Question

How does change in per unit tax influence the supply of a good by a firm? Explain.

Answer 1

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.