Question

In: Economics

1. Explain whether each of the following actions would affect the firm’s profit-maximizing decision. (Hint: how...

1. Explain whether each of the following actions would affect the firm’s profit-maximizing decision. (Hint: how would each affect MR and MC?)

i.An increase in the per unit cost of a variable input such as labor

ii.A decline in the output price for a price-taking firm

iii.Institution of a small fixed fee to be paid to the government for the right of doing business

iv.Institution of a 50 percent tax on the firm’s economic profits

v.Institution of a per-unit tax on each unit the firm produces

vi.Receipt of a no-strings-attached grant from the government

vii.Receipt of a subsidy per unit of output from the government

viii.Receipt of a subsidy per worker hired from the government

Expert Solution

An increase in the per unit cost of a variable input such as labor: yes it will affect the firm’s profit maximizing decision because the per unit increase in cost of a variable input will increase the marginal cost

A decline in the output price for a price- taking firm : yes it will affect the profit maximizing decision as decline in output price will decrease the revenue of the firm

Institution of a small fixed fee to be paid to the government for the right of doing business: no it will affect the profit maximizing decision

Institution of a 50 percent tax on the firm’s economic profits : no it will not affect the profit maximizing decision because the tax rate is added in fixed cost of the firm and fixed cost of firm does not change its marginal cost.

Institution of a per-unit tax on each unit the firm produces: yes it will affect the profit maximizing decision because per-unit tax is an addition to variable cost and it will increase MC of the firm.

Receipt of a no-strings-attached grant from the government: no it will not affect profit maximizing decision of a firm

Receipt of a subsidy per unit of output from the government : yes it will affect as subsidy given by government to producers will increase their MR and reduce MC.

Receipt of a subsidy per worker hired from the government: yes it will also affect the profit maximization decision of the firm because it will reduce labour cost of the firm which means decrease in the marginal cost of the firm

Rahul Sunny answered 2 years ago

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