Transform oligopoly market into a competitive market

Question

Assignment Problem: Please summarize your results in the table below:

	Financial		Economic
	Proposal A	Proposal  B	Proposal A	Proposal B
NPV	= 0 (at real discount rate)	= 0 (at real discount rate)	N.A.	N.A.
IRR	10% (same as real discount rate)	10% (same as real discount rate)	N.A.	N.A.
PB	10 years	10 years	N.A.	N.A.
B/C	PV of return / initial investment	PV of return / initial investment	N.A.	N.A.
	0.9973	0.9978
	1	1
Life Cycle Cost	$ 100 bn.	$ 160 bn.	$ 84 bn.	$ 144 bn.
Equivalent Annual Cost	$ 5 bn.	$ 6 bn.	$ 1 bn.	$ 2 bn.
Consumer Surplus	N.A.	N.A.	$ 8 bn.	$ 8 bn.
Producer Surplus	N.A.	N.A.	$ 10 bn.	$ 15 bn.
Total Surplus	N.A.	N.A.	$ 18 bn.	$ 23 bn.
Deadweight Loss	N.A.	N.A.	N.A.	N.A.

Note: NPV; Equivalent Annual Cost; Life Cycle Cost; and Surpluses (Consumer, Producer, and Total)and Deadweight Loss - must be rounded off to the nearest billion dollars (i.e., no decimals), and IRR and PB - to the nearest 'whole' percents and years (i.e., no decimals), and B/C - to one decimal point only.

Question 1: Which proposal will you recommend from investor's perspective?

• A
• B
• Either
• Neither

Question 2: From a financial perspective, will you select any of these projects on the basis of the indicator of Consumer Surplus?

• Yes
• No

Question 3: Will your recommendation, based on economic perspective, change if the opportunity cost of money is zero?

• Yes
• No

Question 4: In Figure, will the response of demand to changes in prices in the range of 9 to 12 cents per unit be:

• Elastic
• Inelastic

Question 5: Will your recommendation, based on economic perspective, change if - due to unanticipated global financial turmoil - there is hyperinflation after the first ten years of the projects' life spans?

• Yes
• No

Question 6: Will your recommendations, based on economic perspective, change if the government succeeds in converting the monopoly market, into an oligopoly market, but is unable to transform oligopoly market into a competitive market (i.e., the market stays as an oligopoly for the last 40 years of project life-spans)?

• Yes
• No

Question 7: How much subsidies (expressed in present value terms) will the government need to provide for Proposal B in order to encourage the producer to sell electricity at the competitive market prices throughout the 60 year project duration?

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