A profit-maximizing monopolist faces the demand curve q = 100

Question

A profit-maximizing monopolist faces the demand curve q = 100 - 3p.It produces at a constant marginal cost of $20 per unit.A quantity tax of $10 per unit is imposed on the monopolist's product.The price of the monopolist's product
A)rises by $5.
B)rises by $10.
C)rises by $20.
D)rises by $12.
E)stays constant.

Quizplus · Accepted Answer

A quantity tax shifts the monopolist's marginal cost curve upward by the amount of the tax. Since the marginal cost increases from $20 to $30, the monopolist will adjust quantity and price to a new equilibrium. The price does not increase by the full amount of the tax because the monopolist also absorbs part of the tax in the form of reduced profit margins. The specific increase depends on the elasticity of demand. Without the exact demand function details and calculations, a general principle is that the price increase is less than the tax increase, making a $5 increase a plausible scenario given the options provided.