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(a)Consider a firm with a total short-run cost function C=a+b.Q. New legislation means that it must pay an environmental tax which is a fixed sum, independent of whether it produces any output. How does this tax affect the firm's fixed cost (FC) marginal cost (MC)and average total cost (ATC)?

(b) Now suppose that the tax is proportional to the number that it produces. How does this affect the firm's fixed, marginal and average costs.

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Solution Summary

An overview of effects on fixed, marginal and average costs is depicted. Proportional tax numbers for a firm's fixed marginal and average costs.

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(a) This tax amount will be countable in FC, as it can be considered as a fixed cost that is independent of the number of units the firm ...

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