An increased tax on profits leaves the optimal rate of output unchanged in the short run.

Question

Quizplus · Accepted Answer

When there is an increased tax on profits, the firm's marginal cost of production increases. In the short run, since the firm's optimal output is determined by comparing marginal cost with marginal revenue, the increased tax on profits only affects the cost side of the equation and leaves the optimal rate of output unchanged. However, in the long run, the firm may adjust its production level to account for the increased cost of production.

An Increased Tax on Profits Leaves the Optimal Rate of Output