You are in charge of strategic pricing department for a national electricity company, UAE (monopoly). According to past calculations the daily demand for electricity is based on the following equation:
Q_electricity^d=f(P_electricity,Income_consumer,P_water )
According to past research this relationship can be numerically defined as follows:
Q_electricity^d=500-1000P_electricity+0.4Income_consumer-500*P_water
- Assume that the average consumer income is 10000, the price of electricity is 2, and the price of water is 1. Find the own-price, income, and cross-price elasticities for the average consumer. Discuss your findings.
2.Draw the demand graph for the average consumer (Income=10000) when price of water is 1. State under which conditions the demand is elastic or inelastic or unit elastic.
3.Draw the Marginal Revenue graph for the average consumer (Income=10000, Water Price=1). If the marginal cost of electricity production is constant at 1, what be optimal production level to maximize profits? What will be the price charged to average consumer? Find the Consumer Surplus, Producer Surplus, and Economic Surplus under monopoly. Do the same for competitive market.
Write a 3-5 page academic report on your findings.
Sample Solution
