Question

This is a microeconomic true and false question

I want to know the answer and why

7. If a lump sum tax is placed on firms in a competitive industry, the entire tax will be passed on to the consumers in the form of a higher price in the short-run, but none of the tax will be passed on to the consumers in the long-run

Answer 1

The statement is false

In the short run a lump sum tax imposed on all the firms increases the average cost show that the average cost curve shift up. This does not change the price so in the short run only firms are paying the tax. However in the long run as most of the firms in leave the industry, supply decreases and and with the shift of supply curve to the left, price is increased. In the long run the tax is passed on entirely on the consumers. Therefore the statement is false