Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It does not affect marginal costs, thus production levels remain unchanged.
B
It encourages businesses to produce more since it is fixed.
C
It increases the marginal cost of production, leading to reduced output.
D
It incentivizes businesses to minimize production to avoid the tax.
Understanding the Answer
Let's break down why this is correct
Answer
A lump-sum tax is a fixed amount that a business must pay regardless of how much it produces, while a per-unit tax is charged for each item the business sells. Because a lump-sum tax does not change with production levels, it does not directly affect the cost of making each product. This means businesses can decide how much to produce based on demand and market conditions without worrying about changing their costs per item. For example, if a bakery pays a lump-sum tax of $1,000, it will still produce the same number of cakes if the demand is high, as the tax doesn't increase with more cakes made. In contrast, a per-unit tax would make the bakery consider how many cakes to bake since each additional cake would increase costs, potentially leading them to produce less.
Detailed Explanation
A lump-sum tax is a fixed amount that does not change with how much a business produces. Other options are incorrect because Some might think a fixed tax makes businesses want to produce more; It's a common mistake to think a lump-sum tax raises production costs.
Key Concepts
Lump-sum taxes
Marginal cost of production
Taxation effects on resource allocation
Topic
Lump-Sum Taxes Explained
Difficulty
easy level question
Cognitive Level
understand
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