Assertion (A): A unit tax shifts the long run supply curve of a competitive firm to the left.
Reason (R): A unit tax of Rs t raises the firm’s long run marginal cost by Rs t at every level of output.
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Both (A) and (R) are true and (R) is the correct explanation of (A).
The firm’s long run supply curve is a part of its LRMC curve. A unit tax raises the LRMC by Rs t at every output, so the supply curve moves to the left.
Assertion (A): A unit tax shifts the long run supply curve of a competitive firm to the left. — True. After the tax, at any given market price the firm supplies fewer units of output.
Reason (R): A unit tax of Rs t raises the firm’s long run marginal cost by Rs t at every level of output. — True. The firm must pay an extra Rs t on each unit it produces. So its LRAC and LRMC both rise by Rs t at every output.
Why R explains A?
The long run supply curve is the rising part of the LRMC curve from and above the minimum LRAC. When the LRMC curve moves up by Rs t, the firm reaches p = LRMC at a smaller output for any given price. So the supply curve shifts to the left.
NCERT (2026-27): “Impact of a unit tax on supply … 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.” “… Recall that the long run supply curve of a firm 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. Using this observation in Figure 4.12, it is immediate that S0 and S1 are, respectively, the long run supply curve of the firm before and after the imposition of the unit tax. Notice that the unit tax shifts the firm’s long run supply curve to the left: at any given market price, the firm now supplies fewer units of output.” |