In the short run,an excise tax placed on all firms in an increasing-cost competitive industry will result in:
A)a fall in price and an increase in output.
B)an increase in output and a fall in price.
C)a fall in both price and output.
D)an increase in price and a fall in output.

Question

Quizplus · Accepted Answer

In an increasing-cost competitive industry, as output increases, the firms will face higher costs due to the law of diminishing returns. So, when an excise tax is imposed on all firms, it will increase their costs, leading to a decrease in supply. As a result, the equilibrium price of the product will increase, and the quantity bought and sold will decrease. Therefore, the correct choice is D - an increase in price and a fall in output.

In the Short Run,an Excise Tax Placed on All Firms