Question

A bread producer is maximizing profit but just breaking even in the short run. They currently have to pay $1000 per year in property taxes (regardless of how much they produce). If the property tax increases to $1500 per year, what should the producer do to maximize profits in the short run? Select one: a. reduce output. b. increase price. c. not change output. d. increase output.

Answer 1

Ans.(c) not change output.

As the bread producer is profit maximising and also just breaking even in the short run it means the at the same time in two condition i.e MR = MC and TR = TC. MR = MC is showing bread is in profit maximising condition and TR = TC is showing producer is in Break-Even condition.

Now, in this situation if property tax increases which is kind of fixed cost because it does not depend on level of production. If Fixed Cost increases it implies TC will increase but it will not create any impact on marginal cost. Because we know change in fixed cost does not have any impact on marginal cost.

So, as marginal cost do not change the profit maximising condition remain same i.e MR = MC at same output level. The profit maximising output level do not change. MR is as it was before and MC do not change due to change in fixed cost and we will have same output and price level. Profit maximising quantity and price will be same as before.

The only impact will be the producer will not be in break even condition because as fixed cost increases it will face loss in short run after this increase in property tax.