Assume that the world price of Good A is $8 per unit while its domestic price is

Question

Assume that the world price of Good A is $8 per unit while its domestic price is $6, and the marginal cost incurred by domestic producers for producing one unit of Good A is $5. If the government imposes a tax of $3 per unit on domestic producers, which of the following situations will be observed?
Which Answer:
The tax will increase the price of Good A in the domestic market.
The tax will increase the world price of Good A.
The tax will decrease the profit earned by domestic producers.
The tax will decrease the price of Good A in the domestic market.

Explanation / Answer

The tax will increase the price of Good A in the domestic market.

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