Reference no: EM131593990

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

Q     TVC  

1        50

2       100

3       140

4       170

5       190

6        200

7       220

8       250

9       290

10     340

Current fixed costs for the company equal $150. 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 $30 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. MC will shift up by the amount of the tax (i.e., by $30).

b. TC and AC will both shift up by $30/Q (i.e., $30 divided by Q).

c. TC will shift up by $30 while AC and MC will shift down by $30/Q (i.e., $30 divided by Q).

d. The property tax will shift up TC by $30 and AC by $30/Q (i.e., $30 divided by Q).

Suppose instead that the government considers your production process to be polluting, and imposes a $7 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. The per-unit tax will only affect and shift up the marginal and average cost curves; the others will remain where they are.

c. A per-unit tax will shift up all the curves (TC, TVC, AVC, AC, and MC).

d. Since the per-unit tax reduces profitability, it will shift all of the curves downward by $7 * Q (i.e., $7 times Q).

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. 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.

b. 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.

c. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company.

d. 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.