Question: Please, show me the steps for solving this quiestion: Two firms in a grimy Ohio town produce the same product in a competitive industry. Each

Please, show me the steps for solving this quiestion:

Two firms in a grimy Ohio town produce the same product in a competitive industry. Each has an old factory using an old technology. It still pays to operate these factories but it would not pay to expand them. The only variable factor used by either firm is labor. Each firm pollutes the other and thus reduces the output of the other firm. The production functions of firms A and B respectively are Qa = La0.5 (2/3) Qb and Qb = Lb0.5 (1/3) Qa, where La0.5 and Lb0.5 are the square roots respectively of the amount of labor used by firms A and B. The wage rate of labor is $1 and the price of the firms output is $12.

a. If the two firms each maximize profits independently, what is their total output and how much quasi- rents do their factories earn?

b. If someone buys them both and maximizes joint profits, how much quasi- rent is earned in total?

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer
Step: 1 Unlock blur-text-image
Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock
Step: 3 Unlock

Students Have Also Explored These Related Economics Questions!