Answer to Question #114209 in Microeconomics for Valence

Question

The effects of a tax on a firm's production decision.

Answer 1

Effects of a firm production decision can either affect the firm positively or negatively .Small firms can feel these effects more as compared to large firms.

These effects include;

1)Taxes affects the firms allocation of resources-When high taxes are imposed on the firm this will lower the resources allocated on the firm .The firm will not be in a position to allocate resources so as to increase the productivity as compared to when low taxes are allocated on the firm.

2)Taxes will encourage or discourage upcoming entrepreneurs - When an upcoming entrepreneur is imposed on high taxes this will discourage him or her since the production will go down .When low taxes are imposed on the firm the entrepreneur will be encouraged to continue investing since his or her production curve will go up wards.

3) Taxes will have an effect on ability to work and save-When high taxes are imposed during the production process, the entrepreneur will be discouraged even to work since the profit margin is very low to settle his or her debts and he might end up not saving .When low taxes are imposed the entrepreneur will be encouraged to work and even he will save more.

4)Taxes will have have an effect on investment-During high taxes period investors will not invest more hence this will lower their production as compared to when taxes are low.