The managers of two solar power companies Photon Energies and Aditya Power are deciding

to set up solar power plants in Ladakh. The only source of electricity in Ladakh is solar power

and the market demand for electricity is P = 100 Q , where P is the price per MW and Q

is the demand for energy in MW. You have been hired by Aditya Power for consulting on the

capacity of their plant. Aditya Power has already received the necessary government permissions,

and their plant is going to come up before Photon's plant. However, both the company

will start their production at the same time. Production is completely determined by initial

capacity choice and price of energy is determined by the market. While building the capacity

is expensive, per MW cost of producing solar energy is only |20 for both the firms.

(a) What is the reaction function for Photon Energies? [2 points]

1. Best Response function for Photon Energies is qP = 40 1

2qA

2. function for Photon Energies is qP = 80 3

2qA

3. function for Photon Energies is qP = 40 14

qA

(b) How much capacity should you advice Aditya Power to build? [2 points]

1. 60 MW

2. 50 MW

3. 40 MW

4. 20 MW

(c) What is the capacity choice of Photon Energy in equilibrium? [2 points]

1. 30 MW

2. 25 MW

3. 20 MW

4. 10 MW

(d) What is the equilibrium price of solar energy in the market. [2 points]

1. Rs. 50 per MG

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Indian School of Business Managerial Economics, 2019-20

2. Rs. 40 per MW

3. Rs. 30 per MW

4. Rs. 20 per MW

(e) In equilibrium how much profit each firm earns? [2 points]

1. Aditya Power's profit is Rs. 1200 and Photon Energy's profit is Rs. 600

2. Aditya Power's profit is Rs. 1000 and Photon Energy's profit is Rs. 750

3. Aditya Power's profit is Rs. 800 and Photon Energy's profit is Rs. 400

4. Aditya Power's profit is Rs. 900 and Photon Energy's profit is Rs. 500