PROBLEM ONE Suppose that there firms I j who are duopoly suppliers of electricity to the spot market which is a uniform price auction power exchange. Your power stations are hydro with MC=0.. For (a) (b) and (c) assume the m can only offer a single price to the spot market. What capacity Ki would you build and what price would you offer your capacity to the spot market to maximise profit under the following scenarios? Investment costs are I. Assume that the firms decide to build capacity Ki and then choose the price to maximise profits under a Cournot game. Find the profit maximising Ki and price for: (a) You expect the inverse electricity demand curve will be p(q)=a1-bq (3 marks). (b) You expect demand to be higher with p(q)=a2-bq what is the profit maximising offer? (1 mark) (c) The chance of low demand (a) being realised is e and the chance of high demand (b) is (1-e). What is your best offer now? [Hint D2(p)=Ki+Kj in equilibrium)] What is the price p and output in the low demand period and the high demand period? Show that p1

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