Question - You are a regulator in charge of setting prices for GAZCO, the local natural gas utility. In providing gas to its customers GAZCO has two types of most, a fixed cost of building and maintaining its distribution pipes, and a marginal cost of purchasing gas on the open market. For the current year, the fixed costs are $100 million and the marginal costs are $5 per metric cubic foot (mcf) of gas.
There are 1 million customers in the GAZCO system. The demand from each customer is expected to be
qcustomer = 25 - P
where p is the per-mcf regulated price of natural gas charged by GAZCO.
1. Your buss, who has a degree from UCLA, tells you to just set prices equal to average cost. He calculates that this price is $ 15/mcf of gas. Show that this will clear the market at a price equal to average cost.
2. What would he the deadweight loss at this price?