Question

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 - P. Lake Wobegon Electric's (LWE) cost of producing electricity is TC = 500 +Q. a. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWE's profit with that price. (Round all responses to two decimal places.) The regulated price would be $ , and the firm would produce units of electricity Total consumer surplus would be $ , and the firm would earn a profit. 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? (Round all responses to two decimal places.) The regulated price would be $ , and the firm would produce units of electricity. Total consumer surplus would be $ , and the firm would earn a $ profit. Finally, there will be a deadweight loss of $ . 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? (Round your response to two decimal places.) If each household pays a fee of $ and LWE charges the price calculated in part (a), there will be no deadweight loss and the firm will breakeven. Moreover, households will pay the fee because it is the consumer surplus per household.

Answer 1

- as At socially efficient outcome DWL =0 PEMC=1 ::.Q: 50-1:49 Total output :: 49 x 10 = 490 Total cs : CS = 10[*x (50) *49] =12005 Total profit : 7 = 490*1-500-490 1. b) To make the firm break even: P=ATC a, 50-Q = 500 til ar 19 = 500+ 2? @, 490-500 - 22=0 ory B2 - 490+500 = 0 Q = 34:512 .: P: 15:49 :. Total consumer swephes: cs = x ( 50-15'49) 34:51 : 595:47 ; : Total profit: T=0 Dead weight loss : DWL *(15:49-1). *(99- 34.51) :: Cec would be equal to ES at POME = 104.98 as to total los at pame .: Fee = WIKA500.PCMC=1 Household will pay the fees because this is [less than the consumer swephus at P=1