Suppose a farmer is a price taker in soybeans with cost functions given by Suppose the farmer has to pay a 10% tax on revenue.The new profit maximizing level of output is
A) unaffected by the tax.
B) increased because of the tax.
C) decreased because of the tax.
D) Not enough information to determine.

Question

Suppose a farmer is a price taker in soybeans with cost functions given by  Suppose the farmer has to pay a 10% tax on revenue.The new profit maximizing level of output is
A) unaffected by the tax. 
B) increased because of the tax. 
C) decreased because of the tax. 
D) Not enough information to determine.

Quizplus · Accepted Answer

With a 10% tax on revenue, the farmer's cost function becomes 1.1(2q)+10q, which can be simplified to 12.1q. This increases the overall cost of production and decreases the profit maximizing level of output. Therefore, the correct answer is (C) decreased because of the tax.

Suppose a Farmer Is a Price Taker in Soybeans with Cost