Firm 1 and Firm 2 produce q1 and q2 units of a homogeneous good. Firm 1 islocated upstream from Firm 2, and also produces z units of pollution. Costsfor the two firms are given by:C1(41, 2) = 91 + (z – 1)?C2(42, 2) = q2 + 0.1zq2Market demand for the good is given by P(qı + q2) = 2 – qi – 42.(a) Set up the profit maximization problem for each firm.(b) How much will firm 1 choose to pollute?(c) What are the equilibrium quantities of output chosen by each firm?(d) Suppose there is a market for pollution. That is, firm 1 must pay firm 2Pz for each unit it pollutes. What is the equilibrium price of pollution?How much does firm 1 pollute? How do the equilibrium quantities ofpollution and output in parts (b) and (c) compare to this new equilib-rium?(e) How do the equilibrium quantities of output in part (c) compare to whatyou would observe if pollution was banned?(f) How do the equilibrium quantities of pollution and output in parts (b)and (c) compare to what you would observe if pollution was not bannedbut the firms acted as perfect competitiors?

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Firm 1 and Firm 2 produce q₁ and q2 units of a homogeneous good. Firm 1 is 91 located upstream from Firm 2, and also produces z units of pollution. Costs for the two firms are given by: C₁(9₁, 2) = q₁ + (z − 1)² C2(92, 2) = 92 +0.1zq2 Market demand for the good is given by P(q1 +92) = 2-91-92- (a) Set up the profit maximization problem for each firm. (b) How much will firm 1 choose to pollute? (c) What are the equilibrium quantities of output chosen by each firm?

Firm 1 and Firm 2 produce q₁ and q2 units of a homogeneous good. Firm 1 is 91 located upstream from Firm 2, and also produces z units of pollution. Costs for the two firms are given by: C₁(9₁, 2) = q₁ + (z − 1)² C2(92, 2) = 92 +0.1zq2 Market demand for the good is given by P(q1 +92) = 2-91-92- (a) Set up the profit maximization problem for each firm. (b) How much will firm 1 choose to pollute? (c) What are the equilibrium quantities of output chosen by each firm?

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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