There are 10 households in Lake Wobegon, Minnesota, each with a demand for elect

Question

There are 10 households in Lake Wobegon, Minnesota, each with a demand for electricity of Q = 60 – P. Lake Wobegon Electric’s (LWE) cost of producing electricity is
TC = 600 + 2Q.

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 LWE's profit with that price. (Answers should be rounded two decimal places)

The regulated price would be $___, and the firm would produce ___ units of electricity.

The total consumer surplus would be $___, and the firm would earn a $___ profit.

Explanation / Answer

If the regulators of LWE want to make sure that there is no dead weight loss in the market they would force LWE to charge price=AVERAGE COST=12.3

Output would be determined by TANGENCY of AVERAGE COST curve to the demand curve.Average cost is given by (600+2Q)/Q. Thus QUANTITY is given by

P=60-Q=(600+2Q)/Q=AC

This yields Q=58.

Determining Price or average cost by substituting Q=58 in the formula AC=(600+2Q)/Q we get AC=P=12.3.

Consumer surplus is given by 1/2*58*(60-12.3)= 1383.3.

The producer is charging a price=AVERAGE COST.Hence the profit earned by LWE is 0.

CONSUMER SURPLUS=1/2*(60-2)*58= 1682

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