Question

At which output level does this firm begin to experience diminishing marginal product? Provide reasons for your answer.

Suppose that this firm needs to pay a newly imposed $1 tax on each cupcake it produces and sells. Identify which of the firm’s costs in Table 1 above will be affected and which costs will not be affected by the tax. Explain why the costs you identify will or will not be affected by the tax.

Answer 1

A firm experience diminishing marginal product when additional units of input lead to progressively smaller increases in output. A $1 per cupcake tax increases variable and total costs, but not fixed costs.

Step-by-step explanation:

The firm begins to experience diminishing marginal product once the addition of new units of input (such as labor in the form of barbers) results in a smaller increase in output than previous additions. This happens after the number of barbers increases from one to two when the marginal product decreases from a gain of 24 to a gain of 20, and further diminishes as more barbers are added.

In terms of cost, a $1 tax on each cupcake produced will affect the firm's variable costs and total costs, as these are directly related to the production volume and will rise by the tax amount for each unit produced. Fixed costs, on the other hand, will not be affected by the tax as they do not vary with the level of output.