23.9 (0)- There is free entry into the pollicle indusiny. Anybody can enter this indusiny and have the same Ushaped average cost curve as all of the other rms in the industry. {a} On the diagram below, draw a representative rrn's average and mar- ginal cost curves using blue ink. Also, indicate the longrun equilibrium level of the market price. NAME 291 a 1:: an an 40 Dmnlity (I?) Suppose the govermnent imposes a tax, t, on ever unit of output sold by the industry. Use red ink to draw the new conditions on the above graph. After the industry has adjusted to the imposition of the tax, the competitive model would predict the following: the market price would (increase, decrease) increase by amount t , there would be (more, the same, fewer) fewer rms operating in the industry, and the output level for each rm operating in the industry would Stay the same . (increase, stay the same, decrease). (c) What if the government imposes a tax, I, on every rm. in the in dusiny. Draw the new cost conditions on the above graph using black ink. After the indusin'y has adjusted to the imposition of the tax the competitive model would predict the following: the market price would (increase, decrease) increase , there would be (more, the same, fewer) fewer rms operating in the industry, and the output level for each rm operating in the industry would increase (increase, stay the same, decrease). 23.11 (2) In order to protect the wild populations of cockatoos, the Australian authorities have outlawed the export of these large parrots. An illegal market in cockatoos has developed. The cost of capturing an Australian cockatoo and shipping him to the United States is about $40 per bird. Smuggled parrots are drugged and shipped in suitcases. This is extremely traumatic for the birds and about 50% of the cockatoos shipped die in transit. Each smuggled cockatoo has a 10% chance of being discov- ered, in which case the bird is confiscated and a fine of $500 is charged. Confiscated cockatoos that are alive are returned to the wild. Confiscated cockatoos that are found dead are donated to university cafeterias.* (a) The probability that a smuggled parrot will reach the buyer alive and unconfiscated is . 45. Therefore when the price of smuggled parrots is p, what is the expected gross revenue to a parrot-smuggler from shipping a parrot? .45p. (b) What is the expected cost, including expected fines and the cost of capturing and shipping, per parrot? $.10 x 500 + 40 = $90. (c) The supply schedule for smuggled parrots will be a horizontal line at the market price $200. (Hint: At what price does a parrot-smuggler just break even?) 'd) The demand function for smuggled cockatoos in the United States is D(p) = 7, 200-20p per year. How many smuggled cockatoos will be sold in the United States per year at the equilibrium price? 3, 200. How many cockatoos must be caught in Australia in order that this number of live birds reaches U.S. buyers? 3, 200/.45 = 7, 111. (e) Suppose that instead of returning live confiscated cockatoos to the wild, the customs authorities sold them in the American market. The profits from smuggling a cockatoo do not change from this policy change. Since the supply curve is horizontal, it must be that the equilibrium price of smuggled cockatoos will have to be the same as the equilibrium price when the confiscated cockatoos were returned to nature. How many live cockatoos will be sold in the United States in equilibrium? 3, 200. How many cockatoos will be permanently removed from the Australian wild? 6,400. The story behind this problem is based on actual fact, but the num- bers we use are just made up for illustration. It would be very interesting to have some good estimates of the actual demand functions and cost functions. NAME 293 (f) Suppose that the trade in cockatoos is legalized. Suppose that it costs about $40 to capture and ship a cockatoo to the United States in a comfortable cage and that the number of deaths in transit by this method is negligible. What would be the equilibrium price of cockatoos in the United States? $40. How many cockatoos would be sold in the United States? 6, 400. How many cockatoos would have to be caught in Australia for the U.S. market? 6,400