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#14 Long-Run Equilibrium - Competitive markets

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In a competitive market with a downward sloping demand curve, a tax that increases the fixed cost of every firm will:

a) reduce the number of firms supporting long run equilibrium

b) increase the long-run equilibrium price.

c) not cause the number of firms supporting long-run equilibrium to change

d) answers a and b

e) answers b and c

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The correct answer is (d). If a tax is imposed which increases the fixed ...

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Diminishing the Marginal Productivity of Labor

Below are the questions that will refer to the graph in the attachment.

Assume that the graph illustrates the marginal, average variable and average total cost curves of a typical coffee grower and that the wholesale market for coffee beans is a perfectly competitive market.

A) As output expands, at what level of output does this grower first start to experience diminishing marginal productivity of labor? Explain your answer in 1 or 2 sentences.

B) Assume that the current market price at the wholesale level is $5 per pound. How much coffee will this typical grower produce? Explain your answer in one or two sentences.

C) Is there a price below which the grower will not bother to cultivate & harvest his crops, but will just let the beans rot on the tree? Explain your answer briefly.

D) Assume that as the industry expands (or contracts) the prices of the variable inputs he uses do not change. Is $5 per pound the long run equilibrium price in this market? If so, explain why. If not, explain why not and identify the long run equilibrium price.

E) Suppose there is a shortage of experienced farm labor in the coffee growing regions, so that as the industry expands the wages paid to farm labor rise. How would this affect your conclusion in part (D) about the long run equilibrium price of coffee?

F) Suppose that technological innovation in coffee cultivation greatly reduced the amount of labor used per ton of beans harvested, but required farmers to invest in substantially more large scale capital equipment and computerized hydration management systems. Draw a diagram illustrating the effect on the typical grower's average total cost curve. (i.e. draw a "before" and "after" ATC schedule). What is the effect of this technological change on the minimum efficient scale of production?

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