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An energy company has recently enhanced its capabilities for generating electricity, resulting in a 10% reduction...

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Economics

  1. An energy company has recently enhanced its capabilitiesfor generating electricity, resulting in a 10% reduction in thecost/kwh. The company, which is regulated by the state, is requiredto pass the savings on to consumers via a 10% reduction inrates/kwh. Assume that the company has 100,000 residentialcustomers who paid an average of $60/month consuming each 500kwh/month in the year prior to implementing the new system; thesame 100,000 customers paid $58/month following the shift to thenew system with its lower prices. The total revenue thereforedropped from $6 million per month to $5.8 million per month. Basedupon these facts,

    • What was the increase in volume of electricity that wasgenerated? What was the percentage increase?

Hint: Evaluate first what would have been the averagebill if the volume had stayed the same after the farereduction




    • Was there a change in the demand function? If so, whatis the new demand function? If not, why did the power company haveto produce more electricity?




    • What was the price elasticity in the demand forelectricity?  




    • What was the increase in consumer surplus as a result ofthe reduction in prices?

Answer & Explanation Solved by verified expert
3.9 Ratings (614 Votes)
A Demand function will not change a decrease in cost insteadincrease the supply function The company may    See Answer
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