Question

2) There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 50 - P. Lake Wobegon Electrics (LWE) cost of producing electricity is TC = 500 + Q. a. If the regulators of LWE want to make sure that there is no deadweight loss in this market, what price will they force LWE to charge? What will output be in that case? Calculate consumer surplus and LWEs profit with that price. b. If regulators want to ensure that LWE doesn’t lose money, what is the low

Answer 1

Answer:

a .$1152

b. $452

Explanation:

We are given

Demand, Q = 50 - P and cost, TC = 500 + Q

a) In order to ensure no dead weight loss in the market, equilibrium should be attained at a point where P = MC

Thus, 50 - Q = 2

which gives Q = 48 and P = 2

Price charged = $2 and output produced = 48 units

Consumer surplus = 1/2 (50-2)(48) = $1152

LWE's profit = TR - TC

= (2)(48) - (500+(48))

= 96 - 548

= - 452

Hence, LWE will incur a loss of $452 if it charges $2 as price.