If a new tax on capital increases a firm’s fixed cost of production, which of the following will occur in the short run?

Question

BlackTom AI · Accepted Answer

The scenario describes a tax on capital that raises the firm’s fixed cost in the short run. We must evaluate how each statement would respond to a higher fixed cost while keeping other factors constant.
Option 1: 'Average variable cost will increase.' AV C depends only on variable costs per unit. Since the tax increases fixed cost, not variable cost, AVC does not rise. Therefore this statement is incorrect.
Option 2: 'Average total cost will increase.' ATC = AFC + AVC. The fixed cost rise raises average fixed cost (AFC) at every output level, and since AVC stays the same, ATC must rise as well. This statement is correct.
Option 3: 'Marginal cost will increase.' Marginal cost is driven by changes in variable costs associated with producing an additional unit. A tax on capital that increases fixed costs does not alter the variable costs per unit, so MC remains unchanged. This statement is incorrect.
Option 4: 'The profit-maximizing level of output will increase.' Since MC (and thus the MR = MC condition) is unchanged, the profit-maximizing quantity, if determined by MR = MC, would not automatically increase due to higher fixed costs. This makes the statement incorrect.
Option 5: 'The profit-maximizing level of output will decrease.' For the same reason as above, with no change to MC or MR, the profit-maximizing output level does not decrease due to an increase in fixed costs. This statement is incorrect.
Thus, after examining all options, the only statement supported by the economics of fixed costs in the short run is that average total cost will increase.

AP Economics-Hillebrand Unit 3 Exam (2025) v1- Requires Respondus LockDown Browser

If a new tax on capital increases a firm’s fixed cost of production, which of the following will occur in the short run?

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AP Economics-Hillebrand Unit 3 Exam (2025) v1- Requires Respondus LockDown Browser

If a new tax on capital increases a firm’s fixed cost of production, which of the following will occur in the short run?

View Explanation

Log in for full answers

Similar Questions

If a firm's average total cost decreases as the firm increases its output, the firm's marginal cost must be

When the average total cost curve is at its minimum, we know that the

In the short run, ATC curve and AVC curve converge as output increases because

When the average variable cost curve is upward sloping, the marginal cost curve:

When the average variable cost curve is upward sloping, the marginal cost curve:

If the marginal cost curve is U-shaped,

In the diagram, A represents a firm's _____ curve, B represents its _____ curve, and C represents its _____ curve.

More Practical Tools for Students Powered by AI Study Helper

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In the diagram, A represents a firm's ___ curve, B represents its _ curve, and C represents its ___ curve.