A Blue Ribbon Committee has decided that the amount of acid rain should be reduced and is trying to determine the optimal level of reduction. There are benefits from reducing acid rain (reduced loss of wildlife and forest, better health, etc.), but there are also costs. The committee estimates that the marginal benefit of each unit of reduction is $1,400 -5R, where R is units of reduction, and the marginal cost is 2R. If the committee wants to maximize the net benefit from reducing acid rain, what is marginal cost at the optimal level of reduction?

Question

Quizplus · Accepted Answer

To maximize net benefits, set marginal benefit equal to marginal cost: $1,400 - 5R = 2R. Solving for R gives R = 200. The marginal cost at this level is 2R = 2(200) = $400. However, the question asks for the marginal cost at the optimal level of reduction, which is $200, as the marginal cost function is 2R.

A Blue Ribbon Committee Has Decided That the Amount of Acid