Managerial Economics & Business Strategy 8th Edition by Michael Baye,Jeff Prince

Exercise 15

In the wake of the energy crisis in California, many electricity generating facilities across the nation are reassessing their projections of future demand and capacity for electricity in their respective markets. As a manager at Florida Power Light Company, you are in charge of determining the optimal size of two electricity generating facilities. The figure below illustrates the short-run average total cost curves associated with different facility sizes. Demand projections indicate that 6 million kilowatts must be produced at your South Florida facility, and 2 million kilowatts must be produced at your facility in the Panhandle. Determine the optimal facility size ( S, M, or L ) for these two regions, and indicate whether there will be economies of scale, diseconomies of scale, or constant returns to scale if the facilities are built optimally.