Answer to Question #54313 in Economics of Enterprise for Abdulaziz Mohammed

Question

Widgets are provided by a competitive constant-cost industry where each firm has fixed costs of $30. The following chart shows the industry-wide demand curve and the marginal cost curve of a typical firm:

(Industry-Wide Demand ) - ( Firm’s Marginal Cost Curve) :

(Price - Quantity ) / (Quantity- Marginal Cost ) :
- ($5 -1500) / ( 1 - $5 ).
- (10 - 1200 ) / (2 - 10 ).
- (15 - 900 ) / ( 3 - 15 ).
- (20 - 600) / ( 4 - 20).
-(25 - 300) / (5 - 25).
-(30 - 200) / (6 - 30).
-(35 - 140)/ (7 - 35).
-(40 - 50) / ( 8 - 40).

a.What is the price of a widget?
b. How many firms are in the industry?

For the remaining four parts of this question, assume that the government imposes an excise tax of $15 per widget.
c. In the short run, what is the new price of widgets?
d. In the short run, how many firms leave the industry?
e. In the long run, what is the new price of widgets?
f. In the long run, how many firms leave the industry?

Answer 1

a. The price of a widget equals the marginal cost and marginal revenue P = MC = MR, so P = $25
b. There are 5 firms in the industry.
If the government imposes an excise tax of $15 per widget, then:
c. In the short run the new price of widgets will be 25 + 15 = $40.
d. In the short run no firms will leave the industry
e. In the long run the price of widgets will increase.
f. In the long run most firms will leave the industry.