Economics 29 |

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The Public Service Company of the Southwest is regulated by an elected state utility commission. The firm has total assets of $500,000. The demand function for its services has been estimated as:                P = $250 – $0.15Q

The firm faces the following total cost function:

                                            TC = $25,000 + $10Q

(The total cost function does not include the firm’s cost of capital)

a.     In an unregulated environment, what price would this firm charge, what output would be produced, what would total profits be, and what rate of return would the firm earn on its asset base?

b.     The firm has proposed charging a price of $100 for each unit of output. If this price is charged, what will be the total profits and the rate of return earned on the firm’s asset base?

c.     The commission has ordered the firm to charge a price that will provide the firm with no more than a 10 percent return on its assets. What price should the firm charge, what output will be produced, and what dollar level of profits will be earned?

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