The town of Fairvale currently gets all of its electric power from a nearby coal

Question

The town of Fairvale currently gets all of its electric power from a nearby coal power plant. Based on the size of Fairvale and the (relatively old) technology employed at this plant, it costs $500 million per year [including the cost of pollution) to generate all of the electricity that the town uses in a year. The people of this town are considering building a new plant with (relatively new) technology that causes less pollution, meaning that it could generate the same amount of electricity that the town uses each year at a cost of just $100 million per year (including the cost of pollution). However, if they choose the new plant, they will have to pay a one-time, fixed cost of $8 billion to build the plant, in addition to the cost of generating electricity each year. 2. 0 (2 points) How many years would the new plant have to be in operation before the total costs(fixed and variable) of electricity from the new plant would be less than the total costs of electricity from the old plant? (Hint: the cost of building the old plant is a sunk cost in this scenario) a.

Explanation / Answer

From the question it can be understood that the cost of $100 million for the new plant or $500 million for the old plant are fixed costs which is incurred yearly.Nothing is mentioned regarding the installation cost of the old plant as it is a sunk cost and cannot be recovered.Similarly the $8 billion cost which is needed for the new plant should not be mixed with the fixed cost as this is also an example of sunk cost.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.