Managerial Economics Case Study Solution
The above mentioned graph is shown the elastic, inelastic and unit elastic conditions of electricity demand. In which, it has been found that when the price of electricity will be 2 dollars then the demand for electricity will be unit elastic.In short, it will increase with the same percentage even after the electricity price decreases. While the price level form 4 to 2 dollars are elastic,which means the demand will increase with more percentage as with electricity price will decrease, and the price level form 2 to 0 dollarsare inelastic,which means the percentage change in demand is less than the percentage change in the price of electricity.(Agarwal, 2019).
Q = 500 – 1000 P + 0.4 *10000 – 500*1
Q = 4000-1000P
E = (- 1000*P)/Q
When P = 2, Q = 2000 and E = 1
In second last step, the marginal revenue graph has been drawn to find the optimal quantity level, consumer surplus (CS), producer surplus (PS), total surplus (TS) and optimal price level by using the average income level of 10,000 dollars and the price of water is 1 dollar. The optimal price for electricity has been found through marginal revenue and marginal cost function which derived the optimal price of 2.5 dollars to maximize the profit for the national electricity company during monopoly with the total quantity demanded of 1500 units of electricity.
Q + 4000-1000 P
P= 4000-Q
1000=4 Q
1000
TR = P*Q = (4-Q/1000)* Q = 4 Q
MR + 2TR/2Q = (2 (4Q – (Q2/1000)))/2Q = 4 – (2Q/1000)
MR = MC
4-(2Q/1000) =1
Q/500 = 3
Q Max= 1500
P= (4000-1500) 1000 = 2.5
Total surplus is the combination of consumer surplus and producer surplus. For which, there is a need to find out the consumer and producer surplus by considering the monopoly situation of national electricity company which is 1125 dollars and 2250 dollars respectively, which shows the total surplus of 3375 dollars. In this situation, the producer surplus is higher with consumer surplus that shows the national electricity company derives more benefit here as compared to the customers benefit from electricity. While in competitive market the consumer and producer surplus for national electricity company will be 4500 dollars (total surplus) and 0 dollar respectively, which shows that in such a competitive market, the national electricity company would not derive any benefits as compared to the customers benefit from electricity, because there are some other providers of electricity,whoare providing the same product (substitute)as national electricity companyis providing.(Thampapillai, 2010).
In a competitive market; the optimum price level will be shifted to 2.5 dollars to 1 dollar along with the shift pf total quantity demanded from 1500 units to 3000 units of electricity, because the marginal cost to produce an additional one unit is 1 dollar for the company (Chang, 2010).
Subjective Summary:
After analyzing that the water and electricity are complementary goods and a decrease in water prices will increase the electricity consumption and an increase in average income level will increase the consumption of electricity, as an in-charge of the strategic pricing department of the national electricity company, it will help to summarize that the price range of electricity must be between 2 to 4 dollars, because here the demand is elastic which will increase the electricity demand with more percentage if the electricity price decreases. By using this price range, the optimum price level at which the national electricity company will maximize its profits, should be 2.5 dollars……..
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