Dogo, a town on the Japanese island of Shikoku, is a renowned hot springs resort that hosts two popular bath houses: Ancient Springs (A) and Black River (B). However, the bath's visitors are anything but ordinary. They are ghosts and spirits looking to unwind and escape from whatever it is that ghosts and spirits usually do. Among these ghosts and spirits are a large clientele of stink spirits, who though are willing to pay extraordinary amounts of money for a good bath, also emit noxious fumes into the air that cause everything around them to begin rotting. The town's businesses have come together to try to limit the number of stink spirits coming to the baths. Suppose the marginal benefit (demand) curve for Ancient Springs (A) takes the form MBA = $1000 – 50Q and the marginal benefit curve for Black River (B) takes the form MB® = $500 – 25Q where Q denotes the number of stink spirits the establishment services. a. How many stink spirits would A accept and how many would B accept without any regulation? b. Suppose regulators implement a quantity regulation by issuing 16 permits, each allowing for one stink spirit, and distribute them equally among the bath houses (without allowing for trading). How many stink spirits will each firm have to turn away? c. How much will this cut in stink spirit service cost each firm?
Dogo, a town on the Japanese island of Shikoku, is a renowned hot springs resort that hosts two popular bath houses: Ancient Springs (A) and Black River (B). However, the bath's visitors are anything but ordinary. They are ghosts and spirits looking to unwind and escape from whatever it is that ghosts and spirits usually do. Among these ghosts and spirits are a large clientele of stink spirits, who though are willing to pay extraordinary amounts of money for a good bath, also emit noxious fumes into the air that cause everything around them to begin rotting. The town's businesses have come together to try to limit the number of stink spirits coming to the baths. Suppose the marginal benefit (demand) curve for Ancient Springs (A) takes the form MBA = $1000 – 50Q and the marginal benefit curve for Black River (B) takes the form MB® = $500 – 25Q where Q denotes the number of stink spirits the establishment services. a. How many stink spirits would A accept and how many would B accept without any regulation? b. Suppose regulators implement a quantity regulation by issuing 16 permits, each allowing for one stink spirit, and distribute them equally among the bath houses (without allowing for trading). How many stink spirits will each firm have to turn away? c. How much will this cut in stink spirit service cost each firm?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:2. Dogo, a town on the Japanese island of Shikoku, is a renowned hot springs resort that hosts two
popular bath houses: Ancient Springs (A) and Black River (B). However, the bath's visitors are
anything but ordinary. They are ghosts and spirits looking to unwind and escape from whatever
it is that ghosts and spirits usually do. Among these ghosts and spirits are a large clientele of
stink spirits, who though are willing to pay extraordinary amounts of money for a good bath,
also emit noxious fumes into the air that cause everything around them to begin rotting. The
town's businesses have come together to try to limit the number of stink spirits coming to the
baths.
Suppose the marginal benefit (demand) curve for Ancient Springs (A) takes the form MB^ =
$1000 – 50Q and the marginal benefit curve for Black River (B) takes the form MBB = $500 – 25Q
where Q denotes the number of stink spirits the establishment services.
a. How many stink spirits would A accept and how many would B accept without any
regulation?
b. Suppose regulators implement a quantity regulation by issuing 16 permits, each
allowing for one stink spirit, and distribute them equally among the bath houses
(without allowing for trading). How many stink spirits will each firm have to turn
away?
C.
How much will this cut in stink spirit service cost each firm?
d. Now suppose 16 permits are issued and trading is allowed. What will be the price of
a permit and how many stink spirits will each firm have to turn away? Note: you will
first need to find the marginal abatement cost function for each firm, which is the
slope of the respective marginal benefit curve. Once you find the marginal
abatement cost fuction for each firm be sure to add a subscript to the quantity
variable in each function to signify that the quantity abated will differ between firms
before setting them equal to each other.
e. What is the total cost of reducing stink spirit service to 16 with tradable permits?
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