Question

Question 2 Consider two firms, a gym and a yoga salon. The gym offers aerobics classes with extremely motivating, and loud music. The yoga salon just beside it is affected by this noise but can't really do much about it. Formally, the gym and yoga salon's production functions look like: Gym: A+ n = fgym (Z1,...Zn) Yoga: Y = fgym (Z1,...Zn, n) Where A is the amount of classes sold by the gym, n is the level of noise produced by the classes and Y is the number of yoga sessions that could be sold by the yoga salon given the level of noise n. Zi are the necessary inputs for production (rent, equipment, coach wages, etc). a. Draw a graph of the PPF between these two firms (Hint: the axis represent the amounts produced of A and Y respectively) b. Where would production be for each firm if they operate independently and do not cooperate c. This is an inefficient allocation, which assumption of the Welfare Theorems is violated here? d. Where would production of A and Y be, if the firms were to merge?

Answer 1

a) Production Possibility frontier CPPEJA - → PPF is represents different combinations of quantities of two goods that can be produced by an economy with available limited resources, LPPF n Gym A * c) This is an inefficent allocation, here, pareto efficenc criteria / assumption of the twelfare theorem is violated