A firm observes that in order to minimize the average cost, it must pr

A firm observes that in order to minimize the average cost, it must produce 25,000 units of output. Suppose the government imposes a specific tax on the output of the firm.

Will the output level required to minimize the average cost increase, decrease, stay the same or is it uncertain? Can you tell how much the minimum average cost will change by? Explain.

ANSWER

The specific tax results in a parallel vertical shift of the average cost by the amount of the tax. Therefore, the minimum point will shift up by precisely the tax. The output level which minimizes the average cost will not change.