Question

1. What is peak-load pricing? What are the differences between peak-load pricing and Ramsey pricing?

ii) Is it true that peak demanders pay all capacity costs and off-peak demanders pay none but the marginal costs? Explain.

iii)  What is the traditional rate of return regulation? What are the decision variables for a regulator under this regulatory scheme? What does it achieve? Explain.

2. (7.5 points)  What is Averch-Johnson effect? What does it show? Draw a figure and explain.

Answer 1

1):-peak-load pricing is defined as the practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high.

Difference

peak load pricing is defined as a pricing of a service when the demand of the service varies over time, with the peak users charged the MC and the marginal capacity cost while the off-peak users are charged only the marginal cost while

Ramsey Prices is defined as a Price that allow firms to break even (TR=TC)

but with the smallest possible welfare loss inefficiency

Peak-load pricing is Price discrimination over time

Ramsey pricing is prices which are inversely related to the price sensitivity of usersRamsey Prices occur when

It is occure when the price is greater than the Average incremental cost

iii) :-Rate of Return Regulation (ROR Regulation) is situation under which firm is allowed to charge prices that reflect cost of providing service plus a 'reasonable' rate of return