A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 50 - y and its total costs are c(y) = 10y, where prices and costs are measured in dollars. In the past it was not taxed, but now it must pay a tax of 2 dollars per unit of output. After the tax, the monopoly will
A) leave its price constant.
B) increase its price by 2 dollars.
C) increase its price by 3 dollars.
D) increase its price by 1 dollar.
E) None of the above.

Question

Quizplus · Accepted Answer

The tax increases the marginal cost by $2, so the monopoly will adjust its price to maintain profit maximization. The price will increase by less than the full amount of the tax due to the downward-sloping demand curve.

A Profit-Maximizing Monopoly Faces an Inverse Demand Function Described by the Equation