Question

You own a home-based bakery that specializes in creating themed cupcake displays for special events. The mortgage payment on your home increases dramatically due to a property tax hike in your community.

What impact will this have on your average variable cost, average total cost and marginal cost?

Explain in your post how each of these cost curves would shift and why.

Answer 1

Property taxes are taxes levied on properties owned by businesses.

Property taxes are considered as fixed costs in businesses.

Now, according to the question, as property taxes have been increased, it has led to an increase in mortgage payment.

An increase in mortgage payment would result in an increase in fixed cost of my home-based bakery. Since fixed cost do not change with the change in production of additional quantity of a good, marginal cost curve would not change. As we have already mentioned, an increase in mortgage payment would mean an increase in total cost, average total cost curve would shift upwards by an equal amount of money as equal to the increase in mortgage payment. Like marginal cost, there would be no change in average variable cost as well because average cost curve only depicts change in variable factors of production.