If the Government Levies a $1 Excise Tax on Each

question 107

Multiple Choice

If the government levies a $1 excise tax on each unit of a good sold, what will happen to the producer's cost curve?

• A) The average total cost and marginal cost curves will shift downward by the amount of the tax.
• B) The average total cost and marginal cost curves will shift upward by the amount of the tax.
• C) The marginal cost curve will shift upward by the amount of the tax; the average total cost curve will remain unchanged.
• D) Both the marginal cost and average total costs will remain the same since taxes are not a cost of production.

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Definitions:

Subsidy

A subsidy is a financial contribution provided by the government or a public body to support businesses, consumers, or sectors, reducing the price of goods or services.

Supply Function

A supply function is a mathematical relation that shows how the quantity supplied of a good is influenced by its price and possibly other factors, such as production cost.

Demand Function

A mathematical equation that describes the quantity of a good that consumers are willing and able to purchase at various prices.

Subsidy

Financial assistance granted by a government or other institution to lower the cost of producing goods or services or to support consumers directly.