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Brown City Pet Food Co. produces a complete line of dry pet foods. During the past year they have been test
marketing a meat-based dog food. The firm’s plant is located in an industrial park adjacent to the Brown River. The city’s water system as well as much of its tourism industry is tied to the river. Recent tests show that a higher-than-normal bacteria count in the river stems from the effluent dumped into the river by the company. Experts are certain that the bacteria are generated from production of the new meat-based dog food. The firm’s long-run cost of production is: LAC = LMC = $15 per case, where LAC is long-run average cost and LMC is long-run marginal cost.
(a) The company faces a number of competitors but still has some degree of market power. In particular, the firm’s long-run price elasticity is EP= -2.75. Determine its optimal price and resulting profit margin.
(b) The current high bacteria count makes the river unsuitable and unsafe for swimming and other recreation – a result that has enormous cost to the town. A possible remedy is for the town to treat and clean the river water at a feasible cost of about $2 per thousand grams of effluent. The town has also petitioned Brown to remedy the discharge by installing expensive pollution equipment. However, under current town ordinances, the company is under no obligation to install the equipment and management has indicated that the plant would probably be forced to shut down if they were required to do so. Suggest a means by which the town might regulate the pollution problem.
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