8. Bank borrowing is __________customized than issuing bonds, so it often works better for relatively small firms.

a. more

b. less

Booster class

Microeconomics

Skill

Understanding How Businesses Raise Financial Capital

answer

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Raushan RajLv8

2 Nov 2020

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Consider two firms that produce energy drinks and have factories located next to the Hudson river. Each firm pollutes 50 tons of chemicals into the river per day. The government decides to reduce the pollution by allocating each firm 40 tradeable permits. Each permit allows a firm to pollute 1 ton of chemical into the river per day. Note that Firm A can abate its pollution for $50 per ton and Firm B can abate its pollution for $100 per ton.

1 which of the following statements is correct:

a. The price of the tradeable permit will be greater than $100.

b. The price of the tradeable permit will be less than $50.

c. Firm A will be better off if it sells permits to Firm B.

d. Firm B will be better off if it sells its permits to Firm A.

2 suppose instead of issuing the permits the government decides to pass a regulation that only allows each firm to pollute 40 tons of chemicals into the Hudson river per day. This regulation would:

a. Result in a more efficient outcome than issuing permits.

b. Result in a less efficient outcome than issuing permits.

c. Result in the same outcome as issuing permits.

d. None of the above are necessarily true.

The presence of competition in free markets:

A. is undesirable because it results in unnecessary duplication of efforts.

B. usually results in better quality and lower prices.

C. is rare since most markets eventually evolve into monopolies.

D. is undesirable because one big firm can usually produce goods more efficiently than a large number of small firms