The second triangle is bounded by LRMC, peak demand, and a vertical line at 100 thousand kWh.)

(2) [Wholesale power markets, economic dispatch: 20 pts]

1. Demand and supply "curves" should be stairsteps. Demand is plotted from highest bids to lowest bids. Supply is plotted from lowest asks to highest asks.
2. Generator A: 0 megawatt-hours.
Generator B: 50 megawatt-hours.
Generator C: 10 megawatt-hours.
Generator D: 0 megawatt-hours.
3. \$30 per megawatt-hour
4. Generator C.

(3) [Sources of market power: 16 pts--2 pts each box]

1. 1.7.
2. 0.588.
3. decreases, increases.
4. decreases, increases.
5. increases, decreases.

III. Challenge question [6 pts]

Same as Version A.