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 = 575 + 2Q.

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?

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?