Opportunity Cost HW

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Kaiser

Kaiser.s Almon plant can produce K tons of aluminum/year. A ton of

aluminum requires e megawatt hours of electricity. (Assume that any other

electricity costs are negligible.) Kaiser has signed a contract that allows it

to buy e  K tons of electricity at the price of $23 per megawatt hour. The

spot price of electricity has jumped to $550 per megawatt hour.

The cost of producing K ton of aluminum is F + V C(K). For this prob-

lem, it is convenient to separate out the electricity cost from the rest of

Almon.s costs and write the cost of running the Almon plant as C(K) =

F + V C0(k) + 23eK. The plant either runs at full capacity, or not at all.

Kaiser anticipates that the price of aluminum will be constant for the

next three months, as will the spot price of electricity.

1. Suppose that Kaiser cannot sell back any electricity it buys.

(a) If Kaiser.s contract speci.es that it must pay for eK megawatt

hours whether or not it uses them, at what price should Almon

suspend operation?

(b) If Kaiser.s contract speci.es that it must only pay for the megawatt

hours it uses, at what price should Almon suspend operation?

2. Suppose that Kaiser can sell back any electricity it buys.

(a) If Kaiser.s contract speci.es that it must pay for eK megawatt

hours whether or not it uses them, at what price should Almon

suspend operation?

(b) If Kaiser.s contract speci.es that it must only pay for the megawatt

hours it uses, at what price should Almon suspend operation?

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