19 . 11. Excise Tax on Monopoly with Linear Demand and Constant MC A monopoly has the total cost equation: TC = 4Q + TAX where: t= excise tax rate ($ per unit) TAX = tQ = total tax paid by the monopoly firm %3D %3D The market demand (D) equation is: Qo = 24 - 2P a. Write the total revenue, marginal revenue and marginal cost (inclusive of tax) equations. TR = MR = MC = b. Solve for the profit-maximizing Q", P*, and n* as functions of the tax rate t. Q* = %3D p* = n* = When t rises by $1, P* rises by $ .
19 . 11. Excise Tax on Monopoly with Linear Demand and Constant MC A monopoly has the total cost equation: TC = 4Q + TAX where: t= excise tax rate ($ per unit) TAX = tQ = total tax paid by the monopoly firm %3D %3D The market demand (D) equation is: Qo = 24 - 2P a. Write the total revenue, marginal revenue and marginal cost (inclusive of tax) equations. TR = MR = MC = b. Solve for the profit-maximizing Q", P*, and n* as functions of the tax rate t. Q* = %3D p* = n* = When t rises by $1, P* rises by $ .
Chapter1: Making Economics Decisions
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Transcribed Image Text:19
11.
Excise Tax on Monopoly with Linear Demand and Constant MC
20
C. Solve for the point elasticity of demand (as a function of t) at the profit-maximizing quantity and
price.
A monopoly has the total cost equation:
TC = 4Q + TAX
where:
t= excise tax rate ($ per unit)
TAX = tQ = total tax paid by the monopoly firm
ED =
The market demand (D) equation is:
QD = 24 - 2P
a. Write the total revenue, marginal revenue and marginal cost (inclusive of tax) equations.
d. Verify the price markup rule at the profit maximum:
(P* - MC*)/P* =- 1/Ep
TR =
MR =
MC =
b. Solve for the profit-maximizing Q*, P*, and n* as functions of the tax rate t.
e. GRAPH the monopoly market situation and compare a tax of $4 per unit to the no-tax case. Show D
and MR. Graph the MC curves for t = 0 and t = 4. Mark the equilibria for t= 0 and t = 4.
Q* =
p* =
n*
When t rises by $1, P* rises by $
24
12
14
16
18
20
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