Econ 132 UC San Diego Energy discussion questions only do the part E?short answer?for five past exams. Name _______________________ Student Number_________

Econ 132 UC San Diego Energy discussion questions only do the part E?short answer?for five past exams. 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 op…
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