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The EPA now requires each firm has to surrender to the EPA four pollution certificates for every unit of output that it produces. The equilibrium market price of these permits is $2 per certificate. (Other industries use the same type of permits, so if a firm in the copper wire industry wants to purchase additional permits it is not limited to trading with firms in the same industry.) The firm is given 20 permits by the EPA and it can buy additional permits on the market or sell some of its endowment of twenty.
1. What is the firm's cost function when the cost of pollution certificates is included?
2. What is the firm's marginal cost function when the cost of pollution certificates is included?
3. Derive the firm's supply function.
4. The market demand function is still Q = 160 ! 5P, and there are still ten firms in the industry, each identical to Percam. Derive the market supply function and confirm that P* = 20 is the new equilibrium price.
5. What is the individual firm's profit maximizing level of output at the new equilibrium, and what is the resulting profit?
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