There is free entry into the pollicle 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) On the diagram below, draw a representative firm€™s average and marginal cost curves using blue ink. Also, indicate the long-run equilibrium level of the market price.

(b) Suppose the government imposes a tax, t, on every unit of output sold by the industry. Use red ink to draw the new conditions on the above graph. After the industry has adjusted to the imposition of the tax, the competitive model would predict the following: the market price would (increase, decrease) ______ by amount ______, there would be (more, the same, fewer) ______ firms operating in the industry, and the output level for each firm operating in the industry would ______. (increase, stay the same, decrease).
(c) What if the government imposes a tax, l, on every firm in the industry. Draw the new cost conditions on the above graph using black ink. After the industry has adjusted to the imposition of the tax the competitive model would predict the following: the market price would (increase, decrease) ______, there would be (more, the same, fewer) ______firms operating in the industry, and the output level for each firm operating in the industry would ______ (increase, stay the same, decrease).

Transcribed Image Text:

Price 20 Red mc P+t , Red a ' Blaćk ac Blue 5 Blue 10 20 30 40 Quantity