A Small Island Nation Produces Only Boxes of Macaroni and Cheese

question 48

Multiple Choice

A small island nation produces only boxes of macaroni and cheese, most of which it sells in the export market. The world price per box is $10, regardless of the quantity exported. The nation has three macaroni and cheese factories, each of which varies in efficiency, but it's impossible for the government to determine each factory's marginal cost. To profit the most as a country, what should this nation's government do?

• A) Order each factory to produce the same quantity.
• B) Shut down the two most inefficient factories and produce at the most efficient one until marginal cost is $10.
• C) Let the producers compete in the market to determine the optimal quantity and allocation of macaroni and cheese production.
• D) Impose a tax on exports and see which factory survives the longest.

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Definitions:

Horizontal Equity

The principle that individuals with the same income or resources should be treated equally by the tax system.

Tax Deductions

Expenses that can be subtracted from gross income to reduce the amount of income that is subject to income tax.

Double Taxation

A taxation principle where income taxes are paid twice on the same source of earned income, property, or financial asset.

Saving Rate

The proportion of disposable income that is saved rather than spent by households.