Question

Let's assume that the federal government has just given everyone a temporary one-year income tax cut and that they have quickly mailed out the tax

rebate checks. If the demand curve for a product temporarily increases and if the sales spike upward in an industry that previously had zero economic

profits for several years, then what will happen next?

Multiple Choice

• That the temporary spike in sales won't do much good in the long-run because as more firms enter the industry to seize the new profits, then this will eventually bring the entire industry back to a situation of zero economic profits.

• In the short-run times will be good, but in the long-run everyone will return to zero economic profits.

• This event will probably create more jobs and improve the economy.

• All of the answers listed are correct.

Answer 1

The correct option is (d) all of the above.

As government has announced a temporary income tax cut, it increases the demand for a particular product and industry will make new good profits ( more than zero economic profit) which temporarily was making zero economic profit.

​​​​​​​​​​​Due to the tax cut, firm started making good profits in the short run but in the long run, more firms will enter the industry to take advantage of the new profits due to which firms will start earning zero economic profit again. So in the long run, firm will return to zero economic profits..

As in the short run, sales of product rises, it eventually will create more job opportunities for people and will improve the situation of the economy.