The inverse demand in a Cournot duopoly is P = a − b(Q₁ + Q₂),and costs are C₁(Q₁)= c₁Q₁ and C₂(Q₂)= c₂Q₂.The government has imposed a per-unit tax of $t on each unit sold by each firm.The tax revenue is: A) t times the total output of the two firms should there be no sales tax. B) less than t times the total output of the two firms should there be no sales tax. C) greater than t times the total output of the two firms should there be no sales tax. D) None of the preceding answers is correct.

Question

Quizplus · Accepted Answer

The government tax revenue is equal to the per-unit tax multiplied by the total quantity sold by both firms. Since the tax is imposed on each unit sold by each firm, the total tax revenue is equal to 2t times the total quantity sold by both firms. This is less than t times the total output of the two firms if there were no sales tax, since the sales tax reduces the total quantity sold.

The Inverse Demand in a Cournot Duopoly Is P =