A profit-maximizing monopolist faces a demand function given by q = 1000 - 20p, where p is the price of her output in dollars.She has a constant marginal cost of 20 dollars per unit of output.In an effort to induce her to increase her output, the government agrees to pay her a subsidy of $10 for every unit that she produces.She will
A)increase her price and lower her output.
B)decrease her price by $5 per unit.
C)decrease her price by $10 per unit.
D)decrease her price by more than $10 per unit but by less than $16 per unit.
E)decrease her price by more than $16 per unit.

Question

Quizplus · Accepted Answer

DWith the subsidy, the effective marginal cost to the monopolist decreases from $20 to $10 per unit (since the government is covering $10 of the cost for every unit produced). This reduction in marginal cost encourages the monopolist to produce more, which typically leads to a decrease in price to sell the additional output. The exact amount of price decrease depends on the demand elasticity, but it's clear that the price will decrease because the monopolist's cost structure has improved. Option B suggests a specific decrease in price, which could be a direct result of the reduced effective marginal cost. Option D acknowledges a potential decrease in price due to the subsidy but without specifying the exact amount, which allows for the variability in how much the monopolist decides to adjust the price based on demand elasticity and the desire to expand output.

A Profit-Maximizing Monopolist Faces a Demand Function Given by Q