Individual or Group Project

The Town Council of the Isle Au Haut is deeply concerned about the number of Phrenologists practicing their trade in the community.  The industry has been operating for years and the Town Council has been able to ascertain the following facts:

·        the business operates is a perfectly competitive environment

·        the total cost per week  is given by the function
      TC = 100 + q2

·        the market demand per week is given by the function
      Q = 5000 - 50P

The Town Council is considering establishing a per unit tax of $5 per consult to be collected from the shops. The revenues from the tax will be used to enforce health standards in the Phrenology consulting shops.  It is also hoped that the fee will curtail both the number of shops and the number of customers.

The local paper is full of outraged editorials.  These editorials state that there are probably thousands of firms.  These firms are rumored to charge anywhere from $20 to $100 per ”consult.”   Furthermore the proposed tax will simply be passed onto the consumer and have no impact on the number of firms, or on the number of customers.

Fortunately, you—as an economist, with expertise in perfectly competitive markets, are available.  The town council asks you to prepare a report discussing the impact of the proposed tax.

Hints:  What can you deduce from the facts?  If the industry is in long run equilibrium, how many firms are there? What is the price?  What is the impact of the proposed tax on consumer surplus?