In a competitive market with a downward-sloping demand curve, a tax that increases the fixed cost of every firm will:
A)reduce the number of firms supporting long-run equilibrium.
B)increase the long-run equilibrium price.
C)not cause the number of firms supporting long-run equilibrium to change.
D)answers a and b.
E)answers b and c.

Question

Quizplus · Accepted Answer

A tax that increases the fixed cost will reduce the number of firms in the long-run equilibrium because some firms will not be able to cover the increased costs. This reduction in the number of firms will lead to a higher long-run equilibrium price due to decreased supply.

In a Competitive Market with a Downward-Sloping Demand Curve, a Tax