Intermediate Microeconomics Assignment

Markets and the General Equilibrium

Published by: https://assignmentessayhelp.com/

Filename: 1SAMPLE16C129-Intermediate-Microeconomics-Assignment.pdf

For more assistance visit: https://assignmentessayhelp.com/economics-assignment-help/

Uploaded: May 26, 2016

Enjoy

Abstract

It is given that industry comprising of 20 firms has constant costs and is in long run

equilibrium under perfect competition. Each firm is producing 150 units of output, which it

sells at the price of $20 per unit; out of this amount each firm is paying $4 tax per unit of the

output. The government decides to abolish the tax.

a) Initially, the firms received $16 ($20-$4) for each unit of output and there was zero profit

in the long run equilibrium. The market price for each unit was P= MC1 + tax = 16 + 4 =

$20. As the tax is abolished, the price received by each firm for one unit of output becomes

$20 which is now equal to the market price. The MC and AC of an individual firm shift

vertically upwards while the amount of output remains constant at 150 units. Hence, in the

short run, the firms start earning a profit ($4 X 150= $600) due to the rise in price. This

positive profit poses as an incentive to other firms to join this industry and the number of

firms starts increasing gradually in the short run.