Suppose a firm A produces a product q, but also pollution x that affects a second firm B. Firm A is a competitive firm and faces an equilibrium price of £12 for its product. The cost function of firm A is CA (q, x) = q² + (x-4)². Firm B is a competitive firm and faces an equilibrium price of £10. Firm B's cost function is CB (r, x) = r² + xr. Compute the equilibrium prices and quantities and the profits of the two separate, competitive firms. Interpret the first order conditions. Explain. Compute the social optimum, that is, the equilibrium prices, quantities, and profit when firm A and B are merged. Interpret the compare it to the solution in (a). Explain.

Suppose a firm A produces a product q, but also pollution x that affects a second firm B. Firm A is a competitive firm and faces an equilibrium price of £12 for its product. The cost function of firm A is CA (q, x) = q² + (x-4)². Firm B is a competitive firm and faces an equilibrium price of £10. Firm B's cost function is CB (r, x) = r² + xr. Compute the equilibrium prices and quantities and the profits of the two separate, competitive firms. Interpret the first order conditions. Explain. Compute the social optimum, that is, the equilibrium prices, quantities, and profit when firm A and B are merged. Interpret the compare it to the solution in (a). Explain.

Managerial Economics: A Problem Solving Approach

5th Edition

ISBN:9781337106665

Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor

Chapter10: Strategy: The Quest To Keep Profit From Eroding

Section: Chapter Questions

Problem 10MC

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