Question

17. consider the same industry as in problem 16. suppose the market is in long-run equilibrium and that an annual license fee is imposed on barber shops. a. illustrate the short-run effects of the change on the price and output of haircuts for a typical firm in the community. b. now show what happens to price and output for a typical firm in the long run. c. who pays the fee in the long run? how does this compare to the conclusions of the model of perfect competition?

Answer 1

In the short run, the license fee will increase costs and reduce output. In the long run, firms will exit the market and the price of haircuts will increase. Ultimately, consumers pay the fee in the long run.

Step-by-step explanation:

In the short run, the imposition of an annual license fee on barber shops in a perfectly competitive market will lead to an increase in costs for the firms. As a result, the firms will reduce their level of output to minimize losses. This reduction in output will cause the price of haircuts to increase in the short run.

In the long run, the market will adjust to the new conditions. Firms that cannot cover their costs will exit the market, causing the supply of haircuts to decrease. As a result, the price of haircuts will increase further, and firms that remain in the market will increase their output to meet the new demand.

In the long run, it is the consumers who ultimately pay the annual license fee. This is because the increase in price of haircuts is passed on to the consumers due to the higher cost of production for the firms. In a model of perfect competition, it is also the consumers who bear the burden of any fees or taxes imposed on the firms.