Assume that a perfectly competitive, constant-cost industry is in a long-run equilibrium with 40 firms. Each firm produces 90 units of output, which it sells at the price of $39 per unit; out of this amount, each firm pays $3 tax per unit of the output. The government decides to decrease the tax so that the firms will be paying $1 tax per unit. a) Explain what would happen in the short run to the equilibrium price and industry output, number of firms in the industry, output and profit of each firm. Illustrate on graphs for the market and a particular firm. b) Explain what would happen in the long run to the equilibrium price and industry output, number of firms in the industry, output and profit of each firm. Illustrate on graphs for the market and a particular firm. Compare this new long-run equilibrium to the initial long-run equilibrium and to the short-run equilibrium found in a).

Assume that a perfectly competitive, constant-cost industry is in a long-run equilibrium with 40 firms. Each firm produces 90 units of output, which it sells at the price of $39 per unit; out of this amount, each firm pays $3 tax per unit of the output. The government decides to decrease the tax so that the firms will be paying $1 tax per unit. a) Explain what would happen in the short run to the equilibrium price and industry output, number of firms in the industry, output and profit of each firm. Illustrate on graphs for the market and a particular firm. b) Explain what would happen in the long run to the equilibrium price and industry output, number of firms in the industry, output and profit of each firm. Illustrate on graphs for the market and a particular firm. Compare this new long-run equilibrium to the initial long-run equilibrium and to the short-run equilibrium found in a).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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