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CAP AND TRADE PROBLEM Firm A : MAC A =400-5E A Firm B = 120-3E B CAP: E SO = 80 Initial allocation: A =

CAP AND TRADE PROBLEM

Firm A : MAC^A =400-5E^A

Firm B = 120-3E^B

CAP: E^SO = 80

Initial allocation: A = 50, B=30

a. Find equilibrium price of permit P*

b. Find number of permits between traded (and direction of trade) between A and B

c. Find Benefits to each firm cost savings or revenue gains.
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