The inverse demand in a Cournot duopoly is P = a - b(Q₁ + Q₂), and costs are C₁(Q₁) = c₁Q₁ and C₂(Q₂) = c₂Q₂. The government has imposed a per-unit tax of $t on each unit sold by each firm. The tax revenue is: A) t times the total output of the two firms should there be no sales tax. B) less than t times the total output of the two firms should there be no sales tax. C) greater than t times the total output of the two firms should there be no sales tax. D) None of the answers is correct.

Question

Quizplus · Accepted Answer

The tax revenue would be collected on each unit sold by both firms, hence the total tax revenue would be 2tQ where Q is the total output of the two firms. However, the tax would increase the marginal cost of production for each firm, and as a result, the output would decrease. This means that Q would be less than the output without the tax. Therefore, the tax revenue would be less than t times the total output of the two firms should there be no sales tax.

The Inverse Demand in a Cournot Duopoly Is P =