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Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050

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BuyFindarrow_forward

Principles of Microeconomics

7th Edition
N. Gregory Mankiw
ISBN: 9781305156050
Textbook Problem

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

To determine
The policy affects the consumption in the short run and in the long run.

Explanation

Option (c):

Since the imposition of tax is considered a fixed cost in the short run, it would not be affected. But the tax becomes a variable cost in the long run. Thus, imposing tax leads to an increase in the marginal cost, which in turn leads to reduction in the quantity. Thus, option ‘c’ is correct.

Option (a):

Change in the fixed cost does not alter the equilibrium quantity. The tax imposition in the short run affects only the fixed cost...

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