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 monopoly will increase its price by 2 dollars because the tax increases the marginal cost by 4 dollars, and the monopoly will adjust its price to maintain profit maximization, which typically results in a price increase of less than the full amount of the tax.

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