A competitive firm’s minimum long run average cost (LRAC) is Rs 30. The government now imposes a unit tax of Rs 4. Below what market price will the firm now produce zero output in the long run?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Rs 34
A unit tax of Rs t raises the firm’s LRAC by Rs t at every output. So the minimum LRAC rises from Rs 30 to Rs 34.
In the long run the firm produces zero output at any price below the minimum LRAC. So it now stops below Rs 34.
Option (2) Rs 30 — this is the old minimum, before the tax.
Option (3) Rs 26 — this takes the tax away from cost instead of adding it.
Option (4) Rs 120 — this multiplies 30 by 4.
NCERT (2026-27): “Impact of a unit tax on supply A unit tax is a tax that the government imposes per unit sale of output. For example, suppose that the unit tax imposed by the government is Rs 2. Then, if the firm produces and sells 10 units of the good, the total tax that the firm must pay to the government is 10 × Rs 2 = Rs 20. … Now, suppose the government puts in place a unit tax of Rs t. Since the firm must pay an extra Rs t for each unit of the good produced, the firm’s long run average cost and long run marginal cost at any level of output increases by Rs t.” “4.4.2 Long Run Supply Curve of a Firm … Combining cases 1 and 2, we reach an important conclusion. A firm’s long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC together with zero output for all prices less than the minimum LRAC. …” |