Difficult Economics Question
The handmade snuffbox industry is composed of 100 identical firms, each having
short run total costs given by
SRTC = 0.5q2 + 10q + 5
and short run marginal costs by
SRMC = q + 10
where q is the output of snuffboxes per day.
a. What is the short-run supply curve for each snuffbox maker? What is the
short-run supply curve for the market as a whole?
b. Suppose the demand for total snuffbox production is given by q = 1,100 Ė
50P. What is the equilibrium in this marketplace? What is each firmís total
c. Graph the market equilibrium and compare total producer surplus in this case.
d. Show that the total producer surplus you calculated in part c is equal to total
industry profits plus industry short-run fixed costs.
e. Suppose that the government imposes a $3 tax on snuffboxes. How would
this tax change the market equilibrium?
f. How would the burden of this tax be shared between snuffbox buyers and sellers?
g. Calculate the total loss of producer surplus as a result of the taxation of snuffboxes. Show that this loss equals the change in total short-run profits in the snuffbox industry. Why don't fixed costs enter into this computation of the change in short-run producer surplus?
Anyone have any ideas?