Question

E4. (20 points) If a specific tax of 1 is collected from only one competitive form, - How should that firm change its output level to maximize its profit,and how does its maximum profit change?

if a specific tax is collected from only one competitive firm, how should that firm change its output level to maximize its profit, and how does its maximum profit change?

Answer 1

Answer :-

A firm can maximize its profit where its MR is equal to MC which means when MR minus MC, the result should be zero. Therefore, the profit is maximum where MR=MC.

When a firm gets per unit tax, its marginal cost declines and its marginal cost curve shifts left. The firm will take advantage of the decreased marginal cost and respond to the tax by increasing output so that it can maximize its profit. The maximum profits will be greater with the taxes than without taxes.

Price A to the mc తెలుగు me, a meta AC Ex Ez AC, = ACTE P=MR P 2 AC AG o ใน a , quantity 0 CS Scanned with CamScanner

The above graph shows that without tax MC curve is equal to MR curve at E1, satisfying profit maximizing condition.

With introduction of taxes the MC curve shifts to MC1 and making the equilibrium at E2.

Therefore, at E2 firm MR=MC which is a profit maximizing point and at this point the firms output has increased from q to q1.