Question

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

Q	TVC
1	533
2	1024
3	1491
4	1952
5	2425
6	2928
7	3479
8	4096
9	4797
10	5600

Over what range of output does this firm exhibit increasing returns (increasing MPMP), and diminishing returns (decreasing MPMP)?

Select one:

a. Increasing returns for output levels at 2 and higher, and decreasing returns for output levels at 3 and lower.

b. Increasing returns for output levels at 4 and lower, and decreasing returns for output levels at 5 and higher.

c. Marginal costs are always less than fixed costs, so increasing returns is experienced over the whole range of output.

d. Increasing returns for output levels at 6 and lower, and decreasing returns for output levels at 7 and higher.

Current fixed costs for the company equal $1500. Draw two graphs, both with QQ on the horizontal axis: one graph shows TVCTVC and TCTC, and the other shows AVCAVC, ACAC, and MCMC. Suppose that the government imposes a $750 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. MCMC will shift up by the amount of the tax (i.e., by $750).

b. TCTC will shift up by $750 while ACAC and MCMC will shift down by $750Q$750Q (i.e., $750 divided by QQ).

c. TCTC and ACAC will both shift up by $750Q$750Q (i.e., $750 divided by QQ).

d. The property tax will shift up TCTC by $750 and ACAC by $750Q$750Q (i.e., $750 divided by QQ).

Suppose instead that the government considers your production process to be polluting, and imposes a $65 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 only affect and shift up the marginal and average cost curves; the others will remain where they are.

b. The per-unit tax will affect fixed costs, so it will shift up TCTC and ACAC, but not the TVCTVC, AVCAVC, or MCMC curves.

c. A per-unit tax will shift up all the curves (TCTC, TVCTVC, AVCAVC, ACAC, and MCMC).

d. Since the per-unit tax reduces profitability, it will shift all of the curves downward by $65×Q$65×Q (i.e., $65 times QQ).

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 QQ but the per-unit tax may change the optimal QQ.

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 QQ is affected.

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

d. Optimization depends partly on marginal cost but also on marginal benefit. The property tax does not affect MCMC but does affect MBMB, so it could change the optimal QQ. The per-unit tax affects MCMC and MBMB equally, so it would not change the optimal QQ.

Answer 1

Answer-

3) Property tax increases the total cost and AC. For example

Q    FC    TVC     TC     MC      AVC     AC

1    150 200 350      - 200    350

2    150    250 400 50 125    200

3    150    300 450 50 100    150

4    150    350     500     50       87.5     125

after imposing tax,

Q    FC    TVC     TC     MC      AVC     AC

1    180 200 380      - 200    380

2    180    250 430 50 125    215

3    180    300 480 50 100    160

4    180    350     530     50       87.5     135

TC shift up by $30 and AC by $30/Q. So option A is correct.

4) Now impose $7 per unit tax. It will be added in TVC.

Q    FC    TVC     TC     MC      AVC     AC

1    150 207 357      - 207    357

2    150    264 414 57 132    207

3    150    321 471    57 107    157

4    150    378     528     57       94.5     132

Q=1, TVC = 200+(7x1), Q=2, TVC=250+(7x2)........

Therefore per unit tax, there will be a shift in TC, TVC,AC, MC, AVC by $7.

Option A is correct

5) Optimal quantity is decided by where MC cuts the minimal point of total cost. In property tax MC, no change will happen. So optimal quantity wont change per unit tax change.

So option C is correct.