Skyhooks are produced in a constant cost perfectly competitive industry. In the short run, there are 400
Question:
Skyhooks are produced in a constant cost perfectly competitive industry. In the short run, there are 400 firms in the industry, each of which has short run total costs given by:
STC = 256 + 4q + 4q^2 (q>1)
where q is the output of the firm. Fixed costs of $112 are included in these total costs. You are told that the minimum AVC occurs at q = 6 where AVC = 52, and that the minimum AC occurs at q = 8 where AC = 68. The marginal cost curve of the firm is:
SMC = 4 + 8q (q>1)
With 400 firms in the industry, the short run supply curve of the industry is given by the equation:
P = 4 + .02Q for P>52
In the long run, all firms have a long run average cost curve with its minimum point at: q = 8, LAC = 68. The demand curve facing the industry is given by: P = 260 − .06Q where P is price and Q is quantity demanded. Initially the industry is in both short and long run equilibrium at a price of $68 and a total quantity produced and consumed of 3200. Each firm produces 8 units. We want to know what happens in this industry when a $32 per unit tax is placed on the consumers of skyhooks.
1. In the short run after the $32 tax is placed on consumers, determine P (the price paid by the buyers of skyhooks), P (the price received by the sellers of skyhooks), Q (the quantity produced and purchased), and π (the profits earned by each firm). Also determine BS (the buyers’ share of the tax) and SS (the sellers’ share of the tax).
2. Assume that the tax of $32 per unit continues in the long run. Determine P (the price paid by the buyers of skyhooks), P (the price received by the sellers of skyhooks), Q (the quantity produced and purchased), and π (the profits earned by each firm). Also determine BS (the buyers’ share of the tax) and SS (the sellers’ share of the tax) and N (the number of firms in the industry). If any of your answers are not integers, you should round to the nearest unit.
3.Now assume that the number of firms is back at 400 and we are back in the initial equilibrium. Now assume that a tax of $96 is placed on the consumers of skyhooks. How many units of output will be produced and purchased in the short run, and determine BS and SS.
Expert Answer:
1 If the tax of 32 is placed on the consumers the demand curve will shift down by the amount i... View the full answer
