Economics Quiz

A competitive industry is composed of identical firms each with cost function C = 1 + 2Q,where C denotes cost and Q is the level of output. The government imposes a fixed fee of $1 per year on each firm that operates in this competitive market. (a) What happens to output, the optimal scale of a firm, and price if there is free entry into the market? (b) Suppose instead of imposing the $1 fixed fee, the government imposes a tax of $1 per unit of output. What happens to the optimal scale of firms? We again assume all firms are identical and any firm can enter the market.

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