Question

Pretzel stands in New York City are a perfectly competitive industry in long-run equilibrium. One day, the city starts imposing a $100 per month tax on each stand. How does this policy affect the number of pretzels consumed in the short run and the long run?a. down in the short run, no change in the long run

b. up in the short run, no change in the long run
c. no change in the short run, down in the long run
d. no change in the short run, up in the long run

Answer 1

c. no change in the short run, down in the long run

Step-by-step explanation:

Some cost increases will not affect marginal cost. In this query, the city has started impsong a $100 per month tax on each stand. This tax is a fixed cost; it does not affect marginal cost. Imposing such a tax shifts the average total cost curve upward but causes no change in marginal cost. There is no change in price or output in the short run. Because firms are suffering economic losses, there will be exit in the long run.

Prices ultimately rise by enough to cover the cost of the fee, leaving the remaining firms in the industry with zero economic profit.

Explanation for No. of Pretzels consumed in the short run:

In the short run, a firm will produce as long as its average variable costs do not exceed the market price. If the market price is less than the firm's total average cost, but greater than its average variable cost, then the firm will still operate in the short run.

Explanation for No. of Pretzels consumed in the Long run:

If we have P > min(ATC), then entry by new firms is profitable. An infinite quantity would be supplied if the price stayed that high. If we have P > min(ATC), there are profit opportunities, new firms would enter, and market forces will push down the price until P = min(ATC).