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10. EXTERNALITIES (10 POINTS) There are 2 firms located in your town: Firm A and Firm B. Firm A produces widgets using labor, denoted LA. Firm A's production function is YA = LA where ya is Firm A's output of widgets. It costs $2 for Firm A to hire each unit of labor, and the market price of widgets is $10. A byproduct of the widget production process is smoke, denoted s. Producing 1 widget creates 1 unit of smoke. That is, smoke is produced according to the following function S = YA Firm B grows trees using labor, denoted LB. The smoke produced by Firm A reduces tree production. Firm B's production function is yB It costs $2 for Firm B to hire each unit of labor, and the market price of trees is $12. (a) (5 POINTS) If the 2 firms each maximize profit independently, taking the other firm's output as given, how many widgets and trees will be produced? (b) If the 2 firms merged and the resulting firm maximized profit, how many widgets and trees will V be produced? Go to Setting