Answer to Question #206724 in Microeconomics for Fikir

Question

A sales tax of $1 per unit of output is placed on a particular firm whose product sells for $5 in a 

competitive industry with many firms.

a. How will this tax affect the cost curves for the firm?

b. What will happen to the firm’s price, output, and profit?

c. Will there be entry or exit in the industry?

Answer 1

(a) On imposing a $1 tax on a single firm, all its cost curves shift up by $1.

(b) Because in a competitive market the firm is a price- taker, the imposition of tax on only one firm does not change the price in the market.

Since the firm's short run supply curve is its marginal cost curve above average variable cost and the marginal cost curve has shifted up, the firm supplies less to the market at every price. The profits become lower at every quantity supplied.

(c) The firm on which the tax is imposed will exit the industry.