Assume that consumers view tax preparation services as undifferentiated among producers and there are hundreds of companies offering tax preparation in a given market. The current market equilibrium price is $120. Joe Audit's Tax Service is one of the firms, and has a daily, short-run total cost given by: TC(Q) = 100 + 402 and marginal cost is: MC = 8Q First, we want you to re-solve the questions from the TA sessions - since you have the slides available we will not give you very many points, but we want you to work through the solution yourself. (a) (2pts) How many tax returns should Joe prepare each day if his goal is to maximize profits?(b) (2pts) How much will he earn in profit each day? Now let's turn to the real questions we want you to think about: (c) (3pts) Assume that all tax preparation producers have the exact same cost function as Joe. In the long run, would we expect there to be entry of new firms, exit of existing firms, or neither? Why? (d) (5pts) Now let us assume that the long-run total cost function is 0 if Q = 0 TC(Q) = \\ 100 +402 if Q > 0 Note that this may look much the same as the short-run cost function, but now the cost is zero if output is zero - in other words the "fixed cost" of $100 is now variable since it does vary with output, because it is zero when output goes to zero. What must the price be for Joe to stay in the market for tax preparation services? (e) (3pt) But this raises another puzzle, since this lower price means Joe is producing a lower output (his maximizing output Q is lower). With a downward sloping demand curve, the only way to have a lower equilibrium price would be to have a greater quantity Q. How can we have Joe produce a lower quantity and yet also a lower price for the industry? (f) (5pt) Say that demand for tax preparation services is given by Q" = 520 - 8P, where Q is the quantity of tax returns demanded per day. In the long run, how many firms (including Joe's) would we expect to be competing in this market