Two firms, Industrio and Capitalista, 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. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted.
Suppose the government decides to auction 6 permits. The government conducts the auction by starting at a price of $1 and asking how many permits each firm wants to buy at that price. If the total is more than 6, it raises the price by $1 and asks again until the total quantity demanded falls to 6. Under this system, each permit will sell for ________ with Industrio buying ________ and Capitalista buying ________.
A)$31; 2; 4
B)$41; 4; 2
C)$51; 4; 2
D)$101; 3; 3

Question

Two firms, Industrio and Capitalista, 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. Both firms currently use process A, and each emits 4 tons of smoke per day. The government is considering two plans to reduce pollution: requiring both firms to reduce pollution by 25 percent or auctioning pollution permits. Each permit would entitle the owner to emit one ton of smoke per day. Without a permit, no smoke can be emitted.   
Suppose the government decides to auction 6 permits. The government conducts the auction by starting at a price of $1 and asking how many permits each firm wants to buy at that price. If the total is more than 6, it raises the price by $1 and asks again until the total quantity demanded falls to 6. Under this system, each permit will sell for ________ with Industrio buying ________ and Capitalista buying ________.
A)$31; 2; 4 
B)$41; 4; 2 
C)$51; 4; 2 
D)$101; 3; 3

Quizplus · Accepted Answer

At a price of $41, Industrio will buy 4 permits, since the marginal benefit of buying a permit in terms of the reduction in the firm's cost is always greater than $41. Capitalista will purchase 2 permits since the marginal benefit of the first 2 permits in terms of the reduction in the firm's cost is greater than $41, but the reduction in the firm's cost from buying a third permit is less than $41.

Two Firms, Industrio and Capitalista, Have Access to Five Production