Question 2 Suppose we have two power plants currently emit excess levels of sulfur dioxide (SO2). The US EPA requires these companies to reduce (abate) their emissions by 20 tons of SO2 in total. Assume the following marginal cost of abatement functions for these companies as follows: Plant 1: MCA1 = 3001 Plant 2: MCA2 = 10Q2 1. Graph the marginal cost of abatement for both plants given the level of emissions reduction needed in the industry. (Hint: The X axis for Firm 2 will go from right to left). 2. Calculate the optimal level of emissions reduction (abatement) for each plant. 3. Under the optimal scenario, how much would each firm pay in total to reduce its emissions? 4. Now suppose that the manager of Plant 1 has a powerful friends in the government, and was given 20 emission permits for free. Each permit allows the company to avoid abating 1 ton of SO2. However, the government still requires a total of 20 tons to be abated, so Plant 2 will be required to abate all of the required 20 tons of SO2. How much will Plant 2 pay in total to abate these 20 tons? 5. If Plant 1 is willing to sell the emission permits at its Marginal Cost of Abatement, how many permits will Plant 2 buy from Plant 1? 6. How much less will it cost Plant 2 to buy emission permits than to abate this amount of SO2 itself? Question 2 Suppose we have two power plants currently emit excess levels of sulfur dioxide (SO2). The US EPA requires these companies to reduce (abate) their emissions by 20 tons of SO2 in total. Assume the following marginal cost of abatement functions for these companies as follows: Plant 1: MCA1 = 3001 Plant 2: MCA2 = 10Q2 1. Graph the marginal cost of abatement for both plants given the level of emissions reduction needed in the industry. (Hint: The X axis for Firm 2 will go from right to left). 2. Calculate the optimal level of emissions reduction (abatement) for each plant. 3. Under the optimal scenario, how much would each firm pay in total to reduce its emissions? 4. Now suppose that the manager of Plant 1 has a powerful friends in the government, and was given 20 emission permits for free. Each permit allows the company to avoid abating 1 ton of SO2. However, the government still requires a total of 20 tons to be abated, so Plant 2 will be required to abate all of the required 20 tons of SO2. How much will Plant 2 pay in total to abate these 20 tons? 5. If Plant 1 is willing to sell the emission permits at its Marginal Cost of Abatement, how many permits will Plant 2 buy from Plant 1? 6. How much less will it cost Plant 2 to buy emission permits than to abate this amount of SO2 itself