S. Klepper, Economics 73-100, Fall 2011
Consider the automobile industry. Suppose the government increases the tax on automobiles from $2,000 to $4,000 per automobile, where the tax is paid by producers. Furthermore, assume that prior to the increase in the tax, the automobile industry was in long-run equilibrium.
Which of the following statements concerning the effects of the tax in the long run are correct? Mark true for a correct answer and false for an incorrect one and provide explanations for each of your answers.
_____1. The minimum average total cost of production across all output levels rises by $2,000.
_____2. The market demand curve for automobiles shifts to the left.
_____3. The price of automobiles rises by $2,000.
_____4. Some automobile producers exit the market.
_____5. All automobile producers that remain in the market earn zero economic profits.