Assume that a firm's only variable input is labor and a new tax has been placed on labor.

Which of the following correctly describes the impact on each of: the marginal cost curve $(M C)$, the average variable cost curve $(A V C)$, average total cost curve $(A T C)$, and average fixed cost curve $(A F C)$ ?

Choose 1 answer:
(A) $M C$ shifts up; $A V C$ shifts up; $A T C$ shifts up; $A F C$ doesn't change.
(B) $M C$ doesn't change; $A V C$ doesn't change; $A T C$ shifts up; $A F C$ doesn't change.
(C) $M C$ doesn't change; $A V C$ shifts up; $A T C$ shifts up; $A F C$ doesn't change.
(D) $M C$ doesn't change; $A V C$ doesn't change; $A T C$ shifts up; $A F C$ shifts up.
(E) $M C$ shifts up; $A V C$ doesn't change; $A T C$ doesn't change; $A F C$ doesn't change

Question

Assume that a firm's only variable input is labor and a new tax has been placed on labor.

Which of the following correctly describes the impact on each of: the marginal cost curve $(M C)$, the average variable cost curve $(A V C)$, average total cost curve $(A T C)$, and average fixed cost curve $(A F C)$ ?

Choose 1 answer:
(A) $M C$ shifts up; $A V C$ shifts up; $A T C$ shifts up; $A F C$ doesn't change.
(B) $M C$ doesn't change; $A V C$ doesn't change; $A T C$ shifts up; $A F C$ doesn't change.
(C) $M C$ doesn't change; $A V C$ shifts up; $A T C$ shifts up; $A F C$ doesn't change.
(D) $M C$ doesn't change; $A V C$ doesn't change; $A T C$ shifts up; $A F C$ shifts up.
(E) $M C$ shifts up; $A V C$ doesn't change; $A T C$ doesn't change; $A F C$ doesn't change

Accepted Answer

∻Solution∻ ‖ a ⋮ Marginal Cost (MC): The marginal cost curve will shift up because the tax on labor increases the cost of producing each additional unit of output. ‖ ‖ b ⋮ Average Variable Cost (AVC): The average variable cost curve will also shift up because the tax increases the variable cost per unit of output. ‖ ‖ c ⋮ Average Total Cost (ATC): The average total cost curve will shift up as well, since ATC includes AVC, which has increased due to the tax. ‖ ‖ d ⋮ Average Fixed Cost (AFC): The average fixed cost curve will not change because the tax affects only the variable input (labor), not the fixed costs. ‖ ∻Answer∻ ⚹ (A) $M C$ shifts up; $A V C$ shifts up; $A T C$ shifts up; $A F C$ doesn't change. ⚹ ∻Key Concept∻ ⚹ Impact of a tax on labor on cost curves ⚹ ∻Explanation∻ ⚹ A tax on labor, which is a variable input, increases the marginal cost, average variable cost, and average total cost, but does not affect the average fixed cost. ⚹◊What is the relationship between the new tax on labor and the various cost curves in a firm's production process according to microeconomics⍭ Generate me a similar question◊

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