4) Appalachian Coal Mining believes that it can increase labor productivity and,

Question

4) Appalachian Coal Mining believes that it can increase labor productivity and, there-fore, 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?

Explanation / Answer

MC=MR should be the ideal level of pollution reduction point.

MC=MR

40P = 1000-10P

50P = 1000

P = 20

Therer should be 20 units of pollution reduction.

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