Building model of the costs of production of electric power

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Reference no: EM131094732

There are at least two different possible approaches to the problem of building a model of the costs of production of electric power.

I: Model I hypothesizes that per unit costs (C) as a function of the number of kilowatt-hours produced (Q) continually and smoothly falls as production is increased, but it falls at a decreasing rate.

II: Model II hypothesizes that per unit costs (C) decrease fairly steadily as production (Q) increases, but costs decrease at a much faster rate for hydroelectric plants than for other kinds of facilities.

Given this information,

a. What functional form would you recommend for estimating Model I? Be sure to write out a specific equation.

b. What functional form would you recommend for estimating Model II? Be sure to write out a specific equation.

c. Would R(bar)² be a reasonable way to compare the overall fits of the two equations? Why or why not?

Reference no: EM131094732

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