Answered You can hire a professional tutor to get the answer.
Ecn 125 - Energy Economics University of California - Davis James Bushnell Due Thursday October 6, 2016 Problem Set 1 1. You run a venture capital...
1. You run a venture capital fund that is considering an investment in the newly deregulatedpower market in Baja California. Baja has a small market with two utilitiesthat are both selling off their generation assets. Both utilities have identical generationportfolios. The new power market will set prices according to the intercept of supplyand demand. The supply curve will be determined by the registered marginal costof every generator in the market. Those costs (for one utility) are given in the tablebelow.Table 1: Generation portfolio of Utility 1 (same as Utility 2)Tech Capacity MCCoal 1000 $10Gas CC 750 $30Gas CT 250 $50Demand in the Baja market follows two levels, peak and off-peak and is perfectlyinelastic. Assume that in one year there are 5000 off-peak hours and 5000 peak hours.Demand in the peak hours is 3700 MW and in the off-peak it is 1500 MW. Prices areset at the intersection of demand and the aggregate market supply curve. If there isa tie in the cost of generation (between two firms) when setting the market price, thequantities are evenly divided between the two portfolios. For example if demand were500 MW, the price would be $10 (the MC of the coal plants) and each firm would sell250 MW. Assume that generators cannot exercise market power.2 Problem Set 1(a) What will be the on peak and off-peak prices in this market?(b) You are offered the opportunity to lease one of the above generation portfoliosfor one year. This means you will earn revenues according to the market clearingprices in 5000 off-peak and 5000 peak hours. How much would you be willing topay for this lease (in other words, what is the expected annual producer surplusfor one of these portfolios)?Problem Set 1 3(c) In the above market, you have a chance to invest in a new solar plant that wouldonly operate during peak hours. The capital cost of the technology is $215,000per MW of capacity. Unfortunately it is flimsy technology that will only last oneyear. The marginal cost of a solar plant is zero. Prices will be set according tothe intersection of supply and demand using the same approach as before. Howmuch solar capacity would you add to this market? Explain your expected netprofit from this investment.(d) Would your answer change if the solar could somehow also operate during off-peakas well as peak hours?4 Problem Set 1Returning again to the newly deregulated Baja market, consider that your pricingmight not be constrained to equal MC. In other words it may be possible to exercisemarket power. You have purchased the portfolio of utility 1. You know that thesecond portfolio was purchased by a non-profit charity that wants to offer its supplyat marginal cost, even if that doesn’t maximize its profit. Given your expectation ofsupply at MC for the other firm, draw the residual demand your firm would face inpeak hours in the space below.Problem Set 1 52. In California, the marginal cost of producing oil is $50 a barrel. Demand for oil (inmillions of barrels per year) in California is linear, of the form D(p) = 20 −110 ∗ p oran inverse demand of p = 200 − 10q. This week we will assume there is an unlimitedsupply of oil (no scarcity) at $50 a barrel.(a) If all California oil were under the control of a single monopolist, what is theprofit maximizing quantity for that monopolist to produce?(b) What is the deadweight loss from the market power in the California Oil market?Provide both a graphic and numerical answer6 Problem Set 1(c) Now assume that California has limited production capacity and can produce atmost 4 million barrels a year (still at a constant MC of $50 a barrel). Given thisnew production constraint, what is the monopoly price of Oil in California? Whatis the DWL from market power? Illustrate your answer with a graph
