Problem 1. (13 points) Markets: Perfect Competition. Assume that a perfectly competitive, constant cost industry is in a

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Problem 1 13 Points Markets Perfect Competition Assume That A Perfectly Competitive Constant Cost Industry Is In A 1 (159.38 KiB) Viewed 26 times

Problem 1. (13 points) Markets: Perfect Competition. Assume that a perfectly competitive, constant cost industry is in a long run equilibrium with 35 firms. Each firm is producing 90 units of output which it sells at the price of $39 per unit; out of this amount each firm is paying $5 tax per unit of the output. The government decides to decrease the tax, so the firms will be paying $3 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 diagrams 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 diagrams for the market and a particular firm. Compare to the initial long run equilibrium and to the short run equilibrium found in a). Your answer to this question should include graphs and explanations in words; please use complete sentences (not dot points). Please note that the numbers are provided for convenience; you should indicate them on graphs, but you are not expected to do any calculations. Marks could be deducted if your answer is disorganised, not well-written and has too many spelling/grammar mistakes.