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A competitive firm's short-run supply curve is its _____ cost curve above its _____ cost curve
A competitive firm's short-run supply curve is its _____ cost curve above its _____ cost curve.
1) average total, marginal
2) average variable, marginal
3) marginal, average total
4) marginal, average variable
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?
1) down in the short run, no change in the long run
2) up in the short run, no change in the long run
3) no change in the short run, down in the long run
4) no change in the short run, up in the long run
Expert Solution
A)
Option 4 is correct.
A firm's short-run supply curve is the marginal cost curve above its average variable cost curve.
It is because of the fact that a competitive firm produces at an output level where the price is equal to the marginal cost. As a result, a firm decides its production based on the marginal cost curve.
Option 1 is incorrect.
The competitive firm decides its equilibrium based on the equality of price and marginal cost and not on the equality of the price and average total cost. As a result, the average variable cost cannot be the supply curve.
Option 2 is also incorrect.
The firm chooses its output level based on the equality of price and marginal cost not on the equality of the price and average variable cost. As a result, the average variable cost cannot be the supply curve.
Option 3 is incorrect.
The firm has to consider variable cost as fixed costs are ignored while making short-run decisions. So, the firm's supply curve is not the portion of the marginal cost above the average total cost.
B)
Option 1 is correct.
The imposition of a tax of 100 dollars will cause a fall in the number of pretzels consumed in the short run. On the contrary, there will be no change in the long run.
In the short-run, consumers decrease consumption due to a rise in the price level. On the contrary, in the long-run, there will be price adjustments in the market leading to no change in the long-run price. As a result, consumption will have no impact in the long-run.
Option 2 is incorrect.
The imposition of tax will not make the goods cheaper. As a result, the consumption cannot increase in the short-run.
Option 3 is incorrect.
In the short-run, people have the tendency to respond to the changes in the prices. Therefore, it cannot be said that there will be no change in short-run consumption.
Option 4 is incorrect.
The consumers usually respond to the changes in the short-run by making changes in the units of the consumption. Due to which, there must be some changes in the short-run.
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