N6

A utility has a monopoly on the sale of electricity to consumers. Its marginal costs of generation are increasing. In addition to generating power itself, the utility purchases power wholesale from a competitive industry with a rising supply curve. The wholesale price is set by the state Public Utility Commission at pw. The retail price of power is not regulated. The utility incurs variable transmission and distribution costs of t for each unit of power sold at retail to consumers. The market demand curve for retail electricity is downward sloping. You should assume that the monopolist is the only buyer of electricity from the regulated wholesale market and that the monopolist always buys all the electricity generated by the wholesale market.

a. Write down a system of equations which characterizes equilibrium in the wholesale and retail power markets. Calculate the following comparative statics results:

b. The effects of increases in t and on the amount of power the utility generates.

c. The effects of increases in t and w on the retail price.