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Economies of Scale in Electricity Grids
Large infrastructure networks, like electricity grids, are prime examples of industries with significant fixed costs. The initial investment in materials and construction for infrastructure such as pylons and wires is substantial. In contrast, the daily operational and maintenance costs are relatively low. Consequently, once the network is built, the average cost of delivering each unit of electricity decreases as more electricity is transmitted through the system. This demonstrates how high fixed costs lead to economies of scale.
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CORE Econ
Economics
Introduction to Microeconomics Course
The Economy 2.0 Microeconomics @ CORE Econ
Ch.7 The firm and its customers - The Economy 2.0 Microeconomics @ CORE Econ
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Learn After
A regional government is deciding how to build out its electricity infrastructure to serve a large, populated area. The primary goal is to achieve the lowest possible average cost per unit of electricity delivered to consumers. Two plans are proposed:
Plan A: Construct one single, large, interconnected grid to serve the entire region. Plan B: Construct several smaller, independent grids, each serving a different district within the region.
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An electricity provider invests heavily in building a new, extensive network of transmission lines and pylons to serve a growing city. Once this infrastructure is in place, the cost of transmitting each additional kilowatt-hour of electricity is very small. Which of the following statements best analyzes the relationship between the provider's cost structure and the quantity of electricity it delivers?
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Because the initial investment in building an electricity grid is very high while the cost to transmit each additional unit of power is low, the average cost per unit of electricity falls as the total amount of power transmitted increases. This economic principle is known as ____.