Figure 10-7 -Two Firms, a and B, Each Currently Emit 100 Tons

question 136

Multiple Choice

Figure 10-7
-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. After the two firms buy or sell pollution permits from each other, we would expect that Firm A will emit

• A)20 fewer tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.
• B)100 fewer tons of pollution into the air, and Firm B will emit 20 fewer tons of pollution into the air.
• C)50 fewer tons of pollution into the air, and Firm B will emit 50 fewer tons of pollution into the air.
• D)20 more tons of pollution into the air, and Firm B will emit 100 fewer tons of pollution into the air.

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Definitions:

Finance An Acquisition

The act of providing or securing funds to purchase another business or significant asset.

Selling Firm's Shareholders

Individuals or entities that own shares in a company that is in the process of being sold or has sold a portion of its assets.

Divestiture

The process of selling an asset, investment, or division of a company as a strategic move for growth or downsizing.

Wholly Owned Subsidiary

A company whose entire stock is held by another company, making it 100% owned by the parent company.