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Short-run marginal cost curves

1. If the government imposes a $1 per-unit tax, how do the marginal, average total, and average variable costs change? What if instead the government imposes a $100 per-firm tax?

2. a) Why are short-run marginal cost curves expected to slope upward?
b) If you know that average costs are increasing, is the marginal cost curve above or below the average cost curve?
c) If you know that marginal costs are increasing, is it necessarily true that the average cost curve is below marginal cost?
d) Why does the average total cost curve always start above the marginal cost curve in the short run?
e) If marginal cost is equal to average cost, what do you know about that point on the average cost curve? Why?

Solution Preview

1. A $1 per unit (of end product) tax would increase the marginal costs by $1 per unit. The average total cost would be one dollar higher (you add all costs and divide by the level of output). This kind of tax would be variable, and so the variable costs would be $1 higher at all levels (higher than before the tax was imposed) and the average variable cost would be $1 higher ...

Solution Summary

A synopsis of short-run marginal cost curves is embedded.