Include clear workings.

Please refer to the background information below to answer the following six questions. Two firms, X and Y, have access to seven different production processes, each one of which has a different cost (dollars) and gives off a different amount of pollution (tons). The information is summarized in the table below. Process (daily smoke) Cost to Firm X Cost to Firm Y A (6 tons) 80 330 B (5 tons 210 720 C (4 tons) 420 1180 D (3 tons) 710 1750 E (2 tons 1080 2450 F (1 tons) 1530 3380 G (0 tons 2080 4480 23. If pollution is unregulated, and negotiation between the firms and their victims is impossible, firm X will use the production process [ Answer23A ], firm Y will use the production process [ Answer23B , and the total smoke emitted will be [ Answer23C ] tons per day. 24. Suppose the city council set a tax of 295 dollars on each ton of smoke emitted each day. We would expect the firms will emit a total of [ Answer24 ] tons of smoke per day. 25. Suppose initially there is no regulation on pollution (in particular, no tax is imposed on pollution), and the city council has recently decided to cut the total pollution (smoke emissions) by half. If the city council requires each firm to cut its emission by half, the total cost of reducing the emssion to the society will be [ Answer25 ] dollars per day. 26. Continue to assume that the city council wants to cut total smoke emissions by half. Suppose the city council like to set a tax of T dollars on each ton of smoke emitted each day. To achieve the desired reduction in emission, the T should be more than [ Answer26A ] and less than [ Answer26B ]. 27. Continue from the previous question. Using tax as a tool, the total cost of reducing the emission to the society is [ Answer27 ] dollars per day. 28. From the society's perspective, to cut the emission by half, it would be optimal for firm X to adopt process [ Answer28A ] and firm Y to adopt process [ Answer28B ].4. In August 2014, Tesla announced a new "Infinite Mile Warranty". A Forbes article reported: "Tesla announced that it would extend the warranty on the drive unit of its Model S cars to match the battery pack's 8 years and unlimited miles with no limit on the number of owners. This will apply to new Model S models and all ever produced." (Chuck Jones, Forbes, Aug 18, 2014) (a) Suppose that before this warranty is in place, demand for Tesla's model S car specifically is given by: P = 200 - 20, where P is in thousands of dollars per car, and @ is in thousands of cars. Suppose that prior to the new warranty, Tesla's marginal cost of production was constant at 32 thousand dollars per car. Based on these assumptions, prior to the offer of the new warranty what is profit maximizing price per car for Tesla? What quantity is sold? What is the consumer and producer surplus from sale of the model S? (b) Offering this warranty costs Tesla money (since they now have to fix things that break). Specif- ically, Tesla estimates that it will cost them $1 thousand per ten thousand miles driven. Tesla's estimates show that the average customer of their Model S would drive 60 thousand miles in eight years. So all-in-all the expected cost to Tesla of the extended warranty is $6 thousand per car. Assuming that Tesla is risk neutral, what is Tesla's new marginal cost per car? (c) Assume that all buyers of Teslas are risk averse. What will the introduction of this warranty do to the demand curve for this car? (You can't give me an exact equation, but you can tell me something about what happens to the demand curve.) (d) Specifically, suppose that offering the eight year, unlimited mileage warranty increases each po- tential customer's willingness to pay by 10 thousand dollars. With this, calculate the new profit maximizing price that Tesla will charge for a Model S with the warranty. What are consumers and producer surplus now? Did they individually go up or down (from part (a))? Explain, intuitively, why. (e) Recent articles suggest that Tesla's extended warranty may be costing the company more than anticipated. An article in October 2017 on Seeking Alpha noted that in particular, taxi and ride sharing service drivers (who drive a lot more miles than the average driver) are buying the model S because of the unlimited mileage warranty. Suppose that, due to larger than expected purchases by drivers who drive a lot of miles, Tesla revises its estimate of the mileage usually driven during the eight year warranty period to 120 thousand miles (up from 60 thousand miles). Suppose that demand, the cost of the warranty per thousand miles, and all other costs stay the same as above. Under the revised cost assumptions would Tesla's surplus increase or decrease or remain the same if they offered the warranty compared to if they didn't? You can answer qualitatively here (just say "increase" or "decrease" or "remain the same"), but be sure to explain why. Is the nature of the problem described here that of adverse selection or moral hazard? Explain.10. 11. (ii) If 1988 consumer income is expected to remain constant at 650 billion, whilst price is expected to fall by 25, estimate sales revenue in 1988. (iii) Estimate sales revenue in 1988 if consumer income rises by 10% between 1987/88, whilst price falls by 15%. (iv) Use the information above to estimate demand as a linear function of price and income. 'Despite the theoretical advantages of the discounting procedure, capital investment was either justied in terms of some \"need to have" case presented by lower management or on the basis of some elementary payback period calculations.\" Discuss this conclusion from an empirical survey of investment decision-making. Explain the inability of economic theory to nd satisfactory solutions to the theoretical problem of price and output decision-making in oligopolistic markets. 'Advertising in the modern economy has entered the state of persua- sion as distinct from proclamation or iteration' (Turner). Discuss this view of advertising in relation to its role in the modern rm, and explain the determination of an optimal advertising budget. Analyse the effects of an increase in both wage rates and iabour productivity on the costs of the rm