Suppose the government imposes a $100 tax on all business, regardless of how much they produce....
Suppose the government imposes a $100 tax on all business, regardless of how much they produce. How will the tax affect a firm's short-run cost curves? Its short-run production?
Homework Answers
This tax is independent of the level of output which means it is a lump sum tax. It will increase the fixed cost of production for all the businesses. it is therefore likely to increase the average total cost but there will be no change in the average variable cost or marginal cost which depend only on total variable cost. We can therefore experience an upward shift in the average total cost function but there will be no shift in the marginal cost or average variable cost curves.
as a result there will be no change in the level of production because marginal cost of production has not changed. However it will decrease the profit earned by businesses since it has increased the overall cost of production.
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