Firm 1 Produces Output X with a Cost Function C₁(x)

question 6

Multiple Choice

Firm 1 produces output x with a cost function c₁(x) = x² + 10. Firm 2 produces output y with a cost function c₂(y, x) = y² + x. Thus, the more that firm 1 produces, the greater are firm 2's costs. Both firms face competitive product markets. The competitive price of x is $20 and the competitive price of y is $40. No new firms can enter the industry and the old ones must remain. The efficient Pigouvian tax on the x good is

• A) $0.
• B) $1.
• C) $2.
• D) $3.
• E) $4.

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Definitions:

Transfer Price

The price at which goods and services are transferred between departments or subsidiaries of the same company, often used for accounting and tax purposes.

Market Price Approach

A valuation method that estimates the price of an asset based on the current market prices of similar assets.

Decentralization

The distribution of decision-making authority to lower levels in an organization, allowing for more localized and faster decision processes.

Separate Office Staff

A designated group of employees who work in a distinct physical or administrative division within an organization.