CR: Technological improvements and reduced equipment costs

[SHOUMODIPR218]

Dear Experts,

I read the forum and explanation but could not find the place where I am making a mistake in reasoning. Pls analyze my line of reasoning.

Oil power factory includes two costs: price of oil barrel + price of conversion of oil to electricity.

Now since cost of conversion of solar to electricity reduced, the threshold price or the gap in price(cost of solar into electricity -- cost of oil barrel) should decrease. BUT this did not happen OR the gap in price remained same as previous.

cost of solar into electricity minus cost of oil barrel = Threshold
So, for Threshold value to remain same : 1) if cost of solar into electricity decreased, then cost of oil barrel should decrease
2) if cost of solar into electricity increased, the cost of oil barrel should increase

The improvement in efficiency of oil power plant seems irrelevant because the cost that is reduced from there doesnot determine the GAP/THRESHOLD.
beacuse THRESHOLD = Cost of solar conversion - cost of OIL barrel.

Had it been THRESHOLD = Cost of solar conversion - cost of conversion of oil to electricity, then the efficiency in oil power factory would have contributed to threshold.

I know that OFFICIAL answers are ALWAYS CORRECT. I am not challenging the correctness of answer. I am just trying to find a flaw in my reasoning of choosing option A over option C.
So please help with some explanation.

Regards
Shoum

[Sage Pearce-Higgins]

Thanks for detailing your logic so clearly. Let me see if I can find out where your error is.

Oil power factory includes two costs: price of oil barrel + price of conversion of oil to electricity.

That's accurate.

Now since cost of conversion of solar to electricity reduced, the threshold price or the gap in price(cost of solar into electricity -- cost of oil barrel) should decrease. BUT this did not happen OR the gap in price remained same as previous.

This is where I think you go wrong. The text doesn't discuss this gap, but mentions 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. Since we're talking about "more economical", that should include both the price of oil and the price of conversion into electricity. Of course, they deliberately don't mention the conversion price, in order to confuse you.

cost of solar into electricity minus cost of oil barrel = Threshold
So, for Threshold value to remain same : 1) if cost of solar into electricity decreased, then cost of oil barrel should decrease
2) if cost of solar into electricity increased, the cost of oil barrel should increase

This is not accurate. The cost of the oil barrel could remain the same, but the conversion price could change.

What makes this problem tricky is the issue of hidden costs. Sure, solar power has got cheaper, but so has producing power from oil.