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CMA Foundation · Fundamentals of Business Economics and Management · The Fundamentals of Economics

The supply schedule of a firm is linear: at ₹20 per unit it supplies 100 units and at ₹30 per unit it supplies 160 units. Assuming the same straight-line schedule, how many units will it supply at ₹40, and what happens when a ₹5 per unit tax is imposed on the seller, with the market price still ₹40?

The firm supplies 220 units at ₹40, since each ₹10 rise adds 60 units. A ₹5 per unit tax cuts the seller's net price to ₹35, so quantity supplied falls to 190 units, found by reading the same schedule at ₹35.

  1. A220 units at ₹40; with the tax it supplies 190 units, as the net price is ₹35Correct
  2. B220 units at ₹40; with the tax it supplies 220 units, as supply is unaffected
  3. C200 units at ₹40; with the tax it supplies 170 units, as the net price is ₹35
  4. D220 units at ₹40; with the tax it supplies 250 units, as the net price is ₹45

Explanation

Slope is 60 units per ₹10, i.e. 6 units per rupee. At ₹40: 160 + 60 = 220 units. With a ₹5 tax the seller nets ₹35, giving 160 + 6×5 = 190 units. Option with 200 units wrongly assumes a slope of 4 per rupee, and 250 adds the tax instead of subtracting it.

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