Question

Assume that a firm's only variable input is labor and a new tax has been placed on labor. Which of the following correctly describes the impact on each of: the marginal cost curve (MC), the average variable cost curve (AVC), average total cost curve (ATC), and average fixed cost curve (AFC)?

Option 1: MC shifts up, AVC shifts up, ATC shifts up, AFC remains unchanged.
Option 2: MC shifts down, AVC shifts up, ATC shifts down, AFC remains unchanged.
Option 3: MC shifts up, AVC shifts up, ATC shifts up, AFC shifts up.
Option 4: MC shifts down, AVC shifts down, ATC shifts down, AFC remains unchanged.

Answer 1

When a new tax is placed on labor, it increases the cost of employing workers for a firm. As a result, the marginal cost curve (MC), average variable cost curve (AVC), and average total cost curve (ATC) will all shift up.

Step-by-step explanation:

When a new tax is placed on labor, it increases the cost of employing workers for a firm. As a result, the marginal cost curve (MC), average variable cost curve (AVC), and average total cost curve (ATC) will all shift up. This is because the additional cost of labor will increase the cost of producing each unit of output, leading to higher costs overall. However, the average fixed cost curve (AFC) will remain unchanged because fixed costs do not directly depend on the quantity of labor.