Answer to Question #275365 in Microeconomics for khashayar

Question

5. The city government is considering two tax proposals:

• A lump-sum tax of $300 on each producer of hamburgers.

• A tax of $1 per burger, paid by producers of hamburgers.

a) Which of the following curves -average fixed cost, average variable cost, average total cost, and marginal cost- would shift as a result of the lump-sum tax? Why? Show this in a graph. Label the graph as precisely as possible.

b) Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

Answer 1

(a)

A lumpsum tax increases the fixed cost component, so there will be a change in average fixed cost and average total cost curves. As the AFC and ATC curves are derived from the fixed cost component, there will be a shift in these two curves.

(b)

For a tax on output, it adds cost to variable costs. So, there will be a change in average variable cost curve.