Suppose the demand curve for aluminum cans is downward sloping, and the cans are produced in a constant cost industry where the firms are price takers. A $.25-per-can tax is levied on aluminum cans. How much will the price of aluminum cans increase in the short run and the long run?
A) short run, $.25; long run, more than $.25
B) short run, less than $.25; long run, $.25
C) short run, less than $.25; long run, more than $.25
D) short run, $.25; long run, less than $.25

Question

Quizplus · Accepted Answer

In the short run, the price will increase by less than $.25 because the supply curve is upward sloping, and firms cannot immediately exit or enter the market. In the long run, the price will increase by $.25 as the industry adjusts, and firms can enter or exit, restoring the original equilibrium price plus the tax.

Suppose the Demand Curve for Aluminum Cans Is Downward Sloping