Assume the government decides to impose a per-unit tax on a good produced in a perfectly competitive market

a. Graphically illustrate the short-run effects of the tax on the cost conditions faced by a representative firm in the market.

b. Explain the adjustment process to long-run equilibrium in the market. What has happened to long-run equilibrium price and output as a result of the tax? What has happened to the number of firms in the market? Why?

a. The per unit tax would cause the individual firm's cost curves to shift up by the amount of the tax.

b. Assuming the firms in the market were initially in long-run equilibrium, at the initial equilibrium market price firms would now be incurring losses. Over time, some firms would exit the market, causing market supply to decrease (the market supply curve would shift left), and market price to increase until losses are eliminated. Overall, the number of firms in the market would decrease.