Suppose there are two firms and they pollute the environment. Their total abatement cost is given...

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Suppose there are two firms and they pollute the environment. Their total abatement cost is given...

Suppose there are two firms and they pollute the environment. Their total abatement cost is given below.

TC(R1)=1/2(R1)^2,

TC(R2)=2/3(R2)^3/2

Suppose the government wants to reduce pollution by 12 units.

6. Now suppose that firms are allowed to sell and buy pollution permits from each other. In the absence of any permits, they need to reduce pollution by 6 units each. If the price of pollution permits is $2, how many pollution permits would Firm 1 buy?

7.Now suppose that firms are allowed to sell and buy pollution permits from each other. In the absence of any permits, they need to reduce pollution y 6 units each. If the price of pollution permits is $2, how many pollution permits would Firm 2 buy?

8. Can $2 be an equilibrium price for permits?

A Yes, both firms purchase permits and reduce their costs of abatement.

B No, we need the two firms to trade (one firm wants to buy the same amount the other firm wants to sell) and at $2 both firms want to purchase permits.

9. What is the equilibrium price at which permits are traded?

10.

Choose the all correct answers.

A Firm 1 saves $22 by purchasing permits from firm 2 compared to the policy where it has to reduce pollution by 6 units.

B Firm 2 is better off by $18 by selling permits to firm 1 compared to the policy where it has to reduce pollution by 6 units.

C Firm 1 saves $4.5 by purchasing permits from firm 2 compared to the policy where it has to reduce pollution by 6 units.

D

Firm 2 is better off by $0.80 by selling permits to firm 1 compared to the policy where it has to reduce pollution by 6 units.

E Firm 2 is better off by $9 by selling permits to firm 1 compared to the policy where it has to reduce pollution by 6 units.

F Firm 1 saves $9 by purchasing permits from firm 2 compared to the policy where it has to reduce pollution by 6 units.

business economics

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Answer 1

Answer #1

B15 A 2 → total pouuti on wnlu abated Permit pice a, R R2 6, Now for 1) inits abated 1 a 3 4 5 G MAC 1 3 4 5 6 80 pi wil buy wi h buy 3 permits, Nouw when Ri-3, TAG x45 30 total saving compaking to Coor when t has to 4.5 $ option c) ↑sRght = Ογ P2) g

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Answer 2

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