Suppose a cell- phone service provider has monopoly rights for a geographical region and is earning monopoly profits. If the government then imposes a lump- sum tax of $X on this firm, the effect is
A) to increase the firm's average costs and reduce its profit by $X.
B) an increase in output and a decrease in price.
C) a reduction in output and an increase in price.
D) to increase the firm's marginal costs and reduce its profit by $X.
E) an increase in consumer surplus due to the tax revenue.

Question

Quizplus · Accepted Answer

Imposing a lump-sum tax on the monopolist will increase their costs, as they now have to pay an additional amount to the government regardless of the level of output. As a result, the monopolist will reduce their profit by the amount of the tax ($X). This will not lead to an increase in output or decrease in price, as the monopolist still has monopoly power and can set prices according to their own profit-maximizing strategy. There is also no reason to suggest that the tax will increase consumer surplus.

Suppose a Cell- Phone Service Provider Has Monopoly Rights for a Geographical