Consider a perfectly competitive local market for pizza for which the demand side comprises 20,000 identical residents. Each pizza firm in the market has an annual long run total cost function of

() = + 0.001^2 > 0

() = = 0

where is fixed cost, is sunk cost and is firm-level output in pizzas per year. Each firm owns a single facility (i.e. pizza joint), hires a manager and retains insurance, which are the only fixed factors of production. A pizza joint (land, building, siteworks and equipment) is a $800,000 capital investment that is financed by shareholders whom are able to earn an annual rate of return of 5% on investments elsewhere. A managers salary and benefits are $55,000 per year and the cost of insurance is $5,000 per year. The annual demand for pizza in the market is given by () = 200,000 6,000 where is the price per pizza. Let = denote industry level output where is the number of firms operating in the market. Assume that firms engaged in the best alternative use of a pizza joint are willing to pay $500,000 to acquire a pizza joint.

a. Derive the long-run equilibrium values , and . What is average weekly consumption per resident in the market?

b. Suppose the local government levies a tax of $5 per pizza. Incorporating this tax into the market, derive the new long-run equilibrium values , , and

c. Quantify the tax revenue, deadweight loss and number of pizza joint closures resulting from the tax noted in Part (d). Determine how the tax burden is shared between consumers and producers.