Generator 1 has 140 MW capacity and its marginal cost is $80/MWh. Generator 2 has 220 MW capacity and its marginal cost is $130/MWh. The inverse demand curve is: P = 465 - 0.7Q.

a) Draw the supply curve and the inverse demand curve.

b) At what price does supply = demand?

c) Identify on the graph the Consumer Surplus (CS), the Producer Surplus (PS), and the Scarcity Rent (SR). What is the total scarcity rent?

d) Some people argue that we should not allow for scarcity rents (a market clearing price that is higher than the largest supplier bid), and that instead the price should never exceed the largest supplier bid. What do you think, should we allow scarcity rents? Explain.