Prepared by: Alexander Prokopets

Group A 20001029

Subject: Economics for Managers

Instructor: Philip Leatherwood

Ust-Kamenogorsk GES is located on the Irtysh River, 12 km upstream from the regional center of East Kazakhstan, Ust-Kamenogorsk. The station is the second hydroelectric facility in the Irtysh cascade, and serves as a counter-regulator for Bukhtarma GES, leveling weekly/daily fluctuations in the water flow from the Bukhtarma reservoir.

Ust-Kamenogorsk GES houses four hydro generating units with a total installed capacity of 331.2MW (82.8MW each) and an operation head of 39.8 meters. UK GES generates 13.8 KV power. The power generated is then increased by the main transformers to 110 KV and through transmission lines is delivered to UK GES customers.

The station has been operating since 1952. As of October 2 1997, AES signed a concession agreement over Ust-Kamenogorsk and Shulbinsk GESes (located further down in the cascade). At that point, AES Ust-Kamenogorsk LLP was formed with a staff of 197 people.

Over a period of October 2, 1997 and February 29, 2000 Ust-Kamengorosk GES produced 3.9B KW/hrs of power, the production cost of which is one of the lowest in Kazakhstan. The station staff are experienced and highly qualified. The number of staff involved in full operational cycle is 105 people. In 1999, UK GES successfully carried out an overhaul of hydro generating unit #1, having fixed the faults of the generator shaft. The repairs were finished before the flood period, having improved the performance of the generator.

UK GES commissioned a state of the art automated system for commercial metering, controlled by ABB electronic meters. The system allows the station personnel to accurately track the power produced and sold, trace down actual technical losses and draw a comprehensive picture of power being distributed through the station’s transmission lines.

UK GES places a great emphasis on the station’s safe and reliable operations. For the first time since the station’s commissioning, UK GES carried out a complete overhaul of the dam water lock. For the first time in Kazakhstan, AES implemented a vibration analysis of the main transformers using a principally new approach that allowed them to assess the actual state of equipment at minimum costs.

AES now carrying out a capital overhaul of hydro generating unit #3. AES lifted the turbine cover, which allowed them to implement a unique operation on turning lower blades of the turbine without having to take them out. For the most part, they have completed the works correcting the shaft line, repairs of the guiding unit, equipment of the turbine well, compressive reinforcement and electrical equipment.

UK GES people are now working on restructuring. UK GES has formed a committee in charge of restructuring. It has already started compiling information from other AES stations and its own staff on this issue.

Among the station’s plans is a reconstruction program envisioning:

- replacement of 110 KV oil switches into SF switches,

- electric machine driving hydraulic system into a thyristor one;

- installation of an automated system of power production and distribution;

- adding systems of diagnostics and technical monitoring to the main equipment;

- large scale repair works on hydro-mechanical equipment and facilities;

- repairs of the dam control board.

Since 1997, people of UK GES have been operating the station reliably and will continue to improve the company so that it complies with the world standards and meets the demand of East Kazakhstan in safe and clean power.

Questions:

1. What kind of market UK GES’es business belongs to? Why?
2. What are the possible causes, preventing the market from being competitive?
3. How can the Government regulate the industry, that UK GES operates in?
4. How can you characterize the demand curve for electric energy in East-Kazakhstan?

Multiple choice questions:

1. For a natural monopolist:

1. MC is less than MR
2. MC is less than AC
3. Price is constant
4. MC=AR

1. What are the possible ways that government can regulate the monopoly?

1. Taxes
2. Price controls
3. Government ownership
4. All of the above
5. None of the above

1. In which point on the Figure 1. does the monopolist maximize it’s profit?

1. Point A
2. Point B
3. Point C
4. Point D
5. None of the above

1. In which point the monopolist would use it’s resources the most efficiently?

1. Point A
2. Point B
3. Point C
4. Point D
5. None of the above

1. How does the monopolist determine the output to be produced and the price to be charged ?
2. How do the output and price under monopoly compare with those under perfect competition ?
3. How do the monopolists prevent others from entering the market ?
4. Most small towns have only one bakery. Does such a bakery constitute a monopoly? Why or why not? What keeps more bakeries from opening in these towns?
5. Why does government need to control monopolies?
6. Over time a firm may lose its natural monopoly status. What factors could bring this about?
7. What is the "efficiency dilemma" when there is a natural monopoly?
8. List three industries that you feel are candidates for the title of "natural monopoly". Explain your choice.

1. Using Figure 1. calculate approximate profit the monopoly will produce at it’s profit maximizing point and the most efficient point. Compare those two.

1. If the monopolist demand curve is P = 200 – 10Q, and his marginal cost curve is MC = 100 + 5Q, what are the monopolist’s profit maximizing price and output ?
2. The table below shows the demand curve facing a monopolist who produces at a constant marginal cost of $10.

1. A monopolist faces the demand curve P = 11 – Q, where P is measured in dollars per unit and Q in thousands of units. The monopolist has a constant average cost of $6 per unit.

1. Draw the average and marginal revenue curves, and the average and marginal cost curves. What are the monopolist’s profit-maximizing price and quantity, and what is the resulting profit?
2. A government regulatory agency sets a price ceiling of $7 per unit. What quantity will be produced, and what will the firm’s profit be?
3. What price ceiling yields the largest level of output? What is the level of output?

1. Have you mentioned any innovations made by AES company? Explain.
2. Can the big repairs made on the UK GES, which led to increasing of productivity, be considered as technological change.
3. As was mentioned in this case the number of employees working for the UK GES had decreased from 197 in 1997 to 105 in 2000. Explain the possible causes of this change.
4. Suppose the percentage change input of all the other resources is the same as the change in input of labor. How does the total factor of productivity change. (Assume the quantity of output to be constant).

1. As the number of firms adopting a new process increases, the profitability of its adoption by a nonuser:

1. decreases
2. increases
3. remains constant

1. The rate of growth of output per hour of labor is

1. an adequate measure of the rate of technological change.
2. influenced by the rate of technological change
3. independent of the rate of technological change.
4. Constant in Kazakhstan
5. None of above

1. If R(t) is the present value of gross profit when the duration of an R and D project is t years, and if the time-cost trade-off function is C(t),

1. profit equals R(t) – C(t).

dC dR

2. the first order condition for profit maximization is ---- = -----.

dt dt

3. the firm should choose t to minimize C(t).
4. all of the above.
5. Both a and b.

1. For a particular machine tool, a doubling of cumulative output results in a 10% reduction in average cost. The cost of producing the 100^th of these machine tools is 200000 tenge. What is the cost of producing the 200^th of these machine tools? 400^th?
2. A company is trying to develop an improved pollution reducing equipment. There are two possible approaches to this technical problem. If either one is adopted, there is a 50-50 chance that it will cost 200,000 tenge to develop the equipment and a 50-50 chance that it will cost 100,000 tenge to do so. The expected cost of development is the sum of the total costs of development if each possible outcome occurs times the probability of the occurrence of this outcome.

1. If the firm chooses one of the outcomes and carries it to completion, what is the expected cost of developing the equipment?
2. If the two approaches are run in parallel and if the true cost of development using each approach can be determined after 25,000 tenge has been spent on each approach, what is the expected cost of developing the equipment? (Note that the total cost figure for each approach, if adopted, includes the 25,000 tenge).

1. A company estimates that the cost of developing and introducing a new product (in thousands of tenge) equals

Where t is the number of years taken to develop and introduce the new product. The discounted profit (gross of innovation cost) from a new product of this type (in thousands of tenge) is estimated to equal

R = 340 – 280t, for 1≤t≤6

1. The managers of the company are committed to develop and introduce this new product within 6 years, and it is impossible to develop and introduce it in less than 1 years. What project duration would minimize cost?

What is the optimal project duration? Why?