Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below.
Suppose the firms are both currently using process A. If the government imposes a tax of $110 per ton of smoke emitted, then Acme will use process ________, and FirmCo will use process ________.
A)B; A
B)C; A
C)C; C
D)D; C

Question

Two firms, Acme and FirmCo, have access to five production processes, each of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are shown in the table below.   
Suppose the firms are both currently using process A. If the government imposes a tax of $110 per ton of smoke emitted, then Acme will use process ________, and FirmCo will use process ________.
A)B; A 
B)C; A 
C)C; C 
D)D; C

Quizplus · Accepted Answer

Firms will switch to a cleaner production process as long as the marginal benefit of doing so is greater than the marginal cost. Given the tax, the marginal benefit of reducing emissions by 1 ton is $110 per day, and the marginal benefit of reducing pollution by 2 tons is $220 per day. Acme's cost of reducing pollution by 2 tons by moving from process A to B and by moving from process B to C is less than $220 per day, but its cost of reducing pollution by 2 tons by moving from process C to D and by moving from process D to E is greater than $220. Thus, it will be in Acme's interest to switch to process C. Since FirmCo's cost of reducing pollution by 2 tons is always greater than $220, it will stick with process A.

Two Firms, Acme and FirmCo, Have Access to Five Production