Question

Suppose that the market for laptops is perfectly competitive. The long-run equilibrium price is $3000 for a laptop. Suppose that the laptop market is initially in long-run equilibrium. Assume that all businesses that make laptops are identical.

1. On a diagram, illustrate the market demand for laptops, the short-run and long-run market supply of laptops. (1 mark)

The government decides to impose $500 tax for each laptop sold by the firm.

1. Using an appropriate diagram, explain how the introduction of the tax will affect laptop producers in the short run and in the long run. Also explain how the tax will affect the market price of laptops and the total number of laptops sold in the short run and the long run. Will the tax lead to a larger change in equilibrium quantity in the short run or in the long run? Fully explain your answer.

Answer 1