You have collected the following data on output and total variable costs: Q TVC
ID: 2439154 • Letter: Y
Question
You have collected the following data on output and total variable costs:
Q
TVC ($)
1
50
2
84
3
105
4
118
5
128
6
137
7
151
8
173
9
208
10
260
c. Suppose that the government imposes a $30 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how?
d. Suppose instead that the government considers your production process to be polluting, and imposes a $6 tax per unit produced (replacing the property tax in the previous question). How does this tax increase compare to the property tax increase, in terms of the effect on your company’s cost curves?
e. Your boss says “either of these taxes is going to force us to change our production levels.” Given what you know about optimization analysis, how would you respond?
Q
TVC ($)
1
50
2
84
3
105
4
118
5
128
6
137
7
151
8
173
9
208
10
260
Explanation / Answer
(c) A flat tax of $30 will be a fixed cost, which will increase total fixed cost and average fixed cost, therefore increasing total cost and average total cost. But total variable cost and average variable cost will remain unchanged, and marginal cost will not change. Therefore, TFC, TC curves will shift upward and AFC, ATC curves will shift upward. TVC, AVC and MC curves will remain unchanged.
(d) The unit tax will be a variable cost. Therefore, TFC and AFC will remain unchanged. But TVC, TC, AVC, ATC and MC will increase, shifting all these curves upward.
(e) The statement is incorrect. Cost is optimized (minimized) when marginal revenue (MR) is equal to MC. Since fixed costs do not affect MC, the optimal price-output decision will not change for case (c) of flat tax. But for case (d) of non-flat unit tax, optimal quantity will be lower and optimal price will be higher than before, assuming demand (therefore MR) remains unchanged.
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