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ebonyadams ebonyadams
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6 years ago
Assume an electric company has spent 3 billion on a nuclear power plant. It's producing at a price per kilowatt hour that is above its average variable cost. However, after 10 years the price remains below average total cost.
 
  If there is no expectation that price will equal or rise above the average total cost what would you expect this company to do with its nuclear power plant? Why is the 3 billion not part of the decision? Explain.



Ques. 2

Explain how price adjusts to eliminate excess demand.
 
  What will be an ideal response?



Ques. 3

Why is it not a contradiction to say that a firm is simultaneously earning an accounting profit but suffering an economic loss?
 
  What will be an ideal response?



Ques. 4

Maxine's Cookie Shop sells chocolate chip cookies in a perfectly competitive market for 2 per dozen. Maxine currently produces 200 dozen cookies per day and average total cost at this level of production is 1.75 .
 
  What level of profit is this firm earning? Explain.



Ques. 5

Explain the difference between price cap regulation in a natural monopoly and the effect of a price ceiling in a competitive market.
 
  What will be an ideal response?



Ques. 6

What incentive does price cap regulation attempt to give the firm? How does it give the firm this incentive?
 
  What will be an ideal response?



Ques. 7

Describe the main problem with rate of return regulation and name an alternative regulatory scheme that has been devised to deal with that problem.
 
  What will be an ideal response?
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wrote...
6 years ago
(Answer to Q. 1)  In the short run it is acceptable to make an operating profit in order to minimize economic losses. However, in the long run the expectation is that the firm should be able to enjoy at least a normal profit. Since this firm has no hope of earning a normal profit the best thing to do in the long run is to shut down the nuclear power plant.

(Answer to Q. 2)  When there is excess demand, quantity demanded is greater than quantity supplied. Therefore, the price will rise. As the price rises, quantity demanded falls and quantity supplied rises. Price will continue to rise until quantity demanded and quantity supplied are equal (at the market equilibrium).

(Answer to Q. 3)  Accounting profit is determined by taking total revenue and subtracting explicit costs only. Economic profit is determined by taking total revenue and subtracting all economic costs which include explicit and implicit costs. Therefore, this statement is not a contradiction.

(Answer to Q. 4)  Maxine's Cookie Shop is earning profits of 50 per day. This can be calculated by taking total revenue (2 x 200 = 400) and subtracting total cost (1.75 x 200 = 350).

(Answer to Q. 5)  In regulating a natural monopoly, a price cap regulation is a price ceiling in which a rule specifies the highest price that the firm is allowed to charge. A price cap lowers the price and increases output. This type of regulation gives a firm an incentive to operate efficiently and to keep its costs under control. In a competitive market, a price ceiling establishes the highest price that all firms in the market are allowed to charge. But the major issue is that in a competitive market, the competitive equilibrium already is efficient. And, to be effective, the price ceiling needs to be below the market equilibrium price. A shortage of the good occurs because firms are willing to supply less output than they would produce in the absence of the price ceiling. As a result, inefficiency is created.

(Answer to Q. 6)  Price cap regulation is intended to motivate the firm to operate efficiently and keep its costs under control. It does so setting the maximum price the company can charge and then allowing the firm to keep part (or perhaps all) of any economic profit it can make if it cuts its costs.

(Answer to Q. 7)  The main problem with rate of return regulation is that a firm might be inclined to inflate its costs, because its price is set at a level that permits the firm to recoup all its costs. Therefore, the firm might incur unnecessary costs that serve the interests of its managers, such as lavish offices, company cars, travel, entertainment, etc. The alternative regulation scheme is price cap regulation. With price cap regulation, the regulating agency sets the maximum price the company can charge. The company is allowed to charge any price below the cap and can keep all (or some) of any economic profit it can make.
ebonyadams Author
wrote...
6 years ago
Dude, you're awesome. I wish I had you as my teacher!
wrote...
6 years ago
Come to the forum always, I'm be around
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