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1. How would the change in total economic surplus beaffected if the law instead required health insurance to pay only $500 perprocedure?
2. Two firms, Sludge Oil and Northwest Lumber, have access to five productionprocesses, each one of which has a different cost and gives off a differentamount of pollution. The daily costs of the processes and the correspondingnumber of tons of smoke emitted are as shown in the following table:

Process
A
B
C
D
E

(smoke)
(4 tons/day)
(3tons/day)
(2 tons/day)
(1 ton/day)
(0 tons/day)

Cost to Sludge Oil
50
70
120
200
500

($/day)

Cost to Northwest
100
180
500
1,000
2,000

Lumber ($/day)

a. If pollution is unregulated, which process will each firm use, and what willbe the daily smoke emission?
b. The City Council wants to curb smoke emissions by 50 percent. To accomplishthis, it requires each firm to curb its emissions by 50 percent. What willbe the total cost to society of this policy?
Given MC= $1000. At this price, the number of procedures is 40. If the law requires that the health insurance will pay only $500 per procedure, then the quantity demanded at this level will be such that the total economic surplus will remain unaffected because the rise in the consumer surplus(as borne by the employee) will be equal to the fall in the producer surplus(as borne by the insurance company). If pollution is unregulated, then the firm Sludge oil will produce where the marginal cost is minimum. Sludge Oil: Cost per ton under process A: 50/4= 12.5 B: 70/3= 23 C:120/2=60 D: 200/1=200 E: 500 Thus, it will produce under process A….

Northwest lumber: Cost per ton under process A: 100/4=25 B: 180/3=60 C: 500/2=250 D: 1000/1=1000 E: 2000 As the minimum cost is under scheme A, the firm will choose scheme A. b) The total cost to the society will be half the amount which the firm has to bear. Total cost for firm A per ton =500+12.5= 512.5 Total cost for firm B per ton= 2000+25= 2025 Thus the expenses borne by the public will be 256.25 and 1012.5 respectively.

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