Assume for the sake of simplicity that capital purchased at the beginning of the year can be sold at the end of the year for the same price. Further assume there are 8760 hours in a year. The outside opportunity/economic cost of capital is 8.76% per year. A firm can either produce electricity using solar at a cost of $10,000 for each kilowatt of capacity and a constant marginal cost of $0.01 per kilowatt hour or they can produce using natural gas at a cost of $1,000 for each kilowatt of capacity and a constant marginal cost of $0.10 per kilowatt hour. In the following problems assume that you buy the capacity at the start of the year and sell it at the end of the year.

a. What is the fixed cost of producing one kilowatt constantly for the entire year for each method? What is the average fixed cost for each method with this quantity?

b. What is the variable cost of producing one kilowatt constantly for the entire year for each method? What is the average variable cost for each method with this quantity?

c. What is the total cost of producing one kilowatt constantly for the entire year for each method? What is the average total cost for each method with this quantity?

b. What is the average total cost of producing one kilowatt half the time for each method (think of the capacity being used for 12 of every 24 hours)? What is the average total cost for each method with this quantity?