Assume an electric company has spent 3 billion on a nuclear power ...

[Haya94]

Assume an electric company has spent 3 billion on a nuclear power plant. It's producing at a price per kilowatt hour that is above its average variable cost. However, after 10 years the price remains below average total cost.
 
  If there is no expectation that price will equal or rise above the average total cost what would you expect this company to do with its nuclear power plant? Why is the 3 billion not part of the decision? Explain.

Question 2

Explain how price adjusts to eliminate excess demand.
 
  What will be an ideal response?

[coyin]

Answer to Question 1

In the short run it is acceptable to make an operating profit in order to minimize economic losses. However, in the long run the expectation is that the firm should be able to enjoy at least a normal profit. Since this firm has no hope of earning a normal profit the best thing to do in the long run is to shut down the nuclear power plant.

Answer to Question 2

When there is excess demand, quantity demanded is greater than quantity supplied. Therefore, the price will rise. As the price rises, quantity demanded falls and quantity supplied rises. Price will continue to rise until quantity demanded and quantity supplied are equal (at the market equilibrium).

[Haya94]

TYSM

[Alyson.hiatt@yahoo.com]

Gracias!