**Please check and correct my answers! Thank you.

There is free entry into the textile industry. Anybody can enter this industry and have the same U-shaped average cost curve as all of the other firms in the industry.

a) Suppose the government imposes a $5 tax on every unit of output sold by the industry. After the industry has adjusted to the imposition of the tax, the competitive model would predict the following: the market price would ____ by $5, there would be ___ firms operating in the industry, and the output level for each firm operating in the industry would ____. If graphed, would the new long-run equilibrium price and quantity at MC = min AVC, below this point or above this point?

b) What if the government imposes a tax on every firm in the industry large enough to raise the minimum average cost by $5. After the industry has adjusted to the imposition of the tax, the competitive model would predict the following: the market price would ____, there would be _____ firms operating in the industry, and the output level for each firm operating in the industry would _____. If graphed, would the new long-run equilibrium price and quantity at MC = min AVC, below this point or above this point?

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my answers:

a) increase, more, increase, above the MC = min AVC by an increase of $5 of the same output (ex: 25 units originally cost $10—the original long-run equilibrium price and quantity--but it now cost $15)

b) decrease, fewer, decrease, below the MC = min AVC

Because all the firms have identical cost structures, all firms would be operating at the minimum of their average cost curve. Further, in long-run equilibrium, Price=MC=ATC. So firms are not making economic profits.

Now then, impose the $5 per unit tax.

1) Market price INCREASES,
Because P goes up, Q (market goes down). So,
2) the number of firms must DECLINE. Again, since all firms are identical, Because it is a per-unit tax, the average cost curve rises for all firms by $5. The quantity q at which the AVC and ATC curves are at is minimum will be exactly the same as before. Again, the new equilibrium will be Price=MC=ATC. So,
3) the output level for each firm still operating will be EXACTLY THE SAME AS BEFORE. And 4) to the extent there are zero fixed costs, P=MC=min(AVC). Otherwise, the price will be ABOVE the min(AVC) point.

For part b)
I presume the tax is a per-firm tax; the tax is a fixed cost; it increases total costs but not variable costs. So, the AVC curve remains the same, the TVC curve shifts up an a bit to the right. The minimum point, by definition, is $5 higher. Again, some firms will drop out, the remaining firms will operate where P=MC=ATC.
So P INCREASES by $5, there would be a DECREASE in the number of firms, output per firm would be a bit LARGER than before, and the equilibrium price will be ABOVE the min(AVC) point.

a) Your answer is partially correct. When a $5 tax is imposed on every unit of output sold by the industry, the market price would indeed increase by $5. However, there won't necessarily be more firms operating in the industry. In fact, in the short run, the number of firms will likely remain the same. However, over the long run, some firms may exit the industry due to the increased costs associated with the tax. As a result, the number of firms may decrease. The output level for each firm operating in the industry would decrease because of the higher costs resulting from the tax. If graphed, the new long-run equilibrium price and quantity will be below the MC = min AVC point, reflecting the increased cost due to the tax.

b) Your answer is not correct. When a tax is imposed on every firm in the industry, designed to raise the minimum average cost by $5, the market price would indeed decrease. The tax increases the costs for each firm, leading to an increase in the minimum average cost. As a result, the market price would decrease to reflect this higher cost. The number of firms operating in the industry would likely decrease as well. The increased minimum average cost may make it unprofitable for some firms to continue operating, leading to a decrease in the number of firms in the industry. The output level for each firm operating in the industry would also decrease due to the higher costs. If graphed, the new long-run equilibrium price and quantity will be above the MC = min AVC point, reflecting the increased cost resulting from the tax.