Question

A soot-spewing factory that produces steel is next to the laundry. We will assume that the factory faces a prevailing market price of P=$40. Its cost function is C ( X ) = X^2, where X is the steel output. The laundry produces clean wash, which it hangs out to dry. Suppose each unit of steel creates one unit of soot (S), that is, X = S. The soot from the steel factory smudges the wash so that the laundry has to protect the laundry from the soot of the factory and this increases its costs of producing cleaned clothes. The cost function of the laundry is C(Y, S)=Y^2 +½S, where Y is pounds of laundry washed. A pound of clean laundry sells for $10. Both firms face a competitive market.

5. In the competitive equilibrium, how many pounds of clean laundry are produced?

6. Given that an externality exists, is the competitive equilibrium efficient?

A. Yes, the competitive equilibrium is always efficient.

B. No, the steel plant produces more steel than what is efficient.

C. No, the laundry produces not enough clean laundry.

D. Yes, the competitive equilibrium maximizes joint profits.

7. Maximize joint profits. What is the optimal amount of steel? Use two decimals.

8. Maximize joint profits. What is the optimal amount of laundry?

9. How much soot is produced in the competitive equilibrium?

10. How many units of soot are efficient?

Answer 1