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Question: each firm belonging to a competitive industry has the following...

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Each firm belonging to a competitive industry has the following long-run cost function

C(q) = 10q 2q^2 + q^3

where q denotes the output of a representative firm.

Firms can enter and exit the industry freely. The industry has constant costs: input prices do not change as industry output changes. The market demand facing the industry is given by

Q = 20 P

 

(a) Derive the long-run industry supply curve.

 

(b) How many firms operate in the industry?

 

(c) Suppose a regulator imposes a lump-sum tax of 8 on each firm. Does the

output produced by a firm rise or fall as a consequence of this policy? Explain.

(Hint: Consider the following equation:

−(8/q^2) 2 + 2q = 0

 

 (d) How much revenue does the tax policy in part (c) raise?

 

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