Microeconomics Answers

The Odessa Independent Phone Company (OIPC) is currently engaged in a rate case that will set rates for its Midland-Odessa area customer base. OIPC has total assets of $20 million. The Texas Public Utility Commission has determined that an 11 percent return on assets is fair. OIPC has estimated its annual demand function as follows:
P = 3,514 − 0.08Q
Its total cost function (not including the cost of capital) is
TC = 2,300,000 + 130Q
a. OIPC has proposed a rate of $250 per year for each customer. If this rate is approved, what return on assets will OIPC earn?
b. What rate can OIPC charge if the commission wants to limit the return on assets to 11 percent?
c. What problem of utility regulation does this exercise illustrate?

California Electric has a cost of equity 16 percent. the firm consistently been authorized a return on equity capital below this cost. Also, the effects of regulatory lag and attrition have further reduced the realized return to the 13 percent range. If the utility expects this problem to continue, what actions would you expect Cal Electric to take as a result?

What motivation does a monopolist have to over-invest in plants and equipment? what factors might restrain the monopolist from such over-investing?

If the regulatory process is working effectively, the aggregate of all projects undertaken by a nondiversified electric utility firm should have a net present value that equals zero. Why is this true

8. The Public Service Company of the Southwest is regulated by an elected state
utility commission. The firm has total assets of $500,000. The demand function
for its services has been estimated as
P = $250 − $0.15Q
The firm faces the following total cost function:
TC = $25,000 + $10Q
(The total cost function does not include the firm’s cost of capital.)
a. In an unregulated environment, what price would this firm charge, what
output would be produced, what would total profits be, and what rate of
return would the firm earn on its asset base?
b. The firm has proposed charging a price of $100 for each unit of output. If
this price is charged, what will be the total profits and the rate of return
earned on the firm’s asset base?
c. The commission has ordered the firm to charge a price that will provide the
firm with no more than a 10 percent return on its assets. What price should
the firm charge, what output will be produced, and what dollar level of
profits will be earned?

Given demand function: Q = 20 + m/20p
m=480 p=10, calculate the demand for the product given p=10
B) calculate demand for product when o falls to 4
C) calculate substitution effect when p falls to 4
D) calculate the income effect where price is held at 4

Given the demand function :
P = 500 - 4Q^2
Calculate arc elasticity averaged along the arc joining Q = 8 and Q = 10

8. The Public Service Company of the Southwest is regulated by an elected state
utility commission. The firm has total assets of $500,000. The demand function
for its services has been estimated as
P = $250 − $0.15Q
The firm faces the following total cost function:
TC = $25,000 + $10Q
(The total cost function does not include the firm’s cost of capital.)
a. In an unregulated environment, what price would this firm charge, what
output would be produced, what would total profits be, and what rate of
return would the firm earn on its asset base?
b. The firm has proposed charging a price of $100 for each unit of output. If
this price is charged, what will be the total profits and the rate of return
earned on the firm’s asset base?
c. The commission has ordered the firm to charge a price that will provide the
firm with no more than a 10 percent return on its assets. What price should
the firm charge, what output will be produced, and what dollar level of
profits will be earned?

Unique Creations holds a monopoly position in the production and sale of magnometers.
The cost function facing Unique is estimated to be
TC = $100,000 + 20Q
a. What is the marginal cost for Unique?
b. If the price elasticity of demand for Unique is currently –1.5, what price
should Unique charge?
c. What is the marginal revenue at the price computed in Part (b)?
d. If a competitor develops a substitute for the magnometer and the price
elasticity increases to –3.0, what price should Unique charge?

A firm produces two products, milk and cheese Q1 and Q2 represent the output rates for milk and cheese, respectively. The profit function is π= -50 + 10Q1 + 20Q2 - Q1'2 - 2Q2'2 - 2Q1Q2

Determine the output rate for each product that will maximise profit