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See if you can answer any of this. this was sent by a friend, who has a daughter in school somewhere in Georgia. she is a Psych major, and has to take an economics course.
I left half day yesterday, and have a few things waiting for me today. If you can help cool !
Here is the problems:
Free Market Pricing v. Price Controls in California Utilities LEAD STORY-DATELINE: The Wall Street Journal, June 4, 2001. Alfred Kahn, currently an economics professor at Cornell University, led the USA's drive to deregulate the airline industry as chairman of the Civil Aeronautics Board under President Jimmy Carter. What was argued at the time is in every freshman textbook on economics. In a normally functioning competitive market, price shocks have an immediate effect on supply and
demand. Producers, such as Delta Airlines, respond to higher prices by boosting supply immediately (adding flights), and consumers respond by cutting back purchases (of air tickets). The price settles back to a new equilibrium level.
But that is not happening in California's wholesale electricity market, and Mr. Kahn was one of 10 economists who supported Governor Gray Davis' demand for the federal government to impose price caps on wholesale electricity. The Governor's motivation comes from some cold, hard facts, not to mention some cold offices last winter. The state's electricity bill jumped to more than $27 billion for 2000 from $7.4 billion in 1999, and the Governor expects the bill to reach $50 billion or more in 2001. The state government can no longer afford to supply all essential services. As a result of what he calls "unusual circumstances in electricity," Kahn favors the wholesale price caps. One "unusual circumstance" is the prevailing caps on retail prices for electricity.
President George W. Bush remains one of the free marketers. Apparently reading from Kahn's 1970's freshman economics text, Bush says that "price caps do nothing to reduce demand, and they do nothing to increase supply." If anything, complain Bush-thinking economists, price controls will lead to worse shortages because power companies cannot earn a decent return on their investment and will cut back plans to build new utility plants, making a bad situation worse. Kahn's uniqueness
rebuttal goes something like this: Even if wholesale prices are left free to continue their ascent, it takes nearly two years for new power plants to come on line, so energy supplies remain limited. Meanwhile, wholesale producers are deliberately holding power off the market, forcing prices and their profits even higher. Moreover, since retail consumer prices are capped, consumers have no incentive to cut back on their consumption of electricity. The rising wholesale prices, a rising cost to the retail sellers of power, cannot be offset by raising their prices, putting a serious profits squeeze on California retail suppliers of electricity. Therefore, Mr. Kahn and like-minded economists advocate temporary price caps at wholesale to soften the increasing fiscal burden on the state government until new plants come on line. The price caps could be set at a level that would yield a strong return to the industry's investments.
Please answer the following questions:
6. How would you characterize the elasticities of demand and supply in the retail electric power market? Why?
7. How would you characterize the elasticities of demand and supply in the wholesale electric power market? Why?
8. Why is the California "model" for deregulation of electric power a poster child for truly bad deregulation design?
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You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price
of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.
Should management continue to operate at a loss?
I left half day yesterday, and have a few things waiting for me today. If you can help cool !
Here is the problems:
Free Market Pricing v. Price Controls in California Utilities LEAD STORY-DATELINE: The Wall Street Journal, June 4, 2001. Alfred Kahn, currently an economics professor at Cornell University, led the USA's drive to deregulate the airline industry as chairman of the Civil Aeronautics Board under President Jimmy Carter. What was argued at the time is in every freshman textbook on economics. In a normally functioning competitive market, price shocks have an immediate effect on supply and
demand. Producers, such as Delta Airlines, respond to higher prices by boosting supply immediately (adding flights), and consumers respond by cutting back purchases (of air tickets). The price settles back to a new equilibrium level.
But that is not happening in California's wholesale electricity market, and Mr. Kahn was one of 10 economists who supported Governor Gray Davis' demand for the federal government to impose price caps on wholesale electricity. The Governor's motivation comes from some cold, hard facts, not to mention some cold offices last winter. The state's electricity bill jumped to more than $27 billion for 2000 from $7.4 billion in 1999, and the Governor expects the bill to reach $50 billion or more in 2001. The state government can no longer afford to supply all essential services. As a result of what he calls "unusual circumstances in electricity," Kahn favors the wholesale price caps. One "unusual circumstance" is the prevailing caps on retail prices for electricity.
President George W. Bush remains one of the free marketers. Apparently reading from Kahn's 1970's freshman economics text, Bush says that "price caps do nothing to reduce demand, and they do nothing to increase supply." If anything, complain Bush-thinking economists, price controls will lead to worse shortages because power companies cannot earn a decent return on their investment and will cut back plans to build new utility plants, making a bad situation worse. Kahn's uniqueness
rebuttal goes something like this: Even if wholesale prices are left free to continue their ascent, it takes nearly two years for new power plants to come on line, so energy supplies remain limited. Meanwhile, wholesale producers are deliberately holding power off the market, forcing prices and their profits even higher. Moreover, since retail consumer prices are capped, consumers have no incentive to cut back on their consumption of electricity. The rising wholesale prices, a rising cost to the retail sellers of power, cannot be offset by raising their prices, putting a serious profits squeeze on California retail suppliers of electricity. Therefore, Mr. Kahn and like-minded economists advocate temporary price caps at wholesale to soften the increasing fiscal burden on the state government until new plants come on line. The price caps could be set at a level that would yield a strong return to the industry's investments.
Please answer the following questions:
6. How would you characterize the elasticities of demand and supply in the retail electric power market? Why?
7. How would you characterize the elasticities of demand and supply in the wholesale electric power market? Why?
8. Why is the California "model" for deregulation of electric power a poster child for truly bad deregulation design?
*************************************************************************************************************************************************
You've been hired by an unprofitable firm to determine whether it should shut down its unprofitable operation.
The firm currently uses 70 workers to produce 300 units of output per day. The daily wage (per worker) is $100, and the price
of the firm's output is $30. The cost of other variable inputs is $500 per day. Although you don't know the firm's fixed cost, you know that it is high enough that the firm's total costs exceed its total revenue.
Should management continue to operate at a loss?
