California Power Exchange By Nate Sukonik, Michelle Lee, Cathy Aronin, and Zack Honig Question #1:

June 30, 2000

3000 2500 2000 Price 1500 1000 500 0 0 10000 20000 30000 Quantity 40000 50000 Demand Supply

June 30, 1999

3000 2500 2000 Price 1500 1000 500 0 0 10000 20000 Quantity 30000 40000 Demand Supply

Question #2: Equilibrium Data

June 30, 2000

3000 2500 2000 Price 1500 1000 500 0 0 10000 20000 30000 Quantity 40000 50000 Demand Supply

June 30, 2000 Equilibrium Quantity: 32,144.72 Price: 749.99

June 30, 1999

3000 2500 2000 Price 1500 1000 500 0 0 10000 20000 Quantity 30000 40000 Demand Supply

June 30,1999 Equilibrium Quantity: 31,376.09 Price: 109.99

Question #3:

June 30, 1999: Delta Quantity Demanded = 31,376.09 31,495.85 Quantity Demanded = 31,376.09 Delta Price Demanded = 109.99 106 Price demanded = 109.99 Price Elasticity Demanded = ( (31,376.09 31,495.85) / (31,376.09) ) / ( (109.99 106) / (109.99) ) = ( (-119.76) / (31,376.09) ) / ( (3.99) / (109.99) ) = 0.1052

June 30, 2000: Delta Quantity Demanded = 32,144.72 32,145.62 Quantity Demanded = 32,144.72 Delta Price Demanded = 749.99 749.5 Price demanded = 749.99 Price Elasticity Demanded = ( (32,144.72 32,145.62) / (32,144.72) ) / ( (749.99 749.5) / (749.99) ) = ( (-0.9) / (32,144.72) ) / ( (0.49) / (749.99) ) = 0.0429

Question 3 Part II: Had the supply conditions not changed from the 30th of June 1999 to the 30th of June 2000, what would have been the increase in the price of a megawatt/hour caused by the shift in demand? If the supply conditions had not changed from the 30th of June 1999 (price cap of $250 megawatt/hour) to the 30th of June 2000, the price of a megawatt/hour would have been $400, a $290.01 increase in price from June 1999.

June 2000 Demand vs. June 1999 Supply

3000 2500 2000 1500 Demand 1000 500 0 0 -500 5000 10000 15000 20000 25000 30000 35000 40000 45000 Supply

Price

Quantity

Question #4:

Actual June 2000 Supply Curve

3000 2500 2000 Price 1500 1000 500 0 0 5000 10000 15000 20000 Quantity 25000 30000 35000

Predicited June 2000 Supply Curve With Natural Gas Price Increase
3000

2500

2000

Price

1500

1000

500

0 0.00

5,000.00

10,000.00

15,000.00 20,000.00 Quantity

25,000.00

30,000.00

35,000.00

Question 4 Continued: It is evident from that graphs that the price of input accounts for the shift in supply. You can see that in the graph with the natural gas price increase, the quantity increases while the price does not severely change. The quantity supplied increases insignificantly in comparison to the original supply curve. According to the law of supply, if the price of inputs increases the supply curve will shift in as seller are less willing or able to sell goods at existing prices.

Question 5: The electric utilities have claimed that the rising prices for electric power were caused by the actions of the sellers in the market who conspired to withhold electric power (decrease the supply) with the intent of pushing prices up. How could you establish whether or not the sellers may have benefited from such actions? Would their revenues increase as a result of the higher market prices? Why? In order to determine whether or not the sellers could have benefited from the price increase, we must know the price elasticity of demand at the prior equilibrium point. From question 3, we know that in June of 1999 the price elasticity of demand was 0.1052 and in June of 2000 the price elasticity of demand was 0.0429, which are both inelastic. We also know that an increase in prices will increase revenue if the price elasticity of demand is inelastic, which it is as this point. Therefore, the sellers would have benefitted from collusion to raise prices, as their revenues would have increased.