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Suppose all firms in a perfectly competitive and zero-fixed-cost industry previously in its long-run equilibrium are now receiving an upfront subsidy from the US government.
Suppose all firms in a perfectly competitive and zero-fixed-cost industry previously in its long-run equilibrium are now receiving an upfront subsidy from the US government. Please use a graphic tool to answer the following questions:
- a)How do the MC and AC curve change due to this government intervention?
- b)At the current price, are the existing firms earn positive, negative, or zero profit?
- Identify the size of the profit/loss in the graph.
- c)Will we observe entry or exit in this industry as time goes by?
- d)What happens to the market price as the industry goes back to a long-run
- equilibrium?
- e)By how much each firm and the entire industry are producing in the long run?
- f)Draw the new long run industry supply curve in your graph.
- g)How do you think will the social welfare change?
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