Suppose a paper mill earns $1,000,000 in profits when it pollutes a river,and it can abate pollution at a cost of $A.The effects of the pollution are confined to a single farmer who earns $400,000 if the water he uses from the river is clean and $300,000 if it's polluted.Which of the following expressions gives the combined profit of both firms with abatement?
A) $(1,300,000 - A)
B) $(1,400,000 - A)
C) $(700,000 + A)
D) $(1,700,000 - A)

Question

Quizplus · Accepted Answer

If the mill does not abate pollution, its profit is $1,000,000. However, if it abates pollution, its profit becomes $1,000,000 - A.

If the mill does not abate pollution and the farmer's water is clean, the farmer's profit is $400,000. However, if the mill does not abate pollution and the farmer's water is polluted, the farmer's profit is $300,000.

If the mill abates pollution, the farmer's profit will always be $400,000, since the water will always be clean.

Therefore, the combined profit of the two firms with abatement is $1,000,000 - A + $400,000 = $1,400,000 - A.

Suppose a Paper Mill Earns $1,000,000 in Profits When It