A competitive industry has 10,000 identical firms.For each firm in the industry, the long-run cost of producing y units of output is c(y)  $100  y2 if y  0 and c(0)  0.The government imposes a lump sum tax of $300 on each firm in the industry.Firms can avoid this tax only by going out of business.There is free entry and exit into this industry.In the long run, the number of firms

A) stays constant and the price of output rises by $30.
B) doubles and the price of output doubles.
C) is halved and the price of output is doubled.
D) stays constant and the price of output rises by less than $30.
E) None of the above.

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Zybrea Knight · Accepted Answer

Final Answer : E, Explanation :  In a competitive industry with free entry and exit, firms will enter or exit the market until economic profits are zero. A lump sum tax does not affect the marginal cost of production, so it does not change the price at which firms are willing to supply their product. Instead, it reduces profits. Firms will enter or exit until profits are zero again, which may change the number of firms but not necessarily in the ways described by options A, B, C, or D. None of these options accurately describe the effect of a lump sum tax in a competitive market with free entry and exit.

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