Suppose a monopoly is producing its profit-maximising output level.Now suppose the government imposes a lump-sum tax on the monopoly, independent of its output.As a result, the monopolist will increase the price of its product to cover its higher cost.

Question

Quizplus · Accepted Answer

A lump-sum tax is a fixed amount of tax that the monopolist has to pay regardless of the level of output it produces. Since the tax is not related to the cost of production or the level of output, the monopolist will not have any incentive to increase its price to cover the higher cost. Therefore, the monopolist's profit-maximizing output level will remain unchanged, and the burden of the lump-sum tax will fall entirely on the monopolist.

Suppose a Monopoly Is Producing Its Profit-Maximising Output Level