Consider a competitive market involving firms with identical U-shaped average cost curves that is in the long run equilibrium. Suppose that the government imposes a lump sum tax on every firm in this industry. A firm can avoid the tax only if it stops production altogether.
(a) How will this tax affect the number of firms in the industry?
(b) What will happen to the equilibrium price of the good?
(c) When long run equilibrium is re-established, how will each firm's output compare with the initial equilibrium output?