Tuesday
July 29, 2014

Homework Help: MICROECON - Perfect Competition

Posted by Anonymous on Thursday, October 29, 2009 at 8:40am.

**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

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