Question

A new CEO who is determined to recover the fixed costs of his units, so he reduces the Period 1 bid to make sure they run.

1. What does this say about the wisdom of bidding below marginal cost in order to make sure units operate? (2 mark)

2. Do you agree with the new CEO’s view of how generating units recover their fixed costs in the market over time? What is your view of how generating units recover their fixed costs? (2 mark)

Answer 1

Biding here indicates staying a price for the product. The new CEO wished to cover the fixed cost of his unit. When 2 parties bid, the one with the hihighest bid amount wins.

Here under bidding would help as business will opt for some one who is charging him a lower price. When the CEO bids lower, he attracts customers which keeps the units running. Like this for the moment in period 1 he may not make much to any profit however his basic cost, I.e the fixed cost that he has to incure irrespective of the level of production that occurs are taken care of.  

1. In my opinion I believe the wisdom of bidding below the marginal cost considering the situation is wise. In an attempt to make a profit or meet the cost, the unit may shut down due to no buyers. With time, the unit can recover from shutting down If for the moment it focuses on running the unit.

2. Organization for various reasons fall in and out of losses or ssituations where they find it difficult to even function. Like the CEO, I too agree that for the unit to continue functioning, they may resort to such a method and over time recover with higher level of production where they can make profits.