Question

Question 22 10 pts Suppose that an electricity provider would build a power plant at the cost of $50 million. Once the plant is built, it would cost the plant $0.07 per kilowatt hour of electricity that it produces. Over its lifetime, the plant is expected to generate 100 million kilowatt hours. Suppose that the regulators believe that the investors who put up capital to build the plant should be able to recoup its investment plus a 300% return throughout the life of the plant. Calculate the price per kilowatt hour that the regulators should allow the plant operators should charge.

Answer 1

Fixed cost of building power plant =50,000,000

Variable cost associated with producing electricity = 0.07x ,where x is the number of kilowatt hours of electricity it produces

x = 100,000,000

Variable cost = 0.07(100,000,000) = 7,000,000

Total cost to investors = Fixed cost + Variable cost = 50,000,000 + 7,000,000 = 57,000,000

The regulators want the investors to receive their initial investment as well as 300% return

Therefor, Amount to be recouped/ Profit = Total cost + Additional Profit

Amount to be recouped/ Profit = 57,000,000 + 300%(57,000,000) = 57,000,000 + 171,000,000 = 228,000,000

The price that should be allowed by the regulators can be calculated as follows

We know that

Profit = Total revenue - Total cost

Since we have already incorporated the total cost in profits

Profit = Total revenue = Price * Quantity

Price = Profit/ x = 228,000,000/100,000,000 = 2.28

The price of $2.28 should be charged.