Questions for Analysis and Responses
Our approach to this case is built on the information that California electricity producers behave as price takers. This statement implies that the electricity market is perfectly competitive. Before answering the questions given, we briefly describe industry supply, marginal costs, and profits for perfectly competitive markets.
First, the industry supply curve is a sum of supply curves for individual producers. In turn, each firm's individual supply curve is the quantity supplied, from zero capacity to maximum capacity, at a price equal to marginal cost. Marginal cost is determined by taking the derivative of the cost function with respect to quantity. The cost function C(Q) for each firm is the sum of variable costs VC(Q) and fixed costs FC. Because VC(Q) in this case is VC*Q, the derivative of the cost function is VC. Therefore, for each firm, the marginal cost MC is equal to the total variable cost TVC (See Appendix A) and is......
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Approximate Pages: 6 (260 words per double-spaced page) |