Reference no: EM132978961

A publicly owned municipal utility has an old generator that costs $91/MWh but the unit has infinite capacity. In this market, the only demand is the demand from this municipal utility. The municipal utility needs to buy 220MW (perfectly inelastic demand). There are two other generators in this market, which are both for profit generators. The first (for profit generator) unit has 165MW capacity and its marginal cost is $38/MWh. The second unit has a capacity of 250MW and its marginal cost is $65/MWh. In this market, all generators, including the municipal utility's expensive generator, are required to bid at their true marginal cost or lower. All generators can bid in their full capacity at one price or they can bid in multiple blocks (Q1 at price P1, Q2 at price P2, ...) The objective of the municipal utility is to minimize the total cost to serve its 220MW load.

a) What is the offer curve (the municipal utility generator) that the municipal utility should make to minimize the total cost? Draw it. Make sure you label all parts, the quantity and the price for each block.

b) Assume that the two for profit generators bid their full capacity at their true marginal cost. Draw the total market supply curve for all three generators (including your answer to part (a) above for the municipal utility generator). Draw on the same graph the demand curve.

c) What is the market clearing price?

d) What is the total cost to the municipal utility (include the amount it has to pay for the 220MW it purchases for its load and any profit or loss its generator may incur)?

e) Is your answer to part c the same as if the municipal utility bid the generator at its true marginal cost? If your answer is no (there is a difference), what would the total cost be to the municipal utility if it bid its generator at its true marginal cost?