00:01
Okay, so i've set up this problem by first drawing the tax, right? we have a competitive industry with a supply curve and a demand curve, and there is some tax, and i've drawn the tax as shifting demand, which decreases the quantity.
00:16
Right? when i tax demand, people are willing to pay less for the product because they know they're going to have to pay this tax on top, and so the demand curve shifts in.
00:24
So let's go through the example, the options we're given for the question.
00:29
A says the number of firms in the industry will increase in the long run.
00:33
This is clearly wrong, right? we can rule this one out.
00:37
The demand curve is downward sloping, but the tax shifts the demand curve in.
00:41
The tax shifting the demand curve in reduces the amount of quantity, and less quantity to go around means fewer firms, not more, right? so when i say b, b is correct.
00:53
B shows that the tax means the quantity in the marketplace is going to shrink, and that quantity in the marketplace is going to shrink because people want to buy less of the product.
01:06
You could say, well, why don't we have the same number of firms producing smaller quantity each, right? as opposed to the number of firms shrinking, each firm could get smaller.
01:15
Well, we also know that in competitive marketplaces, firms always want to produce at the minimum average cost...