A profit-maximizing monopoly faces an inverse demand function described by the equation p(y)= 30 - y and its total costs are c(y)= 5y, where prices and costs are measured in dollars.In the past it was not taxed, but now it must pay a tax of 2 dollars per unit of output.After the tax, the monopoly will
A)increase its price by 3 dollars.
B)increase its price by 2 dollars.
C)increase its price by 1 dollars.
D)leave its price constant.
E)None of the above.

Question

Quizplus · Accepted Answer

The monopoly will increase its price by 1 dollar. The tax increases the marginal cost by 2 dollars, but the monopoly will only increase the price by 1 dollar due to the elasticity of demand and the markup rule.

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