A region is supplied with electricity from wind and natural gas generation through the grid. There is an effective daily generation output capacity (readily available (think of it as dispatchable)) of 25 MWh of wind and 35 MWh of natural gas. The daily fixed installed capacity cost of wind is $ 1000 and for natural gas total fixed capacity cost is $ 350. Wind can produce at a constant marginal cost of $ 0 while natural gas can produce at a constant marginal cost of $ 40 per MWh used in generation (you dont need to worry about total production per year or in hours per year). The total cost for the installed wind capacity, therefore, is TCwind=1000 and for the installed NG capacity TCNG=350+40Q. There is a daily demand for electricity Q (in MWh) equal to: p=300-5Q, where Q=MWh of electricity, and p=$/MWh.

1. If there was a competitive electricity market with a competitive bidding process what would be the equilibrium price, quantity supplied in MWh and the production by wind and natural gas in the short term? What would be the profit for wind and natural gas? (6)
2. What would be a possible long term outcome in this electricity market? (4)
3. Now assume both producers compete as Cournot duopolists. What is the market price and the quantities supplied by each technology? What are each technologies profits under this model? (8)
4. What if the two producers of electricity colluded in the bidding process? What is a likely outcome in terms of electricity output and profits? What could go wrong in achieving that outcome? Explain. (6)
5. Assume a vertically integrated utility acquired both electricity generators with their capacity. How would the utility charge for electricity if they followed a uniform average cost price, and how much would each generation source produce under this model? (6)