If a firm is currently in a short-run equilibrium earning a profit, what impact

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 not change output and earn a higher profit. OC. Th fm il nt ua lorpro 0 D. The firm will decrease output to earn a higher profit. If a firm is currently in a short-run equilibrium earning a profit, what impact will an increase in varable factor prices have on its production decision? O A. The firm will not change output but earn a lower profft. O B. The firm will not change output and earn a higher profit O C. The firm will decrease output to eam a higher profit. 0 D. The firm will decrease output and earn a lower profit

Explanation / Answer

If in the short-run firm is earning profit and government impose a lump-sum tax on the production, It will not affect the quantity production because a firm produces usually where MR= MC and at this point profit is maximised. With the lump-sum tax profit is reduced but if the firm produces more, then profit will decrease and fixed amount of tax will reduce net profit more.

But if firm reduces production, even then profit will reduce and fixed the amount of tax further reduce the total profit.

Therefore it will be best for the firm to continue to produce at the profit-maximising level of output because here net total profit is maximised.

Hence option A is the correct answer.

Hence firm will not change output and earn a higher output.

If a firm in short-run is earning the profit, it means the firm is producing at the profit-maximising level, so if variable factor cost has increased it means MC has increased and it will cut MR curve below the profit maximising quantity, It means firm profit will be maximized at a lower quantity. It means firm decreases output for earning maximum profit.

Hence option C is the correct answer.

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