A competitive industry is composed of identical firms each with cost function C = 1 + 2Q2 ,where C denotes cost and Q is the level of output. The government imposes a fixed fee of $1 per year on each firm that operates in this competitive market.
(a) What happens to output, the optimal scale of a firm, and price if there is free entry into the market?
(b) Suppose instead of imposing the $1 fixed fee, the government imposes a tax of $1 per unit of output. What happens to the optimal scale of firms? We again assume all firms are identical and any firm can enter the market.