Question

You own a home-based bakery that specializes in creating themed cupcake displays for special events. The mortgage payment on your home increases dramatically due to a property tax hike in your community.

What impact will this have on your average variable cost, average total cost and marginal cost?

Explain how each of these cost curves would shift and why.

Step 1

given that the bakery is home based and the mortage payment on the home increases due to property tax hike.

this is clear that the cost will increase due to this property tax hike.

Step 2

the average variable cost changes as output increases. but here there is no change in output. therefore, there will be no impact on average variable cost. also, the average variable cost curve which is U shaped remains same.

Step 3

average total cost is total cost(=total fixed cost + total variable cost) divided by the output. here due to the tax hike, total cost rises,...

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