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7. (15 points) Consider a perfectly competitive market with many identical firms. A typical firm incurs a fixed cost of $200 each month and its monthly production function is provided below. Total Output variable cost 0 0 1 60 2 100 3 120 4 150 210 6 280 7 370 480 A. What is the long run equilibrium price in this market? Use the additional space in the table to make any relevant calculations. Explain your reasoning. B. What quantity does the firm produce each month in the long run market equilibrium?C. Suppose the government imposes a price ceiling of $50 per unit. How many units would the firm produce in the next month? D. Will consumers be better off if the price ceiling is adopted? Explain. E. Describe what happens to this industry over time if the price ceiling persists. What is the new long run equilibrium price and quantity with the price ceiling?8. (10 points) Alfie has $100 per week to spend solely on food and he can choose between junk food or healthy food. Alfie currently spends $50 per week on junk food and $50 on healthy food. A. Draw Alfie's budget constraint on the graph below. $ junk food 120 110 100 90 80 70 60 50 40 30 20 10 0 10 20 30 40 50 60 70 80 90 100 110 120 $ healthy food B. Concerned with the adverse health effects of junk food, the mayor imposes a new tax on junk food such that $1 will only purchase $0.80 worth of junk food. Draw Alfie's new budget constraint after this junk food price increase. Label clearly. C. Will Alfie's consumption of healthy food increase as a result of the tax? Explain using the concepts of income and substitution effects.9. (15 points) The graph below shows the monthly supply and demand for wildlife tours in a National Park. The wildlife tour industry is perfectly competitive. The Parks Department recently determined that the first 40 wildlife tours each month do no harm to the park. However, beyond 40 tours, each additional tour does damage that requires an extra $20 of clean-up and maintenance. 110 100 90 80 70 60 50 40 30 20 10 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 number of tours A. Use the graph to explain how many tours would be efficient. B. If the market for tours is unregulated, how many wildlife tours are conducted each month?C. Would it be more efficient to cap the number of tours at 40 per month, rather than allow the unregulated outcome from part B? Explain using the graph. D. What size tax would lead to the efficient outcome you described in part A
