In a monopolistically competitive market the government...

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? Why? What is the effect on prices and the number of firms under monopolistic competition if a government provides a subsidy that reduces the fixed cost of each firm in the industry

Transcript

00:01 Very good morning today i'll be teaching you some important concepts in a monopolistic competitive market okay suppose we have a monopolistic competitive market okay what is a monopolistic competitive market a monopolistic competitive market is one which is having a large number of firms with product differentiated who produces differentiated products okay so there will be large number of firms and they will be producing differentiated products understood now let's see what happens when government enforce or they put specific tax of say for example one dollar per unit of output let's see the effect of tax let's see first the effect of specific tax a specific tax okay in a monopolistic market when a specific tax of one dollar per unit of output per unit of output is divide it will increase what will do first it will increase the cost of production okay for each unit sold it will increase the cost of production as a result the profit decreases for a particular firm profit decreases for a particular firm okay so the tax reduces the margin between the price and the cost of production leading to lower profits for firms so this is the effect of a specific tax for example of dollar one per unit of output understood now let's see what is the effect of a specific tax has on the number of firms impact on the number of firms impact on on the number of firms okay so what will happen since we have seen with the imposition of a specific tax does increases the reduces the profit for firms so some less efficient firms may exit the market due to reduction in profit okay due to reduction in profit some less efficient firm will leave the market okay conversely firms can absorb the tax burden and if they absorb the tax burden okay so they can stay will remain stable for a while so there is not a direct effect on the number of firms in the market but it may indirectly influence the entry and exit decisions okay for the firms who can like absorb tax burden they can remain in the market and the one who are less firms who cannot withstand the burden of profit reduction so they will exit the market understood now coming on to the effect on prices coming on to the effect on prices okay so specific tax increases the firm's cost of production we have seen earlier so with this increase in cost may lead to slight increase in the prices of the goods as well because firm may pass on either all or some of all the tax burden to consumers by raising the prices of their products to maintain the desired profit levels so what will happen they will raise the product prices they will the product prices okay and may pass the burden to the consumers either…

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