Question

Consider again Worked-Out Problem 14.2. The daily demand for pizza is

          Qd=32,900−600P,Qd=32,900−600P,

where P is the price of a pizza. The daily costs for a pizza company include $845 in avoidable fixed costs and variable costs equal to

          VC=5Q+Q2/80,VC=5Q+Q2/80,

where Q is the number of pizzas produced each day. Marginal cost when producing Q pizzas is

          MC=5+Q/40.MC=5+Q/40.

Recall that the price is $11.50, and the total quantity demanded is 26,000 pizzas per day. In a long-run equilibrium, each active firm produces 260 pizzas per day, its efficient scale. That means there are 100 active firms in the initial long-run equilibrium. Suppose that starting at the initial long-run equilibrium with a price of $11.50 and 100 active firms, the government requires firms to pay a tax of $11.50 per pizza.

a. Complete the table below.

Instructions: Round quantities to the nearest whole number and prices to 2 decimal places.

	No tax	With a tax = $11.50
Short-run equilibrium price	11.50
Short-run equilibrium quantity	26,000
Consumer surplus	562,000
Producer surplus	84,500
Aggregate surplus	647,400
Government revenue	—
Deadweight loss	—

b. In the long run, the equilibrium price will be $ and the quantity will be .   

c. Relative to the short-run equilibrium, deadweight loss:

	cannot be determined.
	decreases.
	stays the same.
	increases.

Answer 1