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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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BuyFindarrow_forward

Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Suppose all firms in a perfectly competitive market structure are in long-run equilibrium. Then demand for the firms’ product increases. Initially, price and economic profits rise. Soon afterward, the government decides to tax most (but not all) of the economic profits, arguing that the firms in the industry did not earn the profits. Rather, the profits were simply the result of an increase in demand. What effect, if any, will the tax have on market adjustment?

To determine

The effect of imposing tax.

Explanation

The effect of imposition of tax on the firm’s profit is that it reduces the entry of new firms into the industry...

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