Question

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).

Please explain each question in detail and illustrate on the diagram as well, Thanks!

PS：there is no given equilibrium

Answer 1