Question

1. Assume each firms long-run average cost are given by AC=10+0.002Q where Q is market output, so long-run costs are increasing in market output. Market demand is given by QD=DP=1,050-50P $wydb1oOwMAXyWgblJU2tXsAAAAASUVORK5CYII=$
   1. What is the long-run equilibrium price and market quantity?
   2. If market demand increases to QD=DP=1,600-50P $Acy8y4zil4I4gAAAABJRU5ErkJggg==$ find the new long-run equilibrium price and market quantity.
   3. Graph these equilibrium outcomes and calculate the change in producer surplus between (a) and (b)
   4. If a tax of $5.50 per unit output is introduced find the price producers pay, price consumers pay and the new level of market output.
   5. What is the total tax revenue from the new tax? Assuming the market was in the equilibrium found in part (a) before the tax was introduced, what is the consumer and producers tax burden? What does the relative size of the producer’s and consumer’s tax burden tell you about the relative size of the elasticity of supply and elasticity of demand?
   6. Calculate the dead weight loss associated with the new tax.

Answer 1

Date long run Market anerage cost , AC = 10 + 0.002 a demand, Q = (011) = 1050-50P (a.) At long run equilibrium, we must = 7 P- AC P = 10 +0.002g. 8 = P - 10 0.002 A = 500 P - 5000 will giver supply This for the output. Therefore, at equilibrium Q = QP Soop - 5000 = 1050 - 50p - 550 P = 6050 pm = 11 and * = 500 writs. Hence long run market quantity respectively. equilibrium are 11 and price and 500 units

(6) 4 market demand increases do ao(P) = 1600 - 50P to new long run equilibrium 500 - 5000 = 1600 -sop. 550 P = 6600 p* = 12 and d = 1000 units. Hence, ich market demand increases them both equilibrium price and equilibrium quantity will increase. (c) Price 32 P 12 P=11 - 500 10801050 1600 Quantity

I'm the ginen diagram pro en diagram surplus. producer area below the price line and above the supply curue. Howener in the run equilibrium supply wine is horizerdal at the price lend. and all to profit is equal to you. Therefore, Producer Surplus is equal to zero. Hence, change in producer Surplus also equal to zero.