Cost benefit - Managerial Economics by ClassOf1

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Cost benefit analysis from the given data- How much pollution reduction should Appalachian Coal Mining undertake? : Where P represents a reduction of one unit of pollution in the mines. It also feels that for every unit of pollution reduction the marginal increase in revenue (MR) is MR = 1,000 – 10P.

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									              Sub: Economics                                                       Topic: Managerial Economics

              Question:
              Cost benefit analysis from the given data- How much pollution reduction
              should Appalachian Coal Mining undertake?
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              Appalachian coal Mining believes that it can increase labor productivity and, therefore, net
              revenue by reducing air pollution in its mines. It estimates that the marginal cost function for
              reducing pollution by installing additional capital equipment is MC = 40P

              Where P represents a reduction of one unit of pollution in the mines. It also feels that for every
              unit of pollution reduction the marginal increase in revenue (MR) is MR = 1,000 – 10P

              How much pollution reduction should Appalachian Coal Mining undertake?

              Solution:
              The marginal cost function is given as,

                                                                      MC = 40P

              The marginal Revenue function is given as,

                                                                MR = 1,000 – 10P

              At equilibrium,                                    MR=MC

                                                                       1,000 – 10P =40P

                                                                       50P= 1000

                                                                       P= 1000/50= 20

              Appalachian Coal Mining should undertake 20 unit of pollution reduction.

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