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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.

Solutions

Verifieda) The lump-sum tax affects the fixed cost, because the $300 are needed to be payed no matter how many hamburgers are sold.

Because fixed cost is part of total cost, not only average fixed cost but also average total cost is affected. Both curves shift upward. Marginal cost and average variable cost stays the same because they don't depend on fixed cost.

a. The lump sum tax is similar to increase in fixed cost. Its imposition would shift average fixed cost upwards, proportionately. It will have no impact on average variable cost and marginal cost, since variable cost is not affected by lump sum tax. Average total cost curve would shift upwards as it is sum of average variable cost and average fixed cost.\

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