This Question: 1 pt 10 of 12 (8 complete) This Quiz: 12 pts Question He Assume a

Question

This Question: 1 pt 10 of 12 (8 complete) This Quiz: 12 pts Question He Assume a competitive firm faces a market price of $100, a cost curve of C 0.003q+30q+750, MC -0.009q+30 and a marginal cost curve of If a specific tax of $5 per unit is implemented, what would be the new equilibrium output level? it would be units (round your answer to two decimal places) If, instead, a lump sum tax of $441 is implemented, what would be the new equilibrium output level? It would be units. (round your answer to two decimal places)

Explanation / Answer

Solution:

In perfect competition, for individual firm

Market price is demand curve itself = $100 (so, horizontal or perfectly elastic curve)

Marginal cost curve is same as short-run supply curve :

p = 0.009q2 + 30

a) With per unit tax of $5 per unit, firm's total cost increase by 5q. So, the marginal cost now is 0.009q2 + 30 + 5

At equilibrium, 100 = 0.009q2 + 35

On solving, we get q = (65/0.009)1/2 = 84.98 units

b) With lumpsum tax, the fixed cost of the firm increases so total cost increases but marginal cost remains unchanged

So output level at new equilibrium remains same as old equilibrium

100 = 0.009q2 + 30

On solving this, q =(70/0.009)1/2 = 88.19 units

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