MJC ECON102, Spring 2022 Midterm Exam 2 Instructor: Zheng Huang 2.4 Two firms, LexCorp and Wayne Enterprises, have access to five production processes, each one of which has a different cost and gives off a different amount of pollution. The daily costs of the processes and the corresponding number of tons of smoke emitted are as shown in the following table: Process (smoke) A (4 tons/day) B (3 tons/day) C (2 tons/day) D (1 ton/day) E (0 tons/day) Lex Corp (S/day) 40 70 120 190 350 Wayne Enterprises (S/day) 50 100 230 380 700 a. If pollution is unregulated, which production process will each firm choose, and what will be the total daily smoke emission? (5 points) b. The City Council wants to reduce total emissions down to 2 tons of smoke per day. To accomplish this, it requires each firm to reduce its emissions to 1 ton of smoke per day. What will be the total cost to society of this policy? (5 points) c. The City Council again wants to reduce total emissions down to 2 tons of smoke per day. This time the City Council sets a tax of $T per day on each ton of smoke emitted. How large will T have to be to reduce total emissions down to 2 tons of smoke per day? Specifically, what is the smallest whole dollar tax on each ton of smoke emitted that will guarantee that total emissions fall to 2 tons per day? Under this tax, what production process will each firm choose? If the revenue collected from taxing emissions is used to offset other taxes, then what will be the total cost to society of this policy? (5 points) d. Now, instead of taxing pollution, the City Council decides to auction off six permits, each of which entitles the bearer to emit I ton of smoke per day. No smoke may be emitted without a permit. Suppose the government conducts the auction by starting at $1 and asking how many permits each firm wants to buy at that price. If the total is more than six, it then raises the price by $1 and asks again, and so on, until the total quantity of demanded permits falls to six. How much will each permit sell for in this auction? How many permits will each firm buy? What will be the total cost to society of this policy? (5 points)