Economics 172

Homework 9 Chapter 9 Due Friday April 17

Review Questions

9.4, 9.10, 9.12, 9.16, 9.24, 9.26, 9.28

My questions:

1. In long run equilibrium, each firm in a perfectly competitive industry earns zero profit. Why would anyone ever want to start a business in a perfectly competitive industry?

2. The ballpoint pen industry is a competitive industry in long run equilibrium and all pens sell for $2.

a. Assume that all firms have normally shaped average and marginal cost curves. Show, using all relevant graphs the initial long run equilibrium situation for a representative firm in the ballpoint pen industry. Be sure to show output level and all relevant costs.

Ballpoint pens are manufactured in numerous factories all over the U.S. and can be easily shipped. One of the companies that manufacture these pens, ClevePens is located in Cleveland, Ohio. In order to raise revenue, the Cleveland City Council decides to put a tax of 20 cents per pen on the production of pens in factories located in the city.

b. Show graphically and briefly discuss how this tax will affect the market price and quantity of ballpoint pens in the United States.

c. Show and briefly discuss how this tax will affect the price, quantity, and profits of ClevePens in the short run.

d. Show graphically and briefly discuss how this tax will affect the price, quantity, and profits of ClevePens in the long run.