Answer to Question #157258 in Economics for Uzair

Question

Problem 5: The local government in Karachi is considering two tax proposals:

• A lump-sum tax of Rs. 300 on each producer of Ice-cream.

• A tax of Rs. 1 per unit of Ice-cream, paid by producers of Ice-cream.

                                                                                                                      

a.    Which cost curves; average fixed cost, the average variable cost, average total cost, and marginal cost would shift as a result of the lump-sum tax? Why?

b.    Which cost curves; average fixed cost, the average variable cost, average total cost, and marginal cost would shift as a result of the per-unit tax? Why?

Answer 1

a) A lump-sum tax is one-time payment from producers to the local government. The lump-sum tax increases producer's average fixed cost and average total cost, but has no effect on marginal cost and average variable cost. Therefore, average fixed cost and average total cost curves would shift upward as a result of the lump-sum tax.

b) Per unit tax is the tax on producers for every unit produced. Per unit tax increases producer's marginal cost, average variable cost and average total cost, but has no effect on average fixed cost. Therefore, average variable cost, average total cost and marginal cost curves would shift upward as a result of the per-unit tax.