Question

Two firms, ABC Textile, Inc. and XYZ Coal Mining, Inc., each currently dump 12 tons of chemicals into the local river. The local government has decided that 24 tons of pollution is too much. They want to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government gives each firm five pollution permits, which it can either use or sell to the other firm. ABC Textile has a resource cost of $45,000 for each ton of pollution that it eliminates and it costs XYZ Coal Mining the amount of $38,000 for each ton of pollution that it eliminates. It is likely that

Select one:

A. Both firms will use their own pollution permits and none will be sold.

B. XYZ Coal Mining will buy all of ABC Textile’s pollution permits. Each one will cost between $38,000 and $45,000.

C. XYZ Coal Mining will buy all of ABC Textile’s pollution permits. Each one will cost less than $38,000.

D. ABC Textile will buy all of XYZ Coal Mining’s pollution permits. Each one will cost less than $38,000.

E. ABC Textile will buy all of XYZ Coal Mining’s pollution permits. Each one will cost between $38,000 and $45,000.

Answer 1

Question

ABC Textiles can eliminate each ton of pollution at cost of $45,000.

XYZ Coal Mining can eliminate each ton of pollution at cost of $38,000.

The government gives each firm 5 pollution permits. These permits can be sold to each other by the firms.

It can be seen that XYZ Coal Mining can eliminate each ton of pollution at lower cost than the ABC Textiles.

This means that ABC Textiles can purchase pollution permits from XYZ Coal Mining.

The maximum that ABC Textiles would be willing to pay will be $45,000 and minimum that XYZ Coal Mining would be willing to accept is $38,000.

So,

It is likely that ABC Textiles will buy all of XYZ Coal Mining's pollution permits. Each one will cost between $38,000 and $45,000.

Hence, the correct answer is the option (E).