Question

A coal burning power plant in upstate New York has been the only provider of power in the region for many years. Recently, a plant that uses wind to create energy was built nearby. The wind plant produces less energy than the coal plant but at a lower cost. Will the coal plant be able to remain competitive in this new market environment?
A. Yes, if the coal plant sells energy at a price below its marginal cost.
B. Yes, if the coal plant's decreased output is still sufficient to recover costs.
C. No, the coal plant's customers will switch to the wind powered plant.
D. No, the coal plant will be forced to cut prices and operate at a loss.
Answer: B

Answer 1

With arrival of new plant which produces energy at the level lower than that of the coal burning power plant but at comparatively low cost, it is possible for the coal power plant to remain in the market and stay competitive.

If the coal power plant reduces its output, then the cost associated with its production will also reduce. As a result, it can set a price lower than it was charging before. Therefore, if it manages to reduce the cost of production through reduced output and still able to keep the price above its cost of production, it can gain markup and remain competitive in the market. However, the coal power plant must keep its eye on the price of the newly arrived power plant and set their price lower than their price so that they are able to have an edge in the market.

So, the correct answer will be option (b).