Consider a single-price monopolist that is in equilibrium at output level Q* and price P*.If the government imposes a new tax on the firm of $25 per unit of output,then
A)output and price will remain at Q* and P*
B)output will fall and price will rise by $25
C)output will fall and price will fall by less than $25
D)output will rise and price will fall by $25
E)output will fall and the price will rise by less than $25

Question

Quizplus · Accepted Answer

When the government imposes a new tax on the monopolist, the cost of production will increase by $25 per unit. This will result in a decrease in the profit margin of the monopolist, forcing them to increase the price of the product to maintain the level of profit. However, as a monopolist, they cannot increase the price of the product beyond a certain limit as it might lead to a decrease in demand. Therefore, the monopolist will increase the price but by less than $25. Consequently, the output will fall, and the price will rise by less than $25. Hence, option E is the correct choice.

Consider a Single-Price Monopolist That Is in Equilibrium at Output