In the Long-Run Equilibrium of a Competitive Market, the Market

question 125

Essay

In the long-run equilibrium of a competitive market, the market supply and demand are:
Supply: P = 30 + 0.50Q
Demand: P = 100 - 1.5Q,
where P is dollars per unit and Q is rate of production and sales in hundreds of units per day. A typical firm in this market has a marginal cost of production expressed as:
MC = 3.0 + 15q.
a. Determine the market equilibrium rate of sales and price.
b. Determine the rate of sales by the typical firm.
c. Determine the economic rent that the typical firm enjoys. (Hint: Note that the marginal cost function is linear.)
d. If an output tax is imposed on ONE firm's output such that the ONE firm has a new marginal cost (including the tax) of:
MCt = 5 + 15q,
what will the firm's new rate of production be after the tax is imposed? How does this new production rate compare with the pre-tax rate? Is it as expected? Explain. Would the effect have been the same if the tax had been imposed on all firms equally? Explain.

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