Suppose that the government cuts the payroll tax and this 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).
Suppose that the government cuts the payroll tax and this 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).
Related textbook solutions
Related questions
11)
A constant-cost, perfectly competitive industry experiences a permanent increase in demand. In adjusting to this change, what will happen to the price of the product?
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It will increase in the short-run and then decrease in the long-run, but end up above its original level in the long-run. |
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It will increase in the short-run and then increase further in the long-run. |
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It will increase in the short-run and then decrease back to its original level in the long-run. |
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It will increase in the short-run and then decrease below its original level in the long-run. |
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It will decrease in the short-run but return to its original level in the long-run. |
12)
Assume that a perfectly competitive firm owns or rents a higher-quality resource that results in lower average total costs and higher economic profits in the short run. What will happen in the long-run?
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The price of the higher-quality resource will be bid upward resulting in economic rents and equalizing costs across firms. |
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New firms will enter and compete with any excess profits away. |
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None of the other answers is correct. |
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The government will tax away any excess profits. |
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The firm with the higher-quality resource will earn positive economic profits in the long run. |
13)
Which of the following are characteristics of long-run equilibrium?
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No firm has an incentive to change its level of output. |
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No firm has an incentive to change its plant size. |
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Economic profit is zero |
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All of the above |
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None of the above |
14)
Which of the following statements is consistent with the textbookĆ¢ĀĀs analysis of perfect competition?
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Although individual perfectly competitive firms wonĆ¢ĀĀt pay to advertise, the industry as a whole may well advertise. |
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Higher costs for one firm in the industry will result in that firm charging a higher price than the other firms in the industry. |
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If all the firms in an industry charge an identical price for their products, this is clear evidence of collusive behavior. |
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All of the above |
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None of the above |
15)
The assumptions that define the market structure known as monopoly include which of the following?
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High barriers to entry. |
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There is one seller. |
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There are no close substitutes available. |
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All of the above |
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None of the above |
