a.
In the short-run, the equilibrium condition is (price = marginal cost).
Imposition of tax should decrease supply; it shifts the MC curve to the left, making the equilibrium at the same price but at reduction of output.
Price: should not change
Number of firms: remains the same, since in the short-run escaping from the market is not possible.
Output: reduces
b.
In the long-run all factors of production become variable. The loss-making firms would leave the market, making the price level same but output would increase up to that level where each firm earns normal profit (that is (P = ATC again)).
Price = should not change
Number of firms = reduces
Output = increases
4. (8 points) A competitive industry is in long-run equilibrium. An excise tax is then placed...
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