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Suppose that two firms, X and Y, face the following abatement costs: MACX = 1.2AX,                        MACY =...

Suppose that two firms, X and Y, face the following abatement costs:
MACX = 1.2AX,                        MACY
= 0.3AY
TACX = 0.6AX2
                              TACY
= 0.15AY2
Further assume that the combined abatement standard is 40 units for both firms.
Based on the model given, the cost-effective solution would arise if

each firm abates 20 units of pollution

firm X abates 8 units, and firm Y abates 32 units

firm Y does all the abating because its MAC is lower

firm X abates 24 units, and firm Y abates 16 units
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Answer #1

Option 2nd is correct. Please see the answer below:

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