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Suppose all firms in a perfectly competitive market structure are in long-run equilibrium. Then demand for the firms' product increases. Initially,...

Suppose all firms in a perfectly competitive market structure are in long-run equilibrium. Then demand for the firms' product increases. Initially, price and economic profits rise. Soon afterward, the government decides to tax most (but not all) of the economic profits, arguing that the firms in the industry did not earn the profits. They were simply the result of an increase in demand. What effect, if any, will the tax have on market adjustment?

This question was asked on May 31, 2010.

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