Question

Question 16 Firms A through Drelease a certain amount of pollution and the government wants to intervene somehow to lower pollution. In the table below, each firm is tabulated along with the cost to reduce pollution. Firm A B D 54 Unit to be eliminated First unit Second unit Third unit Fourth unit с 54 66 82 57 68 86 108 67 82 107 62 73 91 107 111 For Firm A, to reduce the first unit of pollution costs $54. After that, to eliminate the second unit of pollution costs $67. Hence, to eliminate two units of pollution costs Firm A $121. Suppose the government charged each firm $50 per unit of pollution they release. How many units of pollution would be eliminated? 3 a. b. 5 Oco O d. 8 None of these e. Question 17 Read the table carefully: Labor Hours Needed to Make 1 Unit of Number of Units Produced in 24 Hours Sugar Wheat Sugar 24 1 14 Wheat Dominican 6 Republic United States 14 24 16 The Dominican Republic has comparative advantage in O a. Wheat b. None of these. Oc Sugar d. Wheat and Sugar e. Nothing

Answer 1

Question 16

A firm will reduce a particular unit of pollution if the cost to eliminate that particular unit is less than the cost to emit(fee charged by the government). If the cost of eliminating a particular unit of polluti@on is greater than the fee charged by the government, then it will be profitable for the firm to emit that particular unit of pollution and pay the fees charged by the government.

For example.

For firm A it will cost $54 to eliminate first unit of pollution but it will only cost $50 to emit the first unit of pollution. Since the cost of polluting is less than the cost of eliminating, it means that firm A will choose to emit the first unit of pollution.

We will apply the above decision rule for each firm.

On observing the table we find that for firmA, firmB, firmC and firmD the cost of eliminating the pollution is greater than the cost of polluting($50 per unit pollution charged by government) for all units of pollution. Thus no firms will have any incentive to eliminate any particular unit of pollution. So firmA, firmB, firmC and firmD will reduce 0 units of pollution each.

So correct answer is option (c).