If a competitive firm has to pay a lump sum tax, it will produce less.

If a competitive firm has to pay a lump sum tax, it will produce less.

Indicate whether the statement is true or false

ANSWER

False. A lump sum tax is not related to the amount of output produced. It will increase fixed cost and thus lower profit. However, marginal cost will not be affected and the profit-maximizing quantity will stay the same.