Suppose that a honey farm is located next to an apple orchard and each acts as a competitive firm. Let the amount of apples produced be measured by A and the amount of honey produced be measured by H. The cost functions of the two firms are cH(H) = H2/100 and cA(A) = A2/100 − H. The price of honey is $2 and the price of apples is $3.
(a) If the firms each operate independently, the equilibrium amount of honey produced will be __________ and the equilibrium amount of apples produced will be _________
(b) Suppose that the honey and apple firms merged. What would be the profit-maximizing output of honey for the combined firm? ____________ What would be the profit-maximizing amount of apples? _________
(c) What is the socially efficient output of honey? _________. If the firms stayed separate, how much would honey production have to be subsidized to induce an efficient supply? __________