A profit-maximizing monopoly faces an inverse demand function described by the equation p(y) = 90 - y and its total costs are c(y) = 9y, where prices and costs are measured in dollars. In the past it was not taxed, but now it must pay a tax of 4 dollars per unit of output. After the tax, the monopoly will
A) increase its price by 4 dollars.
B) increase its price by 2 dollars.
C) leave its price constant.
D) increase its price by 6 dollars.
E) None of the above.

Question

Quizplus · Accepted Answer

The tax increases the marginal cost by 4 dollars, but the monopoly will increase the price by less than the full amount of the tax due to the downward-sloping demand curve. The price increase is typically less than the tax amount, often around half, hence a 2 dollar increase.

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