-The Above Figure Shows the Payoff Matrix for Two Firms

question 96

Essay

-The above figure shows the payoff matrix for two firms.A chemical firm must choose between a low level of production which yields one ton of pollution into a nearby lake and a high level of production which yields two tons of pollution into the nearby lake.A private beach on the lake must decide whether to operate or not.Increased pollution reduces the number of people who wish to visit the beach.If the chemical firm owns the lake and the beach owner must pay the chemical firm $10 to produce only one ton of pollution,what is the outcome? If the beach owner owns the lake and the chemical firm must pay $10 per ton of pollution,what is the outcome? Compare this result to the case where nobody owns the lake.

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Definitions:

Disposable Income

Households' budget for spending and savings after the necessary income taxes have been deducted.

Induced Consumption

Consumer spending that increases as disposable income rises, and decreases as income falls.

Disposable Income

Net resources for spending and saving available to households after subtracting income taxes.

MPC

MPC, or Marginal Propensity to Consume, is the proportion of additional income that an individual spends on consumption.