Electricity is supplied competitively by two types of firms. The first type of firm has a very efficient (i.e., low-cost) form of power generation; this component of the market (which consists of dozens of competitive producers) will supply up to 10 Million megawatt hours (MMH) per day at a price of 1 per MMH. At any lower price, this market segment will supply nothing, but due to capacity constraints, a higher price than 1 will not produce greater supply than 10 MMH. [Hint: the supply curve for this segment is horizontal to 10 MMH, and then it becomes vertical.] The second segment of the market is less efficient, but similar in form. In aggregate, it will supply up to 5 MMH at a price of 2 per MMH. At any lower price, the inefficient segment will not supply any electricity; at a higher price than 2, this segment will only supply 5 MMH due to capacity concerns.

(a). Graph the markets aggregate supply curve carefully labeling the points of interest on the curve. At a price of p = 1/2, how much is supplied by the market? At a price of p = 3/2, how much is supplied? At a price of p = 3, how much is supplied? (b). Suppose that the market demand curve for electricity is given by P(Q) = 16 Q. What is the equilibrium price in this market? [Hint: graph the supply and demand curves rather than using algebra.] How much does each segment of suppliers produce at this equilibrium? (c). Suppose that government regulation forces the closure of all the inefficient plants due to pollution problems. What is the new equilibrium price and quantity?