1) The perfectly competitive blank compact disc industry is in long-run equilibrium, selling blank discs for $5 apiece. Now the government imposes an excise tax of $2 per disc produced.
- Show what happens to the price and output of discs in the short run.
- Now show the impact in the long run.
- Who pays the tax? (Note: Show quantities as Q1, Q2, etc.)
2) A monopoly firm has just taken over the blank compact-disc industry. There have been technological advances that have lowered production cost, but the monopoly firm charges a price greater than average total cost, even in the long run. As it turns out, the firm is still selling compact discs for $5. The government imposes an excise tax of $2 per disc produced.
- What happens to price?
- What happens to output?
- Compare your results to your answer in Problem 3 and explain.