Suppose all firms in a perfectly competitive and zero-fixed-cost industry previously in its long-run equilibrium are...

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Suppose all firms in a perfectly competitive and zero-fixed-cost industry previously in its long-run equilibrium are now receiving an upfront subsidy from the US government. Please use a graphic tool to answer the following questions: a) How do the MC and AC curve change due to this government intervention? b) At the current price, are the existing firms earn positive, negative, or zero profit? Identify the size of the profit/loss in the graph. c) Will we observe entry or exit in this industry as time goes by? d) What happens to the market price as the industry goes back to a long-run equilibrium? e) By how much each firm and the entire industry are producing in the long run? f) Draw the new long run industry supply curve in your graph. g) How do you think will the social welfare change? Suppose all firms in a perfectly competitive and zero-fixed-cost industry previously in its long-run equilibrium are now receiving an upfront subsidy from the US government. Please use a graphic tool to answer the following questions: a) How do the MC and AC curve change due to this government intervention? b) At the current price, are the existing firms earn positive, negative, or zero profit? Identify the size of the profit/loss in the graph. c) Will we observe entry or exit in this industry as time goes by? d) What happens to the market price as the industry goes back to a long-run equilibrium? e) By how much each firm and the entire industry are producing in the long run? f) Draw the new long run industry supply curve in your graph. g) How do you think will the social welfare change?

Answer rating: 100% (QA)

Answer AThe price wont be suffering from the upfront subsidy but upfront subsidy will end ... View the full answer