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The following graph shows the average total cost (ATC) curve, average variable cost (AVC) curve, and average fixed cost (AFC) curve for Eleanors Pizza Parlor when the retail price Eleanor pays for pizza sauce, including sales tax, is $15 per gallon. ATC AVC OUTPUT (Pizzas per day) Suppose the sales tax on pizza sauce is removed, so the price of pizza sauce decreases to $14 per gallon. In the following table, indicate how each cost and curve is affected, if at all. Cost Effect on Cost and Curve AVC AFCpecreases, and therefore the curve shifts down Increases, and therefore the curve shifts up Is unaffected, and therefore the curve does not shift In the foll d, if at all Cost ATC AVC AFCd, if at all. s unaffected, and therefore the curve does not shift Decreases, and therefore the curve shifts down Increases, and therefore the curve shifts up Cost ATC AVC AFCIn the following table, indicate how each cost and curve is affected, if at all. Increases, and therefore the curve shifts up CostIs unaffected, and therefore the curve does not shift ATC AVC AFC Decreases, and therefore the curve shifts down

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Answer #1

ATC: Decreases, and therefore the curve shifts down

AVC: Decreases, and therefore the curve shifts down

AFC: Is unaffected, and therefore the curve does not shifts down

Explanation:

Sales tax is a variable cost. The price of pizza sauce was $15. When tax is removed, the price is $14. It means the tax per gallon is $1. When tax is removed, the AVC will shift down. The tax reduction has no effect on AFC. So, AFC curve will remain unchanged.

ATC = AFC + AVC. since AVC curve shifts down keeping AFC curve unchanged, therefore, ATC curve shifts down.

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