Suppose that there are 100 consumers in the economy with identical preferences over good x and y described by the following utility function: U(x, y) = x ^(4/5) y^(1/5). Each consumer has an income of 500. The cost of production x2 of good x is described by the following cost function C(x) = 400 +800.
Find the long run equilibrium price and quantity. How many firms would operate on the market in the long run?
Suppose now that the government decides to impose 10% income tax on the consumer in order to raise revenue. Find the short run effect of this policy on the equilibrium price and quantity.
What will be the equilibrium price and quantity in the long run after this policy is implemented. How many firms will operate on the market?