Competition 2

 

Competition 2

Question 3 (This question has 2 parts (i) and (ii))
Suppose that there are 2 firms (Firms 1 and 2) in a market. Each firm uses two inputs (labour and
electricity) to produce its output. Firm 1’s isoquants have a normal shape (downward sloping and
convex) whereas Firm 2 uses a fixed-proportions technology.
(i)
Suppose that both the firms produce the same level of output and currently choose to use the same
input combination (which involves positive quantities of both inputs). Represent this situation on a
diagram and briefly explain it.
(ii)
Suppose now that the country in which both the firms operate introduces a carbon pricing regime.
Since electricity production relies heavily on burning fossil fuels, electricity prices are particularly
affected by carbon pricing. Show on your diagram, how the introduction of carbon-pricing will affect
each firm at their initial input combination as per part (i). Assuming that both firms intend to keep
producing the same level of output, which firm will be able to make a better adjustment to the costpressures
induced by the carbon pricing regime in the long run and how? Explain with the aid of a
suitable diagram.

Is this the question you were looking for? If so, place your order here to get started!