Question

7.

In 2017, the Trump Administration reduced corporate taxes and got rid of dozens of unnecessary government regulations on business. (Everything said up to this point is true). What logically should happen next to the economy?         

Multiple Choice

• Business firms should see their costs go down

• Business firms should be able to create more jobs

• Business firms should see more profit potential

• All of the statements are true and correct

8.

When government regulators wants a monopoly to earn “a fair rate of return,” then they will allow the price to be set at what point?

Multiple Choice

• Where Price = Average Total Cost

• Where Price = Average Total Cost

• Where Price is just equal to the equilibrium point

• Where Price = Marginal Cost

11.

Why does government typically put sales taxes on inelastic goods such as liquor and cigarettes rather than on elastic goods?

Multiple Choice

• There is a better chance at collecting more tax revenues from these items.

• All statements are true

• Consumers can’t easily stop using these types of inelastic goods

• Inelastic goods tend to be price insensitive

12.

Constant returns to scale on the Long-Run Average Total Cost Curve means what?

Multiple Choice

• The Long-Run Average Cost Curve is shifting down

• The business is operating at the low-end flat range of the Long Run Average Total Cost curve and your costs are not rising as you increase production.

• You are getting a fixed rate of return on your financial investments

• The Long-Run Average Cost Curve is shifting up

Answer 1

7. Corporate tax is a type of cost to the firm as it reduces the overall income of the firm. Reduction in corporate taxes leaves more income to the firm which leads to a rise in investments. As this additional investment results in a rise in capital stock, the demand for labor also rises to work with the new capital which, in turn, would lead to rise in employment level. With more capital and higher productivity, firms expect more profit over time.

So, reduction in corporate taxes and other government regulations result in:

decline in cost for business firms

increase in employment level (creation of more jobs)

profit potential for business firms

Hence, all of the statements are true and correct.

8. A fair rate of return price is a regulated price charged by the monpolist which is equal to the average total cost (ATC). The price equal to average total cost is referred to as 'fair rate of return' because at this price, the monopolist is able to earn normal profits so that it can survive in the market. This price is less than the price charged by the profit-maximizing monopolist which selects the profit-maximizing quantity at the point where MR=MC and price corresponding to this quantity.

Hence, when government regulators wants a monopoly to earn “a fair rate of return,” then they will allow the price to be set at the point where Price= Average Total Cost

11. A good has an elastic demand when the change in price has a big effect on the quantity demanded. A good has an inelastic demand when buyers' demand do not change as much as the change in price of that good. That is, with a change in the price of inelastic goods, consumers' buying habits related to that good remains about the same. So, if the price of inelastic goods increase due to sales tax imposed by the government, it can generate more tax revenue as consumers using inelastic goods do not suddenly change their buying habits.

So, imposition of sales tax by the government on inelastic goods such as liquor and cigarettes have better chances to generate more tax revenue from these inelastic goods as compared to that on elastic goods because consumers cannot easily stop using these goods which means that inelastic goods tend to be price insensitive.

Hence, all statements are true.

12. Constant returns to scale means that average cost of production does not change as output rises.

The shape of LRAC (long run average cost) curve shows three stages of returns to scale:

Downward sloping LRAC curve- increasing returns to scale (increase in output by a larger proportion than increase in cost of inputs, resulting in lower average cost per unit)

Upward sloping LRAC curve- decreasing returns to scale (increase in output by a lesser proportion than increase in cost of inputs, resulting in higher average cost per unit)

Flat LRAC curve- constant returns to scale    

Hence, constant returns to scale on the LRAC curve means that the business is operating at the low-end flat range of the LRAC curve and costs are not rising with the increase in production.