If the Production of a Product Results in Significant External

question 235

Multiple Choice

If the production of a product results in significant external costs, an appropriate government policy might be to

• A) subsidize the production of the good.
• B) tax producers and thus shift the supply curve to the left.
• C) tax consumers' incomes and thus shift the demand curve to the left.
• D) subsidize consumers since the good is being under-consumed.

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Definitions:

Variable Cost

Variable costs vary directly with the level of production output and can include expenses like raw materials and labor directly involved in a product's manufacturing.

Fixed Costs

Fixed costs are those business expenses that remain constant regardless of the level of production or sales, such as rent, salaries, and insurance.

Operating Leverage

A measure of how revenue growth translates into growth in operating income, indicating the proportion of fixed to variable costs in a company's cost structure.

Break-even Point

The point at which total revenues equal total costs, resulting in neither profit nor loss.