Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

CHAP. 11] RECENT AND ADVANCED TOPICS IN MARKET STRUCTURE 269
(a)
In Fig. 11-5 D o is the market demand curve for electricity during the off-peak period, while D p is the higher
market demand curve for electricity during the peak period. The short-run marginal cost curve of the firm is
given by SMC. At the uniform price of 3¢/kWh at all times (to cover the short-run average cost of both
periods together) the firm public utility sells 1 million kWh during the off-peak period (A o on D o ) and 5
million kWh during peak periods (A p on D p ).
Fig. 11-5
(b)
(c)
At A o the marginal benefit to consumers from one additional kilowatt-hour (given by the price of 3¢/kWh)
exceeds the marginal cost of 1¢ for generating the last kilowatt-hour of electricity produced (given by point B o
on the SMC curve). From the society viewpoint, it would be profitable if the public utility supplied more electricity
until P ¼ SMC ¼ 2¢ (point E o , at which D o and SMC intersect). The social benefit gained would thus
be equal to the shaded triangle A o B o E o .
AtpointA p , the marginal benefit to consumers from one additional kilowatt-hour (given by the price of 3¢/kWh)
is smaller than the marginal cost of 5¢ for generating the last kilowatt-hour of electricity produced (point B p on
the SMC curve). From society’s point of view, it would pay if the firm supplied less electricity until
P ¼ SMC ¼ 4¢ (point E p ,atwhichD p and SMC intersect). The social benefit gained (by using the same
resources to produce some other service that society values more) would thus be equal to the shaded triangle
B p A p E p .
11.13 (a) Starting from Fig. 11-6 draw a figure showing peak-load pricing when substitution in consumption is
taken into consideration. (b) Is the benefit of peak-load pricing greater or smaller when substitution in
consumption is taken into consideration than when it is not? Why?
(a)
When substitution in consumption is taken into account, with peak-load pricing, the off-peak demand will be
higher and the peak demand will be lower as compared with the case where substitution in consumption is not
taken into account. This is shown by D 0 o and D 0 p, respectively, in Fig. 11-5.
Fig. 11-6