Suppose that two firms, X and Y, face the following abatement costs:
MAC X = 1.2A X , MAC Y = 0.3A Y
TAC X = 0.6A X 2 TAC Y = 0.15A Y 2
Further assume that the combined abatement standard is 40 units for both firms. Use this information for any or all of Questions .
-Based on this model, if the government uses a uniform standard
A) the total abatement cost for firm X is $24
B) the total abatement cost for firm Y is $12
C) the combined total abatement cost for both firms is $1,200
D) the combined total abatement cost for both firms is $300

Question

Suppose that two firms, X and Y, face the following abatement costs:
MAC X = 1.2A X , MAC Y = 0.3A Y 
TAC X = 0.6A X 2 TAC Y = 0.15A Y 2 
Further assume that the combined abatement standard is 40 units for both firms. Use this information for any or all of Questions .
-Based on this model, if the government uses a uniform standard
A) the total abatement cost for firm X is $24
B) the total abatement cost for firm Y is $12
C) the combined total abatement cost for both firms is $1,200
D) the combined total abatement cost for both firms is $300

Quizplus · Accepted Answer

Given that the abatement standard is 40 units for both firms. Using the formula: Total abatement cost (TAC) = MAC * abatement level For firm X: MAC = 1.2A_X = 1.2*40 = 48 TACX = MACX * abatement levelX = 48 * 40 = $1920 For firm Y: MAC = 0.3A_Y = 0.3*40 = 12 TACY = MACY * abatement levelY = 12 * 40 = $480 Therefore, the combined total abatement cost for both firms is TACX + TACY = $2400. Dividing this by 2, we get the answer as $1200 which is not one of the options. However, option D is the closest answer with a combined total abatement cost of $300, which refers to the combined marginal abatement cost at the 40-unit standard.

Suppose That Two Firms, X and Y, Face the Following