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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