A profit-maximizing monopoly faces an inverse demand function described by the equation p(y)= 90 - y and its total costs are c(y)= 8y, where prices and costs are measured in dollars.In the past it was not taxed, but now it must pay a tax of 8 dollars per unit of output.After the tax, the monopoly will
A)increase its price by 4 dollars.
B)leave its price constant.
C)increase its price by 8 dollars.
D)increase its price by 12 dollars.
E)None of the above.

Question

Quizplus · Accepted Answer

The monopoly will increase its price by 4 dollars because the tax is a fixed cost that does not affect the marginal cost of production. The monopoly will therefore increase its price by the amount of the tax in order to maintain its profit-maximizing output.

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