Polystyrene (aka styrofoam) is non-biodegradable and is not easily recyclable. In the United States, many cities and at least one state have enacted laws that ban the use of polystyrene containers. These locales understand that banning these containers will force many businesses to turn to other more expensive forms of packaging and cups, but argue the ban is environmentally important.

Suppose my friend Joe owns a firm with a conventional production function resulting in U-shaped ATC, AVC, and MC curves. Finally, suppose that Joe's business sells takeout food and drinks which are currently packaged in styrofoam containers and cups.

Question 1

• Graphically depict, with proper labels, the short-run AFC₀, AVC₀, ATC₀, and MC₀ curves for Joe's firm prior to the ban on using styrofoam containers.

Question 2

After the ban is imposed, Joe's firm switches to the more expensive biodegradable disposable cups. This increases the cost associated with each cup of coffee it produces.

• Which cost curve(s) will be impacted by the use of the more expensive biodegradable disposable cups? Why? Which cost curve(s) will not shift, and why not? Please use the table below to answer this question. For the second column ("Impacted? If so, how?"), please use one of the following three choices: No shift; Shifts up (i.e., increases: at nearly any given quantity, the cost goes up); or Shifts down (i.e., decreases: at nearly any given quantity, the cost goes down).

Cost Curve	Impacted? If so, how?	Explanation of the Shift: Why or Why Not
AFC
MC
AVC
ATC

• Use a copy of the graph you created in Question 1 to depict the new positions of any of the four curves (AFC, AVC, ATC, and MC) that may have shifted, relative to the original curves which depicted the use of inexpensive styrofoam containers. Please label the new curves with subscript 1. (You may want to use a different color for the new curves as well).

Question 3

Now that Joe's firm has switched to the more expensive biodegradable disposable cups, the city where his firm operates decides to increase the cost of the annual business license fee from $1,000 to $3,000 to cover the salary of the newly created position of a biodegradable cup enforcement officer. Thus, Joe, who is about to pay his 2023 business license fee, will pay $2,000 more. (You do not have to show the specific magnitude of this change in your graph; creating curves that show the general impact of this change on costs will be sufficient.)

• Which cost curve(s) will be impacted by this increase in the cost of the annual business license fee? Why? Which cost curve(s) will not shift, and why not? Please use the table below to answer this question. For the second column ("Impacted? If so, how?"), please use one of the following three choices: No shift; Shifts up (i.e., increases: at nearly any given quantity, the cost goes up); or Shifts down (i.e., decreases: at nearly any given quantity, the cost goes down).

Cost Curve	Impacted? If so, how?	Explanation of the Shift: Why or Why Not
AFC
MC
AVC
ATC

• Use a copy of the graph you created in Questions 1 and 2 to depict the new positions of any of the four curves (AFC, AVC, ATC, and MC) that may have shifted, relative to the original curves which depicted the use of inexpensive styrofoam containers from Question 1 and the curves associated with the switch to more expensive biodegradable cups that you had illustrated in Question 2. Please label the new curves with subscript 2. (You may want to use a third color to show curves that shifted in this question).

Question 4

Carefully explain the role of the Law of Diminishing Marginal Product (marginal returns) in determining the U-shape of AVC and ATC. (Hint: Think of what a typical production functions shows to you as what happens to the output as you increase the input in the short run.)