econ2a-ansps5

econ2a-ansps5 - BRANDEIS UNIVERSITY Department of Economics...

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BRANDEIS UNIVERSITY Department of Economics Economics 2a Mr. Coiner Intro to Econ Fall, 2000 Answers to Problem Set 5 1. a) The cost to Acme to cut back by 3 tons is $3 + $6 + $9 = $18. The cost to Bloated to cut back by 3 tons is $1 + $2 + $3 = $6. The total cost for both firms is $24. b) The high cost reducer, which is Acme, will buy permits from the low cost reducer, Bloated. Acme will buy 2 permits from Bloated. Here’s why. The first extra permit is worth up to $9 to Acme, because with that permit it will only have to cut back by 2 tons, not 3. Bloated is willing to sell the first permit for any amount over $4, which is its cost of reducing by 4 tons instead of only 3. So they’ll work out a sale at a price between $4 and $9. The second extra permit is worth up to $6 to Acme, because with that permit it will only have to cut back by 1 ton, not 2. Bloated is willing to sell the 2 nd permit for any amount over $5, which is its cost of reducing by 5 tons instead of 4. So they’ll work out a sale at a price between $5 and $6. BUT Acme will NOT buy a 3 rd permit from Bloated. The third permit is worth only $3 to Acme, but Bloated would only sell it for a price of $6 or more. So that sale will not happen. Note that with 2 permits transferred from Bloated to Acme, Acme cuts back by 1 ton at a cost
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This note was uploaded on 04/10/2008 for the course ECON 2a taught by Professor Coiner during the Fall '08 term at Brandeis.

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econ2a-ansps5 - BRANDEIS UNIVERSITY Department of Economics...

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