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Technological improvements and reduced equipment [#permalink]
04 Jul 2008, 15:01
This post was BOOKMARKED
Technological improvements and reduced equipment costs have made converting solar energy directly into electricity far more cost-efficient in the last decade. However, the threshold of economic viability for solar power (that is, the price per barrel to which oil would have to rise in order for new solar power plants to be more economical than new oil-fired power plants) is unchanged at thirty-five dollars. Which of the following, if true, does most to help explain why the increased cost-efficiency of solar power has not decreased its threshold of economic viability? (A) The cost of oil has fallen dramatically. (B) The reduction in the cost of solar-power equipment has occurred despite increased raw material costs for that equipment. (C) Technological changes have increased the efficiency of oil-fired power plants. (D) Most electricity is generated by coal-fired or nuclear, rather than oil-fired, power plants. (E) When the price of oil increases, reserves of oil not previously worth exploiting become economically viable.
Here's my expanation why A is wrong (rather long).
The value of threshold does not depend on oil prices at all. See the example below:
Let’s see if oil prices could influence the threshold.
Imagine that we need to produce 100 units of energy.
For solar plants, it will cost 50 dollars. For oil plants, it will cost, say, 45 dollars. We know that this cost proportional to oil price. What does ‘threshold’ means? It is the price for oil for with total cost of producing 100 units of energy at oil plant will be equal to the cost of producing the same amount of energy at solar plant. From the argument, we know that this price is 35$ per barrel. So, for this price, the cost of producing 100 units of energy at oil plant will be 50.
But what happens if the prices for oil go down? Clearly, the cost for producing 100 units of energy also goes down – say, to 40. But it will not by itself change the threshold – because this threshold depends on the cost of producing of energy at solar plants as well as on the corresponding cost for oil plants. So, as far as cost of energy producing at solar plant remains stable, change in oils prices does not influence the threshold.
On the other hand, lowering the cost of energy producing at solar plants indeed moves the threshold down – and lowering low prices could not prevent this.