In a perfect competitive market, no one would benefit from the event that lowers the production of firms because of free entry and free exit in the competitive market. In perfect competition no one has the ability to affect the price. Both sides takes the market price as given and the market. Clearing price is the one at which there is neither excess supply nor excess demand i.e. suppliers will keep producing as long as they can sell the goods for a price that exceeds their cost of making one more (marginal cost of production). Buyers will go on purchasing as long as the satisfaction they derive from consuming is greater than …show more content…
MR = 500+ 2x -10Q iii) the firm will produce where MR = MC = 500-20Q=100 solving for Q we get 20
b) How much will it charge?
The demand equation is P=500-10Q
Substituting Q in the equation we get P=500-(10x20) = 300
c) Can you determine its profit per day? (Hint: you can; state how much it is.)
Marginal cost is constant hence MC=AVC.
MC=100=TC=MC x Q = 100x20=2000
Profits = TR-TC
TR= PQ= 300 x 20 = $6000
Profit = 6000-2000=$4000
d) Suppose a tax of $1,000 per day is imposed on the firm. How will this affect its price?
i) Increase in tax reduces the output and raises the price. ii) P = $500 − 10Q iii) From (e) below, quantity is 15 iv) Therefore, P=500-(10x15) = $350
e) How would the $1,000 per day tax its output per day?
Tax of $1000 reduces profit to $3000 from $4000
If Q of 20 produces profit of $4000, then $3000 will be produced by; (20x3000)/4000 =15.
Therefore, output reduces to 15
f) How would the $1,000 per day tax affect its profit per day?
P= (15 x 350) - (100x15) = 5250-1500 = $3750
Reduction in profit is $(4,000-3750) = $250
g) Now suppose a tax of $100 per unit is imposed. How will this affect the firm’s price?
i) Tax of $100 reduces profit to $(4000-100) =$3900 ii) If quantity 20 produces profit of $4000, then $3900 is produced by (3900x20)/4000 = 19.5
h. How would a $100 per unit tax affect the