Question 4 (20 marks) Assume that gadgets are produced and sold in a perfectly competitive, constant-cost...

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Question 4 (20 marks) Assume that gadgets are produced and sold in a perfectly competitive, constant-cost industry. There are 100 identical firms in the industry. Each firm has a short-run supply curve given by: S qi = p-4 0 for p12 for p <12 2 Th The market demand for gadgets is given by QP = 5200 - 300p. The industry is currently in a position of long-run equilibrium. a) What are the long-run equilibrium market price and quantity? How much output is each firm producing? b) What must be the minimum efficient scale of a firm? What must be the minimum average variable cost of the firm? Explain. Suppose now that the government has decided to implement a carbon tax to reduce carbon dioxide emissions. In particular, it starts collecting a tax of $2 per unit from the firms in this industry. f) c) d) Compute after-tax equilibrium price and quantity of the market. How much output does each firm produce? Illustrate the effects of the carbon tax on a pair of diagrams (one for the market and the other for the firm). Show clearly the changes in (i) the industry output, (ii) the quantity supplied by each firm, and (iii) the economic profit or loss of a firm. Illustrate a new long-run equilibrium in a pair of diagrams. Relative to the initial long-run equilibrium, what will happen to (i) the price of the product, (ii) the industry output, (iii) the quantity supplied by each firm, (iv) the number of the firms in this industry. Will the tax burden be shared between buyers and firms in the long run? Explain. Suppose that, instead of a carbon tax, the government requires the firms in this industry to make a once- for-all investment in a filtering system. g) Repeat d) - f) when the government sets the regulation that requires the firms to make a once- and-for-all investment in the filtering system. Question 4 (20 marks) Assume that gadgets are produced and sold in a perfectly competitive, constant-cost industry. There are 100 identical firms in the industry. Each firm has a short-run supply curve given by: S qi = p-4 0 for p12 for p <12 2 Th The market demand for gadgets is given by QP = 5200 - 300p. The industry is currently in a position of long-run equilibrium. a) What are the long-run equilibrium market price and quantity? How much output is each firm producing? b) What must be the minimum efficient scale of a firm? What must be the minimum average variable cost of the firm? Explain. Suppose now that the government has decided to implement a carbon tax to reduce carbon dioxide emissions. In particular, it starts collecting a tax of $2 per unit from the firms in this industry. f) c) d) Compute after-tax equilibrium price and quantity of the market. How much output does each firm produce? Illustrate the effects of the carbon tax on a pair of diagrams (one for the market and the other for the firm). Show clearly the changes in (i) the industry output, (ii) the quantity supplied by each firm, and (iii) the economic profit or loss of a firm. Illustrate a new long-run equilibrium in a pair of diagrams. Relative to the initial long-run equilibrium, what will happen to (i) the price of the product, (ii) the industry output, (iii) the quantity supplied by each firm, (iv) the number of the firms in this industry. Will the tax burden be shared between buyers and firms in the long run? Explain. Suppose that, instead of a carbon tax, the government requires the firms in this industry to make a once- for-all investment in a filtering system. g) Repeat d) - f) when the government sets the regulation that requires the firms to make a once- and-for-all investment in the filtering system.