Before a unit tax is imposed, a competitive firm’s minimum long run average cost (LRAC) is Rs 40, reached at an output of 100 units. The government now imposes a unit tax of Rs 5. What is the firm’s new long run break-even point?
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → A price of Rs 45, at an output of 100 units
A unit tax of Rs 5 raises the LRAC by Rs 5 at every output. The whole curve moves up by Rs 5, so its lowest point stays at the same output.
New minimum LRAC = Rs 40 + Rs 5 = Rs 45, still at 100 units.
The break-even point is the point of minimum LRAC. So it is now at a price of Rs 45 and an output of 100 units.
Moving the curve up by the same amount at every output does not move its lowest point to the left or right.
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.” “4.4.4 The Normal Profit and Break-even Point … The point on the supply curve at which a firm earns only normal profit is called the break-even point of the firm. The point of minimum average cost at which the supply curve cuts the LRAC curve (in short run, SAC curve) is therefore the break-even point of a firm.” |