PART C

Moving a nations source of power from fossil fuels (such as coal) to clean energy sources (such as solar) can reduce carbon emissions. Suppose the price of a unit of coal (PC) is $50 and the price of a unit of solar (PS) is $30. A representative power plant can use a mixture of coal and solar inputs to produce one unit of electricity. The power plant has two types of technologies available to them to produce one unit of electricity:

Q8. Assume that the power plant uses no other inputs in its production process. Question 8 Calculate the production costs required for the two types of technology to produce one unit of electricity. Show your workings. Which technology would the power plant choose? [2 marks] [max words: 100]

Q9. Using an isocost diagram, model a change in relative prices that would incentivize a shift in technologies from the choice you indicated in your answer to Question 8. On your diagram, be sure to state the new prices and include all isocost lines (before and after the change in prices). Label the intercepts and slopes of the isocost lines and show the resultant choice of technologies, along with their associated quantities before and after the change in prices. Calculate the innovation rent that arises due to this switch in technologies, show your working. [10 marks] [max words: 100]

Technology A Technology B Coal (C) 10 units 3 units Solar (S) 2 units 20 units