Question

Question 1

1. (From previous semester's final exam) Consider the market for solar power. Assume the

market is perfectly competitive and initially in long-run equilibrium; solar power sells

for $.25 per kwh (kilowatt hour, a unit of power).

a. Draw 2 graphs, one to represent the market (supply and demand), and one to

represent a single firm (demand, marginal cost, and average cost curves). Assume

a u-shaped average cost curve. Show the equilibrium price and the quantity

produced by the market (Q) and by each individual firm (q).

b. Next, to encourage conservation, Congress taxes all forms of energy EXCEPT

solar power, causing an increase in the demand for solar power. Show what

happens to the market and the firm in the short run; indicate clearly what happens

to price, quantity, and profit.

c. What happens to the market and the firm in the long run? Indicate clearly what

happens to price, quantity, and profit, for each the market and the firm.