1. Wholesale electricity markets Suppose there are two types of consumers, 1 and 2. The electricity demand curves are: 91 = 10-2p 92 = 10-2p, where 91 and 92 are the amounts of electricity they consume and p is the price of electricity (both consumer types pay the same price). 1.1 Find an equation that contains the total amount of electricity, q = 91 + 92, as a function of the price. Hint: Add together the two demand curves above and express q as a function of p. There are two generators, A and B, which have marginal costs of mCA = 1 and mc = 2. Generator A has a maximum capacity of 10, and generator B has a maximum capacity of 5. Assume that one firm (A) owns generator A and a second firm (B) owns generator B. 1.2 Draw the demand and supply curves on a single diagram. Note: you can just show the total demand curve from 1.1, rather than the curves for each type. 1.3 If both firms submit bids equal to their marginal costs up to their maximum capacity, what are the equilibrium price and quantity? How much electricity does each consumer type purchase? How much electricity does each generator produce? 1.4 Suppose that instead of bidding its marginal cost, firm A submits a bid for generator A that is 1.5 rather than its marginal cost. How does this bid affect equilibrium price and quantity? How does it affect firm A's profits? Hint: remember that A's actual marginal costs are 1, not 1.5, but the system operator constructs the supply curve based on the bids rather than the actual marginal costs. 1.5 Suppose that instead of bidding its marginal cost, firm A submits a bid for generator A that is 2.5. What are the equilibrium price and quantity? How does this bid affect firm A's profits? 1.6 Based on your answers to 1.4 and 1.5, what are firm A's incentives to submit bids that are different from its marginal costs?