Quiz 22. Production externalities

Quiz 22. Production externalities - (a) Suppose the price...

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Shomu Banerjee ECON 201 EXTERNALITY QUIZ A honey farm is located next to an apple orchard. The honey producer’s cost function is c H ( h ) = ( h 2 /100) – a /5, where h is the quantity of honey produced and a is the quantity of apples produced—there is a positive externality here since apple production reduces the honey farm’s cost of production. The apple orchard’s cost function is c A ( a ) = ( a 2 /100) – h , which shows a similar positive externality since honey production reduces the apple producer’s cost. Each firm behaves as competitive producer in its market and maximizes its profits.
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Unformatted text preview: (a) Suppose the price of honey is $2 per unit. How much honey does the farm produce? (b) Suppose the price of apples is $3 per unit. How many apples does the orchard produce? (c) What are the profits of each producer? (d) Suppose the two firms merge. Solve for the quantity of honey and apples produced and the profit of the merged company. ( Hint : Write down the profit function of the merged firm and then differentiate with respect to h and a .)...
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This note was uploaded on 10/26/2010 for the course ECONOMICS ECON 201 taught by Professor Dr.shomubanerjee during the Summer '07 term at Emory.

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