(7.5 points) A monopoly faces the demand curve P 100-.01Q, where P is price and
ID: 1129686 • Letter: #
Question
(7.5 points) A monopoly faces the demand curve P 100-.01Q, where P is price and Q is weekly production measured in cents per unit. The firm's cost function is C 50Q+20,000. Assuming the firm maximizes profit, a. What is the level of production, price, and total profit per week? b. If the government decides to put a tax of 20 cents per unit ON THE BUYERS of this product, what week? will be the new level of production, price the buyer pays, price the monopoly receives, and profit per c. What is the incidence of the tax on the buyers and on the monopoly?Explanation / Answer
MR= MC
MR= 100-0.02Q
MC=50
100-0.02Q=50
Q=2500
Price is =100-0.01*2500=75
Now consumer pays 75+20 in presence of 20 cents of tax
Then quantity demand is
95=100-0.01Q
0.01Q=5
Q=500 (new level of production)
Profits for monopoly is TR-TC= 75*500-50*500-20000=37500-2500-20000=15000 in case of tax incidence.
Hence though tax is levied on buyer due to tax incidence buyer buys less quantity of good which decrease the profit for monopoly.
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