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Question
How does change in per unit tax influence the supply of a good by a firm? Explain.
Solution
Changes in Tax
When there is a rise in taxes, there will be an increase in the cost of production which results in a decline in the profit margin and the supply of the good. The supply curve S shifts leftwards from S to S1. It leads to a fall in the supply of good from OQ0 to OQ1, where the price remains constant at OP.
When there is a decrease in taxes, there will be a decrease in the cost of production which results in a rise in the profit margin and the supply of a good. The supply curve S shifts leftwards from S to S2. It leads to an increase in the supply of good from OQ0 to OQ3 where the price remains constant at OP.
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