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A B C D E Total
Name _______________________________
Student Number_______________________
Econ 132 (W2015): Mid Term Exam 2 [81 Points Total]
A. Fill In The Blank (May Require More Than One Word) [20 Points]
1. The United States gets approximately ______% of its electric power from nuclear reactors.
2. A barrel of oil is refined into several different products including diesel fuel and gasoline. One other
product that comes from every barrel of oil is _____________________.
3. _______________________pricing for electricity would raise prices during the times of highest
demand and lower them during times when demand was less.
4. A monopolist who sells less than the competitive quantity creates a _____________________ loss
that neither consumers nor producers gain.
5. U.S. nuclear power plants tend to have a generating capacity of around ____________________MW.
6. What region of the United States has relatively poor potential for renewable electricity generation
(geothermal, solar and wind)? ____________________________
7. The gasoline tax in Australia and Canada are most similar to what other industrialized country?
__________________________
8. A regulator who sets price so that the quantity produced is where average total cost equals demand
allows a natural monopolist to recover its ______________________________.
9. Between 1930 and 1940, the fraction of farms in the United States with electricity whet from 10% to
___________% due in large part to the efforts of the __________________________Administration to
increase employment by building infrastructure during the Great Depression.
10. Corporate average fuel efficiency (CAFE) standards were initiated by President _________________
in the mid 1970’s in response to the embargo by Arab members of OPEC.
11. The transportation sector uses about _________% of the total U.S. energy consumption.
12. SUV and minivans were classified as “light trucks†which allowed them to have lower standards with
respect to ________________________ and _________________________ relative to automobiles.
13. Introduction of a large carbon tax would make electricity generated with _________________ and
____________________ look less attractive to potential wholesale electricity purchasers.
14. The two basic components of electric power provision that are thought to be the most amenable to
successful deregulation are? (a) _______________________ and (b) __________________________
15. The 1979 ____________________________ nuclear accident in the United States did no harm to
people because the reactor had a ___________________________ that prevented leakage of radiation.
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B. Multiple Choice Questions [10 Points]
1. A natural monopoly is most like to succeed in making large profits at the consumers’ expense if:
(A) close substitutes exist (B) demand is elastic
(C) fixed costs are large (D) rate of return is ignored
1. Combined cycle gas turbine (CCGT) greatly increases its thermal efficiency by:
(A) being paired with wind mills that produce electricity when the wind is high
(B) generating direct rather than alternating current
(C) transmitting power with an oil cooled underground power line
(D) using the heat from the gas turbine in a steam turbine
2. Which of these factors is typically the major influence on the cost of power from a nuclear plant?
(A) Capacity factor at plant (B) Price of uranium
(C) Disposal of nuclear waste (D) Increased security due to terrorism threat
3. The Averchâ€Johnson effect tends to occur when the rate of return for a utility is set above the market
rate of return and suggests that a utility will overâ€invest in:
(A) cleaner burning coal, (B) generating equipment with high variable cost
(C) pollution control equipment (D) generating equipment with low fixed costs
4. Most electrical power in California is generated using:
(A) coal (B) natural gas (C) solar (D) wind
5. Which of these is often used to generate the base load for an electric utility?
(A) LPG (B) nuclear (C) solar (D) wind
6. Tennessee Valley Authority
(A) is a rural electric cooperative (B) has a diversified portfolio of power generating facilities
(C) major producer of wind power (D) a major supplier of power to California
7. Increasing the reliability of an electrical system from 99.5% to 99.9% will change the cost per KWh by:
(A) less than 0.1% (B) about 0.1%
(C) between 0.3% and 0.4% (D) greater than 0.4%
8. How large is the per gallon gasoline tax that economists (Parry, et al.) estimate is needed in the
United States to correct for different externalities associated with motor vehicle?
(A) $0.20 (B) $1.00 (C) $2.00 (D) $4.00
9. A local air pollutant associated with automobiles burning gasoline is:
(A) carbon dioxide (B) carbon monoxide (C) sulfur dioxide (D) sulfur hexofloride
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10. Under which of these conditions is a power generator most likely to have substantial market power:
(A) large solar thermal plant on grid shut down for repair, high temperatures
(B) large wind farm experiences very low wind conditions at night
(C) a new CCGT opens and faces low natural gas prices
(D) a new transmission line is added to the grid allowing power to be sold between regions
C. TRUE or FALSE [10 POINTS]
1. Demand for electricity as a function of temperature will have the shape of the letter “W†if houses use
electricity for cooling and heating.
(A) TRUE (B) FALSE
2. Renewable energy portfolio standards for electricity increase prices that consumers pay for electricity.
(A) TRUE (B) FALSE
3. The U.S. industrial sector’s energy use has tended to fall over time for the last two decades.
(A) TRUE (B) FALSE
4. Setting electricity prices using a rate of return approach provides strong incentives to an electricity
utility to reduce its cost of producing electricity.
(A) TRUE (B) FALSE
5. Publically owned power companies on average charge residential consumers a higher price for
electricity than do investor owned utilities.
(A) TRUE (B) FALSE
6. FERC stands for Federal Emergency Response Corporation.
(A) TRUE (B) FALSE
7. Hydroelectric dams tend to store water in reservoirs so it can be released in the late afternoon time
period to generate electricity when the demand for it is high.
(A) TRUE (B) FALSE
8. States that deregulated their investor owned utilities had electric rates that were higher than nearby
states that did not deregulate their investor owned utilities.
(A) TRUE (B) FALSE
9. Government agencies generally subsidize about 50% of U.S. mass transit system costs.
(A) TRUE (B) FALSE
10. In terms of reducing oil consumption, it would be better to increase the miles per gallon that a
Toyota Prius gets (42 mpg) by 2 mpg than the miles per gallon that a heavy truck gets (6 mpg) by 1 mpg.
(A) TRUE (B) FALSE
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D. Quantitative Problems (26 points, 2 points each including subparts)
1. It is the year 4800 and humanity has colonized the moon. On the moon there are only two coldâ€fusion
electric power generators. As they are operated by rival factions, they are unable to collude. Firm 1 has
the cost function c1 = 2.16 + 2(q1)
2
, where q1 is the quantity of electricity it produces. Firm 2 has the cost
function c2 = 3.14 + (q2)
2
. Inverse demand for electricity is P = 1300 †4q1 †4q2. Please answer the
following questions using this information:
1a. How much electricity will each firm produce if the two firms act as a Cournot duopoly?
1b. What will the equilibrium price of electricity be on the moon?
1c. In what direction would the market price change if Firm 1’s cost function changed to c1 = 2.16 + q1 +
2(q1)
2
, assuming that Firm 2’s cost function did not change. Briefly explain the economic intuition behind
your answer (3 sentence maximum).
1d. In what direction would the equilibrium price and quantity change if Firm 1 exited the market? Why
(3 sentence maximum)?
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2a. A geothermal plant has been proposed for being built east of Los Angeles near Barstow. The Los
Angeles Department of Water and Power has agreed to buy any power generated by the geothermal
plant for $0.50 per kWh. The plant’s annual cost function for producing electricity is given by 200,000 +
.04q + .0000001q2
, where $200,000 is the annual fixed cost. How many kWh should this plant generate
each year to maximize its profits?
2b. How large would fixed costs have to be before it is optimal not to build this geothermal plant?
3. A new CCGT power plant is designed to generate at most 500 MW of power. If for 50% of the year it
generated 450 MW of power, for 30% of the year it generated 400 MW of power, for 15% of the year it
generated 300 MW and for 5% of the year it generated 0 MW. What was the plant’s annual capacity
factor?
4a. A firm is currently using 1200 kWh per month and the price of electricity is $0.15 per kWh. If the
firm’s short run price elasticity of demand is â€0.25, how much electricity would the firm consume next
month if the per kWh hour jumped to $0.20kWh.
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4b. If over the medium run (a couple of years), the price remained at $0.20 kWh and the firms’s
electricity consumption fell to 50% of its former level, what would the estimate of long run demand
elasticity be?
4c. If the price doubled to $0.30 and the long run price elasticity was â€0.70, by what percentage would
demand drop in the long run from its original level?
5a. The OhioPUC uses the standard formula, pq = Expenses + sB, to regulate an investor owned utility.
The engineering cost formula used by the PUC for determining expenses is 4,000,000 + .05q, where
$4,000,000 is considered the annual fixed cost and .05 is the marginal cost of natural gas for generating
electricity. The PUC has assumed the value, B, of the coalâ€fired power plants and the distribution system
is equal to $30,000,000 and the PUC has decided s=.06 equals the fair market rate of return that the
utility is entitled to. Approximately, how much electricity was the PUC forecasting the utility would sell
when setting the price of electricity at $0.25 kWh?
5b. Would the Ohio PUC have been assuming that the amount of electricity being sold was larger, the
same, or smaller than in 5a if it had assumed the value of B was equal to $20,000,000 instead of
$30,000,000, assuming none of the other parameters in 5a change?
6. The California PUC’s economic staff estimates that the price elasticity for residential electricity during
peak hours in the summer is â€.40. How much would electric demand drop during peak hours if peak hour
prices were to go up by 60%?
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E. Short Answer (15 points total; 5 points each)
1. You are asked to forecast demand for electricity for a California investor owned electricity utility for
each 15 minute period during the day. This forecast needs to be available to the utility to use one day
ahead so the utility can predict how much electricity it needs to buy in the spot market. Briefly describe
what variables you would want to use to help make the forecast and why?
2. The Interstate Highway System in the United States started by President Eisenhower in 1956 had a
large influence on how American cities and metropolitan areas grew and related to each other. Briefly
describe the role played by the interstate highway system from the perspective of changing economic
incentives and negative externalities.
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3. California’s attempt at deregulating its electricity sector essentially bankrupted the state and resulted
in the recall of Governor Gray Davis. Explain why Davis’ refusal to raise electric prices paid by consumers
played a major role in the degree of market power which the power generators exercised to raise
wholesale prices and the effective bankruptcy of California’s major investor owned utilities. Note what
Davis should have done differently and how it would have worked in economic terms.
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