If a good is produced by an increasing-cost competitive industry and the demand for its product is elastic,the imposition of a per-unit tax on producers will cause price to _____ in the short run.
A)rise by the amount of the tax
B)fall by the amount of the tax
C)rise by less than the amount of the tax
D)fall by more than the amount of the tax

Question

Quizplus · Accepted Answer

In an increasing-cost competitive industry, the cost of production increases as the industry expands. Therefore, when a per-unit tax is imposed on the producers, the cost of production will increase, and the supply curve will shift upward. As a result, the equilibrium price will increase, but by less than the amount of the tax. This is because the demand for the good is elastic, meaning that consumers are price-sensitive and will reduce their purchase of the product as the price increases. Therefore, producers cannot fully pass on the tax to consumers, leading to a smaller increase in price.

If a Good Is Produced by an Increasing-Cost Competitive Industry