a. Show the output, price and profits of a monopoly in a well-labeled diagram. b. Suppose...

a. Show the output, price and profits of a monopoly in a well-labeled diagram.

b. Suppose the government imposes a lump-sum tax of $200,000 on this monopoly in (a). In words, explain whether this will affect your answers to (a).

Expert Solution

a) Q is quantity produced

OP is the price charged

equilibrium is determined where MR= MC at point E and price is determined by AR curve at this output level Q

profits will be area below price line and abova the avarage cost which isequal to OM = QN at level of output Q

profits=PRNM

b) when the government imposes a lump-sum tax of $200,000 on this monopoly

fixed cost of this firm will increase by $200,000 and AC will shift upward but not parallely as ouput increases change in AC due to this lumpsum tax goes on decreasing because its Fixed Cost

new AC = old AC+ FC/q

as q, quantity increases FC/q will decrease

MC will not get affected as it is fixed cost whereas MC is affected by Variable cost

after this

Q and P will remain at same level but profits will decrease due to increase AC

profits will decrease to shaded region which is samller than area PRNM

Rahul Sunny answered 2 years ago

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