Peak Load Pricing for Electricity Imagine a market where demand for electricity

Question

Peak Load Pricing for Electricity

Imagine a market where demand for electricity is characterized by Qp = 20-Pp in peak periods and Qo = 8-2Po in off-peak periods. Both the peak period and the off-peak period take up half of each day. The variable cost per unit of output per period is 0.5. Capital costs, which are sunk and cannot be adjusted between periods, are 0.75 per unit of capacity per day.

a. If peak and off-peak pricing is allowed, what is the optimal capacity, peak price and off-peak price?

b. If only one price can be charged throughout the day, what price and capacity would maximize social surplus?

Explanation / Answer

a). Solution :- i). Peak pricing system :-

Peak price = Variable cost per unit + Capital cost per unit.

= 0.50 + 0.75

= $ 1.25

Optimal capacity = 20 - 1.25 (Put the value of peak price in peak period equation given in the question).

= 18.75

ii). Off-peak pricing system :-

Off peak price = Variable cost per unit = $ 0.50

Optimal capacity = 8 - 2 * 0.50

= 8 - 1

= 7.

Conclusion :-

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

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