ECON372 2025FC Assignment 1.
Due Date is Friday 11th April by 11.59pm by file upload.
Question 1 (18 marks)
Consider an electricity market where the base of the demand curve is vertical and varies linearly between 4000MW and 8000MW (so is equally likely to be found anywhere in that range). Above 7500MW demand can be curtailed at a price of $5000/MWh. The market is competitive with three types of plants as below.
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Technology
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FC per MWh
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Variable costs per MWh
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Carbon Emissions in tonnes per MWh
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Peak (diesel peaker)
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$15
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$200
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25
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Mid (gas)
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$30
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$40
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10
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Baseload (hydro)
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$50
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$0
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0
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(a)What is the optimal amount of baseload plant that should be built? (2 marks)
(b) What is the duration of the price spike so that the peaker plant just recovers its fixed costs? (2 marks)
(c) What is the optimum mid-load capacity? (2 marks)
(d) What is the total capacity and hence peak capacity? (2 marks)
(e) Sketch the load duration curve and the offer stack (2 marks)
(f) Show all plants just cover costs (4 marks)
(g) Suppose now the government imposes a tax of $30 a tonne. Suppose there is no
change in capacity (so capacity doesn’t adjust). Calculate the profit that each type of
plant makes. Why do some plants make a profit even though the market is
competitive? (4 marks)
Question 2 (18 marks)
Consider a owner of a mine which can operate for two periods in a perfectly competitive market. The price in the first period is p0 and in the second period it is p1. The interest rate is r and there are constant marginal costs for mining MC for both periods. The market demand curve is qt=a-bpt. The initial stock of mineral in the mine is R0.
(a) Write down the Hotelling rule with perfect competition with constant marginal costs. (1 marks)
(b) If a=20, b=1, R0=10, r=0.08 and MC=8 find the mining path and the price. (4 marks)
(c) Suppose that the owner of the mine is a monopoly write down the Hotelling rule for a monopoly with constant marginal costs of mining. (1 marks)
(d) Find the mining and price path (4 marks).
(e) Now back to the competitive market explain what you would expect for the mining path if the second period MC increased. (4 marks)
(f) Test your intuition by solving with MC0=8, MC1=10 (4 marks)