Reference no: EM13797121
Suppose that the demand for electricity in Miami is
P = 50000 - 0.25*Q
Where Q is million kilowatt hours, and P is price in $ per million kilowatt hours. The current marginal cost (MC) curve for supplying electricity with coal-powered technology is:
MCcoal = 10000 + 2.25*Q
(a) Plot the demand and supply curves for this market. Show the equilibrium price, and quantity for electricity. Label consumer surplus, producer surplus, and cost of goods sold on the figure you have drawn.
(b) Compute equilibrium price (P*), equilibrium quantity (Q*), consumer surplus, producer surplus, TWTP, and total production cost of goods sold.
(c) Now suppose that a new market for environmentally friendly, but more expensive, wind power erupts on the scene in Miami. The marginal cost curve for producing wind power for residents is:
MCwind = 25000 + 5*Q
On a new graph, plot the original demand and marginal cost curves for electricity. Label the equilibrium price calculated above as P*. Now, plot the new marginal cost curve. Your graph should have one demand curve, and two marginal cost curves.
Answer the following (for these questions, describe what happens in the market for electricity):
(d) Will anyone purchase wind power? Why or why not?
What happens to the market price for electricity when the new supply of wind power is available? (note that I am not asking for a quantitative answer, but what will happen in general)
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