Why can we be sure that no household will choose electricity

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Reference no: EM13199604

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 - P.

a. Lake Wobegon Electric's (LWE) cost of producing electricity is
TC = 500 + Q.

b. If regulators want to ensure that LWE doesn't lose money, what is the lowest price they can impose? Calculate output, consumer surplus, and profit. Is there any deadweight loss?

c. Kristina knows that deadweight loss is something that this small town can do without. She suggests that each household be required to pay a fixed amount just to receive any electricity at all, and then a per-unit charge for electricity. Then LWE can break even while charging the price calculated in part (a). What fixed amount would each household have to pay for Kristina's plan to work? Why can you be sure that no household will choose instead to refuse the payment and go without electricity?

Reference no: EM13199604

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