ECON 132 Energy Economics Mid Term exams

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There are five past exams, and only do the part A,B,C for each exam.

Name _______________________ Student Number______________ W2013 Econ 132: Mid Term Exam 2 (89 Points Total) A. Fill In The Blank (May Require More Than One Word) [20 Points] 1. The ___________________ standards put in effect by President Carter caused an increase in the _____________________________________ that passenger vehicles got. 2. What type of renewable energy source is best suited for providing base load power? _________________________________ 3. All U.S. states have _____________________________________ commissions to regulate privately held electric power companies because they were perceived to be ____________________ monopolies. 4. The name of the nuclear power plant owned by Pacific Gas and Electric is_______________________. 5. In addition to different types of air pollution, two of the main negative externalities from motor vehicles are ______________________________ and ________________________________. 6. The part of the transportation sector that experienced a large increase in fuel usage after it was deregulated during the 1970’s was ____________________________________________. 7. The _______________________effect suggests that a regulated electric utility receiving an above market rate of return will over‐invest in capital intensive ways to generate electricity. 8. The United States in recent years has seen sizable decreases in the price of natural gas (and sizable increases in its use). What technological innovation is responsible for driving down the price of natural gas? ____________________________________________________________ 9. Which component of an electrical system has been the main focus of deregulation efforts? _____________________________________________________ 10. The _____________________________________(FERC) failed to initially place a wholesale price cap on interstate sales of electricity during the California Electricity Crisis of 2000‐2001. 11. Federal, state and local government agencies subsidize _____________________________________________________. motor vehicle travel by 12. The political representatives from the _____________________________ region of the United States often oppose subsidies for electricity generated by wind because their region generally lacks good locations with enough wind to turn large wind turbines. 13. The load profile for an electric utility on a daily basis is usually divided into three parts: (a) base, (b) _________________ and (c) _____________________. 14. Economists often favor a _______________ tax swap whereby one type of tax such as the gasoline tax is increased and another type of tax reduced so the overall amount of taxes paid stays the same. 15. A very high degree of ___________________________ in an electric system will result in very high prices for customers because it involves a large amount of ____________________ that is rarely used. `1 B. Multiple Choice Questions [10 Points] 1. The Interstate Highway system in the United States was started in: (A) 1936 (B) 1946 (C) 1956 (D) 1966 2. The technology/fuel usually used to generate electricity for very short term demand is: (A) Coal (B) Hydro (C) Natural Gas (D) Wind 3. Which country do economists believe has closest to the correct tax on gasoline for the United States? (A) Australia (B) Canada (C) United Kingdom (D) Venezuela 4. A nuclear power plant currently runs at a capacity of 74%. Engineers determine how to increase its capacity to 79%. If this were done, which of these numbers best describes how much profits from operating the plant would likely increase? (A) 0.5% (B) 2.5% (C) 5.0% (D) 17.0% 5. The largest negative externality from motor vehicles in most large cities is: (A) Traffic accidents (B) Time lost from traffic congestion (C) Global air pollutants (D) Health effects of local air pollutants 6. The Rural Electrification Program (REA) was initiated by which president? (A) Roosevelt (B) Eisenhower (C) Nixon (D) Carter 7. A combined cycle gas turbine (CCGT) greatly increases its thermal efficiency by: (A)Using heat from the gas turbine in a steam turbine (B) Generating alternating rather than direct current (C) Using a wind turbine to boost electrical output (D) Super cooling the transmission line from the CCGT plant 8. Under which of these conditions is a power generator most likely to have substantial market power: (A) nuclear plant down for repair, high temperatures (B) early mornings in the spring (C) large new CCGTs open, natural gas prices falling (D) hot summer day in LA, cool day in Las Vegas 9. In the United States, nuclear waste from power plants are stored in (A) Yucca Flats, Nevada (B) Deaf Smith, Texas (C) in cooling ponds at each plant (D) lead containers shipped to France 10. Better forecasting of the demand for electricity at each point in time helps to: (A) Decrease the risk of blackouts (B) Decrease the need for spinning reserves (C) Reduce costs (D) All of the above (A, B and C) `2 C. TRUE or FALSE [12 POINTS] 1. The Three Mile Island nuclear disaster in the United States killed more people than the Fukushima nuclear disaster in Japan. (A) TRUE (B) FALSE 2. Transportation uses about 40% of the energy consumed in the United States (A) TRUE (B) FALSE 3. Having a state public utility commission set a renewable portfolio standard of 30% by 2020 will likely cause a decrease in the price of electricity in that state. (A) TRUE (B) FALSE 4. Only 30% of the price of gasoline at a gas station goes to the owner of the well that produced oil from which the gasoline was refined. (A) TRUE (B) FALSE 5. In most industrialized countries, the amount of electricity produced by hydroelectric dams is likely to see large increases during the next decade because this source of electricity does not emit carbon dioxide. (A) TRUE (B) FALSE 6. Electricity produced by publically owned utilities on average is less expensive for residential customers than power produced by IOUs. (A) TRUE (B) False 7. The reason why renewable sources of electricity generation, like wind and solar, do not account for more than 10% of U.S. electricity generation is because these sources are characterized by high fixed cost and high variable costs. (A) TRUE (B) FALSE 8. Demand for electricity as a function of temperature often follows a J shaped relationship in places where natural gas is used for most heating needs. (A) TRUE (B) FALSE 9. To induce households to install solar panels, large government subsidies are typically needed. (A) TRUE (B) FALSE 10. Increasing the gasoline tax is often viewed as regressive. One common way to offset this problem is to reduce another tax like the capital gains tax. (A) TRUE (B) FALSE 11. States that had electricity prices much higher those in neighboring states were typically the most supportive of taking actions to restructure their large investor owned utilities. (A) TRUE (B) FALSE 12. Oregon is the state with the largest amount of installed wind turbine capacity. (A) TRUE (B) FALSE `3 D. Quantitative Problems (32 points, 2 points each including subparts) 1a. There is a geothermal plant in Imperial County that can sell electricity to San Diego Gas and Electric. The geothermal plant has an annual cost function for producing electricity of 3,000,000 + .02q + .0000001q2, where $3,000,000 is the annual fixed cost the company has for leasing the land and q represents the amount of electricity produced during the year. If San Diego Gas and Electric is prepared to pay $0.40 per KWh for the electricity, write down the equation that represents the profits to the company that operates this geothermal plant for a year. 1b. Derive the first order condition that holds when profits are maximized. 1c. If some electricity from the plant is produced, then the project operator will maximize profits by producing how many KWh of electricity a year? 1d. Should the company produce any electricity from the plant under the conditions of 1a? Briefly explain your answer in economic terms. 1e. What is the most that the company should be willing to pay to lease the land under the conditions of 1a (other than the fixed cost of leasing the land), if it does not want to lose money? 1f. How much profit would the company make if the price that San Diego Gas and Electric paid for electricity was $1.40 per KWh rather than $0.40 per KWh and the other conditions were the same as 1a? `4 2. If the California PUC believes the price elasticity of demand for electricity in the early evening on a normal fall day is ‐.20, then how much do they believe the price of electricity has to increase in order to get a 10% reduction in demand? 3a. Your apartment has been using 500 kWh per month and the price of electricity is $0.30 per kWh. Your short‐run price elasticity of demand is ‐0.20, how much electricity will you consume next month If the price per kWh increases to $0.50 per kWh? 3b. Briefly explain in economic terms why your new electric bill is greater than $150 per month and less than $250 per month. 4. A wind turbine capable of producing 2 MW of power in an hour under optimal wind conditions, produces how much power during a one year period if it operates at an average capacity factor of 30%? 5a. The Georgia Public Utility Commission has determined the rate of return (r) for an investor owned utility should be 10%. The PUC has also determined that the capital base (B) for the utility is equal to $10,000,000. If the cost function for generating power is 2,000,000 + .06q where $2,000,000 is the fixed cost and .06 is the marginal cost for generating electricity (the usual quadratic term has been dropped to make the problem easier). Write down the standard equation for setting revenue (left hand side) equal to the cost of generating the electricity plus the return to the capital base. Let the price of electricity set by PUC be represented by p. 5b. There are two unknowns in the equation you wrote down in (2a), q and p. Briefly explain in economic terms why there is really only one unknown in the (5a) equation and note which of these two variables is typically “set” by the PUC. `5 6. Two electric power generators serve Perth Australia, which is a city isolated from the rest of Australia’s power grid. They cannot legally talk with each other when determining what price they will charge for electricity and how much electricity to produce. The price function is 120 – .02q1 – .02q2, where q1 is the amount of electricity sold by power generator 1 and q2 is the amount of electricity sold by power generator 2. The cost function for power generator 1 is 800 + .06q1 + .0002q12. The cost function for power generator 2 is 400 + .04q2 + .0002q22. a. If the two power generators act as a Cournot duopoloy, how much electricity will be produced by generator 1 and by generator 2? b. What is the price charged in Perth for electricity? c. In what direction would the price of electricity in Perth change if firm 1’s cost function changed to 800 + .08q1 + .0002q12? Briefly explain the economic intuition behind your answer. d. In what direction would the amount of electricity produced and the price charged changed if a new power generator entered the market with the cost function 500 + .05q + .00015q2? `6 E. Short Answer (15 points, 5 points each question) 1. Briefly discuss the major implications over time of the government setting different fuel economy and safety standards for automobiles versus light trucks. 2. Draw a graph for an investor owned natural gas utility with a demand curve, a marginal revenue curve, a marginal cost curve, and an average total cost curve. Label the price and quantity that would result if the company acted like a monopolist, PM and QM. Label the competitive market result, PC and QC. Label the best (from the consumer’s perspective) feasible solution that a regulatory agency’s actions can help to achieve, PF and QF. Why is the competitive market solution not feasible? `7 3. California’s attempt at deregulating its electricity sector essentially bankrupted the state and resulted in the recall of Governor Gray Davis. Explain why Davis’ refusal to raise electric prices paid by consumers played a major role in the degree of market power which the power generators exercised to raise wholesale prices and the effective bankruptcy of California’s three major investor owned utilities. Scratch Space For Calculations `8
Name _______________________ Student Number______________ W2012 Econ 132: Mid Term Exam 2 (89 Points Total) A. Fill In The Blank (May Require More Than One Word) [20 Points] 1. A barrel of oil is refined into different products. The second largest fraction after gasoline is ___________________________________. 2. _______________________________is the nuclear power plant owned by Southern California Edison. 3. In 1975, approximately 20% of passenger vehicles were classified as light trucks. Currently that fraction is around ___________%. 4. CAFE stands for _____________________________________________________________________. 5. Roughly what percentage of states has mandatory renewable energy portfolio standards? _______% 6. The State of ____________________ is the location of very large deposits of natural gas in shale and there is considerable controversy there over the use of ______________________ to remove it. 7. The Interstate Highway System was started in 1956 by what U.S. President? _____________________ 8. The per gallon gasoline tax in many European countries like Germany and the United Kingdom is _________ times higher than the average gasoline tax in the United States. 9. Any energy source that can turn a turbine can generate __________________________. 10. The investor owned utility (IOU) that went bankrupt during the California Energy Crisis was ________________________________________________. 11. Setting the price of heavy rail (subway) tickets equal to the marginal cost of providing service generally implies the government will need to provide a ___________________ to the subway operator. 12. The California electricity crisis could have been avoided if the State of California ____________________ imposed a price cap on what consumers could be charged or if FERC ___________________ imposed a price cap on wholesale electricity sales. 13. Electric power demand as a function of temperature resembles the shape of which letter of the alphabet: ___________. 14. An industry which is characterized by a declining marginal cost curve over the entire range of potential market demand is considered a ______________________________________ by economists. 15. The part of the electric system that is thought by economists to be most capable of being successfully deregulated is _________________________________. 16. Does automobile or mass transit generally receive larger subsides from the government? ___________________________________________ 17. What part of the United States has the highest potential for generating wind power? ____________________________________ 18. Natural gas and oil prices in the United States have traditionally moved up and down together. Briefly note what they have been doing recently. _____________________________________________ `1 B. Multiple Choice Questions [10 Points] 1. The nuclear reactor accident that did the most harm to people was: (A) Chernobyl (B) Fermi (C) Fukushima (D) Three Mile Island 2. The most economically efficient way to reduce traffic congestion in San Diego would be to: (A) Increase gas tax (B) Increase car pool lanes (C) Charge peak hour tolls (D) Reduce trolley frequency 3. Which of these describes the amount of power produced by a large nuclear or coal facility: (A) 1000 KW (B) 250 MW (C) 2000 MW (D) 2500 MW 4. If these power generators are all capable of producing electricity, which is most likely to be called upon to provide electricity by the grid operator when demand is very low: (A) coal fired power plant (B) natural gas peaking unit (C) solar thermal (D) wind 5. The president who stopped the planned increase in the vehicle fuel efficiency standard that had been put in place by President Carter was: (A) Bush (Sr.) (B) Clinton (C) Reagan (D) Roosevelt 6. California governor who was impeached for his role in the California electricity crisis: (A) Brown (B) Davis (C) Schwarzenegger (D) Wilson (7) The Aversh‐Johnson effect suggests that a regulated electric utility receiving an above market rate of return from the PUC will over‐invest in: (A) natural gas peaking plants (B) pollution control equipment (C) low sulfur coal (D) All three [A, B, C] (8) A nuclear power plant has a current capacity of 78%. Engineers determine how to increase its capacity to 81%. Which of these best describes how much profits at the plant are likely to increase from this action: (A) 0.4% (B) 0.8% (C) 1.6% (D) 16% (9) Under which of these conditions is a power generator most likely to have substantial market power: (A) nuclear plant down for repair, high temperatures (B) late night time, high wind conditions (C) large new CCGTs open, natural gas prices falling (D) hot summer day in LA, cool day in Phoenix 10. Main obstacle(s) to achieving large scale reductions in CO2 by building nuclear power plants: (A) high construction cost (B) lack of political solution to long term waste disposal (C) public fear (D) All three [A, B, C] C. TRUE or FALSE [12 POINTS] 1. The Nuclear Regulatory Commission (NRC) recently approved the Tennessee Valley Authority to build a new nuclear power plant. (A) TRUE (B) FALSE `2 2. The amount of diesel fuel consumed by commercial long haul trucks dramatically increased as a result of deregulation. (A) TRUE (B) FALSE 3. The original U.S. highway system was designed primarily for military purposes. (A) TRUE (B) FALSE 4. A standard approach to reducing grid transmission losses in California is to build a solar thermal plant in the desert. (A) TRUE (B) FALSE 5. States with electricity prices that were considerably below the average U.S. price for electricity were the most strongly supportive during the 1990’s of deregulating electric power generation. (A) TRUE (B) FALSE 6. A standard use of a large nuclear power plant is to provide backup power for when electrical output from solar generators fails due to clouds. (A) TRUE (B) FALSE 7. A combined cycle gas turbine (CCGT) has substantially higher thermal efficiency than a regular natural gas fired power plant. (A) TRUE (B) FALSE 8. Carbon sequestration is a low cost proven technique for reducing the carbon dioxide emissions from coal fired power plants. (A) TRUE (B) FALSE 9. Energy consumption by the U.S. industrial sector has been rapidly increasing over the last decade. (A) TRUE (B) FALSE 10. A state that requires utilities to substantially increase the fraction of electricity being generated by renewable resources is likely to see substantial decreases in the average electric bill paid by households. (A) TRUE (B) FALSE 11. A large part of a household’s electric bill typically goes to pay for generating equipment that often only runs a few hours a day and on many days is not used at all. (A) TRUE (B) FALSE (12) Just over 10% of U.S. electricity generated comes from solar (photovoltaic & thermal). (A) True (B) False `3 D. Quantitative Problems (32 points, 2 points each including subparts) 1a. An off‐shore wind farm north of San Francisco has been proposed. The wind farm project has been offered a contract to sell as much electricity as it produces at a fixed price of $0.30 kwh. The project’s annual cost function for producing electricity is 2,000,000 + .015q + .0000001q2, where 2,000,000, the annual fixed cost represents the payment on the loan to build the wind farm if it is built. Write down the equation for profit maximization and the first order condition for profit maximization. 1b. The project operator will maximize profits by producing how many kWh of electricity a year? Briefly explain your answer. 1c. Write down the new first order condition with respect to profits if the fixed price the project receives of electricity changes to $0.50 per kWh assuming the other parameters in part (1a) remain the same. What number of annual kWh maximizes profits? 1d. How would the amount of electricity that it was optimal to sell in part (1a) change if the coefficient on the quadratic part of the cost function changed from .0000001 to .0000002? 1e. How much electricity would it be optimal to sell annually under the conditions of (1a) except that the fixed cost for the offshore wind farm is reduced from $2,000,000 to $200,000 due to a major technological advancement related to the construction of offshore wind farms? `4 2a. The Colorado PUC uses the standard formula, pq = Expenses + sB, to regulate an investor owned utility. The PUC’s engineering cost formula for determining expenses is 4,000,000 + .05q, where $4,000,000 is considered the annual fixed cost and .05 is the marginal cost of coal for generating electricity. The PUC has assumed the value, B, of the coal plant and the distribution system is equal to $30,000,000 and the PUC has decided s=.08 equals the fair market rate of return that the utility is entitled to. Approximately, how much electricity was the PUC forecasting the utility would sell when setting the price of electricity at $0.25 kWh? 2b. Would the Colorado PUC have been assuming that the amount of electricity being sold was larger, the same, or smaller than in 2a if it had assumed the value of s was equal to .07 instead of .08, assuming none of the other parameters in 2a change? 2c. If the cost of generating electricity increases in the sense that the coefficient on q in the engineering cost function suddenly rises from .05 to .08 due to the price of coal increasing, what (qualitative) action is the Colorado PUC likely to take? 3. A power plant running at 15% capacity produces 3 MW of power. What is the plant’s maximum capacity? If there are no maintenance problems with this plant, what type of plant is it likely to be? 4. There are 1 billion VMT in a small town. If the long run price elasticity of VMT is ‐.2, how many VMT should the city expect if fuel costs go up by 80%? `5 5. The Arizona PUC’s chief economist has testified at a commission hearing that if electric prices on very hot summer days went up by 60% that demand for electricity by residential households would fall by 30%. What price elasticity does this economist believe holds for electricity demand for residential households on hot summer days in Arizona? 6. Two natural gas power plants generate electricity to sell to the market. These generators act as a Cournot duopoly. Generator 1 faces the cost function 500,000 + .5q1 + .005q12, where q1 is the number of megawatts of electricity it sells. Generator 2 faces the cost function 750,000 + .4q2 + .002q22, where q2 is the number of megawatts of electricity it sells. Both generators face the market price p = 3,000 ‐ .3q1 ‐ .3q2. 6a. How many megawatts of electricity will firm 1 sell? 6b. What will the market price be? 6c. Which generator will be more profitable? 6d. What would happen to q1 and q2 if generator 1’s fixed cost increased from 500,000 to 750,000? 6e. Assuming generator 1’s fixed cost remains changed to 750,000, how would your answer to part (6c) change? `6 E. Short Answer (5 points each) 1. California deregulated power generation by requiring investor owned utilities to sell off their fossil fuel power plants to other companies. Explain why letting companies purchase multiple fossil fuel plants helped lead to the California electricity crisis. Briefly note how California solved its electricity crisis and its relationship to the problem created by allowing companies to purchase multiple power plants. 2. Note briefly three reasons why it would be desirable to raise the tax on motor vehicle fuels. Note one of the main potential problems with raising fuel taxes. Speculate as to the main reason that the U.S. has not raised its fuel tax while other industrialized countries have. `7 3. Briefly describe the forces behind this graph. `8
A B C D E Total Student Name__________________________/Number ____________ Econ 132: Mid Term Exam 2 (Winter 2014) [80 Points Total] A. Fill In The Blank (May Require More Than One Word) [20 Points] 1. The two renewable energy sources that generate the largest amount of electricity in the United States are hydro power and _______________________ . 2. Define a Negawatt: _________________________________________________________________. 4. The interstate highway system in the United States was started by President ___________________. 5. A component of an electrical system that was not the focus of recent efforts to deregulate the electricity sector is ______________________________. 6. The main difference between Chernobyl and nuclear reactors used for generating electrical power in Japan and the United States is ____________________________________________________. 7. A PUC dominated by consumer interests will tend to set the rate of return __________________ , which will induce the investor owned utility to build fewer new power plants than are needed. This is the reverse of the _____________________________ effect whereby utilities invest too much money building capital intensive power plants. 8. If demand substantially exceeds supply on an electric grid a _______________________ will happen. 9. Two local air pollutants that motor vehicles are largely responsible for are: (a) __________________ and _____________________. 10. Governor _____________ failed to solve California’s electricity crisis in 2001 because he refused to allow electricity prices paid by consumers to _________________. 11. The quantity of electricity produced by U.S. nuclear power plants has steadily increased over time, even though no new plants have been built, because their _____________factor has gone up over time. 12. Time of day pricing is useful for an electric utility because it can help reduce ____________ demand. 13. California’s San Onofre nuclear power plant that had an installed capacity of approximately _____________MW recently was permanently shut down. Its installed capacity is being largely replaced by what type of power source? _______________________ 14. Economists tend to favor ________ externalities rather than using ____________________ policies. 15. ____________________ is a controversial technique used to extract natural gas from shale that has substantially reduced its price. As a result, plans to build new _____________________ power plants have been abandoned in favor of building power plants that use natural gas. `1 B. Multiple Choice Questions [10 Points] 1. The U.S. gas tax is thought to be too low by most economists. Which country’s gas tax would economists believe is closest to what the U.S. should have? (A) Canada (B) Germany (C) Kuwait (D) Mexico 2. Which two sources of electric power have accounted for most of the new installed capacity in the United States during the last five years? (a) geothermal and solar (b) biomass and nuclear (c) hydro and batteries (d) natural gas and wind 3. The largest amount of wind power is installed in: (A) Florida (B) New York (C) Rhode Island (D) Texas 4. In terms of capital cost per MW of electricity power, which of these sequences are ordered from highest to lowest cost? (A) CCGT, Nuclear, Wind (B) Solar, Coal, CCGT (C) Hydro, Wind, Solar (D) Coal, Geothermal, CCGT 5. Increasing the reliability of an electrical system from 99.6% to 99.7% will change the cost per KWh by: (A) less than 0.1% (B) about 0.1% (C) between 0.3% and 0.4% (D) greater than 0.4% 6. When a PUC sets the rate of return on an investor owned utility, it is effectively setting: (A) price of electricity (B) maximum price paid for natural gas (C) price paid for coal (D) investment in renewable energy portfolio 7. Bonneville Power Authority (A) is a rural electric cooperative (B) is located in Tennessee (C) sells power form coal plants (D) sells power from large hydro dams 8. The overall peak demand for the electric utility serving Dallas Texas will usually occur about: (A) 5 pm in the summer (B) 9 pm in the winter (C) 8 am in the winter (D) 9 pm in the summer 9. An example of a demand side management strategy that reduces demand during all parts of the load profile during a day is: (A) interruptible load program (B) better forecasting of peak demand (C) time of day (real time) pricing (D) minimum efficiency standards for refrigerators 10. Thermal efficiency in a combined cycle gas turbine is greatly increased by: (A) generating alternating rather than direct current (B) using a wind turbine to boost output (C) using heat from the gas turbine in a steam turbine (D) super cooling the transmission line `2 TRUE or FALSE [12 POINTS] 1. Under President Reagan the corporative average fuel efficiency (CAFE) standards were made substantially more strict resulting in a large increase in the average miles per gallon (mpg) of new cars and light trucks that were sold. (A) TRUE (B) FALSE 2. The U.S. is currently shipping nuclear waste from its nuclear power plants to Iran for processing. (A) TRUE (B) FALSE 3. One of the main factors that encouraged urban sprawl in California was the interstate highway system because it went through the middle of cities. (A) TRUE (B) FALSE 4. The eastern part of the United States has more good sites for producing electricity using geothermal energy than the western part of the United States. (A) TRUE (B) FALSE 5. A natural monopoly is characterized by having its marginal cost of production falling over the entire (relevant) range of production. (A) TRUE (B) FALSE 7. Spinning reserves on an electric grid are usually provided by small natural gas peaking plants. (A) TRUE (B) FALSE 8. It is widely believed by economists that FERC could have stopped the California electricity crisis of 2000‐2001 by putting an interstate wholesale price cap into place. (A) TRUE (B) FALSE 9. Renewable energy portfolio standards are widely used by PUCs even though they will increase the price of electricity. (A) TRUE (B) FALSE 10. Starting in the mid‐1980’s, two trends started with respect to motor vehicles: (a) horsepower started to steadily increase and (b) the ratio of light trucks to cars steadily increased. (A) TRUE (B) FALSE 11. More than 100,000 people are killed each year in U.S. motor vehicle accidents each year. (A) TRUE (B) FALSE 12. Ticket prices cover only about 20% of the operating cost of mass transit systems in the United States. (A) TRUE (B) FALSE `3 D. Quantitative Problems (28 points, 2 points each including subparts) 1. Los Angeles had 80 billion VMT last year. How many VMT should Los Angeles expect if gasoline costs go down by 20% if the long run price elasticity of VMT is ‐.3? 2a. A household is currently using 2000 KWh per month and the price of electricity is $0.20 KWh. If the household’s short run price elasticity of demand is ‐0.30, how much electricity would the household consume next month if the per KWh price jumped to $0.25 KWh. 2b. If over the long run (a couple of years), the price remained at $0.25 KWh and the household’s electricity consumption fell to 60% of its former level (2000 KWh), what would the estimate of long run demand elasticity be? 2c. If the price doubled to $0.40 KWh (from $0.20 KWh) and the long run price elasticity is ‐0.70, by what percentage would demand drop in the long run from its original level (2000 KWh)? 3. A coal‐fired power plant can at most generate 1000 MW of power. For 50% of the year it generated 990MW of power, for 30% of the year it generated 900 MW of power, for 15% of the year it generated 100 MW and for 5% of the year it generated 0 MW. What was the plant’s annual capacity factor? `4 4a. On the island of Maui in Hawaii, there are two electric power generators. What price will they charge for electricity and how much electricity will they produce if they cannot actively collude. The price function is 300 – 2.5q1 – 2.5q2, where q1 is the amount of electricity sold by power generator 1 and q2 is the amount of electricity sold by power generator 2. The cost function for power generator 1 is 700 + 60q1 + 2.5q12. The cost function for power generator 2 is 400 + 40q2 + 2.5q22. How much electricity will be produced by generator 1 and by generator 2 if they act as a Cournot duopoloy? 4b. What price will be charged for electricity on Maui under the conditions of 4a? 4c. In what direction would the price of electricity in Maui change if firm 1’s cost function changed to 700 + 80q1 + 2.5q12? Briefly explain the economic intuition behind your answer. 4d. In what direction would the amount of electricity produced and the price changed if an additional power generator entered the market with the cost function 500 + 50q + 1.5q2? Why? 5. A wind farm can, on average, generate 3 MWh a day. The wind farm has a long term contract to sell as much electricity as it wants to Pacific Gas and Electric at $100 per MWh. Its cost function for producing electricity using wind is 12000 + 2q + .0001q2, where 12000 is the annual fixed cost and q is the total number of MWh sold during the year. How many MWh of electricity should this wind farm expect to sell in a year in order to maximize its profits? `5 6a. A solar thermal plant in Riverside County plans to sell electricity to Southern California Edison. The annual cost function for the plant for producing electricity is given by 3,000,000 + .02q + .0000001q2, where $3,000,000 is the annual fixed cost the company has for leasing the land and q represents the amount of electricity produced during the year in KWh. If Southern California Edison is prepared to pay $0.52 per KWh for the electricity because it has to meet California’s renewable energy portfolio standard, write down the equation that represents the profits to the company that operates this solar thermal plant for a year. 6b. What is the first order condition for profit maximization for this firm? 6c. Assume that the fixed cost was paid and that some electricity from the plant is produced. The project operator will maximize profits by producing how many KWh of electricity a year? 6d. Should the company produce any electricity from the plant under the conditions of 6a? Briefly explain your answer in economic terms. `6 E. Short Answer Questions (10 points, 5 points each) 1. Draw a graph for an investor owned natural gas utility with a demand curve, a marginal revenue curve, a marginal cost curve, and an average total cost curve. Label the price and quantity that would result if the company acted like a monopolist, PM and QM. Label the competitive market result, PC and QC. Label the best (from the consumer’s perspective) feasible solution that a regulatory agency’s actions can help to achieve, PF and QF. Why is the competitive market solution not feasible? 2. Draw a graph that shows the supply curve for electricity and a demand curve for electricity under normal conditions and demand curve that is near the electric system’s installed capacity. Use the graph to explain why small increases in demand can cause little to no increase in the wholesale price of electricity or very, very large increases in wholesale prices. Briefly explain under what conditions is it in the interest of a power generator to shut down part of its generating capacity. `7
A B C D E Total Name _______________________________ Student Number_______________________ Econ 132 (W2015): Mid Term Exam 2 [81 Points Total] A. Fill In The Blank (May Require More Than One Word) [20 Points] 1. The United States gets approximately ______% of its electric power from nuclear reactors. 2. A barrel of oil is refined into several different products including diesel fuel and gasoline. One other product that comes from every barrel of oil is _____________________. 3. _______________________pricing for electricity would raise prices during the times of highest demand and lower them during times when demand was less. 4. A monopolist who sells less than the competitive quantity creates a _____________________ loss that neither consumers nor producers gain. 5. U.S. nuclear power plants tend to have a generating capacity of around ____________________MW. 6. What region of the United States has relatively poor potential for renewable electricity generation (geothermal, solar and wind)? ____________________________ 7. The gasoline tax in Australia and Canada are most similar to what other industrialized country? __________________________ 8. A regulator who sets price so that the quantity produced is where average total cost equals demand allows a natural monopolist to recover its ______________________________. 9. Between 1930 and 1940, the fraction of farms in the United States with electricity whet from 10% to ___________% due in large part to the efforts of the __________________________Administration to increase employment by building infrastructure during the Great Depression. 10. Corporate average fuel efficiency (CAFE) standards were initiated by President _________________ in the mid 1970’s in response to the embargo by Arab members of OPEC. 11. The transportation sector uses about _________% of the total U.S. energy consumption. 12. SUV and minivans were classified as “light trucks” which allowed them to have lower standards with respect to ________________________ and _________________________ relative to automobiles. 13. Introduction of a large carbon tax would make electricity generated with _________________ and ____________________ look less attractive to potential wholesale electricity purchasers. 14. The two basic components of electric power provision that are thought to be the most amenable to successful deregulation are? (a) _______________________ and (b) __________________________ 15. The 1979 ____________________________ nuclear accident in the United States did no harm to people because the reactor had a ___________________________ that prevented leakage of radiation. `1 B. Multiple Choice Questions [10 Points] 1. A natural monopoly is most like to succeed in making large profits at the consumers’ expense if: (A) close substitutes exist (B) demand is elastic (C) fixed costs are large (D) rate of return is ignored 1. Combined cycle gas turbine (CCGT) greatly increases its thermal efficiency by: (A) being paired with wind mills that produce electricity when the wind is high (B) generating direct rather than alternating current (C) transmitting power with an oil cooled underground power line (D) using the heat from the gas turbine in a steam turbine 2. Which of these factors is typically the major influence on the cost of power from a nuclear plant? (A) Capacity factor at plant (B) Price of uranium (C) Disposal of nuclear waste (D) Increased security due to terrorism threat 3. The Averch‐Johnson effect tends to occur when the rate of return for a utility is set above the market rate of return and suggests that a utility will over‐invest in: (A) cleaner burning coal, (B) generating equipment with high variable cost (C) pollution control equipment (D) generating equipment with low fixed costs 4. Most electrical power in California is generated using: (A) coal (B) natural gas (C) solar (D) wind 5. Which of these is often used to generate the base load for an electric utility? (A) LPG (B) nuclear (C) solar (D) wind 6. Tennessee Valley Authority (A) is a rural electric cooperative (B) has a diversified portfolio of power generating facilities (C) major producer of wind power (D) a major supplier of power to California 7. Increasing the reliability of an electrical system from 99.5% to 99.9% will change the cost per KWh by: (A) less than 0.1% (B) about 0.1% (C) between 0.3% and 0.4% (D) greater than 0.4% 8. How large is the per gallon gasoline tax that economists (Parry, et al.) estimate is needed in the United States to correct for different externalities associated with motor vehicle? (A) $0.20 (B) $1.00 (C) $2.00 (D) $4.00 9. A local air pollutant associated with automobiles burning gasoline is: (A) carbon dioxide (B) carbon monoxide (C) sulfur dioxide `2 (D) sulfur hexofloride 10. Under which of these conditions is a power generator most likely to have substantial market power: (A) large solar thermal plant on grid shut down for repair, high temperatures (B) large wind farm experiences very low wind conditions at night (C) a new CCGT opens and faces low natural gas prices (D) a new transmission line is added to the grid allowing power to be sold between regions C. TRUE or FALSE [10 POINTS] 1. Demand for electricity as a function of temperature will have the shape of the letter “W” if houses use electricity for cooling and heating. (A) TRUE (B) FALSE 2. Renewable energy portfolio standards for electricity increase prices that consumers pay for electricity. (A) TRUE (B) FALSE 3. The U.S. industrial sector’s energy use has tended to fall over time for the last two decades. (A) TRUE (B) FALSE 4. Setting electricity prices using a rate of return approach provides strong incentives to an electricity utility to reduce its cost of producing electricity. (A) TRUE (B) FALSE 5. Publically owned power companies on average charge residential consumers a higher price for electricity than do investor owned utilities. (A) TRUE (B) FALSE 6. FERC stands for Federal Emergency Response Corporation. (A) TRUE (B) FALSE 7. Hydroelectric dams tend to store water in reservoirs so it can be released in the late afternoon time period to generate electricity when the demand for it is high. (A) TRUE (B) FALSE 8. States that deregulated their investor owned utilities had electric rates that were higher than nearby states that did not deregulate their investor owned utilities. (A) TRUE (B) FALSE 9. Government agencies generally subsidize about 50% of U.S. mass transit system costs. (A) TRUE (B) FALSE 10. In terms of reducing oil consumption, it would be better to increase the miles per gallon that a Toyota Prius gets (42 mpg) by 2 mpg than the miles per gallon that a heavy truck gets (6 mpg) by 1 mpg. (A) TRUE (B) FALSE `3 D. Quantitative Problems (26 points, 2 points each including subparts) 1. It is the year 4800 and humanity has colonized the moon. On the moon there are only two cold‐fusion electric power generators. As they are operated by rival factions, they are unable to collude. Firm 1 has the cost function c1 = 2.16 + 2(q1)2, where q1 is the quantity of electricity it produces. Firm 2 has the cost function c2 = 3.14 + (q2)2. Inverse demand for electricity is P = 1300 ‐ 4q1 ‐ 4q2. Please answer the following questions using this information: 1a. How much electricity will each firm produce if the two firms act as a Cournot duopoly? 1b. What will the equilibrium price of electricity be on the moon? 1c. In what direction would the market price change if Firm 1's cost function changed to c1 = 2.16 + q1 + 2(q1)2, assuming that Firm 2’s cost function did not change. Briefly explain the economic intuition behind your answer (3 sentence maximum). 1d. In what direction would the equilibrium price and quantity change if Firm 1 exited the market? Why (3 sentence maximum)? `4 2a. A geothermal plant has been proposed for being built east of Los Angeles near Barstow. The Los Angeles Department of Water and Power has agreed to buy any power generated by the geothermal plant for $0.50 per kWh. The plant’s annual cost function for producing electricity is given by 200,000 + .04q + .0000001q2, where $200,000 is the annual fixed cost. How many kWh should this plant generate each year to maximize its profits? 2b. How large would fixed costs have to be before it is optimal not to build this geothermal plant? 3. A new CCGT power plant is designed to generate at most 500 MW of power. If for 50% of the year it generated 450 MW of power, for 30% of the year it generated 400 MW of power, for 15% of the year it generated 300 MW and for 5% of the year it generated 0 MW. What was the plant’s annual capacity factor? 4a. A firm is currently using 1200 kWh per month and the price of electricity is $0.15 per kWh. If the firm’s short run price elasticity of demand is ‐0.25, how much electricity would the firm consume next month if the per kWh hour jumped to $0.20kWh. `5 4b. If over the medium run (a couple of years), the price remained at $0.20 kWh and the firms’s electricity consumption fell to 50% of its former level, what would the estimate of long run demand elasticity be? 4c. If the price doubled to $0.30 and the long run price elasticity was ‐0.70, by what percentage would demand drop in the long run from its original level? 5a. The OhioPUC uses the standard formula, pq = Expenses + sB, to regulate an investor owned utility. The engineering cost formula used by the PUC for determining expenses is 4,000,000 + .05q, where $4,000,000 is considered the annual fixed cost and .05 is the marginal cost of natural gas for generating electricity. The PUC has assumed the value, B, of the coal‐fired power plants and the distribution system is equal to $30,000,000 and the PUC has decided s=.06 equals the fair market rate of return that the utility is entitled to. Approximately, how much electricity was the PUC forecasting the utility would sell when setting the price of electricity at $0.25 kWh? 5b. Would the Ohio PUC have been assuming that the amount of electricity being sold was larger, the same, or smaller than in 5a if it had assumed the value of B was equal to $20,000,000 instead of $30,000,000, assuming none of the other parameters in 5a change? 6. The California PUC’s economic staff estimates that the price elasticity for residential electricity during peak hours in the summer is ‐.40. How much would electric demand drop during peak hours if peak hour prices were to go up by 60%? `6 E. Short Answer (15 points total; 5 points each) 1. You are asked to forecast demand for electricity for a California investor owned electricity utility for each 15 minute period during the day. This forecast needs to be available to the utility to use one day ahead so the utility can predict how much electricity it needs to buy in the spot market. Briefly describe what variables you would want to use to help make the forecast and why? 2. The Interstate Highway System in the United States started by President Eisenhower in 1956 had a large influence on how American cities and metropolitan areas grew and related to each other. Briefly describe the role played by the interstate highway system from the perspective of changing economic incentives and negative externalities. `7 3. California’s attempt at deregulating its electricity sector essentially bankrupted the state and resulted in the recall of Governor Gray Davis. Explain why Davis’ refusal to raise electric prices paid by consumers played a major role in the degree of market power which the power generators exercised to raise wholesale prices and the effective bankruptcy of California’s major investor owned utilities. Note what Davis should have done differently and how it would have worked in economic terms. Scratch Space `8
Name _______________________ Student Number______________ W2011 Econ 132: Mid Term Exam 2 A. Fill In The Blank (May Require More Than One Word) [20 Points] 1. Techniques for sequestrating carbon from electric power plants that burn _________ are unlikely to become widely implemented due to their ___________ cost and the change in the price in natural gas. 2. Heavy fuel oil/bunker oil is the residual left after refining a barrel of ________ into different products. 3. Nuclear power plants were treated as ________________ assets and retained by traditional investor owned utilities in the process of deregulating electricity in California. 4. The major nuclear power disaster that harmed large numbers of people was __________________. 5. From an economic perspective, it is usually desirable for price to equal marginal cost. However if a PUC set price equal to marginal cost, a utility would not be able to cover its _________________ cost. 6. Since the mid‐1980’s, the average miles per gallon of the U.S. car fleet has not increased. What aspect of motor vehicles has increased instead? __________________________________________________ 7. Renewable energy portfolio standards tend to _____________ the price consumers pay for electricity. 8. Better forecasting of electricity demand reduces cost to consumers because it reduces the need for (spinning) __________________ capacity. 9. Other than hydro, the two largest renewable energy sources used to generate electricity are: _________________________ and ______________________________. 10. If a PUC allows an investor owned utility to receive a below market rate of return on capital, it will try to invest in _____________ capital than is needed to meet expected demand. 11. A _______________________________ increase in the gasoline tax could be coupled with a reduction in the _______________________ tax to insure that consumers face the full cost associated with driving without increasing the total amount of taxes they pay. 12. The Federal government is the _________________ consumer of energy in the United States. 13. DSM stands for _______________________________________________________ 14. One key use for smart meters would be to allow for _________ load pricing. 15. Economists tend to favor __________ externalities rather than using command and control policies. 16. The State of California wants to put solar panels on how many home roofs? ____________________ 17. The gasoline tax in the United States is most similar to what country? _____________________ `1 B. Multiple Choice Questions [10 Points] 1. A combined cycle gas turbine (CCGT) greatly increases its thermal efficiency by: (A) Generating direct rather than alternating current (B) Using the heat from the gas turbine in a steam turbine (C) Using a second fuel source such as oil or coal to superheat water (D) Transmitting power with a large aluminum transmission cable 2. Which of these factors is typically the major influence on the cost of power from a nuclear plant? (A) Capacity factor at plant (B) Price of uranium (C) Disposal of nuclear waste (D) Increased security due to terrorism threat 3. Generating capacity of the San Onofre nuclear power station in Southern California is approximately: (A) 10MW (B) 20MW (C) 200MW (D) 2GW 4. The state with the largest amount of installed wind capacity is? (A) Arizona (B) California (C) Nevada (D) Texas 5. Which of the following is an effective way to reduce traffic congestion in urban areas? (A) Increase subsidies to mass transit (B) Increase the fuel economy of cars (C) Improve light truck safety (D) Reduce gasoline tax 6. In which of the following U.S. sectors has end‐use energy consumption been flat for the last decade: (A) Commercial (B) Industrial (C) Residential (D) Transportation 7. The large increase in the fraction vehicles which are SUV is driven in large part by: (A) Low real gas prices in recent years (B) Government efforts to improve safety standards (C) Lower CAFE standards for light trucks (D) A dramatic increase in interstate highways 8. Under which of these conditions is a power generator most likely to have substantial market power: (A) 1 plant down for repair, low temperatures (B) Night time, high wind conditions (C) New CCGT opens, low natural gas prices (D) Hot summer day, transmission grid congestion 9. A typical building standard designed to improve energy efficiency would involve: (A) Requiring more insulation and better windows (B) Requiring better washers and dryers (C) Meeting LEED standards (D) Requiring gas ovens 10. Which of the following does not result from placing price controls on gasoline: (A) A reduction in supply (B) Queuing at gasoline stations (C) Incentive for more fuel efficient cars (D) A decrease in the depth of new wells `2 C. TRUE or FALSE [12 POINTS] 1. Peak load demand for electricity on a very cold winter day is likely to be higher than peak demand on a very hot summer day. (A) TRUE (B) FALSE 2. China imports substantial amounts of coal from Australia to help power its growing electric demand. (A) TRUE (B) FALSE 3. Because electricity is not storable, blackouts can occur if supply does not equal demand. (A) TRUE (B) FALSE 4. President Reagan stopped the planned increase in the vehicle fuel efficiency standard that had been put in place by President Carter. (A) TRUE (B) FALSE 5. The per MW of capacity capital cost of building a geothermal plant are lower than that for coal. (A) TRUE (B) FALSE 6. Peaker plants tend to have high marginal cost and high capacity factors. (A) TRUE (B) FALSE 7. Without large subsidies, there would be very little solar power installed to generate electricity. (A) TRUE (B) FALSE 8. Two programs that had major impacts on the economic geography of the United States were President Roosevelt’s rural electrification effort and President Eisenhower’s Interstate and Defense Highway System. (A) TRUE (B) FALSE 9. The gasoline tax in the United States would have to be more than double what it currently is if it were to fully internalize all externality cost. (A) TRUE (B) FALSE 10. A high feed‐in tariff for solar panels on single family homes will reduce the price per kWh paid by residential customers by reducing the use of natural gas. (A) TRUE (B) FALSE 11. On average, light trucks are annually driven more miles than heavy trucks. (A) TRUE (B) FALSE 12. Roughly half of the energy consumed in the United States is in the transportation sector. (A) TRUE (B) FALSE `3 D. Quantitative Problems (34 points, 2 points each including subparts) 1a. A solar thermal power plant is schedule to be built west of San Diego. The plant will be able sell as much electricity as it produces at a fixed price of $0.40 kwh. The plant’s annual cost function for producing electricity is 120,000 + .03q + .0000002q2, where 120,000 is the annual fixed cost. How many kwh of electricity will this plant sell in a year to maximize its profits? 1b. Write down the new first order condition with respect to profits if the fixed price the plant receives of electricity changes to $0.50 per kWh assuming the other parameters in part (1a) remain the same. 1c. How would the amount of electricity that it was optimal to sell in part (1a) change qualitatively if the coefficient on the quadratic part of the cost function changed from .0000002 to .0000001? 1d. How would the amount of electricity that it was optimal to sell in part (1a) change quantitatively if the fixed cost of operating the plant dropped from $120,000 to $100,000 due to a property tax reduction given solar energy facilities? `4 2a. The Florida PUC uses the standard formula, pq = Expenses + sB, to regulate an investor owned utility. The engineering cost formula used by the PUC for determining expenses is 5,000,000 + .06q, where $5,000,000 is considered the annual fixed cost and .06 is the marginal cost of natural gas for generating electricity. The PUC has assumed the value, B, of the combined cycle gas turbine (CCGT) plant and the distribution system is equal to $40,000,000 and the PUC has decided s=.07 equals the fair market rate of return that the utility is entitled to. Approximately, how much electricity was the PUC forecasting the utility would sell when setting the price of electricity at $0.20 kWh? 2b. Would the Florida PUC have been assuming that the amount of electricity being sold was larger, the same, or smaller than in 2a if it had assumed the value of B was equal to $50,000,000 instead of $40,000,000, assuming none of the other parameters in 2a change? 2c. If the cost of generating electricity falls in the sense that the coefficient on q in the engineering cost function suddenly drops from .06 to .04 due to the price of natural gas falling, what (qualitative) action is the Florida PUC likely to take? 3a. A California utility offers an in‐store rebate of $100 in 2010 toward the purchase of a particular energy efficient refrigerator which sells for $500. If the number of these energy efficient refrigerators sold in the previous year (100,000) increased by 40% after the rebate is offered, what is the price elasticity of demand for the energy efficient refrigerator. [Assume that the rebate is unexpected to avoid any purchase timing issues, that there are no macroeconomic effects and that the rebate program does not convey any extra information about the energy efficiency of the refrigerator.] 3b. The utility undertook this refrigerator rebate program to receive negawatt credits. The cost of the rebate program is simply the number of refrigerators times $100. If the number of kWh estimated to be saved by the program was 50,000,000, what is the cost per negawatt? 3c. Explain briefly why estimating the number of kWh saved by the program is likely to be difficult and controversial. `5 4. The California PUC’s economic staff estimates that the price elasticity for residential electricity during peak hours in the summer is ‐.60. How much would electric demand drop during peak hours if peak hour prices were to go up by 30%? 5a. A company is given an exclusive temporary franchise by a local government to sell electricity to a community using an existing distribution system after the U.S. Environmental Protection Agency forced the closure of a small coal fired power generator for not meeting air pollution standards. The price function the generator faces is $2500‐.002q where q is the number of megawatt hours (MWH) sold. The company’s cost function for generating power is 100,000,000 + .4q + .0025q2, where 1,000,000 is the fixed cost of renting a large CCGT for the year. To maximize profits, how much electricity should the company produce? 5b. At what price per MWH will the company sell electricity? 5c. If the quantity produced in 5a is for the year as a whole, how much profit does the company make for operating the generator for a year? 5d. What is the rate of return (in percentage terms) that the company receives for its upfront investment in renting the diesel generator for a year in 5a? 5e. Assume now that the government lets another company supply power in addition to the first company and that the two companies do not collude. Using the conditions in 5a and letting the quantity of power produced by the first company be represented by q1 and the quantity of power produced by the second company as q2, write down the price function for the two companies jointly supplying power to the area. 5f. If the second company has the cost function, 50,000,000 + .6q2 + .0075q22, qualitatively what happens to the price charged to consumers relative to 5a? `6 5g. Using the price function from 5e, the cost function for firm 1 from 5a and the cost function for firm 2 from 5f, write down the formula for the optimal q1 for firm 1 to produce, assuming that the two firms represent a Cournot duopoly with consistent expectations about each other’s reaction function. You do not need to solve numerically for q1 but to receive credit you will need to express q1 only in terms of the coefficient of the price function and the two cost functions [hint: use algebra to eliminate q2]. `7 E. Short Answer (5 points each) 1. What are the five basic components of electric power provision? State whether each is likely or unlikely to be amenable to successful deregulation. 2. Discuss briefly why wind and natural gas are likely to be the most attractive choices for building new generating capacity if a large carbon tax was put in place. 3. California’s attempt at deregulating its electricity sector essentially bankrupted the state and resulted in the recall of Governor Gray Davis. Explain why Davis’ refusal to raise electric prices paid by consumers played a major role in the degree of market power which the power generators exercised to raise wholesale prices and the effective bankruptcy of California’s major investor owned utilities. `8

Tutor Answer

Tutornicabel
School: University of Virginia

Attached.

Running head: 2011 Economics Mid Term exams

2011 Economics Mid Term exams
Name of student
Name of Professor
Name of course
Name of institution

1

2011 Economic Mid Term exams
2
Part A
Question one
Techniques for sequestrating carbon from electric power plants that burn Coal are unlikely to
become widely implemented due to their high cost and the change in the price in natural gas.
Question two
Heavy fuel oil/bunker oil is the residual left after refining a barrel of crude oil or petroleum into
different products.
Question three
Nuclear power plants were treated as stranded or fixed assets and retained by traditional investor
owned utilities in the process of deregulating electricity in California.
Question four
The major nuclear power disaster that harmed large numbers of people was Chernobyl
Question five
From an economic perspective, it is usually desirable for price to equal marginal cost. However,
if a PUC set price equal to marginal cost, a utility would not be able to cover its Production cost.
Question six
Since the mid‐1980’s, the average miles per gallon of the U.S. car fleet has not increased. What
aspect of motor vehicles has increased instead? fleet has improved from 16.9 mpg in 1991 to

2011 Economic Mid Term exams
3
around 17.9 mpg
Question seven
Renewable energy portfolio standards tend to decreases the price consumers pay for electricity.
Question eight
Better forecasting of electricity demand reduces cost to consumers because it reduces the need
for (spinning) reserve capacity.
Question nine
Other than hydro, the two largest renewable energy sources used to generate electricity are;
Natural gas and solar energy.
Question ten
If a PUC allows an investor owned utility to receive a below market rate of return on capital, it
will try to invest in Return capital than is needed to meet expected demand
Question eleven
A higher increase in the gasoline tax could be coupled with a reduction in the gas tax to ensure
that consumers face the full cost associated with driving without increasing the total amount of
taxes they pay.
Question twelve
The Federal government is the largest consumer of energy in the United States.
Question thirteen
DSM stands for Demand Side management.

2011 Economic Mid Term exams
4
Question fourteen
One key use for smart meters would be to allow for basic load pricing
Question fifteen
Economists tend to favor incentives to reduce environmental externalities rather than using
command and control policies.
Question sixteen
The State of California wants to put solar panels on how many home roofs? 15% to 20% of the
residual buildings
Question seventeen
The gasoline tax in the United States is most similar to what country? Canada
Part B
Question one
(B) Using the heat from the gas turbine in a steam turbine
Question two
(A) Capacity factor at plant
Question three
(D) 2GW
Question four
(D) Texas

2011 Economic Mid Term exams
5
Question five
(B) Increase the fuel economy of cars
Question six
(C) Residential
Question seven
(B) Government efforts to improve safety standards
Question eight
(A) 1 plant down for repair, low temperatures
Question nine
(C) Meeting LEED standards
Question ten
(C) Incentive for more fuel-efficient cars
Part C
Question one
(B) FALSE
Peak load demand for electricity on a very cold winter day is likely to be lower than peak
demand on a very hot summer day.
Question two

2011 Economic Mid Term exams
6
(A) TRUE
Question three
(A) TRUE
Question four
(A) TRUE
Question five
(A) TRUE
Question six
(B) FALSE
Peaker plants tend to have low marginal cost and low capacity factors
Question seven
(B) FALSE
solar power installed to generate electricity does not require large subsidence.
Question eight
(A) TRUE
Question nine
(B) FALSE

2011 Economic Mid Term exams
7
The gasoline tax in the United States would have low if it were to fully internalize all externality
cost.
Question ten
(A) TRUE
Question eleven
(A) TRUE
Question twelve
(B) FALSE
About 28% of energy consumed in the United States is in the transportation sector.


Running head: 2012 Economics Mid Term exams

2012 Economics Mid Term exams
Name of student
Name of Professor
Name of course
Name of institution

1

2012 Economic Mid Term exams

2

Part A
Question...

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