Question

In a monopolistically competitive? market, the government applies a specific

tax of? $1 per unit of output. What happens to the profit of a typical firm in this? market? Does the number of firms in the market rise or? fall???

Assume firms are identical in terms of their cost structure? (e.g., their cost curves are the? same).

If a? $1 per unit governmenttax

is? introduced, then in the short run firm profits will

decrease, increase or unchanged?

and in the long run the number of firms will

increase, decrease, unchanged?

until firms,

earn zero profit , incurr losses, earn positive profit?

.

Answer 1

In monopolistic competitive market (product are differentiated), specific tax of $1 per unit of output will increase the marginal cost of production by $1. As a result the, the profit margin will decrease. This will lead to the reduction of number of firm (for whom now doing business will become non profitable will leave the market).

in the short run firm profits will

decrease

and in the long run the number of firms will

decrease

until firms,

earn zero profit .