Full exam for Energy Economics in the Energy Engineering degree programme at Politecnico di Milano. The document covers: ENERGY ECONOMICS – Solutions with Explanations (Exam 20/01/2026) Support document: questions, options, correct answer, and brief explanation. Q1 In a two-node power market with a transmission limit of 800 MW, the unconstrained flow from Node 1 to Node 2 would be 900 MW. How is
Full exam for Energy Economics in the Energy Engineering degree programme at Politecnico di Milano. The document covers: ENERGY ECONOMICS – Solutions with Explanations (Exam 20/01/2026) Support document: questions, options, correct answer, and brief explanation. Q1 In a two-node power market with a transmission limit of 800 MW, the unconstrained flow from Node 1 to Node 2 would be 900 MW. How is
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ENERGY ECONOMICS – Solutions with Explanations (Exam 20/01/2026) Support document: questions, options, correct answer, and brief explanation. Q1 In a two-node power market with a transmission limit of 800 MW, the unconstrained flow from Node 1 to Node 2 would be 900 MW. How is the market equilibrium affected by this physical constraint? • A. The Market Operator cancels all transactions to prevent line damage. • B. The system splits into two nodal markets with a higher price in Node 2 and a lower price in Node 1. • C. The market remains a single zone with a single price of 7.5. • D. Both nodes adopt a uniform price of 8.0 to discourage consumption. • E. The extra 100 MW are stored in virtual hubs for the next day. Correct answer: B (B. The system splits into two nodal markets with a higher price in Node 2 and a lower price in Node 1.) Explanation: The transmission limit creates congestion, so the unconstrained single-price outcome cannot be sustained. The market therefore separates into two nodal prices: the importing (scarce) node faces a higher price, while the exporting node has a lower price due to relatively excess supply. Q2 Given a linear demand curve Q = 1,400 − 2,000P, what is the price elasticity of demand when the price is P = 0.20 € ? • A. -0.2. • B. -0.5. • C. -1.0. • D. -0.4. • E. -2.0. Correct answer: D (D. -0.4.) Explanation:
Point elasticity: ε = (dQ/dP)·(P/Q). Here dQ/dP = −2000. At P = 0.20, Q = 1400 − 2000·0.20 = 1000. So ε = (−2000)·(0.20/1000) = −0.4. Q3 In the context of industrial organization, what does the concept of “subadditivity” signify regarding a natural monopoly? • A. The sum of marginal costs across all firms is always equal to the market clearing price. • B. Only firms with increasing returns to scale can be considered for regulatory protection. • C. It is less costly to produce a specific level of output within a single firm than with two or more firms. • D. Total cost increases exponentially as more firms enter the market. • E. The marginal revenue of a firm is always lower than its average variable cost. Correct answer: C (C. It is less costly to produce a specific level of output within a single firm than with two or more firms.) Explanation: Cost subadditivity means that, for a given total output, one firm can produce it at a lower total cost than two (or more) firms splitting production. This property is what underpins the notion of a natural monopoly. Q4 Which of the following defines a “pure public good” in the context of energy and environmental resources? • A. A good that is both non-excludable and non-rivalrous. • B. A resource where use by one individual reduces availability to others. • C. A good where individuals can be effectively excluded from its consumption. • D. A resource that is rivalrous but non-excludable, like deep-sea fisheries. • E. A commodity provided exclusively by state-owned monopolies. Correct answer: A (A. A good that is both non-excludable and non-rivalrous.) Explanation:
Regulatory lag allows the firm to keep (temporarily) the benefits from cost reductions until the next rate review. This strengthens cost-efficiency incentives and mitigates the capital-bias distortion described by Averch–Johnson. Q7 In the “classic” Peak-Load Pricing model, how are the capacity costs allocated to achieve efficiency? • A. Peak consumers pay the sum of marginal operating costs and full capacity costs. • B. Capacity costs are shared equally between peak and off-peak consumers regardless of demand. • C. Off-peak consumers pay for all capacity costs to discourage night-time consumption. • D. Neither group pays for capacity costs; these are covered by international carbon credits. • E. Off-peak prices are set to zero to encourage maximum utilization of idle plants. Correct answer: A (A. Peak consumers pay the sum of marginal operating costs and full capacity costs.) Explanation: In the classic peak-load pricing model, capacity is chosen to meet peak demand, so peak-period prices include both marginal operating cost and the marginal capacity cost (scarcity/capacity charge). Off-peak prices reflect only marginal operating cost. Q8 Consider a perfectly competitive market where Demand is P = 90 − Q and Supply is P = 30 + Q. What are the equilibrium quantity (Q*) and price (P*)? • A. Q* = 60, P* = 30 • B. Q* = 45, P* = 45 • C. Q* = 30, P* = 60 • D. Q* = 20, P* = 70 • E. Q* = 90, P* = 30 Correct answer: C (C. Q* = 30, P* = 60) Explanation:
The April 2024 data indicate that OPEC countries account for roughly four-fifths of proven oil reserves. Among the options provided, the consistent value is about 79%. Q11 When the price of a good increases, the change in consumer surplus is represented by a trapezoid. What is measured by the rectangle within that trapezoid? • A. The value of the units no longer consumed due to the price hike. • B. The loss in surplus because the consumer pays more for units they continue to consume. • C. The profit gain for the producer from attracting new high-value customers. • D. The total deadweight loss generated by the reduction in production. • E. The marginal cost of the last unit sold before the price changed. Correct answer: B (B. The loss in surplus because the consumer pays more for units they continue to consume.) Explanation: When price increases, the loss in consumer surplus is the area between the old and new prices under the demand curve up to the new quantity-graphically a trapezoid (often decomposed into a rectangle plus a triangle). The rectangle indicate the loss of consumer surplus for the consumers who remain in the market (still purchase the good), but have now to pay more for the same product. Q12 In the general formulation for performance-based regulation R = a + (1 − b)TC, which setting for the sharing parameter provides the strongest incentives for cost efficiency? • A. b = 1. • B. b = 0. • C. b = 0.5. • D. b equal to the marginal cost of abatement. • E. b equal to the price elasticity of demand. Correct answer: A (A. b = 1.) Explanation:
Emissions from the generation of purchased electricity consumed by the company are classified as Scope 2. Scope 1 covers direct emissions from owned/controlled sources; Scope 3 covers other indirect emissions along the value chain. Q15 If a firm’s Marginal Cost function is MC(Q) = 4 + 0.5Q and the Fixed Cost is €1,000, calculate the Total Cost (TC) for producing 20 units. • A. €1,000. • B. €1,180. • C. €1,090. • D. €1,240. • E. €1,400. Correct answer: B (B. €1,180.) Explanation: Since MC(Q) = dTC/dQ, total variable cost is the integral: TVC(Q) = ∫(4 + 0.5Q)dQ = 4Q + 0.25Q². At Q = 20, TVC = 4·20 + 0.25·400 = 80 + 100 = 180. Total cost is TC = FC + TVC = 1000 + 180 = 1180.
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