Question

Each firm is producing 150 units of output in which it sells at a price of R20 per unit; out of this amount each firm is paying R4 tax per unit of the output,the government decide to abolish tax . Explain what would happen in the short run of the equilibrium price and industry output;number of firms , illustrate on a diagram for number of the market and number firms

Answer 1

In the short run the equilibrium price will decrease, the industry output will increase; number of firms will increase as a result of the revenue which the firms receive without tax.