A profit-maximizing monopoly faces an inverse demand function described by the equation p(y)= 40 - y and its total costs are c(y)= 7y, where prices and costs are measured in dollars.In the past it was not taxed, but now it must pay a tax of 6 dollars per unit of output.After the tax, the monopoly will
A)increase its price by 6 dollars.
B)increase its price by 9 dollars.
C)increase its price by 3 dollars.
D)leave its price constant.
E)None of the above.

Question

Quizplus · Accepted Answer

The tax increases the marginal cost from 7 to 13. The monopoly sets marginal revenue equal to marginal cost to maximize profit. The new price is calculated by finding the quantity where MR = MC and substituting back into the demand function, resulting in a $3 increase in price.

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