Suppose a proportional tax is imposed on a monopolist's profits. Relative to the pretax situation, the monopolist will:
A)produce the same output and charge the same price as before the tax.
B)encourage new firms to enter and share the tax burden.
C)produce less, decreasing TC.
D)produce the same output, increase the price, and pass the tax to consumers.

Question

Quizplus · Accepted Answer

A proportional tax on profits does not affect the marginal cost or the marginal revenue of a monopolist. Therefore, the monopolist will continue to produce the same output and charge the same price as before the tax, as their profit-maximizing condition remains unchanged.

Suppose a Proportional Tax Is Imposed on a Monopolist's Profits