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E202Solutions4.2

# E202Solutions4.2 - A tax that is independent of output does...

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b. What would be the profit-maximizing number of bats if the firm’s fixed costs were not \$60 per day but only \$30? Answer : The profit-maximizing number of bats is unchanged but profits rise \$30 to \$65. Fixed costs do not affect the profit-maximizing level of output. 4. How would Paducah’s profit-maximizing level of output be affected if the government imposed a tax of \$10 per day on the company? What would Paducah’s profit-maximizing level of output be if the government imposed a tax of \$2 per bat instead? Why do these two taxes have such different effects? Answer : A tax of \$10 per day would decrease Paducah’s profit by \$10 per day at every level of output. But the company would still maximize its profit by producing 20 bats per day.
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Unformatted text preview: A tax that is independent of output does not change marginal cost, and hence does not change the profit-maximizing level of output. But a tax of \$2 per bat has exactly the same effect as any other \$2 increase in the marginal cost of making each bat. As we see in the last column of the table below, the company’s profit-maximizing level of output now falls to 15 bats per day. At that level it earns exactly 0 profit, but at any other level of output it would sustain a loss. Q (bats/day) Total Revenue (\$/day) Variable cost (\$/day) Total cost (\$/day) Profit (\$/day) 60-60 5 50 15 85-35 10 100 30 110-10 15 150 60 150 20 200 105 205-5 25 250 165 275-25 30 300 240 360-60 35 350 330 460-110...
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