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Effetc of the sales tax to firms price-output and profit

A sales tax of $1 per unit of output is put on any firm whose product sells for $5 in a competitive industry. What will happen to the firm's price, output, and profit?

As the firm is a price-taker in a competitive market, the imposition of the tax on just one firm does not change the market price. As the firm's short-run supply curve is its marginal cost curve above average variable cost & that marginal cost curve has shifted up (inward), the firm supplies less to the market at every price. Profits are lower at each quantity.

 

 

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