Question

Suppose that aggregate market demand is D(P) =p-3, the cost curve of a monop- olist's firm is c(y) = y + 10. a. What price will the monopolist charge consumers? b. If the government imposes a tax t, what will the new price charged be? (The price will be a function of t.) c. With the tax t, will less than the full amount of the tax or more than the full amount of the tax be passed on to consumers?

Answer 1

C. Now, when tax is imposed, there is an increase in the market price. In almost all the cases, when tax is imposed either on the consumer or the producer, the burden of that gets shifts partially on the both parties i.e. the consumers and the producers. In this scenerio, the price has been increased from 2 to 2(t+1)/(t-1). This burden will shift more on the consumers side than the producers as the producer is a monopolist and has more bargaining power. He is the only seller and therefore can charge a higher price for his commodity.

But if we notice the demand curve, the quantity demanded in the market is very low, therefore there is also a chance that the producers takes more burden of the tax and provide the consumers with a low price.

Now, in this case, with a tax t, the increase in price due to tax is,

2((1-t-t-1)/(1-t))

2(-2t/1-t)

-4t/1-t

Which is negative.

Therefore, the tax burden on the consumers is negative that is there is a reduction in the price level for the consumers, due to the structure of the demand curve in the market.