A competitive industry has 10,000 identical firms. For each firm in the industry, the long-run cost of producing y units of output is c(y) = $100 + y2 if y 0 and c(0) = 0. The government imposes a lump sum tax of $300 on each firm in the industry. Firms can avoid this tax only by going out of business. There is free entry and exit into this industry. In the long run, the number of firms

Question

A competitive industry has 10,000 identical firms. For each firm in the industry, the long-run cost of producing y units of output is c(y) = $100 + y2 if y > 0 and c(0) = 0. The government imposes a lump sum tax of $300 on each firm in the industry. Firms can avoid this tax only by going out of business. There is free entry and exit into this industry. In the long run, the number of firms

Quizplus · Accepted Answer

In the long run, firms will exit the industry due to the lump sum tax, as it increases their costs. The number of firms will decrease until the remaining firms can cover their costs, including the tax, at the market price. The price of output will adjust to ensure zero economic profit, but it will not necessarily rise by a specific amount like $30 or double.

A Competitive Industry Has 10,000 Identical Firms