Question
Using a diagram showing a firm’s short-run ATC, AVC and MC curves, compare and contrast the...
Using a diagram showing a firm’s short-run ATC, AVC and MC curves, compare and contrast the effect of imposing either a $1 per unit excise tax or a $100 lump-sum tax on the firm.
Homework Answers
Answer #1
(a) A per-unit tax will increase AVC, ATC and MC, therefore all these curves will shift upward. In following graph, after the tax, the curves will shift upward from AVC0, ATC0 and MC0 to AVC1, ATC1 and MC1 respectively, with MC0 intersecting AVC0 and ATC0 at their minimum points, and MC1 intersecting AVC1 and ATC1 at their minimum points.
(b) A lump-sum tax will increase ATC, leaving other two cost curves unchanged. So ATC curve will shift upward. In following graph, after the tax, the ATC curve will shift upward from ATC0 to ATC1, with MC0 intersecting AVC0, ATC0 and ATC1 at their minimum points.
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TC
AVC
AFC
ATC
MC
P
TR
PROFIT
0
100
---
---
---
---
50
1
25
50
2
20
3
53.3
4
17.5
5
90
6
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7
265
8
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35
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Q. Output AFC AVC ATC MC 0 &nbs
Q. Output
AFC
AVC ATC
MC
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300
$ --- $
--- $ ---
1
300
100
400 100
2
150
75
225 50
3
100
70
170 60
4
75
73
148 80
5 60
80
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6 50
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140
7
43
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0
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3
215
100
4
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6
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9
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