Electricity Economics

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This is a leader-follower game. There is only one bus with two generators and two loads. Generator 1 is a strategic bidder and is the leader. Generator 2 is a price taker and is the follower. There is perfect information for all parties. Generator 1 will maximize its profit by taking into consideration the fact that Gen 2 is a price taker and Gen 1 will then determine its optimal output. Gen 2 will follow by acting as a price taker and determining its optimal output after knowing what Gen 1 will produce. Hint: to assist you, solve each question below in the order presented.

a. Find the aggregate inverse demand curve for this market.

b. Write the profit function for generator 1.

c. How does a price taker determine its output? Write this equation.

d. Solve for the optimal production of G1 and G2.

e. What is the market clearing price? What is the consumption for d1? What is the consumption for d2?

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