Practice

Free response question

Microeconomics · Hard · 30 marks

IEO past paper: 2026 International Economics Olympiad, open questions

Open Question 5. AI data centres: Earth or orbit? Firm SpaceY must decide whether to locate an AI training facility on Earth or in low-Earth orbit. Consider sunlight in orbit is free and continuous, but every piece of orbital equipment must first be launched from Earth. Assume the orbital facility is technically feasible and ignore every private cost not stated explicitly: computing hardware, cooling and heat rejection, communications, radiation shielding, maintenance, insurance, and end-of-life disposal. All quantities and prices below are hypothetical.

(a)In choosing a location, is an AI training data centre more like a shopping mall or an aluminium smelter facility? Name the location principle at work, and state which location factors matter most and which barely matter for such a centre.[6](b)Electricity on Earth costs $0.05/kWh. A centre draws power continuously, operating 8,000 hours per year for 5 years. Ignore discounting unless explicitly asked. On Earth the firm buys grid power. In orbit power is free, but supplying 1 kW of continuous power requires launching 10 kg of equipment, at a current launch price of $1,500/kg. (i) For a 1 kW load, compute the lifetime Earth electricity bill and the orbital launch cost. (ii) At what launch price per kg does orbit just break even? By what factor must today's launch price fall to reach it? (iii) Ignoring discounting was assumed above. Does that assumption favour Earth or orbit, and why?[9](c)Today a firm pays to launch, but pays nothing else. Identify two costs an orbital centre imposes on parties other than the firm and its customers, and state who bears each. Then name precisely the economic problem associated with these costs. Choose one of the two suggested costs and propose a corrective instrument and the single obstacle to enforcing it.[8](d)Some regions have abundant electricity that is effectively stuck (stranded): remote hydro with no transmission line, associated gas which is burnt off, so its local value is near zero. Electricity is costly to transport and to store; a trained model is a small file (weights). Explain in what sense building an AI training centre at such a site lets a firm "export electricity" that otherwise would be difficult to sell.[7]

Up to 5 AI marks a day. The mark scheme is shown after marking.

Report a mistake