Suppose a specific excise tax is imposed on a monopolist's product. In order to maximize profits, the monopolist will produce:
A)less output and charge a higher price.
B)the same output and charge a higher price.
C)the same output and charge the same price as before the tax.
D)more output and charge a lower price.

Question

Quizplus · Accepted Answer

When an excise tax is imposed on a monopolist's product, the monopolist will have to pay the tax for each unit of output sold. This will increase the monopolist's costs and decrease profits. In order to maximize profits, the monopolist will reduce the amount of output produced and charge a higher price to make up for the added cost of the tax. Therefore, the correct choice is A.

Suppose a Specific Excise Tax Is Imposed on a Monopolist's