In the wake of the energy crisis in California in 2000 and 2001, many electricit
ID: 1105622 • Letter: I
Question
In the wake of the energy crisis in California in 2000 and 2001, many electricity generating facilities across the nation periodically reassess their projections of future demand and capacity for electricity in their respective markets. As a manager at Florida Power & Light Company, you are in charge of determining the optimal size of two electricity generating facilities. The accompanying figure illustrates the short-run average total cost curves associated with different facility sizes. Demand projections indicate that 6 million kilowatts must be produced at your South Florida facility, and 2 million kilowatts must be produced at your facility in the Panhandle. Determine the optimal facility size (S, M, or L) for these two regions, and indicate whether there will be economies of scale, diseconomies of scale, or constant returns to scale if the facilities are built optimally. Average Total Cost for Various Plant Sizes 10 ATC ATCM ATC Kilowatts per hour (millions)Explanation / Answer
Optimal facility size for South Florida: L (It has the minimum average cost among all the options available when production demand is 6mn kW)
For the optimal facility in South Florida, there are diseconomies of scale (ATC is increasing)
Optimal facility size for the Panhandle: M (It has the minimum average cost among all the options available when production demand is 2mn kW)
For the optimal facility in the Panhandle, there are economies of scale (ATC is decreasing)