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Homework answers / question archive / If the government imposes a $1 per-unit tax, how do the marginal, average total, and average variable costs change? What if instead the government imposes a $100 per-firm tax? 2
If the government imposes a $1 per-unit tax, how do the marginal, average total, and average variable costs change? What if instead the government imposes a $100 per-firm tax?
2. a) Why are short-run marginal cost curves expected to slope upward?
b) If you know that average costs are increasing, is the marginal cost curve above or below the average cost curve?
c) If you know that marginal costs are increasing, is it necessarily true that the average cost curve is below marginal cost?
d) Why does the average total cost curve always start above the marginal cost curve in the short run?
e) If marginal cost is equal to average cost, what do you know about that point on the average cost curve? Why?
A $1 per unit (of end product) tax would increase the marginal costs by $1 per unit. The average total cost would be one dollar higher (you add all costs and divide by the level of output). This kind of tax would be variable, and so the variable costs would be $1 higher at all levels (higher than before the tax was imposed) and the average variable cost would be $1 higher than before. Marginally, the average variable costs would experience a higher percent increase than average total costs; although the nominal amount is the same.
If the government imposed a $100 per-FIRM tax, then this would be dealt with as a fixed cost since it does not vary with the level of production. As such, average variable costs are unchanged. Average total costs would increase by $100 divided by the quantity of production. Marginal costs are also unaffected, except at the intercept (meaning the marginal cost of going from 0 to 1 units of output would be $100 higher).
2. a. The law of diminishing marginal returns.
b. Below.
c. No it is not - suppose marginal costs increase, but at an earlier time the costs were sufficiently high that average costs still exceed the current marginal costs.
d. Because the average cost curve encompasses fixed and variable costs; the fixed costs driving it above marginal costs in the short run.
c. The marginal cost curve has an equilibrium with the average cost curve at its minimum, after which the average cost curve begins to slope upward. This is due to diseconomies of scale.
