# MICROECON - Perfect Competition

posted by .

**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?

-----------
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 \$10βthe original long-run equilibrium price and quantity--but it now cost \$15)

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

• MICROECON - Perfect Competition -

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.

## Respond to this Question

 First Name School Subject Your Answer

## Similar Questions

1. ### Economics

An industry currently has 100 firms, all of which have fixed costs of \$16 and avg. variable cost as follows: Q Avg. Variable Cost (\$) 1 1 2 2 3 3 4 4 5 5 6 6 a. Compute marginal cost and avg. total cost. b. the price is \$10. what is …
2. ### economics

This is going to be really long, but I want to see if my answers are correct. This is problem number 10.10 in my Intermediate Microeconomics book. A perfectly competitive painted necktie industry has a large number of potential entrants. …
3. ### Economics

What is the computing? in terms of math Industry structure is often measured by computing the Four-Firm Concentration Ratio. Suppose you have an industry with 20 firms and the CR is 20%. How would you describe this industry?
4. ### Mircoeconomics

A significant difference between monopoly and perfect competition is that: A. free entry and exit is possible in a monopolized industry but impossible in a competitive industry. B. competitive firms control market supply but monopolies …
5. ### Economics

In a perfect competitive market, industry demand is P = 850 β 2Q, and industry supply is P = 250 + 4Q (supply is the sum of the marginal cost curves of the firms in the industry). Assume that all the firms collude to form a single …
6. ### Managerial Economics

In a perfect competitive market, industry demand is P = 850 β 2Q, and industry supply is P = 250 + 4Q (supply is the sum of the marginal cost curves of the firms in the industry). Assume that all the firms collude to form a single …
7. ### Microeconomics

Suppose thatsome firms in a perfectly competitive industry are incurring negative economic profits. In the long run, the a industry supply curve will not shift b. industry supply curve will shift to the left c. number of firms in the …
8. ### econ

2. Suppose that firms in an industry have the following cost function: C = 100 + 0.25q2, and the industry faces an inverse demand curve of P = 90 β 2Q. a. I f the industry is competitive, find the long-run equilibrium price, quantity, …
9. ### Ms. Sue Please Check My Answers!

1. During the early 1800s, what did New England's textile industry and cotton farming in the South have in common?
10. ### Econ

Please help me and review my answers for my quiz. Let me know which ones you believe to be right and wrong. 1. When P = AR = MR = AC = MC: X economic profits are positive. economic profits are zero. economic profits are negative. normal …

More Similar Questions