Question

If a firm is currently in a​ short-run equilibrium earning a​ profit, what impact will a​ lump-sum tax have on its production​ decision? A. The firm will increase output but earn a lower profit. B. The firm will not change output and earn a higher profit. C. The firm will not change output but earn a lower profit. D. The firm will decrease output to earn a higher profit.

Answer 1

C. The firm will not change output but earn a lower profit

Step-by-step explanation:

So when there is a lump sum tax imposed on the firm, it would cause the extra costs added to the firm's fixed costs. As the variable costs are not affected, the marginal cost remains unchanged.

However, it would shift the ATC (average total cost) curve upward due to the increase in fixed costs - leading the loss.

So that, the firm will not change the output but earn lower profit.