Reference no: EM132473324

Setting (Applies to all three questions)

Polystyrene (also known as styrofoam), is non-biodegradeable and is not easily recyclable. In the United States, many cities and at least one state have enacted laws that ban the use of polystyrene containers. These locales understand that banning these containers will force many businesses to turn to other more expensive forms of packaging and cups, but argue the ban is environmentally important.

Suppose my friend Joe owns a firm with a conventional production function resulting in U-shaped ATC, AVC, and MC curves. Finally, suppose that Joe's business sells takeout food and drinks which are currently packaged in styrofoam containers and cups. 

Question 1

• Graphically depict, with proper labels, the short-run AFC₀, AVC₀, ATC₀, and MC₀ curves for Joe's firm prior to the ban on using styrofoam containers.

Question 2

After the ban is imposed, Joe's firm experiences an increase in both Variable Cost and Marginal Cost. 

• Use a copy of the graph you created in Question 1 to depict the new positions of the four curves, AFC₁, AVC₁, ATC₁, and MC₁, relative to the original curves which depicted the use of inexpensive styrofoam containers. If any of the curves do not shift as a result of an increase in VC and MC, please make sure that you label them appropriately.
• Please explain the shifts of the curves in a short narrative. If any of the curves do not shift as a result of an increase in VC and MC, please make sure that you explain this as well.

Question 3

• Explain the role of the Law of Diminishing Marginal Product (marginal returns) in determining the U-shape of AVC and ATC.