Suppose that the government cuts the payroll tax and that this decrease lowers the marginal cost of producing raspberry jam by $2 per case. Suppose further that the raspberry jam is produce in a perfectly competitive constant cost industry. Trace out the impact of this $2 decrease in costs on the industry. Carefully explain how the market price, industry output, per firm output, and profits are affected by the payroll tax both in the short run and the long run. How much of the $2 decrease in cost is passed on through higher prices in the long run? (You should assume that the industry begins in a long-run equilibrium).

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Sonal Bahl
Sonal BahlLv10
29 Sep 2019

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