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Unformatted text preview: How much profit will each firm earn in the short run? Short run supply does not change (MC is unaffected by lump-sum taxes) Since profits were 0 without the fee, profit now falls to -2. e. Now consider the eventual long run equilibrium after the inspection fee is imposed. Provide a short written explanation (algebra not necessary) of what will happen and why to: Price Quantity Number of firms Long run average costs increase (by 2/ q ), resulting in an equilibrium at a lower price and lower quantity. The number of firms will fall: There is both less total output ( Q goes down) and output per firm increases ( q goes up) due to the increased fixed cost. Since number of firms = Q / q , it must fall....
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- Winter '07