Question

Indigo production in the South operates as a perfectly competitive industry. All farmers have identical technologies and minimum average cost is reached at $3.00 per pound of Indigo - As of October 1, 2020, the industry has been in long run equilibrium. - On October 20, 2020, however, the government imposes a 25 cent tax on every pound of Indigo. a) Using appropriate diagrams, draw the equilibrium for the industry and the representative Indigo farmer as of October 1 b) Using appropriate diagrams, show in both the short run and the long run how the industry and the representative farms will adjust to the 25 cent per pound Indigo tax.

Answer 1

Perfect competition:- describe market structure where competition is at its grretest possible level.basically it is a hypothetical situation which cannot possibly exist in market.

characteristics:- 1. large number of buyers large number of sellers.

2. free entry and exist in the market

3.homogenous product is produced by every firm.

4. no government intervention and no tansportation cost.

(a) the long run equilibrium point for the perfectly competative market ouccrs where the demand curve(price) intersects the merginal cost(mc) curve and the minimun point of average cost (AC) curve. in long run economic profit cannot be sustained.

(b) government will choose to implement taxes to either individuals or firms in order to increase its revenue. when considering taxes of firms. it must be noted that these taxes will increase the prices of goods being produced and sold. when the taxes imposed on industry which increses there price in oreder to cover the losses.supply will shift to left, decrease the quantity being produced. which increse the prices since demand remain unchanged.