Derive the profit-maximizing quantity of sulfuric acid

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Reference no: EM132207470

Question: 1. (From Final 2012) In Ohio there are two manufacturers of sulfuric acid: Chemtrade and Marsulex. The marginal cost of Chemtrade is given by MCc-20c and the marginal cost curve of Marsulex is represented by MCM-QM , where QC and QM are the daily quantities of sulfuric acid in tons produced by Chemtrade and Marsulex, respectively. The world market for sulfuric acid is perfectly competitive, and the world price for sulfuric acid is $250 per ton.

a. Derive the profit-maximizing quantity of sulfuric acid produced by the two firms in one day and the total amount of sulfuric acid that is produced daily in Ohio.

b. Graph your answer to a. by putting the marginal costs of the two firms in the same graph. Be sure to label the axes and all relevant numerical values.

As a by-product of their production process, Chemtrade and Marsulex produce sulfur dioxide, which poses a danger to children and the elderly. The marginal external cost of sulfuric acid production is estimated to be constant at MEC 50 for each firm. Without performing any calculation or using any graph, explain why the quantities that you found in a. are not optimal from a society's perspective. Do Chemtrade and Marsulex produce too little or too much sulfuric acid? Why?

c. Ohio's state government determines that the optimal quantity of sulfuric acid production in Ohio should be 150 tons per day. In order to achieve the socially optimal level of production, authorities decide to regulate the sulfuric acid production by imposing a production cap of 75 tons of sulfuric acid on each firm.

d. What is Chemtrade's marginal profit at the production cap? What is Marsulex's marginal profit at the production cap? Which of the two sulfuric acid producer values the option to increase production the most? Graph your answer in the graph that you drew in part b.

Reference no: EM132207470

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