What will be the effect of a monopoly sales tax imposed on a monopolist's output?
A)It will lead to an increase in the price and a reduction in output.
B)It will lead to an increase in price but will have no effect on output.
C)It will lead to a reduction in output but will have no effect on price.
D)It will have no impact on price or on output.

Question

Quizplus · Accepted Answer

A monopoly has the power to control prices and output. When a sales tax is imposed on the monopolist's output, it increases the cost of production, leading to a decrease in profitability. In order to maintain profits, the monopolist will increase the price, resulting in a reduction in output. Therefore, the sales tax will lead to an increase in the price and a reduction in output.

What Will Be the Effect of a Monopoly Sales Tax