Question

You have collected the following data on output and total variable costs:

Q	TVC ($)
10	72,800
20	124,400
30	159,600
40	183,200
50	200,000
60	214,800
70	232,400
80	257,600
90	295,200
100	350,000

1. Identify the range of output exhibiting increasing returns (increasing MP), and the range exhibiting diminishing returns (decreasing MP).
2. Current fixed costs for the company equal $207,500. Draw two graphs, both with Q on the horizontal axis: one graph shows TVC and TC, and the other shows AVC, AC, and MC.
3. Suppose that the government imposes a $56,000 property tax hike on all businesses; how will that affect your two graphs; i.e., which cost curves will be affected and how?
4. Suppose instead that the government considers your production process to be polluting, and imposes a $650 tax per unit produced (replacing the property tax in the previous question). How does this tax increase compare to the property tax increase, in terms of the effect on your company’s cost curves?
5. Your boss says “either of these taxes is going to force us to change our production levels.” Given what you know about optimization analysis, how would you respond?

Answer 1

Sol :

A.

Quantity	TVC	MC
10	72800	72800
20	124400	51600
30	159600	35200
40	183200	23600
50	200000	16800
60	214800	14800 (Increasing returns)
70	232400	17600
80	257600	25200
90	295200	37600
100	350000	54800 (decreasing returns)

MC = TC_n - TC_n-1

B. Fixed cost = $207500

TO Lost TTC Х quantity

MC AC AVC $) se 0 X quacity

C. Government imposes a hike in property tax of $56000 which will increase the fixed cost . As, fixed cost increases , it will shift upward parallel to the x-axis.

And , AC curve will also increases and shift upward.

D. In this case , it is increase in variable cost. So, as output increases , variable cost per unit of output increases.

It will shift the TVC curve and AVC , AC and MC curve also. All the curve will shift upward.

(Note : As per the policy we have to solve only 4 subparts of the question. So , for the remaining question please post it in separate post.)