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Question 1

Suppose that there are two firms creating `240` units of pollution. Suppose that the government wants to reduce pollution by `192` units, so it gives each firm `24` permits. In addition, the costs of reducing the pollution by each firm are reported in the table below.

Firm Initial Pollution Level Cost of Reducing Pollution by 1 Unit
A 120 units $100
B 120 units $400



Suppose that pollution permits are NOT tradable. What is the cost of reducing the pollution?

Suppose that pollution permits are tradable. Which firm will most likely be selling the permits?

Suppose that pollution permits are tradable. Which firm will most likely be buying the permits?

Suppose that pollution permits are tradable. What is the lowest price at which the pollution permits could be traded?

Suppose that pollution permits are tradable. What is the highest price at which the pollution permits could be traded?

Suppose that pollution permits are tradable at the price of `250`. What is cost of reducing the pollution to firm A?

Suppose that pollution permits are tradable at the price of `250`. What is cost of reducing the pollution to firm B?

Suppose that pollution permits are tradable at the price of `250`. What is total cost of reducing the pollution?

Compare the costs of reducing pollution with non-tradable pollution permits with tradable pollution permits. The cost with tradable pollution permits is

Suppose that the government uses command-and-control regulation and requires each firm to reduce pollution by `96` units. What is the total cost of reducing the pollution?

Compare the costs of reducing pollution with non-tradable pollution permits with command-and-control regulation. The cost with non-tradable pollution permits is

Compare the costs of reducing pollution with tradable pollution permits with command-and-control regulation. The cost with tradable pollution permits is