In market A, there is 500 MW of generation capacity: 300 MW has an incremental production

cost of $20/MWh and 200 MW has an incremental production cost of $35/MWh. In market

B, there is 1000 MW of production capacity, all of which has an incremental production cost of

$30/MWh. In a given hour, the demand in market A is 400 MW and the demand in market B

is 700 MW, both completely price inelastic.

2.1: (5 points) During this individual hour, what would be the social value (total surplus)

created by a transmission line between the two markets (with a very large capacity, e.g.

2000 MW) if there were no price charged for using the line?

2.2: (5 points) During this individual hour, what would be the social value created by a

transmission line between the two markets (with a very large capacity, e.g. 2000 MW) if

there were a postage stamp transmission charge of $7/MWh?

2.3: (5 points) If the capacity of the line were only 70 MW, and the system were operated

under efficient congestion pricing, what would be the price difference between market A

and market B during this hour?