Assume that a perfectly competitive, constant cost industry is in a long run equilibrium with 20 firms. Each firm is producing 70 units of output which it sells at the price of $18 per unit; out of this amount each firm is paying $2 tax per unit of the output. The government decides to abolish the tax.
a) Explain what would happen in the short run to the equilibrium price and industry output; number of firms in the industry; output and profit of each firm. Illustrate on diagrams for the market and a particular firm.
b) Explain what would happen in the long run to the equilibrium price and industry output; number of firms in the industry; output and profit of each firm. Illustrate on diagrams for the market and a particular firm. Compare both to the initial long run equilibrium and to the short run equilibrium.
Your answer to this question should include graphs and explanations in words. Please note that the numbers are provided for convenience; you can indicate them on graphs, but you are not expected to do any calculations