Your boss says \"either of these taxes is going to force us to change our produc

Question

Your boss says "either of these taxes is going to force us to change our production levels." Given what you know about optimization analysis, how would you respond? Select one: Since neither tax is a true "cost" of production (they are unlike paying salaries or buying raw materials), then neither of them affect the optimal choice of Q. Optimization depends partly on marginal cost, which is not affected by the property tax, though it is by the per-unit tax. The property tax won't change the optimal Q but the per unit tax will. Since both taxes alter the cost curves (in different ways), they both necessarily alter the optimal Q for the company. Optimization depends partly on marginal cost, since the property tax affects MC but the per-unit tax doesn't, the property tax will alter the optimal Q while the per unit tax will not.

Explanation / Answer

Option (b).

Property tax, being a fixed amount of tax, does not affect marginal cost and therefore, does not affect optimal level of production. But per-unit tax raises marginal cost and affects optimum output level.

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