Hello guys, i wanted to ask if someone could help me withone excecise that I not really understand. Im new in Business Math and would be thankfull for an answer.
The excercise is:
The excercise is:
- Suppose an electricity company owns a power-plant with attached coal mine. The plant needs 1 ton of coal to produce 1 giga-watt of electricity. Currently, the plant and its attached mine are closed. Located in proximity to the power plant’s location, a single potential customer, an aluminum company, is believed to pay up to € 2 per giga-watt electricity and to buy exactly 10 giga-watts during one upcoming production year. Reactivating the power plant and coal mine, the electricity company incurs set-up costs of € 10. Once being set up, the mine has a capacity of 20 tons of coal per year. Labor costs in mining add € 0.8 per ton of coal produced.
- a) Is it profitable for the electricity company to reactivate the power plant and its attached coal mine for this one customer only? Derive the profit-maximizing quantity of coal to be mined and the span of prices which can be charged to the customer, the aluminum company, without making losses.
- b) Provide your arguments and illustrate graphically that the electricity company cannot implement the optimal solution (derived in part a) above) by internally communicating a price for one gigawatt of electricity if production managers maximize their plant’s surplus.