3. The Placebo Drug Company holds a patent on one of its discoveries. (a) Assuming that the production of the drug involves rising marginal cost, draw a dia- gram to illustrate Placebo's profit-maximizing price and quantity. Also show Placebo's profits. (b) Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo's new price and quantity. How does each compare to your answer in part (a)? (c) Although it is not easy to see in your diagrams, the tax reduces Placebo's profit. Explain why this must be true. (d) Instead of the tax per bottle, suppose that the gov- ernment imposes a tax on Placebo of €110 000 regard- less of how many bottles are produced. How does this tax affect Placebo's price, quantity and profits? Explain.

3. The Placebo Drug Company holds a patent on one of its discoveries. (a) Assuming that the production of the drug involves rising marginal cost, draw a dia- gram to illustrate Placebo's profit-maximizing price and quantity. Also show Placebo's profits. (b) Now suppose that the government imposes a tax on each bottle of the drug produced. On a new diagram, illustrate Placebo's new price and quantity. How does each compare to your answer in part (a)? (c) Although it is not easy to see in your diagrams, the tax reduces Placebo's profit. Explain why this must be true. (d) Instead of the tax per bottle, suppose that the gov- ernment imposes a tax on Placebo of €110 000 regard- less of how many bottles are produced. How does this tax affect Placebo's price, quantity and profits? Explain.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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