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Assume that a perfectly competitive, constant cost industry is in a long run equilibrium with 60...

Assume that a perfectly competitive, constant cost industry is in a long run equilibrium with 60 firms. Each firm is producing 90 units of output which it sells at the price of $41 per unit; out of this amount each firm is paying $3 tax per unit of the output. The government decides to decrease the tax, so the firms will be paying $1 tax per unit.

a) Explain what would happen in the short run to the equilibrium price and industry output; number of firms in the industry; output and profit of each firm. Illustrate on diagrams for the market and a particular firm.

b) Explain what would happen in the long run to the equilibrium price and industry output; number of firms in the industry; output and profit of each firm. Illustrate on diagrams for the market and a particular firm. Compare to the initial long run equilibrium and to the short run equilibrium found in a).

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Rahul Sunny answered 2 years ago
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