Suppose that the garden gnome industry was in long-run equilibrium as described in Problem 1.On January 1, 1993, the cost of plaster and labor remained at $7 per gnome, gnome molds still cost $1,000, and the interest rate remained at 10%, but the government introduced a tax of $7 on every garden gnome sold.Then the equilibrium price of garden gnomes in 1993 would be

A) $16.
B) $9.20.
C) $7.
D) $14.
E) $21.

In long-run equilibrium, firms in a perfectly competitive market make zero economic profit, meaning that the price equals the average total cost (ATC). Before the tax, the equilibrium price covered all costs, including the cost of plaster and labor ($7), the amortized cost of the gnome molds, and a normal return on investment. With the introduction of a $7 tax per gnome, this tax effectively increases the cost of producing each gnome. To maintain zero economic profit and cover this additional cost, the price must increase by the amount of the tax. Therefore, if the equilibrium price was initially sufficient to cover all costs (including the cost of plaster and labor at $7), the new equilibrium price would be the original price plus the $7 tax, making it $14.