(4 points) Evaluate the following statement. Is it True, False, or Partly True? Explain your

reasoning

(Answer: 2 points. Reasoning: 2 points).

Consider an industry characterized by a dominant firm and a competitive fringe. If the

government imposes

a lump sum tax

on the firms in the competitive fringe, the result in the short

run is that the dominant firm's profitability is increased. The reason is that, since the tax causes

the fringe supply curve to shift up, there is a subsequent shift out of the dominant firm's residual

demand curve which in turn results in an increase in the dominant firm's profitability.