The SolarFarm powerplant has both fixed and variable costs. As the plant expands production, it first has constant returns to scale, and then diminishing returns to scale. (a) Draw a large graph showing (only) the firm’s marginal costs and average total costs in a suitably labelled graph. Show on the graph where the firm’s technology changes from constant-returns to diminishing-returns. SolarFarm is a monopolist with a downward sloping demand curve. Add to your graph a demand and marginal revenue curve. Assume that the demand curve intercepts the average cost curve at its minimum point. Show the quantity and price of electricity in this market. (b) The government connects SolarFarm to a nearby town that is currently without electricity. Show in a new, large, graph how the market price and quantity of electricity sold change as a result. (c) Return to the situation in part (a) of this question. The government discovers a new technology that would allow SolarFarm to never experience diminishing returns to scale in production. Should the government release this technology to the firm? Explain using a graph.
The SolarFarm powerplant has both fixed and variable costs. As the plant expands
production, it first has constant returns to scale, and then diminishing returns to scale.
(a) Draw a large graph showing (only) the firm’s marginal costs and average total
costs in a suitably labelled graph. Show on the graph where the firm’s
technology changes from constant-returns to diminishing-returns.
SolarFarm is a monopolist with a downward sloping demand curve. Add to
your graph a demand and marginal revenue curve. Assume that the demand
curve intercepts the average cost curve at its minimum point. Show the
quantity and price of electricity in this market.
(b) The government connects SolarFarm to a nearby town that is currently without
electricity. Show in a new, large, graph how the market price and quantity of
electricity sold change as a result.
(c) Return to the situation in part (a) of this question. The government discovers a
new technology that would allow SolarFarm to never experience diminishing
returns to scale in production. Should the government release this technology
to the firm? Explain using a graph.
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