A competitive industry is in long - run equilibrium. Market demand is linear, p = a bQ
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Question:
A competitive industry is in longrun equilibrium. Market demand is linear, p a bQ where
a b and Q is market output. Each firm in the industry has the same technology with cost
function, cq k q
a What is the longrun equilibrium price? Assume what is necessary of the parameters to ensure
that this is positive and less than a
b Suppose that the government imposes a perunit tax, t on every producing firm in the industry. Describe what would happen in the long run to the number of firms in the industry. What is
the posttax market equilibrium price? Again assume whatever is necessary to ensure that this
is positive and less than a
c Calculate the longrun effect of this tax on consumer surplus. Show that the loss in consumer
surplus from this tax exceeds the amount of tax revenue collected by the government in the
posttax market equilibrium.
d Would a lumpsum tax, levied on producers and designed to raise the same amount of tax
revenue, be preferred by consumers? Justify your answer.
e State the conditions under which a lumpsum tax, levied on consumers and designed to raise the
same amount of revenue, would be preferred by consumers to either preceding form of tax.
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
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