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150220 Energy Prob Set Essay

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Question 1)
a. Competitive market  P=MC
MC : Coal = $10/MWh, Natural gas = $20/MWh
The demand curve must intersect the supply curve on the $10 step, the $20 step or on the vertical portion

Peak : demand intersect on the vertical portion;
q=30,000-100p
20,000=30,000-100p
P=$100
Semi peak : demand intersects supply on the $20 step where (p,q)=(20,20000)
q=22,000-100p
20,000=22,000-100p
P=$20
Off peak : demand curve intersects supply on the $20 step where (p,q)=(20,18000)
Q=20,000-100p
18,000=20,000-100p
P=$20

b. Daily profits for each plant
A day – 1 off-peak hr + 1 hr (50% semi peak or peak)
Coal plant : 10*1000[(20-10)+0.5(20-10)+0.5(100-10)]=$600,000 Natural gas plant : 10*1000[(20-20)+0.5(20-20)+0.5(100-20)]=$400,000

c. To find out, we need to know what the new off-peak, semi peak and on-peak prices will be after another plant enters. Off peak and semi-peak prices do not change. On peak prices are now determined by what happens when all plants produce flat out at 1,000MWh, since demand still intersects supply at the vertical portion of the cur...

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