The city government is considering two tax proposals: \(\cdot\) A lump-sum tax of \(\$ 300\) on each producer of hamburgers. \(\cdot\) A tax of \(\$ 1\) per burger, paid by producers of hamburgers. a. Which of the following curves- -average fixed cost, average variable cost, average total cost, and marginal cost- -would shift as a result of the lump- sum tax? Why? Show this in a graph. Label the graph as precisely as possible. b. Which of these same four curves would shift as a result of the per-burger tax? Why? Show this in a new graph. Label the graph as precisely as possible.

The imposition of taxes on a product has a direct effect on the producers' costs and can ultimately influence market prices and demand. For instance, a lump-sum tax, such as a fixed annual charge on producers, doesn't vary with production levels, and spreads out over more units as production increases, affecting primarily fixed costs. On the other hand, a per-unit tax, like an excise tax on each item produced, adds to the variable cost of every unit made, increasing the cost per unit regardless of the production scale.

These taxes can have multiple economic implications. They can act as a deterrent to production to some extent, especially if the tax increases the cost significantly, making the product less competitive. They might also drive up the price of goods, leading to a potential decrease in consumer demand and a subsequent impact on supply. Moreover, taxes can influence a manufacturer's decisions on whether to enter or exit a market, potentially reducing competition and variety for consumers.

Marginal cost (MC) refers to the additional cost of producing one more unit of a good or service. When a tax is levied on each unit produced - a per-unit tax - it raises the marginal cost because it makes each additional unit more expensive to produce. Returning to our burger example, a tax of \(\$1\) per burger increases the marginal cost by \(\$1\) at every level of output since each additional burger incurs an additional dollar in taxes.

When businesses face higher marginal costs, they may reduce output, raise prices, or both. The intersection of MC with the demand curve dictates the profit-maximizing level of production. Therefore, a shift in MC due to taxation can lead to adjustments in production strategy. It's important to realize that these decisions are not solely based on the tax itself but also on the overall cost structure of the company and how consumers will react to price changes.

Average total cost (ATC) reflects the total cost per unit of output, found by summing fixed and variable costs and dividing by the number of units produced. When taxes are introduced, they alter this delicate balance. A lump-sum tax raises the average total cost indirectly, as the fixed tax spread over more units becomes a smaller addition to the ATC as production increases. In contrast, a per-unit tax directly raises both variable costs and the ATC uniformly because the tax applies to every item produced.

Producers might pass on the increase in ATC to consumers through higher prices, seek ways to reduce other production costs, or accept lower profit margins. This decision-making process is influenced by the sensitivity of consumers to price changes (price elasticity of demand) and the competitive landscape of the marketplace.

In economics, cost curves visually represent the relationship between production levels and costs. The average fixed cost (AFC) curve typically slopes downward as more units are produced because the fixed cost is spread over more units. Marginal cost (MC) depicts the cost of producing one additional unit and typically has a U-shape due to the principles of increasing and then diminishing marginal returns.

When it comes to taxation, these curves offer a graphical representation of the tax's impact on production costs. A lump-sum tax shifts the AFC (and thus ATC) upwards without affecting the slope. A per-unit tax raises the AVC, ATC, and MC curves upward by a constant amount across all levels of output. By studying these shifts, one can predict not just immediate effects on costs, but also long-term strategic decisions by firms and overall market dynamics.