1 2. Two power producers emit sulfur dioxide (SO2). Axion earns a profit of 10 + 20x₁ - ½ x when it emits XA tons of SO2, and Boson earns a profit of 8 + 40xB - ½ x when it emits XB tons. (i) How much SO2 will the two producers emit? (ii) Suppose that a regulator imposes a binding limit on aggregate emissions. Specifically, emissions must satisfy xд + XB ≤ x*. Find the Pareto efficient emissions levels for each producer, given the limit on aggregate emissions. 1 (iii) Now suppose that the regulator gives each producer ½ x* (divisible) emissions permits, each of which permits the holder to emit one ton of SO2. Find a profitable trade (quantity and price per permit) for the producers.

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