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Problems and Applications Q11 There are three industrial firms in Happy Valley
Problems and Applications Q11 There are three industrial firms in Happy Valley. Initial Pollution Level Cost of Reducing Pollution by 1 Unit (Dollars) Firm (Units) A 70 20 B 80 25 C 50 10 The government wants to reduce pollution to 120 units, so it gives each firm 40 tradable pollution permits. another firm. Because firm Because firm has the highest cost of reducing pollution by 1 unit, it would like to has the lowest cost of reducing pollution by 1 unit, it is willing to the firm with the highest cost.
Complete the second column of the following table by indicating who buys and sells permits in this case. Complete the fourth column of the table with the number of permits each firm ends up with after trading with the others. Next, subtract the number of permits from the initial pollution level to determine how many units of pollution reduction each firm has to complete, and enter these values into the fifth column of the table. Next, determine the total cost of reducing the pollution levels you determined in the previous column, and enter that into the final column of the table. Finally, add up the total pollution reduction costs for each firm and enter the total amount in the final cell of the total row in the following table. Initial Pollution Remaining Pollution Reduction Total Pollution Reduction Cost Permits Cost of Reducing Pollution by 1 Unit (Dollars) Firm Buys or Sells Level after Trade (Dollars) A 70 20 B 80 25 ? 50 10 Total . If permits could not be traded, firm A would have to remove units of pollution at a total cost of $ firm B would have to remove units of pollution at a total cost of $ and firm C would have to remove units of pollution at a total cost of $ The overall cost of reducing pollution in this case is $ which is than with tradable permits.
Expert Solution
Working notes:
- ATC = TC / Q
- MC = Change in TC / Change in Q
Thus:
| Q | MC | TC | ATC |
| 1 | 2 | 2 | 2 |
| 2 | 4 | 6 | 3 |
| 3 | 6 | 12 | 4 |
| 4 | 8 | 20 | 5 |
| 5 | 10 | 30 | 6 |
| 6 | 12 | 42 | 7 |
Profit is maximized when P >= MC and MC is increasing.
(1) When P = 11:
When Q = 5, P > MC (11 > 10) but when Q = 6, P < MC (11 < 12). Therefore,
Q = 5
When P = 11, Market quantity = 200
Number of producers = 200 / 5 = 40
Firm revenue (TR) = P x q = 11 x 5 = 55
Firm cost = 30
Firm profit = TR - TC = 55 - 30 = 25
So, 200 pies are sold in market. Each producer makes 5 pies, there are 40 producers each making profit of $25.
(2) False
In long run equilibrium each firms makes zero profit, but here profit is positive, meaning short run equilibrium.
(3) In long run, each producer makes zero profit. Market price is $2 (since in long run equilibrium, P = MC = ATC which holds true when MC = ATC = $2). At this price, 1,100 pies are sold in market, each producer makes 1 pie (since MC = ATC = 2 when q = 1). So there are 1,100 producers (= 1,100 / 1).
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