Refer to the Data Provided in Table 16 -Refer to Table 16

question 232

Multiple Choice

Refer to the data provided in Table 16.2 below to answer the following question(s) .
Table 16.2 shows the situation facing two firms, both of which are polluting. Assume that each firm emits 5 units of pollution.
Table 16.2
$$\begin{array} { | c | c | c | c | c | c | } \hline \text { Firm A } & \text { Firm A } & \text { Firm A } & \text { Firm B } & \text { Firm B } & \text { Firm B } \\\hline \begin{array} { c } \text { Reduction of } \\\text { Pollution by } \\\text { Firm A }\end{array} & \begin{array} { c } M C \text { of } \\\text { reducing } \\\text { pollution for } \\\text { Firm A }\end{array} & \begin{array} { c } T C \text { of } \\\text { reducing } \\\text { pollution for } \\\text { Firm A }\end{array} & \begin{array} { c } \text { Reduction of } \\\text { Pollution by } \\\text { Firm B }\end{array} & \begin{array} { c } M C \text { of } \\\text { reducing } \\\text { pollution for } \\\text { Firm B }\end{array} & \begin{array} { c } T C \text { of } \\\text { reducing } \\\text { pollution for } \\\text { Firm B }\end{array} \\\hline 1 & \$ 1 & \$ 1 & 1 & \$ 8 & \$ 8 \\\hline 2 & 3 & 4 & 2 & 12 & 20 \\\hline 3 & 6 & 10 & 3 & 16 & 36 \\\hline 4 & 10 & 20 & 4 & 20 & 56 \\\hline 5 & 15 & 35 & 5 & 24 & 80 \\\hline\end{array}$$
-Refer to Table 16.2. Suppose the government wants to reduce the total amount of pollution from the current level of 10 to 4. To do this, the government caps each firm's emissions at 2 units and issues 2 permits to each firm. If firms are allowed to trade permits and all possible trades are made, Firm A will reduce its pollution by a total of ________ units.

• A) 2
• B) 3
• C) 4
• D) 5

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Definitions:

Risk-Free Rate

The theoretical return on an investment with zero risk, often represented by the yield on government securities.

Face Value

The nominal or dollar value printed on a financial instrument, such as a bond or stock certificate, representing the amount to be paid at maturity or the value of a share.

Straight Bond Value

The present value of a bond's future interest payments and its redemption value at maturity, assuming it has no special features.

Black-Scholes Option Pricing Model

A mathematical model for pricing an options contract by estimating the variation over time of financial instruments.