Suppose That There Are Only Two Stationary Sources in a Given

question 14

Essay

Suppose that there are only two stationary sources in a given air quality region. The first source has been in existence for several years, while the second source is new. The following functions represent marginal abatement costs (MAC) for each polluting source:
MAC_EX = 10.0 + 0.7A _EX, MAC_N = 9.2 + 0.5A _N,
where A_EX is the percentage abatement level for the existing source, and A_N is the percentage abatement level for the new source.
Assume that the aggregate abatement standard (i.e., for the region as a whole) is set at 40 percent and that the two firms' current abatement levels are A_EX = 10 and A_N = 30.
-Find the cost effective allocation of abatement across the two sources that also satisfies the 40 percent aggregate abatement level. Support with calculations.

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Definitions:

Infinitely Elastic

Describes a perfectly elastic demand or supply curve, where the quantity demanded or supplied changes by an unlimited amount in response to any change in price.

Income Elasticity

A measure of how the demand for a good or service changes in response to changes in income.

Supply Elasticity

The measure of responsiveness of the quantity of a good supplied to a change in its price.

Long Run

A period in which all factors of production and costs are variable, allowing firms to adjust all inputs in response to market conditions.