3. Two firms are located on adjacent properties. The first firm generates smoke as a byproduct of its production process. The smoke imposes cost on the other firm. The first firm produces Cx=0.5x2+7X+1845. The second firm produces Y according to the cost function C,=0.038Y2+12X. Both firms sell their products in perfectly competitive markets with Px=70 and Py=14.06. X according to the cost function: a) Find the optimal X and Y if the firms act independently. What are the profits for each firm? b) Find the optimal X and Y if the firms merge. What are the profits for the joint firm? Explain why profits are different in part a and part b. c) Find the tax that will lead to the socially efficient amount of X. Discuss the strengths and weaknesses of the tax approach for dealing with externalities.

3. Two firms are located on adjacent properties. The first firm generates smoke as a byproduct of its production process. The smoke imposes cost on the other firm. The first firm produces Cx=0.5x2+7X+1845. The second firm produces Y according to the cost function C,=0.038Y2+12X. Both firms sell their products in perfectly competitive markets with Px=70 and Py=14.06. X according to the cost function: a) Find the optimal X and Y if the firms act independently. What are the profits for each firm? b) Find the optimal X and Y if the firms merge. What are the profits for the joint firm? Explain why profits are different in part a and part b. c) Find the tax that will lead to the socially efficient amount of X. Discuss the strengths and weaknesses of the tax approach for dealing with externalities.

Microeconomic Theory

12th Edition

ISBN:9781337517942

Author:NICHOLSON

Publisher:NICHOLSON

Chapter19: Externalities And Public Goods

Section: Chapter Questions

Problem 19.1P: A firm in a perfectly competitive industry has patented a newprocess for making widgets. The new...

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