You have collected the following data on output and total variable costs: Q TVC

Question

You have collected the following data on output and total variable costs: Q TVC ($) 1 60 2 107 3 145 4 178 5 213 6 253 7 304 8 370 9 455 10 566 Q1 Over what range of output does this firm exhibit increasing returns (increasing MP), and diminishing returns (decreasing MP)? Select one: a. Increasing returns for output levels at 6 and lower, and decreasing returns for output levels at 7 and higher. b. Increasing returns for output levels at 4 and lower, and decreasing returns for output levels at 5 and higher. c. Marginal costs are less than fixed costs up to Q = 8, so increasing returns is experienced until Q = 8 and then decreasing returns from Q = 9 and higher. d. Increasing returns for output levels at 6 and higher, and decreasing returns for output levels at 5 and lower. Q2 Current fixed costs for the company equal $75. Draw two graphs, both with Q on the horizontal axis: one graph shows TVC and TC, and the other shows AVC, AC, and MC. Suppose that the government imposes a $15 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how? Select one: a. TC and AC will both shift up by $15Q (i.e., $15 divided by Q). b. The property tax will shift up TC by $15 and AC by $15Q (i.e., $15 divided by Q). c. TC will shift up by $15 while AC and MC will shift down by $15Q (i.e., $15 divided by Q). d. MC will shift up by the amount of the tax (i.e., by $15). Q3. Suppose instead that the government considers your production process to be polluting, and imposes a $4 tax per unit produced. How does this tax increase compare to the property tax increase, in terms of the effect on your company’s cost curves? Select one: a. The per-unit tax will affect fixed costs, so it will shift up TC and AC, but not the TVC, AVC, or MC curves. b. Since the per-unit tax reduces profitability, it will shift all of the curves downward by $4×Q (i.e., $4 times Q). c. The per-unit tax will only affect and shift up the marginal and average cost curves; the others will remain where they are. d. A per-unit tax will shift up all the curves (TC, TVC, AVC, AC, and MC). Q4. Your boss says “either of these taxes is going to force us to change our production levels.” Given what you know about optimization analysis, how would you respond? Select one: a. Since neither tax is a true "cost" of production (they are unlike paying salaries or buying raw materials), then it is impossible to say whether the optimal Q is affected. b. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company. c. Optimization depends partly on marginal cost but also on marginal benefit. The property tax does not affect MC but does affect MB, so it could change the optimal Q. The per-unit tax affects MC and MB equally, so it would not change the optimal Q. d. Optimization depends partly on marginal cost, which is not affected by the property tax, though it is by the per-unit tax. The property tax won't change the optimal Q but the per-unit tax may change the optimal Q.

Explanation / Answer

Question 1

Following table shows the marginal cost schedule -

The marginal cost and marginal product moves in opposite direction.

When marginal cost is decreasing, marginal product increases.

When marginal cost is increasing, marginal product decreases.

The above table shows that upto production of 4 units, marginal cost is decreasing. This means that marginal product will be increasing upto production of 4 units.

On the other hand, from production of 5 units or more, marginal cost is increasing which implies that marginal product for this range of output will be decreasing.

Increasing marginal product indicates increasing returns and decreasing marginal product indicates decreasing returns.

So, there are increasing returns for output levels at 4 and lower, and decreasing returns for output at 5 and higher.

Hence, the correct answer is the option (b).

Output TVC MC 1 60 60 2 107 47 3 145 38 4 178 33 5 213 35 6 253 40 7 304 49 8 370 66 9 455 85 10 566 111

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