A plant uses machinery and waste water to produce steel. The owner of the plant wants to maintain an output of 10,000 tons a day, even though the government has just imposed a $100 per gallon tax on using waste water. The reduction in the amount of waste water that results from the imposition of this tax depends on:

A) the amount of waste water used before the tax was imposed.
B) the cost to the firm of using waste water before the tax was put in place.
C) the rental rate of machinery.
D) the marginal product of waste water only.
E) the ratio of the marginal product of waste water to the marginal product of machinery.

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Exotic FireWorm · Accepted Answer

Final Answer : E, Explanation :  The reduction in waste water usage depends on the relative productivity of waste water compared to machinery. The firm will adjust its input mix based on the marginal productivity ratio to minimize costs while maintaining output.

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