Suppose there are only two firms that pollute, A and B, and each emits 10 tons of waste into the air. Firm A can reduce its pollution at a cost of $100 per ton, and Firm B can reduce its pollution at a cost of $500 per ton. Each has been given an emission credit that allows it to pollute 6 tons. If firms maximize profits, what will happen?
A. Each firm will clean up 4 tons and pollute 6 tons.
B. Firm B will buy one credit from A; it will cut pollution to 7 tons, and firm A will cut it to 5 tons.
C. Firm A will buy four credits from B; A will emit 10 tons, and B 2 tons.
D. Firm B will buy four credits from A; B will emit 10 tons, and A 2 tons.
Answer: D
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