Question: The Public Service Company of the Southwest is regulated by elected state utility commission. The firm has net assets of $500,000. The demand function for its services has been estimated as:
P = $250 - $0.15Q
The firm faces the given total cost function:
TC = $25,000 + $10Q
(The total cost function doesn't comprise 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, describe 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 which will give the firm with no more than a 10 percent return on its assets. What price must the firm charge, what output will be produced and what dollar level of profits will be earned?