14. Each firm belonging to a competitive industry has the following long-run cost function C(q) =...

14. Each firm belonging to a competitive industry has the following long-run cost function C(q) = 10q − 2q^2 + q^3 where q denotes the output of a representative firm. Firms can enter and exit the industry freely. The industry has constant costs: input prices do not change as industry output changes. The market demand facing the industry is given by Q = 20 − P

(a) Derive the long-run industry supply curve. [5 marks]

(b) How many firms operate in the industry? [5 marks]

(c) Suppose a regulator imposes a lump-sum tax of 8 on each firm. Does the output produced by a firm rise or fall as a consequence of this policy? Explain. [5 marks] (Hint: Consider the following equation: − (8/(q^2)) − 2 + 2q = 0

The solution to this is q = 2.)

(d) How much revenue does the tax policy in part (c) raise? [5 marks]

Expert Solution

Rahul Sunny answered 2 years ago

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