Two Firms, a and B, Each Currently Emit 100 Tons

question 456

Multiple Choice

Two firms, A and B, each currently emit 100 tons of chemicals into the air. The government has decided to reduce the pollution and from now on will require a pollution permit for each ton of pollution emitted into the air. The government gives each firm 40 pollution permits, which it can either use or sell to the other firm. It costs Firm A $200 for each ton of pollution that it eliminates before it is emitted into the air, and it costs Firm B $100 for each ton of pollution that it eliminates before it is emitted into the air. It is likely that

• A)Firm A will buy all of Firm B's pollution permits. Each one will cost between $100 and $200.
• B)Firm B will buy all of Firm A's pollution permits. Each one will cost between $100 and $200.
• C)Both firms will use their own pollution permits.
• D)Firm A will buy some of Firm B's pollution permits. Each one will cost less than $100.

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