Question

Two firms, A and B, each currently dump 50 tons of chemicals into the local river. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution dumped into the river. The government will sell 40 pollution permits for $75 each. It costs Firm A $100 for each ton of pollution that it eliminates before it reaches the river, and it costs Firm B $50 for each ton of pollution that it eliminates before it reaches the river. Neither firm produces any less output, but they both conform to the law. It is likely that between the cost of permits and the cost of additional pollution abatement, a. Firm B will spend $3,000. b. Firm B will spend $3,500. c. Firm A will spend $4,500. d. Firm A will spend $4,000.

Answer 1

Answer: Firm A will spend $4,000.

Explanation: Daily chemical dumps into the river firm A & B = 50ton.

i. Firm B clean-up cost before it gets the the river = $50/ton.

= $50 x 50tons = $2500.

ii. Government polution rate $75/ton

= $75 x 40(permits) = $3000

Firm B clean-up is less than the cost of pollution permits with $500. Cleaning up it's pollution would be best since it's the cheaper alternative..

Firm A cleanup cost per ton ($100/ton).

= $100 x 50tons = $5000

ii. Government polution rate $75/ton

= $75 x 40(permits) = $3000.

Firm A clean-up is greater than the cost of pollution permits with $2000. Cleaning up it's pollution would cost more. So purchasing of permits would be best.

iii. Purchasing 40 pollution permits

= $100 x 40

= $4000.

Answer 2

d. Firm A will spend $4,000.

Step-by-step explanation:

Since Firm B cost of Cleanup before it gets the the river is less than the cost of pollution permits, it will choose to clean up its pollution.

However, since Firm A cleanup cost per ton ($100) is greater than the cost of the pollution permit, it will choose to buy permits.

Maximum Allowable Number of Permits=40

Therefore, Firm A will clean up 10 Tons and dump 40 Tons of Waste.

Cost =(10 Tons *$100)+(40 Tons * $75)

=$(1000+3000)

=$4000.

Firm A will spend $4000.