Question

4. (8 points) A competitive industry is in long-run equilibrium. An excise tax is then placed on all firms in the industry a. Explain what you expect to happen to the price of the product, the number of firms in the industry, and the output of each firm in the short run: b. Explain what you expect to happen in the long run to the price of the product, the number of firms in the industry, and the output of each firm:

Answer 1

Answer: In a Competitive market demand cwe Du pour les to horizontal axis. Science it is in the long-run, the enuribrium is (Price : minimum of average total cost = manoggial cost (MC) The graph is as below: u i ww me MC Police ATC AR Cbemard)-HR Output E is the envilibrium where. Atc is the minimum at Scanned with Cåtscabecomes ennal to p. MC ý the supply cwwe

a.

In the short-run, the equilibrium condition is (price = marginal cost).

Imposition of tax should decrease supply; it shifts the MC curve to the left, making the equilibrium at the same price but at reduction of output.

Price: should not change

Number of firms: remains the same, since in the short-run escaping from the market is not possible.

Output: reduces

b.

In the long-run all factors of production become variable. The loss-making firms would leave the market, making the price level same but output would increase up to that level where each firm earns normal profit (that is (P = ATC again)).

Price = should not change

Number of firms = reduces

Output = increases