Question

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

Answer 1

a. The lump-sum tax of $300 on each producer of hamburgers would shift the average fixed cost curve upward, as the tax is a fixed cost that does not vary with the quantity of burgers produced. This means that the producer will have to pay $300 regardless of how many burgers they produce. The graph would look like this:

[Graph showing an upward shift of the average fixed cost curve]

b. The tax of $1 per burger, paid by producers of hamburgers, would shift the average variable cost curve upward, as the tax is a variable cost that increases with the quantity of burgers produced. This means that the producer will have to pay $1 for each burger they produce. The graph would look like this:

[Graph showing an upward shift of the average variable cost curve]

It's important to note that these tax proposals will also affect the marginal cost and average total cost as well, as the fixed and variable costs are components of these two costs. The marginal cost would increase due to the variable cost of the per-burger tax and average total cost would increase due to the fixed cost of the lump-sum tax and variable cost of the per-burger tax.