Q2 [8 marks].

Consider an industry with free entry and exit, and zero economic profits in the long run. In the short run the firm faces an upward sloping supply curve. The government has decided to impose a tax on this industry.

(a) Diagrammatically explain how the tax burden will be shared between the producers and consumers in the short run and the long run. (2+1=3 marks) (b) Calculate the fraction of tax burden passed onto the buyers in the long-run using the elasticity of the supply curve. (2 marks) (c) Can you explain the version of the Fish Market Game that we played in the classroom? Your answer should include equilibrium price prediction, parameter values that are needed and a simple graph in support of your answer.