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    Increasing labour productivity by reducing polition

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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?

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    Solution Summary

    This solution shows the math behind a decision to increase labour productivity by reducing air pollution in mines. The decision is analyzed in terms of the profit-maximizing MR = MC method.