Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
They do not affect marginal costs, allowing firms to produce without changing behavior.
B
They increase marginal costs, discouraging production as output rises.
C
They incentivize firms to lower prices to maintain sales.
D
They create a disincentive for investment in capital goods.
Understanding the Answer
Let's break down why this is correct
Answer
Lump-sum taxes are fixed amounts that a business must pay regardless of how much it produces, while per-unit taxes are charged for each unit produced. When businesses face a lump-sum tax, they do not change their production decisions based on the tax amount because it is constant and does not depend on their output level. For example, if a factory has to pay a $1,000 lump-sum tax, it will still produce the same number of goods if it believes that producing more or less will not change the tax amount. In contrast, with a per-unit tax, like $5 for each product made, the cost increases with each unit produced, which might lead a business to produce less to avoid high costs. Therefore, lump-sum taxes do not influence how much a company decides to produce, while per-unit taxes can discourage production due to their direct impact on costs.
Detailed Explanation
Lump-sum taxes are fixed amounts. Other options are incorrect because Some might think lump-sum taxes raise costs as production increases; It might seem like lump-sum taxes would push companies to lower prices.
Key Concepts
Lump-Sum Taxes
Marginal Costs
Market Efficiency
Topic
Lump-Sum Taxes Explained
Difficulty
hard level question
Cognitive Level
understand
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