Question

Suppose the local government imposes an annual lump-sum tax per plant.How will the average fixed cost, average variable cost, average total cost, and marginal cost curves faced by a steel manufacturer be affected

Answer 1

The Tax is a lump-sum which means that it does not change by output. It is therefore a fixed cost.

Average Fixed Cost ⇒ INCREASE

The new tax would increase the fixed costs which would lead to an increase in the average fixed costs.

Average Variable Cost ⇒ UNCHANGED

The tax is a fixed cost not a variable cost which means variable costs will not be affected.

Average Total cost ⇒ INCREASE

Fixed costs is a part of total cost and if that increases, the total cost will have to increase as well.

Marginal Cost ⇒ UNCHANGED

As the cost that changed is a fixed cost, the total cost will not change as a result of more production so marginal cost will not change.